In Property of Eva Franzen Kollsman v. Commissioner of Inside Income, Case No. 18-70565 (June 21, 2019), the U.S. Court docket of Appeals for the Ninth Circuit addressed in an unpublished opinion whether or not the Tax Court docket accurately decided the honest market worth (FMV) of two Previous Grasp work. Discovering that the Tax Court docket’s rejection of the opinion of the property’s skilled witness and reliance on the Inside Income Service’s skilled witness wasn’t in clear error, the Ninth Circuit upheld the valuation of the work by the Tax Court docket.
Property’s Valuation of Work
Eva Franzen Kollsman (the decedent) died on Aug. 31, 2005, proudly owning two 17th century Previous Grasp work, Village Kermesse with Dance Across the Maypole (Maypole) (depicting the revelry of a village competition) and Orpheus Charming the Animals (Orpheus) (depicting Greek mythological musician enjoying the lyre surrounded by animals).
The property’s skilled witness, a vice chairman of Sotheby’s North America and South America and co-chairman of Sotheby’s Previous Grasp Work (Wachter) ready a consignment settlement for the executor of the decedent’s property by which he valued Maypole between $600,000 and $800,000 and Orpheus between $100,000 and $150,000.
Concurrently, Wachter despatched the executor a letter by which he acknowledged that the FMVs of the work “primarily based on firsthand inspection of the property” had been $500,000 and $100,000, respectively. The letter was connected to the well timed filed Kind 706 of the property, and the FMVs reported on the return had been $500,000 for Maypole and $100,000 for Orpheus.
The executor employed a “preeminent high-quality artwork companies agency specializing in high-quality artwork restoration and framing” to reframe the work. On inspection of the work, a supervisor of the agency famous that the work had been lined by a heavy layer of grime that might be eliminated with relative ease. The work had been cleaned, at a value of $four,500 and $four,350 respectively, earlier than being reframed.
In January 2009 (roughly three and a half years after the decedent’s demise), Maypole bought at Sotheby’s for $2,434,500. Orpheus remained within the possession of the executor on the time of the Tax Court docket trial.
IRS’ Valuation of Work
The IRS issued a discover of deficiency to the property, in the end asserting that the FMVs of the work, as of the decedent’s date of demise, had been $2.1 million for Maypole and $500,000 for Orpheus.
Tax Court docket Evaluation
The Tax Court docket discovered Wachter “exaggerated” the dirtiness of the work and the dangers inherent in cleansing them in arriving at his valuations. In making use of the hypothetical keen purchaser and vendor check to find out the FMV of the work, the courtroom emphasised that the hypothetical purchaser is each knowledgeable and prudent and would have investigated the state of the portray and the cleaning course of obligatory earlier than arriving at a purchase order value.
As well as, the courtroom discovered Wachter’s omission of comparable gross sales to help his valuations to be “exceptional” as comparable gross sales are “fairly essential” in figuring out the worth of artwork.
Lastly, the Tax Court docket discovered the last word sale value of Maypole to be probative proof of its worth as of the decedent’s date of demise and was unpersuaded by Wachter’s attribution of the disparity between his estimated valuation and the last word sale value of Maypole to its vastly improved situation post-cleaning and to a surge in demand for Previous Masters’ works after 2005. Primarily based on its findings, the courtroom gave “little or no weight” to Wachter’s opinion.
In distinction, the Tax Court docket discovered the detailed comparative market information method utilized by the IRS’ skilled in valuing Maypole to be persuasive. The courtroom accepted the valuation of the IRS’ skilled, with a 5% low cost for the portray’s soiled situation and the minor danger concerned within the cleaning course of. Due to this fact, the courtroom held that the related FMV of Maypole pwas $1.995 million.
Equally, the courtroom discovered that the IRS’ skilled “supported his valuations of Orpheus with reasoned argument primarily based on goal market information” in analyzing gross sales of comparable work and offered reasoned arguments for attributing the portray to one in all two potential artists. The courtroom accepted the valuation of the IRS’ skilled, with a 25% mixed low cost for the portray's soiled situation and the cleansing danger, potential bowing of the portray and chance that the artist was the much less outstanding of the 2 choices. Due to this fact, the courtroom held that the related FMV of Orpheus was $375,000.
Ruling Upheld on Attraction
On attraction, the Ninth Circuit famous that the Tax Court docket accurately utilized the legislation by concluding that the related worth of the work was the FMV of the work as of the decedent’s date of demise, or the value at which a keen purchaser and vendor “each having affordable information of related information” would change property.
The Ninth Circuit upheld the Tax Court docket’s findings of truth, together with its:
(1) condemnation of Wachter’s “exaggerate[ion]” of the work’ dirtiness and the cleansing dangers, his insufficient rationalization of the disparity between his valuation and the last word sale value and his lack of comparable gross sales information; and
(2) acceptance of the valuation supplied by the IRS’ skilled, primarily based on the skilled’s “clarify[ation of] his methodology, reliance on comparables, and analysis concerning the work’ circumstances.”
Takeaways
Property planning attorneys confronted with compiling the related info for a 706 (or a 709) could be tempted to outsource valuations and settle for no matter report is produced by the respected skilled concerned. Nonetheless, this case is notable for the extremely important language of each the Tax Court docket and the Ninth Circuit in weighing the work of a seemingly extremely certified valuation skilled. Right here, the executor (and his counsel) was remiss in blindly counting on a educated skilled within the related space reasonably than reviewing the premise for the valuation and in search of each comparables and a reasoned evaluation.
Beth L. Fox is an lawyer at Harrison and Held, LLP.
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