When preparing Estate tax returns where the decedent owned art, antiques, and/or various collectible personal property items, the appropriate valuation of such property has become essential in order to avoid audit, or to successfully defend challenged valuations on audit.

In 2007, the Art Advisory Panel reviewed 131 cases involving a combined total of 1,002 art works, collectibles and cultural property. Of those cases, 120 were estate and gift tax returns with an aggregate total of 885 items of art, collectibles and cultural property. Over 91 percent of these cases were estate and gift tax cases. Of these cases, the appraisals submitted in approximately two-thirds of the cases were challenged, and the aggregate estate tax valuations of the 885 items were raised 58 percent. Annual Summary Report of 2007, The Art Advisory Panel of the Commissioner of the Internal Revenue.

This article is written to assist the tax professional when preparing estate tax returns where the estate contains personal property items such as art, antiques and collections.

1 WHEN IS AN APPRAISAL IS REQUIRED IN AN ESTATE TAX RETURN?

If the estate includes articles having artistic or intrinsic value of a total value in excess of $3,000.00 (e.g. jewelry, furs, silverware, paintings, etchings, engravings, antiques, books statuary, vases, oriental rugs, coins or stamp collections..) or if any collection of similar articles is valued at more than $10,000.00, the appraisal of an expert or experts, under oath, and the required statement regarding the appraiser's qualifications, shall be filed with the return. 26 C.F.R. §20-2031-6(b), Form 706 Instructions for Schedule F.

2 WHEN IS THE ESTATE TAX APPRAISAL REVIEWED BY THE IRS ART APPRAISAL SERVICES?

The Art Advisory Panel assists the Internal Revenue Service by reviewing and evaluating the acceptability of property appraisals submitted by taxpayers in support of fair market value claims on works of art involved in Federal Income, Estate and Gift taxes in accordance with the Internal Revenue Code. All taxpayer cases selected for audit which include art work or cultural property with a claimed value of $20,000.00 or more must be referred to Art Appraisal Services for review by the Commissioner's Art Advisory Panel and/or Art Appraisal Services. Art Appraisal Services manages and provides the staff support and coordination of the Art Panel, and also reviews appraisals of taxpayer cases on works and cultural property not referred to the Panel and/or Art Appraisal Services.

3 WHAT CONSTITUTES "ART" IN THE ESTATE?

Art is broadly defined in 26 C.F.R. §20.2031-6(b), Valuation of household and personal effects, to include many personal property objects the decedent owned at the date of death, including..."articles having marked artistic or intrinsic value in excess of $3,000.00 (e.g., jewelry, furs, silverware, paintings, etchings, engravings, antiques, books, statuary, vases, oriental rugs, coin or stamp collections)". This definition is also repeated, in part, in the Instructions for Schedule F, Line 1, Form 706.

The term "art" includes paintings, sculpture, watercolors, prints, drawings, ceramics, antique furniture, decorative arts, textiles, carpets, silver, rare manuscripts, historical memorabilia, and other similar objects." Section 4.48.2.2, Paragraph 1, Valuation Assistance for Cases Involving Works of Art, of the Internal Revenue Manual.

Section 4.48.3.1, Paragraph 2, of the Tangible Personal Property Valuation Guidelines, Internal Revenue Manual, broadens the above definition of art and other related personal property items as follows, "Personal property includes but is not limited to paintings, watercolors, prints, drawings, sculpture, ceramics, furniture, decorative arts, antiques, textiles, carpets, silver, rare manuscripts, historical memorabilia, antiquities, ethnographic art, collectibles, gems and jewelry..."

4 WHAT CONSTITUTES A "COLLECTION" OR "COLLECTIBLE"?

The IRS definition of collectibles is found in IRC 408 (m), definition of collectibles as referred to in capital gain, as follows: (m) Investment in collectibles treated as distributions. (2) Collectible defined. For purposes of this subsection, the term "collectible" means - (A) any work of art, (B) any rug or antique, (C) any metal or gem, (D) any stamp or coin, (E) any alcoholic beverage, or (F) any other tangible personal property specified by the Secretary for purposes of this subsection.

(3) Exception for certain coins and bullion. For purposes of this subsection, the term "collectible" shall not include - (A) any coin which is (i) a gold coin described in paragraph (7), (8), (9), or (10) of section 5112 (a) of title 31, United States Code, (ii) a silver coin described in section 5112 (e) of title 31, United States Code, (iii) a platinum coin described in section 5112 (k) of title 31, United States Code, or

(iv) a coin issued under the laws of any State, or (B) any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section 7 of the Commodity Exchange Act, 7 U.S.C. 7) requires for metals which may be delivered in satisfaction of a regulated futures contract, if such bullion is in the physical possession of a trustee described under subsection (a) of this section."

5 WHAT IS THE IRS DEFINITION OF FAIR MARKET VALUE FOR ART & COLLECTIBLES IN ESTATES?

Valuation of Property in General

The Court must apply the following definition of fair market value, as set forth in 26 C.F.R. §20.2031-1(b), in determining valuation of works of art and collectibles in estate tax cases:

"The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent¿s gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate. Thus, in the case of an item of property includible in the decedent¿s gross estate, which is generally obtained by the public in the retail market, the fair market value of such an item of property is the price at which the item or a comparable item would be sold at retail.......................All relevant facts and elements of value as of the applicable valuation date shall be considered in every case."

This standard is "objective, using a purely hypothetical willing buyer and willing seller...The hypothetical persons are not specific individuals or entities." Estate of Simplot v. Commissioner of Internal Revenue, 249 F.3d 1191, 1194 (9th Cir. 2001) (quoting underlying tax court opinion that "accurately stated the law").

Household and Personal Effects

26 C.F.R. Section 20.2031-6(a) is similar and is also relied on by the IRS in determining the valuation of household and personal effects in estate tax cases:

"The fair market value of the decedent's household and personal effects is the price which a willing buyer would pay to a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts."

6 THE APPROPRIATE MARKET AND ITS EFFECT ON THE ESTATE'S ART & COLLECTIBLE FAIR MARKET VALUE (FMV)

Determining the appropriate market to use in order to research applicable comparable values is a critical part in the appraiser's determination of the correct value of art, antiques and collectibles. As stated above, C.F.R. §20.2031-1(b) provides that, "..All relevant facts and elements of value as of the applicable valuation date shall be considered in every case." Whether the auction market or the retail market is the appropriate market will depend on the facts in each estate. Case law has also provided insight into the court's rationale in the determination of the appropriate market.

Auction Comparable Sales as the Appropriate Market

The auction value has been traditionally used as the fair market value because it was believed that most executors must use the auction market. The Court has recognized that an appropriate retail market for art objects is the auction (distinguished from a forced-sale auction). Estate of Smith v. Commissioner, 57 T.C. 650 (1972), affd. 510 F. 2d 479 (2d Cir. 1975); Mathias v. Commissioner, 50 T.C. 994, 999 (1968).

Items of tangible personal property sold at a public auction, the price for which it sold will be presumed to be the retail sales price of the items at the time of sale. Revenue Procedure 65-19.

Retail Comparable Sales May be the Appropriate Market

Where the decedent purchased all of the works of art from galleries as first time sales, and not resales, the comparable works used in the valuation conclusion must take into account whether they are first time gallery sales or resales (auction sales). The auction market comparables would be based on comparable resales, therefore the auction market would not be the appropriate market in this case. The retail market would be the appropriate comparable market. C.F.R. §20.2031-1(b).

Retail Comparable Sales as the Appropriate Market

Raymond Biagiotti v. Commissioner 52 T.C.M., (CCH) 588 (1986) dealt with the valuation of pre-Columbian and Mayan art. This case held that auction prices are not the absolute measure of fair market value. The Tax Court observed that Sotheby¿s auction sales did not represent a significant portion of the sales of such art in the U.S., and did not accurately represent the average sale prices of that art. The court found that a better measure of value was what collectors paid private dealers, since collectors rely on dealers' guarantees of authenticity, and auction houses do not guarantee authenticity.

Additionally, in Heriberto A. Ferrari v. Commissioner, 58 T.C.M. (CCH) 221 (1989) which also dealt with the valuation of pre-Columbian and Mayan art, and reaffirmed Biagiotti, retail gallery prices were held to be the correct comparable market place to look at, as the court found that different galleries price even same or similar objects at different levels. Therefore, in this case, the court found that fair market value, as defined by IRS regulations, C.F.R. §20.2031-1(b), was in this case not a single price but a range of prices, and not necessarily the highest prices.

7 CHOICE OF VALUATION DATE IN ESTATES

The Date of Value of the art or collections in an estate is the date of death of the decedent. However, the executor may elect to value the collection on the alternative valuation date, which is generally a term of months after the date of death. 26 C.F.R. §2032-1. This alternative date is most often chosen by the Estate if the market related to certain works of art, antiques and collectibles has gone down since the date of death of the decedent.

8 WHAT IF THERE IS AN EARLY DISTRIBUTION OR SALE BY THE ESTATE?

If it is desired to effect an early distribution or sale of any portion of the art or collectibles of the decedent, this can be done, pursuant to Treasury Regulation §20-2031-6(c). This is often necessary to facilitate disposition of such property and to obviate future expense and inconvenience to the estate when it needs to sell some of the estate's property in order to pay the estate tax. Information regarding the desire to sell any objects should be given to the IRS district director in the form of a written statement of the executor, under oath, accompanied by an appraisal of the subject property. The statement must contain a declaration under penalties of perjury regarding the completeness of the list of such property and the qualifications of the appraiser (as required in 20-2031-6(b)).

Sale before or after Valuation Date

Before the valuation date, the sale price at public auction will be presumed to be the retail price of the object at the time of sale. Auction price will also be presumed to be the sales price of the object if the sale is made within a reasonable period following (after) the applicable valuation date and there is no substantial change in the market conditions or other circumstances. Rev. Proc. 65-19.

This is also affirmed in Rev. Proc. 66-49, which states that the cost or actual selling price of an object in the estate within a reasonable time before or after the valuation date may be the best evidence of its fair market value. Before such information is taken into account, it must be ascertained that the transaction was at arm's length and that the parties were fully informed as to all relevant facts.

The actual sales experience in the period is the best evidence we have of true market absorption rate of gouaches in the marketplace and should be preferred to an estimated liquidation period. Estate of Louisa Calder, 85 T.C. Memo No. 42.

The 28% Long Term Capital Gain Tax on the Sale of Collectibles

The current long term capital gain tax rate on sale of collectibles still remains at 28%. This is something, where there is a choice, that should be considered in making financial determinations as to whether certain estate collectibles are sold. This includes the proceeds from the sale of a work of art, antiques, gems, stamps, coins, precious metals and even wine and brandy collections. This tax, plus any commissions to dealers or auction houses, substantially reduces the net proceeds on the sale of a work of art or collectible for those works or collectibles where the long term capital gain would apply.

Appreciation Discounts Allowed: Date of Sale ¿ Use of Later Sales Dates

Sales after the date of death, provided they are not too far removed from that critical date, may be used to corroborate the ultimate determination of value. Estate of Smith 57 T.C. 605. However, the comparables must be reasonable, as well as not too far removed. "Reasonable" is based on:

i) Degree of similarity,

ii) Proximity of the sale date to the valuation date,

iii) Circumstances of the sale, and

iv) The market conditions between the sale date and the valuation date.

The appreciation discount is applied where the market has substantially changed after the date of death of the decedent, i.e., the Market was no longer similar because it has gone up in value. Recently, a 15% post-death appreciation in value discount applied when after-death comparable sales were used. Estate of Scull v. Commissioner of Internal Revenue, 67 T.C.M. (CCH) 2953 (1994).

9 WHO IS A QUALIFIED APPRAISER?

The Appraiser Should be Disinterested

The estate¿s art and/or collectible appraiser should be disinterested, and the estate's executor must personally certify that the appraiser is disinterested. "The appraisal shall be accompanied by a written statement of the executor containing a declaration that it is made under the penalties of perjury as to the completeness of the itemized list of such property and as to the disinterested character and the qualifications of the appraiser or appraisers." 26 C.F.R. §20-2031-6(b).

This requirement is now being more stringently applied in cases where appraisers have appraised works of art and collectibles for estate tax purposes, and then sold the same items in the appraiser's gallery or auction house. This is a clear violation of the disinterested character of the appraiser, since the appraiser's past, present or future interest in the item being appraised is a conflict of interest.

The IRS applies the same disinterested appraiser requirements to its own IRS "valuators" that the Courts and the Uniform Standards of Professional Appraisal Practice (USPAP) similarly apply to personal property appraisers. Internal Revenue Manual 4.48.3, the Tangible Personal Property Valuation Guidelines, provides that, "Valuators will employ independent and objective judgment in reaching conclusions and will decide all matters on their merits, free of bias, advocacy, and conflicts of interest." at 4.48.3.3.2.

Further, regarding bias and the disinterested character requirement, 4.48.3.4.3 of the Tangible Personal Property Valuation Guidelines requires in part that each written valuation report should contain a signed statement (by the valuator/appraiser) that,

"To the best of my (the valuator/appraiser) knowledge and belief....

"I have no present or prospective interest in the property that is the subject of this report, and I have no personal interest with respect to the parties involved",

"I have no bias with respect to the subject of this report or to the parties involved with this assignment", and

"My compensation is not contingent on an action or event resulting from the analysis, opinions or conclusions in, or the use of, this report."

USPAP Standards Rule 8-3 similarly provides, in part, that the appraiser must certify the following:

"I certify that, to the best of my knowledge and belief:

"the reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions and are my personal, impartial, and unbiased professional analyses, opinions, and conclusions."

"I have no (or the specified) present or prospective interest in the property that is the subject of this report and no (or the specified) personal interest with respect to the parties involved."

"I have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment"

"my compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal."

The Appraiser Must be Qualified - Competency

The executor is also required to certify the qualifications of the art and/or collectible appraiser under 26 C.F.R. §20-2031-6(b). Internal Revenue Bulletin 2006-46 has provided notice of the increased competency requirements for appraisers in charitable contribution appraisals. This elevated competency criteria is also expected to eventually cross over into estate and gift tax appraisals. So who is a qualified appraiser now for estate tax purposes according to the Internal Revenue Service?

If, pursuant to paragraphs (a), (b) and (c) of 26 C.F.R. §20-2031-6, an appraisal is involved, then "Where expert appraisers are employed, care should be taken to see that they are reputable and of recognized competency to appraise the particular class of property involved." 26 C.F.R. §20-2031-6(d).

The competency of an appraiser is ultimately determined by the courts. A recent example of the Court¿s analysis of the competency of an appraiser is as follows (the name of the appraiser has been redacted) "Although Mr. X has a doctorate from the University of Minnesota and is a chartered financial analyst, he is not a member of the American Society of Appraisers (ASA) nor the Appraisal Foundation. Mr. X's report also was not submitted in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP). Mr. X did not provide the customary USPAP certification, which assures readers that the appraiser has no bias regarding the parties, no other persons besides those listed provided professional assistance, and that the conclusions in the report were developed in conformity with USPAP." Kohler v. Commissioner, T.C. Memo 2006-152, pages 28, 32.

10 WHAT IS A QUALIFIED APPRAISAL?

A qualified appraisal of art and collectibles in estate tax returns must include a complete inventory list of the art, antiques, and collectibles. "The appraisal shall be accompanied by a written statement of the executor containing a declaration that it is made under the penalties of perjury as to the completeness of the itemized list of such property and as to the disinterested character and the qualifications of the appraiser or appraisers." C.F.R. §20.2031-6(b)

The appraisal should conform with the provisions of C.F.R. 20-2031-6, the instructions of Schedule F to the Form 706 Estate Tax Return, the Uniform Standards of Professional Appraisal Practice, Chapters 7 & 8, Revenue Procedure 66-49 1966-2 C.B. 1257 Appraisal guidelines; Revenue Procedure 65-19 1965-2 C.B. 1002, Valuation of Tangible Personal Property Guidelines, and recent interpretive case law in addition to the Internal Revenue Manual guidelines.

The IRS Art Appraisal Services applies the Internal Revenue Manual 4.48.3, the Tangible Personal Property Valuation Guidelines, equally to estate tax appraisals of art and collectibles as well as gift tax and charitable contribution appraisals. These Guidelines are helpful to the tax professional as they provide insight and information as to what the IRS wants to see in the appraisal.

The Appraisal Standards Board (ASB) of The Appraisal Foundation is authorized by Congress as the Source of Appraisal Standards and Appraiser Qualifications. The ASB develops, interprets, and amends the Uniform Standards of Professional Appraisal Practice (USPAP) on behalf of appraisers and users of appraisal services. State and federal regulatory authorities enforce the content of the current or applicable edition of USPAP. USPAP represents the generally accepted and recognized standards of appraisal practice in the United States. Uniform Standards of Professional Appraisal Practice, 2008-2009 Edition, Forward, Page U-i.

As of November 13, 2006, Internal Revenue Bulletin 2006-46 has set forth the IRS guidance for "Generally accepted appraisal standards. An appraisal will be treated as having been conducted in accordance with generally accepted appraisal standards within the meaning of §170(f)(11)(E)(i)(ll) if, for example, the appraisal is consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice ("USPAP"), as developed by the Appraisal Standards Board of the Appraisal Foundation. Additional information is available at http://www.appraisalfoundation.org."

This clear statement by the IRS endorsing USPAP as the generally accepted appraisal standard has recently carried over into the estate and gift tax realm. Since the estate and gift tax regulations are not as detailed as the income tax regulations, the specific substantiation requirements are enumerated in the Internal Revenue Procedures and Guidelines, as well as the Courts' cross-interpretive Tax Court Memorandums and case law.

An example of the Court¿s cross-interpretive language is, "Although the regulations under section 170 provide no guidance on whether to value property in bulk or on an individual basis, or on the market to be used to value property and how to select the market, the guidance found in the Estate Tax Regulations is applicable to charitable contributions for income tax purposes." Champion v. Commissioner, 303 F.2d 887, 892-893 (5th Cir. 1962), as reinvoked in Leibowitz v. Commissioner, T.C. Memo. 1997-243. Reverse interpretations also occur where Charitable Contribution regulations may be considered applicable by the Court in Estate tax cases.

11 LEGAL OWNERSHIP & TITLE ISSUES - THE ESTATE TAX EXCEPTION

In Charitable Contributions, the donor must have good legal title (legal ownership) for a fair market value tax deduction as of the date of donation under IRC Section 170.

However, in Estate tax returns, dominion and control by the decedent over the item is the controlling issue. The decedent did not necessarily have to have legal title to the art or collectibles (such as when the decedent was in possession of stolen art at the time of his death). Whether the decedent's possession was legal or not, "it's what's there," and must be counted in the valuation of the estate.

Stolen Art and other Illegally Acquired Objects Includible in Decedent's Gross Estate

This theory was most famously memorialized in the Estate of Joe Meador, the U.S. Army lieutenant who stole a collection of medieval treasures from Quedlinburg in central Germany in the final days of World War II. The estimated value of the stolen items was over $100 million. The IRS determined that stolen art objects must be included in the decedent's gross estate regardless of the fact that they were stolen goods. The IRS held that his heirs had to pay estate tax on the objects they acquired at Joe Meador's death in 1980. TAM 91-52-005, WL 779966 (I.R.S.) (1991).

12 INCLUSION OF BUYER¿S PREMIUMS REQUIRED IN ESTATE VALUATIONS - AUCTION MARKET

If the Estate sells works at auction, it must use hammer price plus add on the Buyer's premium as the total estate tax value. Private Letter Ruling 92-35-005.

In Scull, the estate argued that it only received the hammer price for those artworks sold by the estate at Sotheby's. The Court's response was, "The Court disagrees. The estate constructively received the buyer's commissions. The amount received includes money and the fair market value of the property received. In this context, property includes services. The amount that the estate received as a result of the auction was not only the hammer prices but also Sotheby's services. Sotheby's was petitioner's agent at the auction and had an obligation to use its best efforts to obtain the highest bid for each item. Estate of Robert C. Scull v. Commissioner, 67 T.C.M. (CCH) 2953 (1994).

13 COMMISSIONS MAY BE DEDUCTIBLE

Whether the commissions on sale of the estate's works of art or collectibles is deductible is debatable. Estate of David Smith v. Commissioner, 57 T.C. 650 (1972). Estate of Streeter v, Commissioner, 491 F.2d 375 (3rd Circ 1974). Deductions of selling commissions by beneficiaries may or may not be allowed. The Estate may be able to deduct commissions depending on the facts. IRC 2053 (a)(2).

14 THE ARTIST'S ESTATE TAX BLOCKAGE DISCOUNTS

Blockage discounts traditionally have been applied as a method of recognizing the impact of the simultaneous availability of an extremely large number of objects of the same general category in the estates of artists who leave a large number of works in their estate upon their death. This precedent was originally set by the Estate of David Smith, 57 T.C. 650, 659. Sculptor David Smith had left 425 large sculptures in his estate. This was followed by similar blockage discount rulings in Estate of Louisa Calder, 85 T.C. No. 42, which involved the gift tax related to 1,292 similar gouaches by Alexander Calder, and the Estate of Georgia O'Keefe, T.C. Memo 1992-210, where Georgia O'Keefe had left approximately 400 works remaining in her estate at the time of her death.

Duty of Consistency

Janis v. Commissioner, 87 T.C.M. (CCH) 1322 (2004) recently affirmed the duty of consistency in applying discounts. Here, the 9th Circuit affirmed the Tax Court in holding that it was bound to use discounted value as a basis under the duty of consistency. This means that the taxpayer cannot use an undiscounted value for the basis, and at the same time take a discount in the estate tax return. Whether a discount is applicable is due to the number of objects in the estate.

15 ART GALLERY OWNER INVENTORY DISCOUNTS

The Janis case also provided a five point test related to the estate tax criteria for gallery inventory discounts:

1 There were numerous works by individual artists,

2 Some of the works would be sold in the dealer market as opposed to the retail market,

3 The executor¿s inability to sell the gallery in the retail market for the sum of the value of the individual works of art,

4 The fact that a buyer of the gallery would not pay the full resale price of the underlying assets in a bulk sale, and

5 Any buyer would consider the cost of maintaining the business for a reasonable period of time.

In Janis, the Art Panel applied a $13.M discount to a $36M appraisal of the works of art in the estate.

16 ART GALLERY INVENTORY - ADDITIONAL BLOCKAGE DISCOUNTS

After the Art Advisory Panel (in Janis above) applied the inventory discount, the Panel then applied second additional discount of 37% for blockage. Here, the Art Advisory Panel recognized that the blockage concept usually applies to a large body of works by one artist, usually in the artist¿s estate. But, went on to apply some of the general blockage discount principles to the gallery inventory as follows:

The total combined inventory and blockage discounts applied in Janis were 60.42%. This case applies to collections on a whole, and does not apply as a discount to each work of art sold separately. The step up in basis was limited to the discounted value per artwork.

17 BLOCKAGE DISCOUNTS FOR LARGE COLLECTIONS - THE DECEDENT AS A COLLECTOR

The blockage discount theory has also broadened to include applicable large collections of the decedent, where the decedent is a collector, and not the artist or a gallery owner.

Estate of Scull v. Commissioner of Internal Revenue, 67 T.C.M. (CCH) 2953 (1994).

18 FRACTIONAL OWNERSHIP DISCOUNTS

The Traditional Fractional Ownership Discount Rule - No Discount for Art

Traditionally, in the valuation of fractional ownership interests in real estate, and also in fractional ownership interests in various business interests, the owners would be entitled to discounts for lack of transferability and lack of control. However, the IRS, under Revenue Ruling 57-293, has not allowed fractional discounts in fractional ownership interests of art and other collectable personal property objects. Estate of Pillsbury v. Commissioner of Internal Revenue, 64 T.C.M. (CCH) 284 (1992) has also been relied on by the IRS along with Revenue Ruling 57-293.

Recent Holding by the Ninth Circuit

The Court recently held in Stone v. United States, 60 T.C. 540, Doc 2007-13057, 2007 TNT 106-21 (N.D. Cal. 2007) that Pillsbury did not hold that fractional discounts can never apply to personal property, instead, it held that such a discount cannot be upheld based on a "bare assertion that a discount is appropriate...with no evidence to support it." The Ninth Circuit also cited Propstra v. United States, 680 F.2d 1248, 1252 n.6 (9th Cir. 1982), and stated that "the holder of an undivided interest in property would have to secure the consent of the owner or owners of the remaining interests before being able to sell as a unit. This factor alone could affect valuation regardless of whether real or personal property is involved." 680 F.2d 1248, 1252 n.6 (9th Cir. 1982).

In the Stone estate case, the traditional fractional interest discounts for lack of transferability and for lack of control were still not allowed, so to date no fractional ownership discount on art, antiques and collectibles has yet to be allowed. The court continues to require comparable personal property evidence that a discount is appropriate. However, the Stone estate was allowed a cost discount.

Cost Discount

The Court accepted the incorrect theories that i) an appraiser (in this case an auction house) can appraise an object and at the same time have a future interest in selling the same object at auction, and ii) the appraisal fee could based upon consideration for the right to sell an appraised object. No argument was presented at trial that these theories were in clear violation of both 26 C.F.R. §20-2031-6 and the USPAP standard of care for personal property appraisers, which both require the disinterested character of the appraiser. Had such an argument been made, most likely the appraisal fees of the estate would have been included in the cost discount awarded by the court. Therefore, whether the traditional discount argument is successful in the future or not, it can and should be argued that the cost of the appraisal must be included where cost discounts are allowed.

For those families who own fractional interests in their art, antiques and collectibles, it shall continue to be essential in their estate planning to use appropriate holding companies such as limited liability companies (LLCs) to hold art collections. In so doing, since fractional interest discounts are applicable to LLC interests, the family estate will maintain its entitlement to the discounts for lack of transferability and lack of control.

19 EXCLUSIVE CONTRACTS

It should be ascertained if there are any Gallery/Artist or Gallery/Consignor contracts in existence between the decedent and any galleries. It should also be ascertained if the decedent had any exclusive rights to sell the works and receive commissions. These kinds of contracts provide what the retail market is for the applicable works of the estate, as well as the limits to that market, all of which impact value of the applicable art works. Estate of David Smith v. Commissioner, 57 T.C. 650 (1972)

20 COPYRIGHT - BUSINESS INCOME

Did the decedent create any works, write any books, etc? Did he purchase the copyright to any works? Copyright law treats i) the original artwork and ii) the intangible copyright as two separate items of property. Section 202 of the Copyright Act. In cases such as these, both a personal property appraiser and business value appraiser are required in order to ascertain the value of the work, and then the business income.

21 THE BENEFITS OF REQUESTING AN ADVANCE RULING FOR THE ESTATE

Revenue Procedure 96-15 contains the advance ruling procedure. This procedure is applicable to estate and gift tax returns as well as charitable contributions.

An Advance Ruling is useful to an estate containing valuable works of art in order to have an agreed-on value early in the administration of an estate. This expedites the ability to make distributions of the estate assets, and thus expedites the ability of the beneficiaries under the election to acquire the proceeds and pay the estate taxes. The reduction in time of the administration of the estate also reduces fees and costs.

In order to request an Advance Ruling, the estate must have one item valued at least $50,000. The cost is $2,500 for one to three items, and $250 for each additional item. The current IRS submission and review cycles are i) in by January 15 out by June 30, or

(ii) in by July 15 out be December 31.

22 CONCLUSION

This overview of the valuation of art, antiques and collectibles for estate tax purposes has only briefly addressed the requirements of a qualified appraisal, and some of the issues to be aware of when the estate includes a valuable works of art, antiques, or collectibles. There may be options available which you can recommend to your clients that will help insure the accuracy of the appraised value in the estate tax return, and also maximize the deductions available to the estate.