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The Sonnabend Estate and Fair Market Valuation of Canyon

In late 2007, Ileana Sonnabend, a renowned gallerist and art‐scene mainstay, passed away, leaving behind a massive collection of art worth hundreds of millions of dollars. At the helm of two galleries in Paris and New York, Sonnabend worked for decades to promote and foster contemporary art and artists, and her galleries displayed the works of many well‐known artists, such as Roy Lichtenstein and Robert Rauschenberg. Among the artworks in Sonnabend’s personal collection at her death was Rauschenberg’s Canyon, a celebrated collage painting from the artist’s Combine series. Rauschenberg created Canyon from an array of materials, including a stuffed American bald eagle. Canyon, already famous, gained notoriety when it came time to value Sonnabend’s estate for federal estate tax purposes.

The legal restrictions of the Bald and Golden Eagle Protection Act (BGEPA) and the Migratory Bird Treaty Act (MBTA) banned the sale or other disposition of Canyon, and therefore those administering Sonnabend’s estate listed a value of zero for the painting when assessing Sonnabend’s significant property interests. To reach its determination of zero fair market value, the estate consulted three professional appraisals, all in concurrence. The Internal Revenue Service (IRS) rejected this position and instead estimated Canyon‘s fair market value at $65 million. The IRS then notified the estate of a $29.2 million tax liability deficiency on the painting, and because the Internal Revenue Code empowers the IRS to assign a penalty in the event that a taxpayer makes a “substantial valuation understatement,” it also imposed an $11.7 million penalty.

This Note assesses the IRS’s valuation of Canyon as an application of fair market valuation principles in federal taxation. The Note begins with a background of relevant tax rules, followed by a discussion of prior case law dealing with illegal and other restricted property and artwork. In light of this context, the Note then criticizes the IRS’s analysis in its valuation of Canyon: The IRS’s position is problematic, and it demonstrates some of the unique difficulties with applying fair market valuation principles to artwork. Both the IRS’s and the estate’s conclusions are imperfect, but the $65 million valuation stands too many degrees removed from a realistic determination.