Estate of James A. Elkins, Jr. v. Commissioner of Internal Revenue, No. 13-60472 (5th Cir. Sept. 15, 2014) Estate of Elkins 140 T.C. No. 5 (March 11, 2013)

The upshot of this case is that transfers of fractionally owned tangible assets and collectibles can warrant significant discounts to account for this form of ownership, if the facts and expert opinions are properly presented to the court. A key lesson for attorneys, on both sides of the aisle, is to always support valuation opinions with expert testimony. The 10% fractional interest discount initially reached by the Tax Court was rejected by the Fifth Circuit on appeal, which affirmed the original 44.75% total valuation discount claimed on Form 706.

The Tax Court arrived at its 10% conclusion after noting that the Elkins family loved the art in its collection and wanted to keep it in the family, concluding that other family members would want to purchase the decedent’s share (the undiscounted value of the 64 works of art was $35.2 million). In so doing, the Tax Court veered from the hypothetical willing buyer/willing seller standard.

The Tax Court determined that a 10% discount would provide sufficient profit incentive to a hypothetical willing buyer to enter into a transaction, with the knowledge that the balance of the family would be ready to repurchase the undivided interest at its full undiscounted value.

The Service presented no expert testimony at trial, in contrast to the taxpayer, which had retained trial experts (in art, law and valuation) who opined to discounts ranging from 50% to 95%. The original 44.75% discount claimed on Form 706 was “determined by Deloitte LLP” to account for both lack of control and marketability, but no further details were mentioned in the decision.

In its opinion, the Fifth Circuit noted:

  • We repeat for emphasis that the Estate’s uncontradicted, unimpeached, and eminently
    credible evidence in support of its proffered fractional – ownership discounts is not just a ‘preponderance’ of such evidence; it is the only such evidence.
  • Nowhere is there any evidentiary support for the Tax Court’s unsubstantiated declaration that a, “10% discount would enable a hypothetical buyer to assure himself or herself of a reasonable profit on a resale of those interests to the Elkins children.”
  • The Elkins heirs are neither hypothetical willing buyers nor hypothetical willing sellers, any
    more than the Estate is deemed to be the hypothetical willing seller.
  • …. the situation is only exacerbated by the effect of the various restrictions on partition,
    alienation, and possession that survived the death of the Decedent.