Important lessons regarding valuation issues.

• Author: Geopfert, Paige

On April 28, 2011, the Tax Court held in Estate of Mitchell, T.C. Memo 2011-94, that an estate properly valued both real estate and artwork. The IRS had previously examined the estate's federal estate tax return and claimed that the estate underreported the fair market values (FMVs) of paintings and interests in several real properties. In response, the executor of the estate filed a petition with the Tax Court to contest the entire deficiency. While the parties were able to resolve most valuation and other estate tax issues, they still disputed the FMV of fractional leased-fee interests in two real properties and of two paintings. Both parties agreed on discounts ranging between 19% and 40% for the real property interests.

Asked to determine the FMV of the real property interests and paintings, the court noted that valuing these types of assets "can be an ambitious task," because they "are unique and infrequently exchange hands," and the value of art "often lies in the proverbial 'eye of the beholder.'" Both the estate and the IRS discarded the initial valuations used on the estate tax return and in the notice of deficiency and presented new valuations at trial. The court stated that this case illustrated the difficulty in ascertaining FMV, the "quintessential fact question." The court held that the estate properly determined the FMV of the decedent's real property interests and paintings.

Valuation Issues

Under Sec. 2031, the value of the gross estate of the decedent is determined by including the value of real, personal, tangible, and intangible property held by the decedent at the time of his or her death. Regs. Sec. 20.2031-l (b) indicates that the value discussed in Sec. 2031 equals the property's FMV. The regulations define FMV as the price at which 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. Furthermore, the value of tangible property must reflect its highest and best use as of the valuation date (Estate of Kahn, 125 T.C. 227 (2005)).

As indicated in Mitchell, ascertaining FMV is a question of fact that can cause controversy and litigation, particularly when the assets being valued are distinctive. If a decedent's estate contains assets that have marked artistic or intrinsic value that totals more than $3,000, Regs. Sec. 20.2031-6(b) requires the appraisal of an expert, executed under oath, to be filed with the estate tax return. The regulations also require care to be taken to ensure that the expert appraisers are reputable and recognized as competent to appraise the assets involved.

Because of the frequency of disagreements regarding the valuation of artwork, Rev. Proc. 96-15 instituted a procedure by which a taxpayer may, after transferring artwork valued at $50,000 or more, obtain an IRS statement of value on which the taxpayer may rely in filing the income, gift, or estate tax return reporting the transfer. A taxpayer must attach to and file with his or her return a copy of the statement of value, regardless of whether the taxpayer agrees with it. If the taxpayer disagrees with the statement of value, the taxpayer may submit additional information with the tax return to support a different value.

When the taxpayer and the IRS do...