Oct 1, 2007 12:00 PM, Rorie M. Sherman Editor in Chief

By: Rorie M. Sherman Editor in Chief

David A. Handler, a partner in the Chicago office of Kirkland & Ellis LLP, reports:

• 5 percent discount for fractional interest in artwork

  There's a resolution to an interesting dispute over artwork valuation and the taxpayer has no cause to be happy.

  On May 25, 2007, the U.S. District Court for the Northern District of California rejected a 44 percent discount sought by an estate for the value of paintings in which it holds a 50 percent interest. Stone v. United States, No. 3:06-cv-00259 (N.D. Cal. 2007). The court ruled that the estate was entitled to claim a discount based on its ownership of a fractional interest in the paintings, but rejected the plaintiffs' claimed discount of 44 percent, because the plaintiffs' expert's testimony was not persuasive as applied to the art world. Said the court: “[A] hypothetical willing seller of an undivided fractional interest in art would likely seek to sell the entire work of art and split the proceeds, rather than seeking to sell his or her fractional interest at a discount. At a minimum, because an undivided interest holder has the right to partition, a hypothetical seller under no compulsion to sell would not accept any less for his or her undivided interest than could be obtained by splitting proceeds in this manner.”

  The court determined that the estate was not entitled to claim a discount for appraisal fees, but was entitled to a discount of 2 percent to account for the actual costs of selling the art by an auction house, as well as a discount of $50,000 for legal fees required to enforce the hypothetical seller's right to partition. Ibid., at pp. 10-11. The court said, “[S]ome discount is appropriate to allow for the uncertainties involved in waiting to sell the collection until after a hypothetical partition action is resolved.” Then the court ordered the parties to meet, confer and attempt to settle on an appropriate discount.

  On June 14, 2007, the parties told the court that they were unable to agree. The estate was asserting that a total discount of at least 35 percent was appropriate. The IRS was arguing that, while no discount was appropriate, it'd agree to a 5 percent discount “in a spirit of compromise.”

  On Aug. 10, 2007, the court held the estate had not demonstrated that a buyer would demand more than the 5 percent discount in purchasing the estate's interest.

  After taking into account the 2 percent in sales fees and $50,000 in legal fees that the court already determined the estate is entitled to claim as discounts, a 5 percent discount includes only about a 1.2 percent discount for the uncertainties involved in waiting for the partition action to become resolved. The court said, “While this discount appears to be relatively low, Plaintiffs have provided no evidence from which this Court could reasonably base any larger discount. As a result, any discount other than that to which the government has already agreed would be impermissibly arbitrary.”

• Bigelow affirmed

  On Sept. 14, 2007, the U.S. Court of Appeals for the Ninth Circuit affirmed the Tax Court's decision that the full value of property transferred by Virginia Bigelow to a family limited partnership (FLP) was included in her gross estate for federal estate tax purposes under IRC Section 2036(a)(1) based on the findings that there was an implied agreement with the other partners that she'd retain the right to the income and enjoyment of the transferred property. Bigelow v. Commissioner, No. 05-75957. That requirement is met if there is an implied agreement among the parties to the transaction that the transferor may retain the possession or enjoyment of, or the right to the income from, the transferred property.

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