VALUATION OF ART COLLECTION WAS NOT RELIABLE DUE TO CONFLICT OF INTEREST BY AUCTION HOUSE SPECIALIST
The Tax Court upheld an IRS assessment of a deficiency in the valuation of two Old Master paintings, Pieter Brueghel the Younger’s Maypole and Jan Brueghel the Elder’s Orpheus, for federal estate tax purposes. The estate of an art collector had relied on the opinion of an auction house specialist who significantly undervalued the artworks in order to curry favor with the executor, who was to inherit the paintings.
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The auction house specialist had a conflict of interest because he was trying to win the right to auction the works.
Sotheby’s valuation, based on first-hand inspection, of Maypole as $500,000 and Orpheus as $100,000 was reported to the IRS on the federal estate tax return. At the same time, in a letter to the executor proposing that he handle the auction of the works, he estimated that he could sell the first work for an amount between $600,000 and $800,000 and the second work for an amount between $100,000 and $150,000. The executor gave Sotheby’s a five-year exclusive right to auction the paintings. While the paintings were being cleaned, Maypole was insured for $2 million and Orpheus was insured for $500,000. Maypole was eventually sold for $2.4 million.
The IRS issued a notice of deficiency stating that the value of Maypole was $2,100,000 and the value of Orpheus was $500,000. The Tax Court, largely accepting the IRS valuations, found that Sotheby’s opinion of the value of the artworks was not reliable because it stood to earn a large commission from their sale and therefore had an incentive to “lowball” its estimates of their value. Furthermore, the Court found that Sotheby’s had exaggerated the dirtiness of the paintings and the risk of cleaning them.
Reference: Margery J. Schneider, Tax Update, Probate and Trust Law Section Newsletter, No. 144, Estate of Kollsman v. Commissioner, T.C. Memo 2017-40 (February 22, 2017)
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