VICTORY FOR TAXPAYER OVER THE IRS: Discount Allowed for Fractional Interest in Artwork

In a victory for the taxpayer, the Fifth Circuit ruled that valuation discounts are available for an estate which owns a fractional interest in artwork. In the case of Estate of James A. Elkins, Jr. v. Commissioner (case no. 13-60472, 5th Circuit 2014), the Fifth Circuit rejected the Tax Court’s analysis which resulted in a refund to the Estate of James A. Elkins, Jr. in the amount of $14,359,508.21 plus statutory interest.

Mr. Elkins had a partial or fractional interest in 64 pieces of art at his death. He had varying ownership interests in the art with his three children. All of the artwork was subject to a Tenants in Common agreement which prohibited the sale of any art without the unanimous consent of all the owners. After Mr. Elkins’ death, his estate claimed a substantial discount on the value of the art for estate tax purposes, arguing that the art was not marketable because the estate could not sell it without the unanimous consent of all owners. During the audit of the estate’s Federal Estate and Gift Tax Return (706), the Internal Revenue Service refused to allow any discount for his fractional ownership and imposed an estate tax deficiency of $9,068,266.

The estate appealed to the Tax Court and presented expert testimony in support of its discounted valuation. The Internal Revenue Service presented no expert testimony and held to its position that the assets were not entitled to any discount. The Tax Court in its opinion allowed a discount of 10 percent. On appeal the Fifth Circuit reversed the Tax Court and allowed a discount of 44.47 percent which resulted in a refund of $14,359,508.21.

While it is believed that the IRS could have succeeded in reducing the discount if it had not taken the zero discount approach, the case shows that fractional interests in art and other collectibles are eligible for discount to valuation if properly documented and if careful planning is in place.

To discuss any aspect of this court decision or any aspect of gifting or structuring of assets, please contact a member of the Timoney Knox Estate GroupGeorge M. Riter, Esquire; Michael O’Hara Peale, Jr., Esquire; James J. Jacquette, Esquire; John J. McAneney, Esquire; Thomas A. Boulden, Esquire; Karen S. Dayno, Esquire or Kevin D. Birkhead, Esquire.

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