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Ileana Sonnabend Heirs Can't Sell Illegal Art Piece, IRS Taxes it Anyways

Imagine that someone dies leaving behind a massive collection of valuables-- only some of the valuables can never be sold. What would the IRS do in such a case? What would the heirs do if they get taxed on the illiquid valuables? This is exactly the battle over Ileana Sonnabend's estate, reports The New York Times.

Sonnabend, who passed away in 2007, was a legendary art dealer in the New York scene.

Her estate tax bill came in at $331 million to the IRS and $140 million to the State of New York, according to Forbes.

Her heirs had to sell many of her paintings to pay the estate tax bill but one painting, the "Canyon," escaped sale. In fact, on the estate tax return, the heirs had it valued at $0, based on appraisals from reputable art appraisers.

The problem for the heirs now is that the one painting they can't sell is the highest valued painting in the collection.

The Canyon, a Robert Rauschenberg, can't be sold. At least not legally. It contains a stuffed bald eagle and according to the 1940 Bald and Golden Eagle Protection Act, the painting is illegal to possess, sell, purchase, barter, transport, import or export, writes The Times. Despite this, Sonnabend was able to get a tiny exemption to the law and have the painting loaned to the Metropolitan Museum of Art, due to her attestation that the eagle had been killed and stuffed long before the law came into effect.

The value of art in one's estate for estate tax purposes is generally fair market value. But what's the fair market value of something that can't be sold on the fair market?

The IRS has valued the painting at $65 million, as stated on their Notice of Deficiency last October.

Their argument is that it could be sold on the black market. And according to tax law, whether something is legal or not doesn't affect its taxability, writes Forbes .

The heirs plan to fight the tax deficiency in Tax Court, along with the millions of dollars in penalties. It's a real predicament: If they don't sell the painting, they're violating tax law; if they sell it to pay the estate taxes, they violate federal law.

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