Estate Tax Discount Available For Fractional Interests In Artwork

Recently, the tax court addressed theissue of whether a discount should be permitted in a deceased’s estate forfractional interests in art. Over a thirty-year period, the deceased and hisspouse acquired 64 pieces of art. The couple placed three of the masterpiecesin a trust. After a ten year period, the remainder of the trust would bedistributed to their three children. When the trust expired, each childreceived 16.67% of each of the three masterpieces. Additionally, the children received an 8.98167% undivided interest in the other 61 pieces. The children agreed to a co-tenancy. As a result, the artcould only be sold if they all agreed and the proceeds would be sharedaccording to their percentage of ownership. The deceased’s executor claimed adiscount on the estate tax return. The executor reasoned that because 44.75% ofthe interest in the artwork was not the deceased, the deceased could notcontrol that interest and marketability. 

In Estate of Elkins v. Commissioner, the Tax Court held that a ten percent discount would be permitted in assessing a deceased’s fractional interest in artwork. The court suggests this discount would compensate a potential buyer facing uncertainty in selling the fractional interests of the artwork. The court was not persuaded by the government’s argument that the agreement not to partition the artwork was a constraint on the ability to sell. The court reasoned that the agreement did not literally prohibit the sale of the fractional interests. Further, the court stated it was possible that a buyer would take a title to a fractional interest even though the children retained an interest to sell it to the children themselves. As a result, the selling price would be close to the fair market value of the fractional interests. However, the court concluded that a ten percent discount would be fair to a potential buyer who would likely ask for a price break for the risk the buyer may face when trying to sell the interest.

See  Elkins: Tax Court Allows Modest Discount for Partial Interest in Artwork, Charitableplanning.com Mar. 13, 2013.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.