This is a remarkable story. The IRS has taken the position that a work of art that is illegal to sell because it contains a stuffed bald eagle nonetheless has a fair market value of $65 million for estate tax purposes. The standard approach to valuing assets for most purposes under the tax code is determining the price at which the asset would change hands in a transaction between unrelated parties, neither of which is under a compulsion to buy or sell. If you can’t sell it, common sense says it should have a zero FMV.
I am sure there are exceptions, such as stolen property and narcotics, where the IRS has taxed individuals on the street value of items in their possession despite the items’ illegality. But I can’t think of a comparable situation where a transfer tax has been assessed on an item that is legal to own but illegal to sell. It will be interesting to see how this turns out.