Jean-Michel Basquiat's Family Tells IRS His Art Is Overvalued
The late artist's father and sisters are suing the Internal Revenue Service in United States Tax Court, claiming its bean counters overvalued — by nearly $66 million — their colossal collection of his paintings, drawings and other works.
The lawsuit, filed in May, says the family paid $8.5 million in estate taxes after Basquiat's mother died. That staggering sum was largely based on her share of the family's valuable collection.
The lawsuit claims that after the family paid the government, the IRS wrongfully determined the collection was worth much more and demanded nearly $10 million in additional taxes and penalties.
The tax fight began after Jean-Michel’s mother, Matilda Basquiat, died at 74 in 2008 in Brooklyn, leaving behind an extraordinary fortune, but no will.
She and her estranged husband, Gerard Basquiat, each owned a 50-percent stake in the estate of their son after he died of a drug overdose at 27 in 1988. That estate holds a treasure trove of valuable modern art, including 1,351 paintings and drawings by Jean-Michel, as well as 36 works by other well-known artists including Andy Warhol, according to the lawsuit.
In 2010, Gerard paid the IRS $8.5 million in death taxes for his wife. In the tax return, Gerard valued Matilda's half-interest in their son's estate at $36 million. An appraisal of the estate's artwork by auction house Sotheby's had determined the value, according to court papers.
But a subsequent IRS audit of the estate painted a different picture. Uncle Sam determined Jean-Michel's estate is worth $138 million — with the artwork alone valued at $131 million, records show.
The government put Matilda's stake in her son's estate at $69 million, and said her family owed an additional $7.3 million in death taxes, records show. The IRS also levied nearly $2 million in penalties against the family for having filed a late tax return and for undervaluing the assets.
Gerard Basquiat filed the lawsuit last spring after he and the IRS couldn't reach an agreement in the estate's valuation.
The lawsuit claims the IRS erred in its assessment, mainly by disregarding a blockage discount on the estate.
A blockage discount is a legal concept in which an estate claims that the sale of its artwork all at once would flood the market and significantly depreciate the value of each individual piece. The estate's taxes are determined after applying the discount.
In his lawsuit, Gerard Basquiat says that the art collection in Jean-Michel's estate is worth $127 million. He claims the estate is entitled to a blockage discount of $58.4 million. After applying the discount, the entire estate's value is only $72 million, according to the lawsuit.
Gerald Basquiat died in July, and his lawyers did not return a request for comment. His daughters, Lisane and Jeanine, are now in charge of the estate and have taken over the case.
The IRS did not respond to a request for comment. However, in a legal answer to the lawsuit, it maintains that its valuation is correct.
The case goes to court in April 2014.
Despite his short career, Jean-Michel Basquiat became a darling of the New York art scene, rubbing elbows with Warhol while churning out a prodigious amount of work. In his lifetime, his paintings commanded tens of thousands of dollars.
In the decades since his death, the value of his paintings and drawings have risen exponentially. At a Christie’s auction in May, “Dustheads,” a painting he made in 1982, sold for $48.84 million.
Herb E. Nass, a trusts and estates lawyer and the author of "Wills of the Rich and Famous," said the estates of renowned artists frequently apply for blockage discounts.
"It's very standard to take a substantial blockage discount," he said.
Nass noted that after a legal battle in the 1980s, the estate of Georgia O'Keeffe, the artist known for her paintings of the American Southwest, received a blockage discount of 75 percent on many of her works. The discount saved the estate millions in taxes.
Blockage discounts can be applied to a wide variety of assets — not just art but also stocks. Firms specializing in valuations are hired to determine the amounts.
Richard Hayes, a vice president and regional director at Empire Valuation Consultants LLC, said his firm calculates blockage discounts for art by taking into consideration an outside expert's appraisal and by examining art market conditions and historical sales of artists.
He said that generally when an estate applies a large discount, the government takes notice.
"Anytime that you're taking discounts on intangible assets, that will certainly raise the attention of the IRS," Hayes said. "Clearly, the representatives for [Basquiat's] estate felt that they took an appropriate discount and the Service didn't."