A recent Tax Court case highlights some of the issues faced by estates that own valuable artwork and the need to account for artwork as part of estate planning and estate administration. Artwork is an important aspect of estate planning and administration because artwork can affect the estate’s overall value, and can result in substantial estate or inheritance taxes. Artwork is a non-revenue producing asset that can make financing taxes more challenging, particularly when there is no advanced planning. Valuable artwork is subject to substantial changes in value, depending on market conditions.
This case involved a dispute over the value of fine artwork owned by a sophisticated art collector. The Estate owned three exquisite and valuable paintings: (1) “Tĕte de Femme (Jacqueline)” by Pablo Picasso; (2) an untitled piece by Robert Motherwell; and (3) “Elément Bleu XV” by Jean Dubuffet. The Picasso was by far the most valuable, selling at auction in 2010 for $12.9 million. On the Federal Estate Tax Return, the Estate reported the following values for each painting: (1) $5.0 million for the Picasso; (2) $800,000 for the Motherwell; and (3) $500,000 for the Dubuffet.
The IRS contested the Estate’s reported valuations and commissioned its own experts to value the paintings. The IRS’ experts determined the paintings had substantially higher values than those reported by the Estate: (1) $10.0 million for the Picasso; (2) $1.5 million for the Motherwell; and (3) $900,000 for the Dubuffet. Using these higher values, the IRS issued the Estate a Notice of Deficiency, and the dispute found its way into the U.S. Tax Court.