Generally, it's not a good idea to fight battles with the IRS. However, I think in this case, the potential taxpayers have a good argument.
This New York Times article tells the story of the Sonnabend family. When Ileana, an art dealer, passed away, she left her children quite an extensive art collection worth approximately $1 billion, including a sculptural work called Canyon by Robert Rauschenberg. The kids have already sold off much of the art to pay the nearly $500 million estate tax bill, but they're now in a tiff with the IRS over Canyon.
The problem is this: one of the sculptural elements of Canyon is a stuffed bald eagle. Under The Bald and Golden Eagle Protection Act of 1940, it is illegal to "take, possess, sell, purchase, barter, offer to sell, purchase or
barter, transport, export or import, at any time or any manner, any bald
eagle ... [or any golden eagle], alive or dead, or any part, nest, or
Technically, Ms. Sonnabend's heirs are in violation of the Act by merely possessing the eagle, but they've gotten by with a wink and a nod from the U.S. Fish and Wildlife Service since the eagle was killed and stuffed decades before the Act protecting them was passed; the caveat is that the work must remain on public display, which it is (at the Metropolitan Museum of Art).
Whence the problem with the IRS, then? Since Ms. Sonnabend's heirs cannot legally sell the sculpture, it was appraised with a value of zero dollars. There is no market for it, hence it has no value. The IRS disagrees, and values the work at $65 million in "artistic value"; they are seeking almost $30 million from the heirs as a combination of taxes and penalties.
My verdict: no taxes, value of zero. Why? The work can never be legally sold in a fair and open market transaction, therefore has no dollar value.
I bet the insurance company would beg to differ.