Determining the fair market value of art for tax purposes continues to be a difficult task. For estate tax purposes in particular, executors face the challenge of establishing art values based on expert opinions, contemporaneous sales of comparable but not identical art, and the climate of various art markets — that of the artist, of the particular category and of the art market as a whole.
Given the particularities of the art market, anticipating what evidence of fair market value the Internal Revenue Service or U.S. Tax Court will accept is a challenge. Estate of Newberger v. Commissioner, T.C. Memo. 2015-246, is the latest in a line of cases showing the court's application of tax code to the market.
TIMING AROUND DEATH
In addition to considering sale prices within several months of the death, the court considered the depressed art market on the death date to get the tax value of the estate's pieces by Pablo Picasso, Robert Motherwell and Jean Dubuffet.
The decedent died in July 2009. From late 2008 through 2009, the art market experienced a significant and precipitous decline in sale prices, after which it began to rebound. The Tax Court determined that it was appropriate to adjust art values based on depressed market conditions despite the availability of actual sale prices that were achieved close to the date of death during more favorable conditions.
In December 2009, the estate agreed to sell the Picasso at Christie's for a guaranteed $4,784,689 and 60% of the hammer price exceeding that amount. Christie's published estimates for the sale of the work between $4,784,689 and $6,379,585. Christie's also provided the estate with an appraisal report, listing the Picasso with a date-of-death value of $5 million. On Feb. 2, 2010, the Picasso sold at a Christie's London auction for $12,927,874.
Notwithstanding the sale price, the estate reported that the Picasso had a $5 million date-of-death value. The Tax Court rejected the estate's argument that the sale had been a “fluke” that could not have been reasonably anticipated on the date of death and disagreed with the estate's date-of-death value. The Tax Court upheld the IRS' date-of-death value of $10 million, which was determined by taking into account the sale price for the Picasso in February 2010 and adjusting it down to reflect the July 2009 market conditions.
BEST COMPARABLE VALUES
The best comparable for the Motherwell was another Motherwell that sold in November 2010 for $1,426,500. So the IRS said the estate's Motherwell was valued at $1.5 million. The estate argued that the comparable Motherwell sold nearly 16 months after the death, when the market had rebounded and the date-of-death value was $800,000. The Tax Court agreed.
The sale of another Dubuffet in November 2007 was for $825,000. The Tax Court determined that the IRS argument that the value of the estate's Dubuffet was higher in the market downturn than the comparable one before the downturn was nonsensical, and upheld the estate's $500,000 Sotheby's appraisal.
In Estate of C. Scull v. Commissioner, an estate auctioned the art collection many months after death, but the art date-of-death values were based on an earlier Sotheby's appraisal. The Tax Court had previously recognized that public auction is an appropriate market and that evidence of fair market value from actual sales of art is preferred over willing buyer-seller appraisals.
REDUCED BY APPRECIATION
The Tax Court upheld this position, with the auction as evidence of fair market value. The estate and the IRS agreed the art had appreciated in value from the date of death to the auction. However, because the estate provided no quantitative evidence of the appreciation, the Tax Court permitted the IRS' 15% allowance for appreciation. The end result was consistent with Newberger: The Tax Court determined the art date-of-death values were the sale prices at auction reduced by 15% due to the appreciation in the time from death to auction.
These cases highlight the complexity of determining the fair market value of art. With each work being unique and levels in the art market constantly changing, there will always be a subjective element to fair market value analysis without any way to predict the weight that the IRS or the Tax Court will give to any particular piece of evidence presented to support a fair market value determination for art.
Diana Wierbicki is partner and global head of the art law practice, and Amanda A. Rottermund is an associate at Withers Bergman.