And never more so than in Wondertaxland! Prof. Althouse regales us with the fable of a rich woman who leaves a prominent work of art to her heirs. The problem is, the work of art features a long-dead stuffed endangered species, which therefore cannot be sold legally. How to extract estate taxes from this bonanza? (The woman died in 2007, before the estate taxes were temporarily de-fanged.) If the estate can't sell the art, is it worth anything? Absent the endangered species law, art experts say it would be worth $65 million, thus generating almost $30 million in tax bills. Assuming the estate doesn't have that kind of cash handy without selling the artwork, it's a tough spot.
The problem of valuing an asset that can't be sold isn't really as exotic as this story would suggest. It's the typical problem faced by a family business at death, and the reason it's a very good idea to have a big life-insurance policy available to pay the estate tax with if you don't want your heirs to be dragooned into a fire-sale. For decades I watched people spends untold millions of dollars fighting over the valuation of businesses that couldn't or wouldn't be sold for one reason or another; the usual approach in bankruptcy court is to hire experts to fight over what kind of income it's likely to generate over time, and then over the right discount rate to use in taking a present value of that stream of income. (Bankruptcy lawyers can keep that kind of thing up for years, if a sensible judge doesn't exert some discipline over what can never be more than a rough substitute for reality.)
The best approach is to imitate Solomon: try to find a way to force all the combatants to take responsibility for the flip side of their claims. The IRS should be forced, for instance, to confront the prospect of a charitable deduction from ordinary income resulting from the donation of the artwork to a museum. That will put a stop to wild imaginings about the huge value of the piece. Likewise, if the heirs insist that the work has no value, they should be forced to confront the price they would demand in an eminent-domain action. Even if they can't sell it, they may be very attached to the notion of keeping it, whether for personal pleasure or for the status of owning it. If a museum owned it, it might generate income from admissions fees. Regardless of the popular wisdom, sales are not the only means of establishing a value even in the strict economic sense. The old system of dividing a candy-bar fairly comes to mind: one cuts, the other chooses.
Better yet, though, just get rid of the unified gift-and-estate tax, which is an abomination to start with.