morning your honour's steve mather appearing for the this case in our view will a straight it's the sometimes imperfect intersection between the estate tax on the one hand and the income tax on the other hand in our view this case involves a essentially an artificial condition that is imposed by the estate tax which essentially requires the value of the property of the estate to be considered under the assumption that it all it is all going to be sold at one time that is on the valuation date there's no particular sumption is that it would be sold to one person or in any particular manner but by it record below that the result of that forced not for sale but that that one time sale of all of these artworks that were the property of the estate would result in a reduction of about sixty percent of the value of the pieces that if they had been sold individually over time and even the i r s panels analysis of th if which appears the conclusion appears i think in the excerpts of record it forty eight suggests that this isn't a reasonable way to to liquidate a collection of artworks of this tight but nonetheless it is it is the method that is required by the estate tax you know operates to the benefit of the use of the beneficiaries does it not it certainly operates to the benefit of the state in lowering the estate tax write liability and therefore operates to the benefit of your clients sure sure it does but that benefit is is it at least theoretically accidental because you could have the same scenario in a situation which you don't even have a taxable estate so there's there's no savings to the estate but then then there would be the arguably the burden to the beneficiaries by having what we would it alleged to be an artificially low in value imposed on there as their income tax base how did they get down to to the fourteen million dollar figure because that wasn't the original figure went from thirty six to twenty something then it went down to forty i don't know i wasn't the council  the trial court and i that's that's and i've spoken to the counsel in the tax court and i'm not they weren't clear on how that arrive how that came about i believe that was the result of  case so how do you mean that there is some you know common sense appeal to your argument because you're going to liquidate after the state after the beneficiar probably liquidate one my one or two by two from time to time as opposed to doing it in bulk which would of course even on the regular market would give you some kind of discount so there's some appeal in that but then we're faced with this doctrine of consistency which is imposed in these tax cases and why isn't that answer the question here but i think i get it again  goes back to kind of the different sorts of assumptions that you just pointed out is that i don't believe there's an inconsistency in any representation that was made if you're going to apply the estate tax valu methodology which is liquidate on day one then you get one value if you apply what everybody considers to be a more reasonable approach then you get a different value they are the same value but there's not there's a couple of reasons number one is that's not what the law requires i mean it would be simple if if the law said whatever the basis that there is determined for estate tax purposes is the basis for income tax purposes law doesn't  and even the government doesn't argue that the losses that and in fact there was one occasion in which it was a law was floated or a proposed bill was floated that would have resulted in that exact matching of those two in the statute that is a separate statute for the cost basis and so that doesn't involve the same valuation methodology or assumption as the in essence the liquidations of the beneficiary at the date of the day the death that's part of the cro at the time of death it's the same thing yes is what was figured out here because of the blockade you discount to be only fourteen million dollars well the valuation if you dump it all was the estate tax  you wish it weren't so no i'm not i'm not saying that i'm saying that the artificial construct exists under the estate tax but doesn't necessarily exist under the income tax because it's you're looking at different things being sold and i and that's precisely what the duty of the consistency is designed to do away with is and i mean this personally but your ability on one hand to say it's it's one of benefits  this way it's only x but when it benefits me this way then it's it's completely different and that's why well it's a little bit like having your cake and eat it too and this is the duty of consistency designed so you can't do that  what what what we are saying in this case is that the law values for estate tax purposes under one method and for income tax purposes on another method those methods are not may not always not be consistent but we're not a stuff from recognizing that dichotomy that exists under the law so what i mean what you're saying is if we have one minute and that's the only thing in the estate and that's when i get it twenty million dollars then it comes along and that's the estate tax that ration has no discount because it's just one piece of art on the market and then you sell it then you wouldn't disagree and be stuck with the twenty million  says and then for estate tax purposes they discount them because they're assuming they're all going to be sold in books and you have to sell them as a package right yeah i state and then you may but your argument is that  in and in what sense well in this that supports the argument that you're making it that which argument that it gets if you get to have to figure you play with two figures at the same time well th the case that we cited in the briefs the augustus case recognized that situation and it's a slightly different scenario there was a blockage discount claim for i believe the woolworths stock that was held a large woolworths stock that was held by an estate and then the one of the beneficiaries was arguing for and an income tax basis that was different then the estate tax determined basis and the court in wo allowed that beneficiary to establish a different basis one way out from under this is for your client to say we don't want the blockage discount we'll pay the we'll pay the tax based on the thirty five million dollars well i at this point it's too late for that i know i mean that's the way out of this i mean if you if you don't like it you don't have to take whatever that's true i mean it but as i of stock like you're talking about i think a discount off that if it's multiple items you know liquidating parts of the company that's held in partnerships so that it's not in the corporate status that they can discount so every time that happens you in the end you have stuff going out the other end of vengefully it's resold and it seems like nobody or never has the tax court or any circuit court said you can have different value lease right now like a money i don't know there's very where we would argue they overlay this this impractical assumption that everything has to be liquidated it was those are for artwork so there are there's a calder case and o'keeffe case and in the smith case which which all involved are collections which which would experience this type of phenomenon and then as you pointed out that the large blocks of stock of you know a thinly traded company right and in that scenario sell for free and that is based on the fact that what's a person receives if you take a company you split it ten ways and you get it so each person gets one tenth of the company what as one chance of the company  that the faceless hypothetical market out there is only willing to pay this discounted amount because they don't have control they don't have the right to force decisions and they don't have a saleable interest in the in the enterprise so in that sense it's measuring it as to what this person got and what they could sell it for the the corresponding you know our case we're saying well first they tax purposes  with steam in the sense you can look at this is an inventory discount case because what we have is we have a business that was able to sell its artwork to the tune of two or three million dollars a year in the thirty six and thirty six million dollars worth of inventory so you are i don't have a fifteen million dollar i'm sorry a fifteen year turnover factor you know that that would impact the amount of the discount and certainly in an inventory context if you had a similar link the turnover for your inventory where you had a what is the tax law require i think it helps us on that on the duty of consistency issue probably doesn't cut either way because it doesn't look like it was an issue that was presented to the court so you're attacking the duty of consistency rules with hand well i you know the previous case that i had some years ago established it in this circuit so i would like to go back and reinvent the wheel but i don't i'm not i'm not really attempting to do that what i'm saying is that there is nothing inherently consistent inconsistent with saying the value for estate tax purposes is fourteen million and then arguing the value for income tax purposes which involves different valuation assumptions is thirty six million i don't think those are inconsistent audit the government could have easily closed this audit by saying all right we're going to enter in a closing agreement so fourteen million fourteen million is the value for estate tax purposes and beneficiaries are going to report that as their basis they didn't do it and there's a government you know results cases is you you know that there are varying degrees of finality that you can get in line and they chose to the least final and then complain that the options that were presented to us we the valuation for a state tax purposes is really quite different from the valuation for income tax purposes and that they can be two different things and i think if you take a look at the actual language of the code and regulations section ten fourteen of the internal revenue code says that the basis of property in the hands of the person acquiring the property from a distance is the fair market value at the of the property at the time the dissidence death the treasury regulations establish that the purpose of this section is to provide a basis for property that is equal to the value that was reported for federal estate tax purposes so the regulations do express lee link those two valuations in a revenue ruling and subsequent court rulings establish that it's not it's not always exactly consistent that it's a result of a presumption but that the value reported for state tax purposes is prima fascia the basis for income tax purposes it seemed to me if i read that it's natural that we're focusing on the wrong words because  to the issue of fair market value you have to determine what the property is and so what i think the tax payers are saying and maybe they didn't articulate quite this is that the property you're talking about two i understand i think that is a legitimate way of viewing perhaps of making the argument for two different valuations in some cases but i think the record in this case doesn't support that argument ok so let's go and so do you agree that that there is a difference that you could say property something that is the collection of artwork is is an aggregate piece of property but that the individual pieces of artwork the mathieson the calder that the council they also are pieces of property i think that as i said i think that could be the case in other cases i think in the record in licensing it here then because the record shows that in this case the the artwork at the gallery was operated as a business by city janis during his lifetime when he died the i r s our divisor panel in the estate tax audit was conducted the i r s r t visor panel recommended applying a blockage discount to the gallery's inventory to reflect the fact that this was indeed a collection of artwork that comprise the inventory of an ongoing business they listed several factors several reasons for applying the blockage discount and many of these factors were to reflect the fact that this was an ongoing business that it was going to take time to sell pieces of artwork  to account for various intangibles associated with that business the reputation of the gallery when the gallery was then transferred to a trust the trust continued after sydney's death so operate the gallery as a business after the trust w terminated one nine hundred ninety five conrad and carroll received their interest in the gallery and then they subsequently contributed their interest in the gallery to a partnership which continued during the tax years of issue to operate the gallery as a business so continued to be the inventory of an ongoing business as opposed to carolyn conrad taking home giving up the property and so i understand so you're really saying it is like the inventory situation correct if you didn't have an ongoing business and somebody has all this half of this artwork in their house and they die and they say you know nothing of the third to each of my three children but to value the artwork  as of the date of death would there be in your view a discount because you would have to be looking at selling all of that and flooding the market at the same time with all that what would you have valued chilly i guess it's hard to say i in the cases that have looked at estates of artists where they held a large amount of artwork they did apply blockage discounts to account for potential forced liquidation in order to come up with the money that would require be required to pay the estate tax so in those cases in that situation without giving anything away i guess there would be a stronger case for applying a blockage discount in the estate tax context but then when the paintings are distributed to various beneficiaries who do whatever they want with them need to hold them hang them in their house sell them twenty years later there might be a better argument for valuing the basis at at a higher at a and undiscounted value saying that's not this case that's not this case if you look closely at the schedule c s which reported the operations of the gallery for all the tax years that issue schedule c is the particular forms who report profit or loss from a business it's clear that the gallery was an operating business there are deductions for advertising insurance rents taxes wages employee benefit programs in one year i think it was nine hundred ninety the trust even purchased an additional piece of artwork to add to the inventory on all of the relevant returns that work the move i think those aspects were were things like goodwill were taken to into account in applying the blockage discount to the value of the artwork but the the ultimate value of the gallery as a whole consisted of the value of the inventory  added into that were cash and cash equivalents i think about eight million dollars worth of cash in cash equivalents at the gallery held last about overbuilding really obscure you know where they're fixtures and they yes they i think they rented their property but they had various fixtures if you look closely like you said at the schedule caesars there's lots of listings for all the various fixtures frames an exhibition commissions painted and all of those aspects went into the ewing the gallery if you look at the estate tax return in fact what w valued the property listed is interest in sydney janice gallery and it has an overall value of which the discounted value of the artwork is one component and so when the tax court r opinion is whether petitioners who inherited an art gallery or you can count collate the cost of goods sold using the undiscounted valorie value of the galleries collection of artwork rather than the discounted value and so they really did frame the question as a the state of ashman i think addresses a lot of the the arguments that were raised by the taxpayer and it's in his free just turning to this one point that the taxpayer raised the form eight ninety that the commissioner used to secure the value of the artwork if you look at the record first of all as an initial matter i would like to point out that in the proceedings below the taxpayer never contested that he did agree to value the artworks at fourteen point five million dollars and if you look at the trial memorandum although the record in this case i think  pointed out doesn't really explain how that value was reached the taxpayers trial memorandum filed below states that the state and the commissioner agree that the gross value of the artwork of thirty six million was correct but that the appropriate blackish discount was greater than the amount of terman by the panel they determined that the discounted fair market value of the artwork was fourteen point five million dollars relying on advice of the state's accountant and tax adviser david silverman petitioners as executors of the estate agreed reflects the agreement that is not really the record doesn't show when this agreement was reached that the commissioner and the taxpayer at some point agreed to further discount the value of the inventory at fourteen point five million dollars so for purposes of duty of consistency there was an agreement of fact and agreement regarding the value of this inventory the commissioner relied on that agreement and assessing the estate tax and now that the period of limitations for a assessing additional estate taxes passed the taxpayer attempting to we characterize the situation in a manner that would harm the commissioner so under a state of ashman the duty of consistency is called for unless of course for the questions i think the notion that this is somehow a business that's being valued is completely misstates a record below what the tax court did it clearly did however they may have phrased the issue is that there were agree to a value this gallery if you will as consisting of three components artworks cation cash equivalents and liabilities and then proceeded the only contested issue was the value of the artworks there was no notion of goodwill or any kind of a going concern value to this however the the the this collection may have been presented after the death of sidney janice is is irrelevant it is there is no no there was no entity i mean it was about enterprising lesson just holding him for his personal use but i think the distinction between a personal collection and one that's being held for resale is irrelevant in the context of this case and then the other point is that trust by it's own terms terminated on his death and the trust supposedly held this business but if it by its own terms terminated on his death and whatever was done afterward was just in the nature of the administration the state reach the issue of what the value of the artworks was as a collection of the tax court memoranda decisions as the conran and carol agreed that the discounted price of the collection was fourteen million five hundred thousand dollars i guess not much come from the