Valuation of Artwork for Federal Estate Tax Purposes

Valuation of Artwork for Federal Estate Tax Purposes

Before valuing items of art, [Estate of Elkins v. Comm'r, 2013 U.S. Tax Ct. LEXIS 6 (T.C. Mar. 11, 2013)] held that pursuant to IRC Section 2703(a)(2), the court would disregard an agreement made by the decedent by which he had waived his right to institute a partition action with respect to some of the works of art and thereby had relinquished an important use of his fractional interests in those works.

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Valuing Artwork for Estate Tax Purposes. Under IRC Section 2703(a), the value of a decedent's gross estate includes the value at the time of the decedent's death of all property, real or personal, tangible or intangible, wherever situated. Further guidance on the rule is provided in the treasury regulations. Regulations Section 20.2031-1 provides that the value of every item of property includible in a decedent's gross estate under IRC Sections 2031 through 2034 is its fair market value (FMV) at the time of the decedent's death. [Treas Reg § 20.2031-1(b). The regulations further provide that if the executor elects the alternate valuation method under IRC § 2032, the value of every item of property includible in the decedent's gross estate is the fair market value thereof at the date, and with the adjustments, prescribed in IRC § 2032.]...

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In addition, in determining FMV, case law provides that "the value must reflect the highest and best use of the property on the valuation date." [Estate of Mitchell v. Comm'r, T.C. Memo 2011-94 (T.C. 2011), citing Estate of Kahn v. Comm'r, 125 T.C. 227 (T.C. 2005).]...

The Role of Experts in Valuing Artwork. ... When an estate tax return is examined by the Service, and the item of art has a claimed value of $50,000 or more, the Service calls upon a group of 25 art experts, the Art Advisory Panel, to establish the value of the artwork. When the tax court must determine the FMV of artwork in estate tax cases, the tax court examines the opinions of the parties' experts. In making a FMV determination, the tax court will "evaluate the expert valuation opinions in light of the expert's qualifications and all other evidence," [Estate of Mitchell v. Comm'r, T.C. Memo 2011-94 (T.C. 2011), citing Estate of Christ v. Comm'r, 54 T.C. 493 (T.C. 1970).]...

The Art Advisory Panel of the Commissioner of Internal Revenue. ... The Art Advisory Panel... assists the Art Appraisal Services unit in the Office of Appeals for the Internal Revenue Service. The panel consists of art dealers, scholars, and museum curators, and the Panel plays a significant role in valuing artwork for estate and gift tax purposes.

Taxpayers may submit to the Service property appraisals in support of the FMV claimed for artwork in their federal tax returns, and the Art Advisory Panel assists the Service in the review and evaluation of these appraisals. The Art Advisory Panel's annual report for 2012 explains that the Panel "helps the IRS review and evaluate the acceptability of tangible personal property appraisals taxpayers submit in support of the fair market value claimed on the wide range of works of art involved in income, estate, and gift tax returns."

In addition to assisting the Service in evaluating taxpayers' claimed property appraisals, the Panel also is called upon by the Service to assist in audits...

Revenue Procedure 96-15. ...Revenue Procedure 96-15... lays out the procedures for... a Statement of Value that can be used to substantiate the value of art for federal tax purposes...

Revenue Procedure 96-15 applies to an item of art that:has been transferred

  1. as a charitable gift;
  2. by reason of a decedent's death; or
  3. by intervivos gift.

A Statement of Value may be issued by the Service for an item of art appraised at less than $50,000 where:

  1. the request for the Statement of Value includes a request for appraisal for at least one item appraised at $50,000 or more, or
  2. Service finds that issuance of the Statement of Value would be in the best interest of efficient tax administration.

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Estate of Elkins v. Commissioner. In Elkins, the tax court was called upon to determine the value of a decedent's interests in artwork for estate tax purposes. The issue in the Elkins case was whether the tax court could disregard a certain agreement that restricted the decedent's rights in fractional interests in several items of art. If the court found that the agreement did affect the decedent's rights, the value of the decedent's fractional interests in the artwork would be impacted. The court disregarded the agreement pursuant to IRC Section 2703(a)(2) and determined the fair market value of the decedent's fractional interests in the artwork.

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IRC Section 2703. It is worth noting that the tax court has been asked to determine the application of Section 2703(a)(2). only a few times prior to the Elkins case. In Strangi v. Commissioner, another estate tax case, the tax court held that Section 2703(a)(2) did not apply to a limited partnership agreement. [Estate of Strangi v. Commissioner, 115 T.C. 478 (T.C. 2000); In Holman v. Commissioner, a gift tax case, the tax court disregarded certain transfer restrictions in a limited partnership agreement pursuant to Section 2703(a)(2). [Holman v. Comm'r, 130 T.C. 170 (T.C. 2008).] A search of Section 2703(a)(2) in tax court cases yielded only a handful of results. Nevertheless, as the Elkins case demonstrates, practitioners should consider the possible application of Section 2703(a)(2) in gift or estate tax cases that involve agreements with provisions that restrict a decedent's or donor's right to sell or use property.

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