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Nominal Art Valuation Discount Rejected -- $14 Million Refund

Saul Brenner, CPA, J.D., LL.M. 01.22.2015 | eVisor

The Fifth Circuit Court held that the Tax Court should not have applied a mere 10% discount to a late art collector’s interests — resulting in a $14.4 tax refund to the estate1.

The deceased held fractional interests in art works by Pollock, Picasso, and Cezanne — valued at an estimated $35 million — with his children owning the remaining interests.  The executors applied discounts for lack of control and marketability that amounted to 44.75%. The IRS did not accept any discounts and assessed a tax deficiency, and the Tax Court only agreed to a 10% discount from the pro rata share of the fair market value.

The Fifth Circuit saw no viable evidence to support the nominal 10% discount asserted by the IRS and Tax Court.  It did find the estate’s evidence to support the 44.75% discount to be “uncontradicted, unimpeachable and eminently credible.” The court noted that the children’s interest in the art supported the higher discount rate. A potential buyer would likely ask for a steep discount in a purchase because it would be unlikely that the art could be resold immediately.        

1 Estate of James A. Elkins v. Commissioner, No. 13-60472 (5th Circuit 2014, Doc 2014-22524)


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