Tax Court Dismisses Valuation Expert's Report Due to Conflict of Interest

• Published date: 01 May 2017
• Date: 01 May 2017
• DOI: http://doi.org/10.1002/npc.30314

Bruce R. Hopkins’ NONPROFIT COUNSEL

May 20172THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

ranted and unlawful incursion into the realm of gover-

nance of public charities and other types of tax-exempt

organizations. While never reduced to formal regula-

tions, these policies are “unnecessary” and “ineffective,”

and “impose costs that exceed benefits.” Also on the

block should be reining in of use of the commerciality

doctrine (most certainly an “outdated” policy) and exces-

sive application of the private benefit doctrine. ◆

TAX COURT DISMISSES

VALUATION EXPERT’S

REPORT DUE TO CONFLICT OF

INTEREST

The US Tax Court, on February 22, issued an opinion

valuing two paintings for estate tax purposes (Estate of

Kollsman v. Commissioner). We reviewed this opinion

because the same valuation process would take place in

the nonprofit law context (e.g., valuation of property to

determine a charitable contribution deduction). The Tax

Court found the analysis of the estate’s valuation expert

“unreliable and unpersuasive” (along with undervaluing

the property by $1.77 million) because, in part, he had

a “significant conflict of interest that could cause a rea-

sonable person to question his objectivity.”

Facts

At issue was the value of two seventeenth-cen-

tury Old Master paintings, Maypole, painted by Pieter

Brueghel, and Orpheus, by Jan Brueghel. The estate’s

expert was a Mr. Wachter, vice president of Sotheby’s

North America and South America, and cochairman of

Sotheby’s Old Master Paintings Worldwide (which is to

say he brought solid credentials to the case). Wachter

first saw these paintings in 1981 in the decedent’s

residence; he saw them on several other occasions until

the decedent’s death in 2005. He gave a preliminary

estimate of the value of the paintings when negotiating

auction of them in 2006 at Sotheby’s.

The executor of this estate, shortly after the death,

consulted with a “preeminent fine arts services firm”

(the court’s words) about cleaning and reframing of the

paintings. This firm prepared a report on their condition.

They were eventually cleaned, without removal of any

varnish. Maypole was sold at a Sotheby’s 2009 auction

for $2.1 million.

The estate reported the fair market values, as of the

valuation date, as $500,000 for Maypole and $100,000

for Orpheus. These were the values Wachter assigned

the paintings in 2005. The government asserted the val-

ues were $2.1 million and $500,000, respectively.

Analysis

The court noted that Wachter initially provided his fair

market value estimates at the same time he was soliciting

the executor for the exclusive rights to auction the paint-

ings at Sotheby’s. Wachter was said to have a “direct finan-

cial incentive to curry favor with” the executor by providing

“lowball” financial estimates that would lessen the federal

estate tax burden. Wachter’s simultaneous presentation of

these value estimates and his “pitch for exclusive auction

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Address for Editorial Correspondence: Bruce R. Hopkins. email: brucerhopkins@brucerhopkinslaw.com

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