Art property tax decision will save millions

Robert Motherwell, Elegy to the Spanish Republic # 134 (1976).
Courtesy of the Elkins Collection.

In what is seen as a victory for art collectors seeking to dodge or minimize inheritance taxes, a U.S. appeals court agreed that shared ownership of a premier art collection of several million dollars – also known as “fractional interest” – entitled a Texas family to substantial tax relief when it came to settling an estate.

The value of the collection is immense. For nearly three decades (1970-1999), Houston-based James Elkins and his wife Margaret collected 64 works by artists, including Pablo Picasso, Jackson pollock, Paul Cézanne, Jasper john, Ellsworth Kelly, Cy twombly and Robert motherwell, among others. Ms Elkins died in May 1999 and Mr Elkins died in March 2006. Prior to their death, they set up an income trust retained by the settlor (or GRIT) whereby partial ownership of the art passed to each of their three children.

While the terms of this particular estate planning vehicle are complex, the basic premise is that shared ownership interests prevent a sale or transfer of works, as divided ownership means there should be unanimous agreement on any. proposed sale. In addition, the children had publicly declared that they had no interest in selling the works and that they were in a sufficiently strong financial position that they did not need them.

Three recognized experts

The Elkins family believed that restricted ownership had an impact on the value of the works and that the property taxes owed to them should reflect a 44% reduction in determining their fair market value. In addition, the family employed three well-known experts to provide and justify the extent of the discount. These included: David Nash, co-director of Mitchell-Innes & Nash; William T. Miller, a Texas legal expert; and Mark Mitchell, an expert on valuing fractional interests in property. The IRS, however, disagreed and hit the family with a tax bill, or “deficiency notice,” saying they owed more than $ 14 million plus interest.

The decision, rendered on September 15 by the US Court of Appeals for the Fifth Circuit, ruled in favor of the family. The judge ruled that “this defect resulted solely from the [IRS] Disallowance by the Commissioner of the “reduction of fractional ownership”. Earlier, a US tax court ruled that the family was entitled to some discount rate, but he did not accept the calculations of the Elkins family and instead opted for a seemingly arbitrary “10%” discount. The appeals court disputed this, stating: “We did not agree with the final stage of the court’s analysis which led it not only to reject the [Elkins family’s proposed discount] but also to adopt and apply one of his own without any supporting evidence. The Fifth Circuit ruling ruled in favor of an even larger discount, ranging from 52% to 80%, depending on the work in question and based on testimony from estate experts.

“This is truly the first case to seriously consider this question in the case of fine art.”

Donald Wood, the lawyer representing the Elkins family, told artnet News by phone: This case simply extended this well-established right to works of art. It is truly the first case to seriously consider this question in the case of fine art. “

We also asked art law expert Nicholas O’Donnell, partner of Sullivan & Worcester in Boston, for his opinion on the decision. O’Donnell responded, by e-mail: “The case is a little unusual because while the taxpayer presented an extensive case on the appropriate discount rate, the IRS offered none. On top of that, the Tax Court ruling under review rejected the estate’s proposed rebate and chose 10 percent. The 5th Circuit was particularly critical as this number seemed more or less drawn from the air. “

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