Opinion ID: 3038487
Heading Depth: 2
Heading Rank: 1

Heading: fair market value of the art collection

Text: To determine whether Conrad and Carroll reported the correct value of the gallery for estate tax purposes, the IRS Art Advisory Panel reviewed a sample of the works. The Panel accepted Sotheby’s item-by-item valuation to determine the undiscounted value of the collection. Although the Panel did not agree with the specific discounts urged by Conrad and Carroll, it did agree that a blockage discount was appropriate. As explained by the Panel, In general, a blockage discount is applied to property in an estate in an attempt to reflect the market’s response to a large number of items. Traditionally . . . a blockage discount is applicable in response to a large number of works by one artist, usually in an artist’s estate. The Estate of Sidney Janis is not an artist’s estate, and does not involve a large number of works by one particular artist, but rather works by different artists. However, since it is a valuation problem involving a gallery inventory, some of the general principles are applicable. A number of factors have been considered in determining whether a blockage discount is appropriate and to what extent it should be applied to the subject properties. Consideration was given to the prominence of the artists; the types of works in the 1 The Tax Court also upheld deficiencies against Carroll and his wife for their 1995-1997 joint tax returns. These deficiencies are not part of this appeal. 10018 JANIS v. CIR estate; the distribution of the items (for example, the number and types, and their quality and saleability); the number of similar items available in the marketplace; the market’s response to such works around the valuation date; the number of sales and the prices at which sales were made during the period immedi- ately preceding and following death; the annual sales of the gallery; length of time necessary to dispose of the items; the works that are saleable within a relatively short period of time; the works that can only be marketed over a long period; the demonstrated earning capacity of the business; the tangible and intangible assets, including goodwill; and, the reputation of the gallery and the provenance. Janis, 87 T.C.M. at 1324.2 [1] Ultimately, Conrad and Carroll stipulated to the Panel’s recommendation of the value of the collection for estate tax purposes, $14,500,000. This valuation flowed through to Conrad and Carroll as the heirs of the estate. In valuing inherited property for income tax return purposes, 26 U.S.C. § 1014(a)(1) provides that “the basis of property in the hands of a person acquiring the property from a decedent . . . shall . . . be . . . the fair market value of the property at the date of the decedent’s death.” Under the tax regulations, 26 C.F.R. § 1.1014-3(a), the estate tax valuation of the inherited property upon the decedent’s death is prima facie evidence of the fair market value of the property. Janis, 87 T.C.M. at 1328. Consistent with these circumstances, the Tax Court determined that the agreed-upon estate tax value applied to the collection under § 1014 and § 1.1014-3(a). Id. 2 The Tax Court has a long history of applying blockage discounts in valuing art collections. See, e.g., Estate of O’Keeffe v. Comm’r, 63 T.C.M. (CCH) 2699, (1992); Calder v. Comm’r, 85 T.C. 713 (1985); Estate of Smith v. Comm’r, 57 T.C. 650, (1972), aff’d, 510 F.2d 479 (2d Cir. 1975). JANIS v. CIR 10019 Petitioners argue that the Tax Court’s valuation of the collection was a conclusion of law because the facts were stipulated. Under this argument, Petitioners suggest that we do not owe deference to the valuation determination. Petitioners are incorrect. The Tax Court undertook a detailed analysis whether the basis of each work of art in the collection is the work’s undiscounted fair market value, considered whether the blockage discount was appropriate, and made a determination that each work’s value “is equal to the proportionately discounted value as determined for estate tax purposes.” Janis, 87 T.C.M. at 1327-28. This finding of fact was contingent on an analysis of the factual circumstances of the case, and cannot be characterized as a conclusion of law. See King v. Comm’r, 857 F.2d 676, 678-79 (9th Cir. 1988) (holding that a determination was factual if it “requires an examination of the totality of the circumstances and a balancing of many relevant factual elements”). The Tax Court did not clearly err in its determination of value. “It is the rule in this Circuit that the Tax Court’s determination of the value of property is a finding of fact, which we will reverse only for clear error.” Sammons v. Comm’r, 838 F.2d 330, 333 (9th Cir. 1988).