The Fifth Circuit rejected both the Internal Revenue Service and the Tax Court’s valuation of art contained in an estate, finding an estate’s valuation to be supported by the evidence.
At the time of his death, James A. Elkins Jr. owned fractional interests in varying percentages with his three children in 64 pieces of art by various artists including Pablo Picasso, Henry Moore, Jackson Pollock, Paul Cezanne, Robert Motherwell and Jasper Johns.
The IRS assessed a deficiency against his estate resulting solely from its disallowance of the “fractional ownership discount” applied by the estate in determining the taxable values of Elkins’ pro rata shares of the jointly stipulated fair market values of the works of art.
In the Tax Court, the IRS maintained that absolutely no fractional ownership discount was allowable. “This presumably accounts for [the IRS’s] failure to adduce any affirmative evidence—either factual or expert opinion—as to the quantum of such discounts in the event they were found applicable by the court,” the Fifth Circuit stated.
The Tax Court rejected the IRS zero-discount position, but also rejected the quantums of the various fractional-ownership discounts adduced by the estate through the reports, exhibits and testimony of its three expert witnesses. Instead, the Tax Court concluded that a nominal fractional-ownership discount of 10 percent should apply across the board to Elkins’ share of the stipulated FMV of each of the works of art.
“The entire appeal thus begins and ends with the question of the taxable value of Decedent’s fractional interests in those 64 items of non-business, tangible, personal property that were jointly owned in varying percentages by Decedent and his three adult children at the instant of his death,” according to the Fifth Circuit in its ruling Monday. “Just as it was obvious to the Tax Court that the Commissioner had no viable basis for rigidly insisting that no fractional-ownership discount was applicable, it should have been equally obvious that, in the absence of any evidentiary basis whatsoever, there is no viable factual or legal support for the court’s own nominal 10 percent discount,” it stated.
The court concluded that the discounts determined by the estate’s experts “are not just the only ones proved in court; they are eminently correct.”
The estate was therefore entitled to a refund of more than $14 million.
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