An interesting tax case involving an enviable collection of art is currently pending in federal court in Texas. The collection, which caught the attention of the Internal Revenue Service after the death of banking and media mogul Joe Allbritton in 2012, includes a portfolio of Impressionist and Post-Impressionist paintings. The collection includes works by Paul Cezanne, Winslow Homer, Marc Chagall, Paul Gauguin, Claude Monet, Vincent van Gogh and Pablo Picasso.

Barbara Allbritton, widow of Mr. Allbritton, has sued the United States in her individual capacity and as representative of her late husband’s estate, to recoup approximately $40.6 million in taxes and interest which she claims have been paid "under protest." The IRS asserts that the corporation owned by Mr. Allbritton and members of his family, or trusts for their benefit, made an outright "constructive property distribution" to Mr. Allbritton in 2005, which constituted a dividend. The property distributed included 33 works of art with a value of approximately $139.8 million. The IRS made the alternative assertion that if the art was not distributed, then the Allbrittons received the "fair rental value of the artwork" which, in the IRS’s opinion, equaled approximately $64.8 million.

The issue boils down to the fact that even though the company owned the artwork, it was being "hung" on the walls of the corporate residence owned by the company.

The IRS has focused on the family’s alleged "constructive ownership" or "free use" of valuable art owned by a corporation it controlled. In contrast, the Allbrittons argue that the IRS should respect the fact that the artwork is a separate corporate asset and that they did not possess any rights over the art beyond what any corporate officer in the company would have. The complaint asserts that ownership of the art never transferred from the company to Mr. Allbritton and states that, "[t]here is not a single bill of sale, sales slip, invoice, purchase agreement, ownership transfer document, or anything else reflecting a sale or transfer of the art” from the company to Mr. Allbritton in 2005. The government is, of course, entitled to examine the substance as well as the form of the arrangements.

It will be interesting to see how the government develops its arguments, but this case displays the challenges which taxpayers may face when trying to demonstrate that enjoyable assets such as art represent separate corporate assets. In such cases, it is critically important that art or other moveable, valuable property is consistently treated as a corporate-owned asset and all corporate formalities are respected. It is also recommended that clear evidence of ownership, including in some cases title insurance, be maintained. Given the potentially high values at stake, careful estate and tax planning is recommended for purchases, sales, gifts, bequests, transfers and pledges of art.