Authored by John Walker and Chris D. Treharne, ASA, MCBA, BVAL of Gibraltar Business Appraisals, Inc. a member firm of FCG Issue 15:1
Estate of James A. Elkins, Jr., Deceased, Margaret Elise Joseph and Leslie Keith Sasser, Independent Executors, Petitioners v. Commissioner of Internal Revenue, Respondent
140 T.C. No. 5, Docket No. 16597-10, Filing date March 11, 2013, Judge Halpern
In a case of great interest to appraisers of all stripes, James A. Elkins, along with his children, owned fractional interests in 64 pieces of art, some of which were from famous artists. Upon his death in 2006, his estate valued his fractional interests in the art with deep discounts. The IRS challenged this discounts, asserting no discounts were appropriate.
In a complex case, the Tax Court determined that discounts to fair market value for undivided interests in art were permissible. Specifically, “[t]here is no bar, as a matter of law, to an appropriate discount from pro rata fair market value in valuing, for estate tax purposes, decedent’s undivided fractional interests in the art.”
Experts for both sides testified that markets for undivided interests in art was very limited. Even though empirical data for discounts for lack of marketability (only, not control and marketability) for stock interests in more developed markets suggest greater discounts are appropriate, the court ultimately settled on a ten-percent total discount.
Importantly, the court rejected the IRS claim that discounts should be limited to the difference between the sale price and a seller’s proceeds. Instead, it held “fair market value to the the gross amount paid by the buyer to the seller.” Said in another way: Fair market value is consideration passed from buyer to seller, which should not be distorted by the seller’s net proceeds.