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How Much Is That Picasso In The Window? Tax Court Says Quite A Bit

Anchin in the NewsDecember 30, 2015

This article was published by Forbes.
Anchin Principal Quoted: Gary S. Castle, FCA

How Much Is That Picasso In The Window? Tax Court Says Quite A Bit

Anchin's Art Accounting expert, Gary Castle, provides insight to estate planning for art collectors.

Dueling Experts

The estate’s expert argued that the February Christies auction was a fluke. The IRS expert considered it carving back the price to $10 million to reflect 2009 conditions. Not that it matters, but that would yield a value a bit over what the estate cleared on the auction with the 60% deal. The Tax Court went with the revised IRS value

The estate’s experts ask us to disregard this sale because "[i]t was a fluke", and the estate unconvincingly contends that this sale is not relevant because it could not have been reasonably anticipated on the date of death. To the contrary, the sale of the Picasso may "be taken into account as evidence of fair market value as of the valuation date." Indeed, no evidence is more probative of the Picasso’s fair market value than its direct sale price. (Citations omitted)

On the Motherwell, the experts agreed that the November sale for $1,426,500 was the best comparable, but the estate’s expert carved it back to $800,000 to represent 2009 conditions. The Tax Court went with the estate on that one.

Judge Foley really gave the IRS a hard time on the Dubuffet valuation:

The estate and respondent, respectively, contend that the Dubuffet had a date of death value of $500,000 and $900,000. The best comparable relating to the Dubuffet was the November 14, 2007, sale of Jean Dubuffet’s Element Bleu XIII (i.e., a similarly sized work from the same series) for $825,000.Respondent’s expert’s contention that the Dubuffet’s value was higher during the market downturn than Element Bleu XIII’s value before the market downturn is, in short, nonsensical. We agree with the estate that Sotheby’s $500,000 appraisal (i.e., the value the estate reported on its Form 706) reflects the Dubuffet’s date of death value. (Emphasis added)

You could say that the estate won on two out of three paintings, but it lost on the big dollars.

Some Commentary

Matt Erskine runs a boutique legal practice focusing on unique assets. He thinks the Tax Court got it right:

I agree with the Court. On the Piccaso, sale at a public auction is the ultimate authority on fair market value, especially where there is a price guaranty by the auction house. To argue that it is a fluke is nonsensical, especially when you are dealing with a one-of-a-kind work of art by a well-known artist. Auction houses want such works of art just because they bring attention, and outsized results, during sales. The discount from the actual sale price reflects the uncertainty of the art market after 2008.

I also feel that the appraiser for the estate was talking out of both sides of his or her mouth, since at the same time the opinion was given, the auction house was willing to give a much higher price guaranty.

I also feel that the court was right in rejecting the IRS claims on the value of the other two works. That is the correct application is to take the sale price ($1.4 MM) and work backwards to the Date of Death value (for the one that sold) and correctly for the one that did not sell.

Gary S. Castle, principal and member of the Art Specialty practice group at Anchin, Block & Anchin LLP was impressed by the IRS blowing the Dubufett valuation:

Challenging the Art Panel of the IRS is an expensive and time consuming process. It is therefore imperative that the valuation obtained for the estate tax return is comprehensive in its approach, using current "comps" both at and before the date of death together with any that occurred thereafter. The IRS has an inherent advantage in that it is auditing returns a year or two after they have been filed, and therefore have a larger population of "comps" to review. Also, in the valuation process, both the estate and the IRS must take into account overall economic conditions as well as the art market in particular. In the Estate of Newberger, this clearly did not happen in the Dubuffet work, as the IRS disregarded the economic downturn between 2007 "comp" and the 2009 valuation for the estate tax return, and for that reason the IRS valuation was found to be "nonsensical" by the Tax Court.

Read the complete article at Forbes

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