The Tax Court frequently becomes involved in the resolution of disputes between a taxpayer and the IRS over the value of an asset. Most often these disputes arise in connection with the imposition of the estate tax or the gift tax. The recent case of Estate of Kollsman (T.C. Memo 2017-40) is interesting because the dispute centered on the value for estate tax purposes of two old master paintings owned by Eva Franzen Kollsman. At the time of her death in 2005, she owned Village Kermesse, Dance Around the Maypole by Pieter Brueghel the Younger and Orpheus Charming the Animals by Jan Brueghel the Elder or Jan Brueghel the Younger. There was a dispute over which of the Brueghels had painted Orpheus. Both Maypole and Orpheus were painted in the 17th  century, and the medium for both was oil paint on wood panels.

After the decedent’s death, the co-chairman of Sotheby’s Old Master Paintings Worldwide looked at the paintings and wrote a letter to the executor of the decedent’s estate expressing the view that Maypole would sell at auction for $600,000 to $800,000 and Orpheus would sell for $100,000 to $150,000. Shortly thereafter, Sotheby’s sent the executor a letter expressing its opinion that Maypole was worth $500,000 and Orpheus was worth $100,000, which values were used on the decedent’s federal estate tax return. The executor conferred with an art restoration expert and, based on that expert’s advice, decided that both paintings should be cleaned. The cleaning was highly successful.

In January 2009, Maypole was sold at auction by Sotheby’s for a hammer price of $2,100,000 and a total price to the buyer of $2,434,500, after the buyer’s premium was added. The sale occurred before the audit of the decedent’s estate tax return by the IRS had been completed. The IRS initially adjusted the estate tax value of the paintings to $1,750,000 for Maypole and $300,000 for Orpheus. In the ensuing Tax Court proceeding, it further increased the values to $2,100,000 for Maypole and $500,000 for Orpheus. At the time of the trial in the Tax Court, Orpheus had not been sold.

The decedent’s estate used the expert from Sotheby’s as its expert witness. He defended his prior valuation on two grounds. He believed that the paintings’ value at the time of the decedent’s death was depressed because the paintings were soiled and the dirt obscured the true condition of the paintings. He was also of the opinion that the cleaning process entailed significant risk and might damage the paintings or reveal significant flaws that might render them unsalable. His other rationale was that the art market had risen substantially since the date of the decedent’s death, principally due to wealthy Russian buyers trying to acquire Old Master paintings.

The court largely disregarded the taxpayer’s expert. In part, the court thought he was conflicted in that at the time he first gave the executor his view of the value of the paintings, he knew that the executor wanted a low value for estate tax purposes and was hoping to curry favor in order to obtain the right to auction the paintings at a later date, which ultimately happened.  The court also found that art sales statistics did not reflect the substantial increase in prices after the decedent’s death that had been asserted by the Sotheby’s expert. Much of the increase in auction sale prices had actually occurred prior to the decedent’s death. Finally, the court did not believe that the soiled condition of the paintings had as great an impact on their value as the taxpayer’s expert asserted. The IRS also submitted expert testimony that the cleaning of the paintings was well-advised and not a high-risk endeavor.

The IRS used an art historian and appraiser as its expert. He valued Maypole at $2,100,000 and Orpheus at $500,000. His expert witness report identified certain sales of other paintings that he believed were comparable, in a value sense, to the paintings in question. The court largely accepted the valuation of the IRS expert, adjusting down the value of Maypole by 5 percent to reflect the soiled condition of the painting. The court adjusted down the value of Orpheus by 5 percent to reflect its soiled condition and down 10 percent because evidence in the record showed some bowing of the wood panel.

The court’s opinion is not clear on the extent to which the court was influenced by the posthumoussale of the Maypole painting, although it clearly took  the sale price into consideration. If there are morals in this story, they are: (1) where possible, a significant asset over which there could be a valuation dispute should not be sold until the audit of the decedent’s estate tax return has been completed, at least where the sale price could be significantly higher than the value reported on the estate tax return; and (2) a well-done market value appraisal by a qualified independent appraiser is essential to support the value reported in the return, because the court will take the subsequent sale into account in its determination.