T.C. Mem o. 2 01 5- 24 6

UNITED STAT ES TAX COURT

ESTATE O F BERNIC E NEWBERGER, DECEASED, JP MOR GAN CHASE BANK, N.A., SUSAN NEWBERGER, AND NANCY NE W BERGER, COTRUSTEES, Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 26 24 1- 13
. Fi le d Dec em be r 22 , 20 15
.
Jo hn Pau l Ba rri e, fo r pe ti ti on er. Alex an de r R. Ro ch e, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION FOLEY, Jud ge : Aft er co nc es si on s t he is su es forde ci si on are t he va lu es , pu rs ua ntto sec ti on 20 31 , of t hr ee p ie ces of f in e art work. 1
Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al 1 (co nt in ue d...)- 2 -

[* 2] FINDINGS OF FACT Bern ic e Newb erg er, a re si de ntof P al m Beac h C ou nty , Flo rid a, di edin Ch ic ag o, Il li no is , on Ju ly 28, 2 00 9 (d at e o f de ath) , andhe r wil l was pro ba te d i n Ill in oi s. The Es ta te of B ern ic e Newb erg er (e st at e), o n Oct ob er 2 8, 2 01 0, t im el y

2 fil edFo rm

70 6, Un it edSta te s Es ta te (an d Gen erat io n- Sk ip pi ng Tran sf er) Tax Return, o n wh ic h i t re po rte d v al ue s re la ti ng to Tête de Femm e (J acque li ne ) by Pab lo Pic as so (th e Pi cas so ), Unt it le d b y Ro be rt M othe rwel l (t he Mo th erwel l), a nd Elém en t Bl euXV by

Jea n Dubu ffet(th e Dub uf fet ). The m ark etforfin e art work d ecl in edpre ci pi to us ly dur in g t he au tu m n o f 20 08 . In Oct ob er o f th aty ear 4 4% (i .e., do ub le th e Oct ob er 2 00 7 ra te ) of th e artwork up fo r au ct io n fa il edto reac h i ts m in im um or g ua ran te edpri ce an d was returne d t o t he au ct io ne er o r own er. In20 09 So th eb y ’s andCh ris ti e’s, th e to p artwork auc ti on ho us es , exp eri en cedau ct io n re ve nu e d ecre as es of 5 3% a nd46 %,
res pe ct iv el y . Lower s al e p ric es an d alac k o f av ai labl e, hi gh -qua li ty artwo rk
co nt rib ut edto th e d ecl in e in au ct io n re ve nu e. The a rtwo rkm ark etreb ou nd edin (...co nt inue d) 1 Rev enue Co de rel at in g t o t he da te of d eced en t’s d eat h, an d a ll Ru le refe ren ces are to th e Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. The est at e an d c ot ru st ees ha d am ai li ng ad dr es s i n Il li no is when th e p et it io n 2 was fil ed . The rec or d d oe s n otdi sc lo se wher e th e co tru st ees res id edwhen th e pe ti ti on was fi le d.- 3 -

[* 3] 20 10 , with auc ti on rev enue fro m th aty ear n earl y

do ub li ng th e 2 00 9 t ot al an d al m os t m at ch in g t he 20 07 hi gh po in t. The Pic as so is a si gn edan d d at ed35 .5- b y 23 -in ch oi l o n c an va s wo rk
crea te d i n M ay

19 63 . It d ep ic ts Pab lo Pic as so ’s sec on d wi fe, J acque li ne , who m he po rtr ay edin ov er 4 00 pa in ti ng s. OnFeb ru ary 10 , 19 81 , Ms . Newber ge r acqui red th e Pi cas so for$1 95 ,00 0. Itwas p ur ch as edfro m th e Sai de nb erg Gall ery in New York, New Yo rk , andpre vi ou sl y own edby D an ie l-He nry

Kahn weil er o f Pari s, Fran ce, an d M r. an d M rs . Leig h B lo ckof C hi cag o, Il li no is
. InNov em

be r 20 09 Nanc y , Ms . Newber ge r’s daug ht er, s ou gh t ap pr ai sa ls of th e es ta te ’s pro pe rty. In Decem be r 20 09 So th eb y ’s off

eredto sel l the Pic as so an d gu aran te edth atitwou ldpay th e es ta te $3 m il li onif t he Pic as so di d n otsel l at
au ct io n. Lat er tha t m on th So th eb y ’s in crea se d t he gu aran te e to $3 .5 m il li on . The
es ta te reject edth e o fferan d o n Dec em be r 18 , 20 09 , agr eedto sel l the Pic as so at Ch ris ti e’s Feb ru ary 2, 2 01 0, Lo nd on au ct io n. Th atag reem en t p ro vi de d t he est at e wit h agu aran te e o f $4 ,78 4,6 89 an d 6 0% o f th e h am m er p ric e (i .e., th e am ou ntof th e win ni ng bi d) ex ceed in g t ha t am ou nt . Chr is ti e’s li st edth e Pi cas so init s ca ta lo g wit h a n e xp ect edsal e p ric e b etween$4 ,78 4,6 89 an d $ 6,3 79 ,58 5 a ndpro vi de d t he
es ta te with a n app rai sa l re po rt s ta ti ng th e Pi cas so ha d a$5 m il li on da te of d eat h
va lu e. On Fe brua ry

2, 2 01 0, the Pic as so so ldat C hr is ti e’s Lon do n auc ti onfora- 4 -

[* 4] to ta l p ric e o f $1 2,9 27 ,87 4 (i .e., an $ 11 ,48 4,0 00 ha m m er p ric e an d $ 1,4 43 ,87 4 pa idby the bu y er t o C hr is ti e’s). The est at e rep orte d, o n i ts Fo rm 70 6, t ha t the Pi cas so ha d a$5 m il li on da te of d eat h v al ue . The Mo th erwel l i s a s ig ne d 6 6- by 50- in ch oi l o n c an va s wo rkcrea te d i n 19 66 . On Ma y

27 , 19 69 , Ms . Newber ge r acqui reditfor$8 ,00 0 fr om th e Mar lb or ou gh -Gers on Gall ery inNew York , New York . On Nov em be r 11 , 20 10 , Ro be rt M ot he rwel l’s In Bla ckan d Whi te No. 5 (i.e ., a 66 - by 50 -in ch oi l o n can va s wo rkcrea te d i n 1 96 6) so ldfor$1 ,42 6,5 00 . On th e b as is of an app rai sa l fro m So th eb y ’s th e es ta te rep orte d, o n i ts Fo rm 70 6, t ha t the Mo th erwel l h ada $4 50 ,00 0 d at e o f de ath v al ue . The Dub uf

fetis a si gn edan d d at ed79 .25 -in ch tal l, 4 4- in ch wid e, an d 4 -in ch de ep trans fer o n p ol y es te r cre at edin 19 67 . On Ju ne 10 , 19 82 , Ms . Newber ge r acqui reditfor$4 0,0 00 fro m th e Gal eri e Beyelerin Bas el , Swit zerl an d. On Nov em be r 14 , 20 07 , Jea n Dubu ffet ’s Elém en t Bl euXIII, a s im il arl y si zedwork fro m th e sa m e se rie s, s ol d fo r $8 25 ,00 0. Onth e b as is of a n app rai sa l fr om So th eb y ’s th e es ta te rep orte d, o n i ts Fo rm 70 6, t ha t the Dub uf

fetha d a$5 00 ,00 0 da te of d eat h v al ue . Res po nd en t, o n Au gu st14 , 20 13 , is su edth e es ta te a no ti ce o f de fic ie nc y an d d et erm in edth atth e Pi cas so , th e Mo th erwel l, an d t he Dub uf fetha d d at e o f- 5 -

[* 5] de ath v al ue s o f $1 3 m il li on , $1 .5 m il li on , and$7 50 ,00 0, re sp ect iv el y . On Nov em be r 8, 2 01 3, t he est at e ti m el y fil eda pe ti ti on with t he Co urt. OPINION A tax is im

po se d o n t he tra ns fer o f a d eced en t’s t ax ab le est at e (i .e., th e fai r m ark etva lu e o f al l p ro pe rty at th e ti m e o f th e d eced en t’s d eat h m in us cert ai n de du ct io ns ). See s ecs . 20 01 , 20 31 (a), 2 05 1. Fa ir m ark etva lu e is “ th e p ric e at whi chth e p ro pe rty woul d c hang e h an ds be twee n awil li ng bu y er an d awil li ng se ll er, n ei th er b ei ng un de r an y co m pu ls io n t o b uy or to sel l an d b ot h h av in g reas on ab le kn owl ed ge of r el ev an t fa ct s.” Se c. 20 .20 31 -1 (b ), Est at e Tax Reg s. We de te rm in e th e fai r m ark etva lu e o f th e artwork o n the ba si s o f th e p rep on de ran ce o f th e ev id en ce. See Est at e o f Bo ng ardv. Co m m is si on er, 1 24 T.C. 95 , 11 1 (2 00 5)
. The est at e an d re sp on de nt , res pe ct iv el y , con te ndth atth e Pi cas so ha d ada te of de ath v al ue of $ 5 m il li on an d $ 10 m il li on . The Pi cas so so ldat C hr is ti e’s Lon do n Au ct io n o n F eb ru ary 2, 2 01 0, fo r $1 2,9 27 ,87 4. Th e es ta te ’s exp ert s as k
us to di sr eg ardth is sal e b ecau se “ [i]t was a fl uk e”, an d t he est at e u nc on vi nc in gl y co nt en ds th atth is sal e is no t re le va ntbe cau se itco ul d n otha ve be enreas on ab ly
an ti ci pa te d o n t he da te of d eat h. To th e co ntrary, the s al e o f th e Pi cas so m ay “be ta ke n i nt o a cco un t as ev id en ce o f fai r m ark etva lu e as of t he va lu at io n d at e.” See Est at e o f Ju ng v. Co m

m is si on er, 1 01 T.C. 41 2, 4 31 -4 32 (19 93 ); s ee al so Fir st- 6 -

[* 6] Nat’l Ba nkof Ke no sh a v . Uni te d S ta te s, 7 63 F.2d89 1, 8 94 (7th C ir. 1 98 5)
. In de ed , no ev id en ce i s m or e p ro ba ti ve of the Pic as so ’s fai r m ark etva lu e th anit s di rectsal e p ric e. See Am ba ss ad orApartm en ts , Inc . v. Co m m is si on er, 5 0 T.C. 23 6, 2 42 -2 43 (19 68 ), aff’d, 4 06 F.2d28 8 (2 d C ir. 1 96 9) . The es ta te ’s exp ert s’ fai lu re t o c on si de r th e sa le of t he Pic as so ren de rs th ei r va lu at io n wh ol ly unr el iabl e. Res po nd en t’s ex pe rt, a fte r ad jus ti ng th e $ 12 ,92 7,8 74 sal e p ric e d own wardto refl ectJu ly 28, 2 00 9, m ark etco nd it io ns , val ue d the Pic as so at $ 10 m il li on . W e ag ree wi th res po nd en t’s ex pe rt. The est at e’s expe rts an d re sp on de nt ’s exp ertag ree t ha t the $1 ,42 6,5 00 sal e of In B la ckan d Whi te No. 5 , on Nov em be r 11 , 20 10 , was the be stco m pa rab le rel at in g t o t he Mo th erwel l. Altho ug h In Bla ckan d Whi te No. 5 sh ares m an y 3 ch arac te ris ti cs with t he Mo th erwel l (i .e., th ey were cr eat edin 19 66 , are the same si ze, an d h av e a s im il ar s tyle an d c om po si ti on ), InBla ckan d Whi te No. 5 was s ol d
ne arl y 16 m on th s af

te r th e d at e o f de ath. By tha t t im e, th e art work m ark etha d la rg el y reb ou nd edfro m

it s d own tu rn . Res po nd en t’s ex pe rt d idno t m ak e a m ark et ad jus tm en t as sh e m ad e rel at in g t o t he Pic as so an d, i ne xp li cab ly, va lu edth e Mo th erwel l at$1 .5 m il li on , an a m ou nthi gh er tha n the sal e p ric e o f InBla ckan d A pro pe rty’ s fa ir m ark etva lu e is ge ne ral ly det erm in edby com pa rab le sal es 3 of si m il ar p ro pe rti es th atare re as on ab ly pro xi m at e in ti m e. See Es ta te of S prui ll v. Co m m is si on er, 8 8 T.C. 1 19 7, 1 22 9 n .24 , 12 33 (19 87 ).- 7 -

[* 7] Whi te No. 5 , whi chso ldaft er the m ark etreb ou nd ed . The es ta te ’s exp ert s, ho wev er, ad

jus te d t he $1 ,42 6,5 00 sal e p ric e o f InBla ckan d Whi te No. 5 do wnwar d t o re fle ctJu ly 28, 2 00 9, m ark etco nd it io ns an d v al ue d t he Mo th erwel l at$8 00 ,00 0. We agre e wit h t he est at e’s ex pe rts . The est at e an d re sp on de nt , res pe ct iv el y , con te ndth atth e Dub uf fetha d a da te of d eat h v al ue of $ 50 0,0 00 an d $ 90 0,0 00 . The b es t co m pa rab le rel at in g t o th e Dub uf

fetwas t he Nov em

be r 14 , 20 07 , sal e o f Je anDub uf fet ’s Elém en t Bl eu XIII (i .e., a si m il arl y

si zedworkfro m

th e sa m e se rie s) for$8 25 ,00 0. Res po nd en t’s ex pe rt’s c on te nt io n t ha t the Dub uf fet ’s val ue was h ig he r du rin g t he
m ark etdo wnturn t ha n El ém en t Bl euXIII’s v al ue be fo re the m ark etdo wnturn i s, i n sh ort, n on se ns ic al . W e ag ree wi th th e es ta te th atSo th eb y ’s $5 00 ,00 0 app rai sa l (i.e ., th e v al ue th e es ta te rep orte d o n i ts Fo rm 70 6) refl ect s the Dub uf

fet ’s dat e o f de ath v al ue . To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red
un de r Ru le 15 5.