What is the fair market value of an object that cannot be sold?

The question may sound like a Zen koan, but it is one that lawyers for the heirs of the New York art dealer Ileana Sonnabend and the Internal Revenue Service are set to debate when they meet in Washington next month.

The object under discussion is “Canyon,” a masterwork of 20th-century art created by Robert Rauschenberg that Mrs. Sonnabend’s children inherited when she died in 2007.

Because the work, a sculptural combine, includes a stuffed bald eagle, a bird under federal protection, the heirs would be committing a felony if they ever tried to sell it. So their appraisers have valued the work at zero.

 But the Internal Revenue Service takes a different view. It has appraised “Canyon” at $65 million and is demanding that the owners pay $29.2 million in taxes.

“It’s hard for me to see how this could be valued this way because it’s illegal to sell it,” said Patti S. Spencer, a lawyer who specializes in trusts and estates but has no role in the case.

The family is now challenging the judgment in tax court and its lawyers are negotiating with the I.R.S. in the hope of finding a resolution.

Heirs to important art collections are often subject to large tax bills. In this case, the beneficiaries, Nina Sundell and Antonio Homem, have paid $471 million in federal and state estate taxes related to Mrs. Sonnabend’s roughly $1 billion art collection, which included works by Modern masters from Jasper Johns to Andy Warhol. The children have already sold off a large part of it, approximately $600 million worth, to pay the taxes they owed, according to their lawyer, Ralph E. Lerner.

But they drew the line at “Canyon,” a landmark of postwar Modernism made in 1959 that three appraisers they hired, including the auction house Christie’s, had valued at zero. Should they lose their fight, the heirs, who were unavailable for comment, will owe the taxes plus $11.7 million in penalties.

Inheritances are generally taxed at graduated rates depending on their value. In this case, the $29.2 million assessment for “Canyon” was based on a special penalty rate because the I.R.S. contends the heirs inaccurately stated its value.

While art lovers may appreciate the I.R.S.’s aesthetic sensibilities, some estate planners, tax lawyers and collectors are alarmed at the agency’s position, arguing that the case could upend the standard practice of valuing assets according to their sale in a normal market. I.R.S. guidelines say that in figuring an item’s fair market value, taxpayers should “include any restrictions, understandings, or covenants limiting the use or disposition of the property.”

In this instance, the 1940 Bald and Golden Eagle Protection Act and the 1918 Migratory Bird Treaty Act make it a crime to possess, sell, purchase, barter, transport, import or export any bald eagle — alive or dead. Indeed, the only reason Mrs. Sonnabend was able to hold onto “Canyon,” Mr. Lerner said, was due to an informal nod from the United States Fish and Wildlife Service in 1981.

Even then, the government revisited the issue in 1998. Rauschenberg himself had to send a notarized statement attesting that the eagle had been killed and stuffed by one of Teddy Roosevelt’s Rough Riders long before the 1940 law went into effect. Mrs. Sonnabend was then able to retain ownership as long as the work continued to be exhibited at a public museum. The piece is on a long-term loan to the Metropolitan Museum of Art in New York, which Mr. Lerner said insures it, but the policy details are confidential.

Mr. Lerner said that the I.R.S.’s handling of the work has been confusing. Last fall, the agency sent the family an unsigned draft report that it was valuing “Canyon” at $15 million. After Mr. Lerner replied that the children were refusing to pay, the I.R.S. then sent a formal Notice of Deficiency in October saying it had increased the valuation to $65 million.

That figure came from the agency’s Art Advisory Panel, which is made up of experts and dealers and meets a few times a year to advise the I.R.S.’s Art Appraisal Services unit. One of its members is Stephanie Barron, the senior curator of 20th-century art at the Los Angeles County Museum of Art, where “Canyon” was exhibited for two years. She said that the group evaluated “Canyon” solely on its artistic value, without reference to any accompanying restrictions or laws.

“The ruling about the eagle is not something the Art Advisory Panel considered,” Ms. Barron said, adding that the work’s value is defined by its artistic worth. “It’s a stunning work of art and we all just cringed at the idea of saying that this had zero value. It just didn’t make any sense.”

Rauschenberg’s combines, which inventively slapped together everyday objects he found on the street, helped propel American art in a new direction.

Though the I.R.S. usually accepts the advisory panel’s recommendations, it is not required to; last year it did not follow the group’s opinion in 7 percent of the cases, according to panel’s annual 2011 report.

So how did the panel arrive at the $65 million figure? Ms. Barron said, “When you come up with a valuation you look at comparable works and what they have sold for at public or private sales.”

The I.R.S. declined to comment.

Mr. Lerner told Forbes magazine, which reported the dispute in February, that Joseph Bothwell, a former director of the agency’s Art Appraisal Services unit, had told him “there could be a market for the work, for example, a recluse billionaire in China might want to buy it and hide it.” Mr. Bothwell has since retired from the I.R.S. Ms. Barron said she did not consider any hypothetical black-market buyer.

Still, the notion that the I.R.S. might use the black market in this way to determine a fair market value has surprised some tax experts. James Joseph, a tax lawyer with Arnold & Porter in Washington, noted that the I.R.S. has taxed illegal contraband at its market value, but added: “I don’t know of any instance where the I.R.S. has assumed taxpayers will engage in an illegal activity in order to value their assets at a higher amount. Al Capone went to jail for not paying income taxes on his illegal income, but this is very different than that.”

At the moment, tax experts note that the I.R.S.’s stance puts the heirs in a bind: If they don’t pay, they would be guilty of violating federal tax laws, but if they try to sell “Canyon” to zero-out their bill, they could go to jail for violating eagle protection laws.

Mr. Lerner said that since the children assert the Rauschenberg has no dollar value for estate purposes, they could not claim a charitable deduction by donating “Canyon” to a museum. If the I.R.S. were to prevail in its $65 million valuation, he said the heirs would still have to pay the $40.9 million in taxes and penalties regardless of a donation.

Then, given their income and the limits on deductions, he said, they would be able to deduct only a small part of the work’s value each year. Mr. Lerner estimated that it would take about 75 years for them to absorb the deduction.

“So my clients would have to live to 140 or so,” he said.

 

By ANDREW JACOBS and CLARE PENNINGTON

Published: July 16, 2012

BEIJING — The frothy contemporary-art scene here has lost some of its ebullience in the three and a half months since a German art handler and a Chinese associate were detained on charges that they undervalued imported art to avoid customs duties.

Gallery openings are a bit more subdued, anxious art dealers have been keeping a low profile, and several wealthy collectors have been barred from leaving China while the investigation continues. Auction house giants like Sotheby’s and Christie’s have been asked to cooperate with the authorities in what has become a wide-ranging investigation.

“Lots of people here are not going into work, or they are only using junior staff at their offices and galleries,” said a Beijing gallery director who spoke on condition of anonymity because of the tension surrounding the issue. “They can’t arrest everybody, but everyone is still nervous.”

In the meantime Nils Jennrich and Lydia Chu, employees of the art-handling company Integrated Fine Art Solutions, languish in a Beijing jail on suspicion of smuggling, a crime normally associated with the illegal importation of drugs or arms. The charges carry a maximum of a life sentence.

Mr. Jennrich, 31, the company’s general manager and a German citizen, was taken away on the evening of March 30 during a raid of the business’s Beijing offices; hours later Ms. Chu, 29, its operations manager, was summoned for questioning. Mr. Jennrich’s family and colleagues have expressed concern for his health, saying he has been forced to share a cell with 11 others. During the first days of his detention, they added, he was interrogated for 36 hours straight, a violation of Chinese law.

“It’s a living nightmare,” said Mr. Jennrich’s fiancée, Jenny Dam, who said the couple had planned to marry in May.

No trial date has been set.

The detentions have put a spotlight on the mercurial Chinese legal system and raised questions among collectors and industry executives about the potential pitfalls of China’s fast-growing art and antiques market, which last year surpassed the United States to become the world’s largest, according to the European Fine Art Foundation. The crackdown, industry professionals have warned, could dissuade Chinese collectors from bringing home art purchased abroad.

Some have privately questioned the government’s motivation, noting that Integrated Fine Art Solutions has handled the work of Ai Weiwei, the maverick artist who has earned the government’s wrath for his criticism of the ruling Communist Party. Others have suggested that the case is aimed at taking down a foreign-owned company to clear the way for a well-connected domestic player that recently began lavishly investing in the art-handling business.

“China is supposed to be a lot more integrated with the world economy,” said Jonathan Schwartz, chief executive of Atelier 4, an art logistics company based in New York. “The decision to throw someone in jail tells you that China is not really playing by similar rules as the other large nations that are dealing with culture and transit.”

The Foreign Ministry has declined to comment on the case.

Speaking from Hong Kong, the chief executive of Integrated Fine Art Solutions, Torsten Hendricks, dismissed the allegations — that the accused tried to help buyers avoid $1.6 million in import duties — saying his company does not get involved in art valuation.

“We forward, store and install artwork, that is all,” said Mr. Hendricks, who was also questioned in Beijing by the authorities but was later allowed to leave the mainland. “Determination of value, the statement of this value, is not our responsibility.”

Legal experts said that art handling firms simply work with the values provided by their clients, but that Chinese law is murky on whether individuals employed by shipping companies can be held liable for undervaluing a work.

Nancy M. Murphy, a lawyer at the Beijing firm Jincheng, Tongda & Neal, who is advising Mr. Jennrich’s family, said she hoped that the authorities would take into consideration whether the accused personally profited from undervaluing the work in question.

Ms. Chu’s fiancé, Benoit Granier, said he found the accusations hard to fathom, given Ms. Chu’s modest life, including sharing an apartment with five others. “She’s just trying to find a way in her life,” he said.

Setting aside questions of Mr. Jennrich’s and Ms. Chu’s culpability, several industry experts say the practice of undervaluing art and antiques on Chinese customs forms is widespread. The International Convention of Exhibition and Fine Art Transporters, a trade organization, noted the problem last year in a newsletter and suggested that the practice was harmful to all involved. “There is no way around these regulations without breaking the law,” it wrote.

In China imported art is often levied with duties that can reach 35 percent of an object’s value. Many industry veterans complain of a customs process that is notoriously onerous.

International art experts acknowledge the difficulty of valuing contemporary art, noting that a wild jump in price at auction after a piece passes through customs does not necessarily suggest undervaluing at the border.

Ms. Murphy, the lawyer, said it took an experienced appraiser to know the difference between fraud and the vagaries of a white-hot art market.

She suggested that the arrests were aimed at sending a message to bigger players in the international art scene. “Kill the chicken to scare the monkey,” as she put it.

The crackdown has touched other companies and individuals. Officials have detained three Chinese citizens, including the editor of an art magazine and the chairman of an art investment company. A Chinese transport company, Noah Fine Art Shipping Agency, was forced to turn over a list of its clients, according to The Oriental Morning Post.

Given how lucrative the art market has become, Chinese authorities have a keen interest in reducing tax dodging. Last year China accounted for 41 percent of worldwide auction revenues and about 30 percent of the overall art and antiques market, according to artprice.com and the European Fine Art Foundation.

Karen Sanig, the head of art law at Mishcon de Reya, a firm based in London, said that customs authorities around the world often impose fines after accusations of undervaluing art but that they rarely use their full powers to detain suspects. “It is unusual for two agents from a shipping firm to be arrested,” she said.

Integrated Fine Art Solutions is a relatively small player in art shipping but it has high-profile clients, including the Ullens Center for Contemporary Art — one of China’s best-known museums — and it handles major international art fairs in Hong Kong and Shanghai.

A number of art professionals, speaking on the condition of anonymity out of fear of drawing unwanted attention from the authorities, have suggested that the government may simply be trying to remove the competition as it prepares to enter the lucrative art-handling business.

Two weeks before the detentions, the state-owned Beijing Gehua Cultural Development Group presided over the groundbreaking for a free-trade zone in the capital that will include an advanced art-handling warehouse. According to the state news media, Gehua is investing $785 million in the venture.

There is little precedent for the case against Ms. Chu and Mr. Jennrich, although if the recent prosecution of a Belgian Sinologist accused of smuggling an ancient sarcophagus out of China is any indication, the punishment may be stiff. In 2008 the Belgian, Kurt de Raedemaeker, was convicted of illegally exporting the relic, despite his insistence that he had obtained the necessary government permits.

He received a life sentence, but after spending some time in prison he was allowed to serve his sentence in a Beijing hotel. The former Belgian ambassador, citing Mr. de Raedemaeker’s heart problems, called the punishment a “slow death sentence.” Mr. Raedemaeker, who was 48, died in March in his hotel room.

 

LONDON – At Christie’s post-war and contemporary art auction here on Wednesday evening – an event aptly described by the super dealer Larry Gagosian as “Masterpiece Theatre’’ – collectors from around the world dropped millions of dollars on works by many of the major names of the 20th century, and record prices were set for two of them: Yves Klein and Jean-Michel Basquiat.

Hoping to capture the attention of both established collectors and new-rich ones from places like the Middle East, Russia and Asia, Christie’s had marshaled its international connections, pulling in exceptionally strong artworks for an evening auction like few others London has seen. The sale totaled $207.3 million, against an estimate of $160.1 million to $216.9 million, the highest total of any auction in the category that Christie’s has held in Europe.

Unlike Sotheby’s, whose auction on Tuesday evening made $108 million with more works of lower value, Christie’s reached for the stars.

Three bidders wanted Klein’s “Le Rose du Bleu (RE 22),’’ an organic landscape of pink sponges and pebbles that was bought by a telephone bidder for $36.7 million, a record price for the artist at auction and well above its high estimate of $31.2 million. (Final prices include the buyer’s commission to Christie’s: 25 percent of the first $50,000; 20 percent of the next $50,000 to $1 million and 12 percent of the rest. Estimates do not reflect commissions.) The painting, which was being sold by an anonymous collector, was one of the earliest of just 12 such sponge reliefs that the artist produced in pink rather than his trademark ultramarine blue.

The other record was achieved for a 1981 Basquiat canvas of a primitive figure with clenched teeth, his oversized hands held high in the air. It had been estimated to bring $15.6 million to $23.4 million, but was purchased by a telephone bidder for $20.1 million. (The painting had last been up for sale at Sotheby’s in New York in 2007, when it brought $14.6 million.) Brett Gorvy, chairman of Christie’s post-war and contemporary art worldwide, who took the winning bid, described the buyer as “a seasoned European collector who had been looking for the right Basquiat for years.”

“There was strong American buying tonight,’’ Mr. Gorvy said after the sale. “But Europeans were even stronger.’’ (Surprisingly, he added, there was little action from either Asian or Russian buyers, in contrast to many recent sales.)

Another hefty price was paid for Francis Bacon’s “Study for Self-Portrait,’’ a 1964 full length painting of the artistperched on a bed, which was expected to sell for between $23.4 million and $31.2 million. After it failed to sell at auction at Christie’s in New York in 2008 it was the subject of a law suit, in which the owner, a family trust led by the Connecticut collector George A. Weiss, claimed that Christie’s had reneged on a $40 million guarantee (a sum promised the seller regardless of a sale’s outcome). That suit was settled in July of last year, with Christie’s agreeing to pay the trust an undisclosed.

On Wednesday night William Acquavella, the Manhattan dealer, bid for the work by phone in what became a protracted battle against Christopher van der Weghe, another Manhattan dealer. Mr. van der Weghe won, paying $33.6 million. “We knew we would have to fight for it,’’ Mr. van der Weghe said after the sale, describing the client he had bid for only as an international collector. “Quality is more important these days than ever.’’

Gerhard Richter has been a consistent winner over the past few years and on Wednesday night “Strutur (2),’’ a richly painted 1989 canvas of alabaster whites and gunmetal grays, sold to a telephone bidder for $19.8 million. It had been estimated to bring $14 million to $18 million.
Lucian Freud, who died a year ago, has a loyal following too, especially after the recent exhibitions here and in New York. Two works by him both brought strong prices. “Naked Portrait II,’’ a 1974 painting of the artist’s lover Jacquetta Eliot curled up asleep, had been expected to sell for $5.8 million to $6.8 million; it made $6.7 million. And “Head of a Greek Man,’’ a 1946 portrait, fetched $5.3 million, well above its estimate of $2.3 million to $3 million. Both paintings were purchased by telephone bidders.

Not everything sold high. Jeff Koons’s monumental stainless steel sculpture “Baroque Egg with Bow (Blue/Turquoise),’’ from 1994-2008, was snapped up by Ivor Braka, a London dealer, for $4 million, just under its low estimate. “Koons is one of the truly ground-breaking artists of the 20th and 21st centuries,’’ Mr. Braka said after the sale, “and to buy something like this at this level, especially given the elevated prices for other artists, was great. Some days you just get lucky.’’

Feathery blue skies, pheasants, puppies and pretty youths: Many of Karen Kilimnik's paintings read like an adolescent's fanciful dreams.

But fans and curators see more than that. Ingrid Schaffner, senior curator at the University of Pennsylvania's Institute of Contemporary Art in Philadelphia, says the artist's work is akin to the ballet, "something that looks so beautiful," with "these women who appear to be suspended in a permanent adolescence but are in fact hardworking, disciplined artists." (Ms. Schaffner organized a 2007 Kilimnik show.)

303 Gallery, NY and Galerie Eva Presenhuber, Zurich

Karen Kilimnik's 1998 'Prince Albrecht at Home...' will be on view in Greenwich, Conn.

The artist's imagery is lifted from cult TV shows, 18th-century French paintings, foreign fashion magazines and celebrity promo stills.

A solo exhibition of Ms. Kilimnik's work begins this weekend through September at the Brant Foundation Art Study Center in Greenwich, Conn. (guided tours open to the public by appointment). The show's 60 paintings, drawings and installations are all from the collection of the museum's founders, paper magnate Peter Brant and his wife, the onetime supermodel Stephanie Seymour.

In a phone interview, Ms. Kilimnik herself seems a sweet and shy embodiment of her work. Born in Philadelphia sometime in the 1950s (she's mum on precisely when), she studied architecture at Temple University, worked odd jobs and, ultimately, plied New York dealers with letters and postcards in an effort to get them to show her artwork. Ms. Kilimnik cited a few of her key influences (animal portraitists Sir Edwin Landseer and François Desportes) and explained her paintings' signature small scale: "I couldn't afford anything, I didn't have much room, and I like to work on my own."

Her painting of Leonardo DiCaprio, "Prince Albrecht at Home at the Castle on School Break," sold at Christie's London for $533,117 in October. It's in the Brant Foundation display.

—Rachel Wolff

A version of this article appeared May 5, 2012, on page C14 in some U.S. editions of The Wall Street Journal, with the headline: Art That Dissects the Pretty.

Christie's

 

ARTIST Gerhard Richter

TITLE 'Abstraktes Bild (798-3)'

AUCTION HOUSE Christie's

ESTIMATE $14 million to $18 million

This dreamy 1993 canvas is sure to be a winner when it comes up for sale on May 8. Prices for the 80-year-old Mr. Richter have been steadily rising, helped in large part by a highly praised retrospective at the Tate Modern in London this winter, which is now at the National Gallery in Berlin and will be heading to the Pompidou Center in Paris in June. Last year alone some $200 million worth of works by Mr. Richter sold at auction. “It’s eye candy for the emerging buyer,” Mr. Gorvy said. The size of the canvas — it is nearly eight feet square — make it particularly impressive as does the masterly layering of colors, which is at once romantic and modern. It is being sold by Lyn Ross, the widow of George Ross, a financier from Bryn Mawr, Pa., who died in July.

 

Christie's

 

ARTIST Cézanne

TITLE 'A Card Player'

AUCTION HOUSE Christie's

ESTIMATE $15 million to $20 million

For nearly six decades this watercolor, depicting Paulin Paulet, a gardener on Cézanne’s family estate near Aix-en-Provence, France, was familiar to scholars only as a black-and-white photograph. No one knew if the actual work, a study for Cézanne’s celebrated Card Players paintings, still existed and if it did, who owned it.

But it recently resurfaced, and the Dallas collector who had it in his home is selling it on Tuesday. Cézanne’s images of workers on his farm — pipe-smoking men sitting around a table, their expressions dour, absorbed in a game of cards — are among his most recognizable work. Executed from 1890 to 1896, they were the artist’s take on genre paintings made famous by 17th-century Dutch masters. Although not as instantly recognizable as “The Scream,” the watercolor is considered an art historical landmark, but one that will most likely appeal to the connoisseur collector rather than a speculator or a trophy hunter.