In Elkins v. Commissioner (Tax Court, March 11, 2013), the decedent had owned an art collection consisting of 64 pieces, some of which were paintings by prominent artists including Jasper Johns, Jackson Pollock, Henry Moore, Sam Francis, Cy Twombly, David Hockney, Paul Cezanne, and Pablo Picasso. Following a series of estate planning-oriented transactions, the decedent ended up owning fractional interests in these works of art, and his children held the balance of the interests. The co-owners entered into an agreement whereby they all agreed that none of them would sell their fractional interest in the art unless the other coowners joined in the sale. Following the decedent’s death, the estate tax return filed for his estate claimed a 44.75 percent valuation discount for lack of control and marketability due to the fractional nature of the decedent’s ownership of the art.

On its audit of the estate tax return, the IRS took the position that no discount should be allowed as a result of the fractional nature of the decedent’s ownership. The IRS first argued that no weight should be accorded the agreement among the co-owners restricting sale because IRC Section 2703(a)(2) provides that property shall be valued without regard to agreements restricting the sale of the property unless certain exceptions apply, and none of the exceptions applied to the facts of this case. The IRS also argued that there should be no discount allowed for the decedent’s fractional ownership because there was no market for the sale of fractional interests in works of art. This assertion was supported by the IRS’s expert witnesses, who testified that where a work of art has multiple owners, it sells only when the owners all agree to sell the work, and then each owner receives his true percentage share of the art’s sale value.

While the Tax Court agreed with the IRS on disregarding the agreement restricting sale, it nevertheless thought that some discount should apply for the fractional ownership. The court’s reasoning relied significantly on the facts in the record, including that the decedent’s children had expressed an affinity for the decedent’s collection and wished it to remain in the family and that, following the decedent’s death, each of the children had significant financial resources. From these facts the court concluded that if an unrelated party were to become the owner of a fractional interest, that party likely could sell his interest to the decedent’s children at not more than a modest discount from the actual value of the fractional interest. Taking all of these facts into account, the court determined 10 percent to be the appropriate discount for the fractional nature of the decedent’s ownership rather than the claimed 44.75 percent discount.