Paintings Undervalued by $1.77 Million in Estate Tax Case

If the IRS determines that you gave them a misleading appraisal report, expect to pay.  In Estate of Kollsman v. Commissioner, the Tax Court found that the evaluation used for the Estate’s taxes was off by $1.77 Million. What went wrong?  The Estate expected a Sotheby’s auction house specialist would satisfy the IRS’s appraisal requirements. However, it was found that the expert’s valuations were “lowballed” in order to secure the future sale of the works.

Two Old Master Paintings

The Estate of Kollsman possessed two 17th Century Old Master paintings, one created by Pieter Brueghel the Younger and the other by either Jan Brueghel the Elder, Jan Brueghel the Younger, or a Brueghel studio.  A Sotheby’s specialist examined the two paintings, evaluated them for $500,000 and $100,000 respectively, and offered to have Sotheby’s sell the works at auction. The executor then submitted the specialist’s appraisal with their estate tax reports.

The Tax Courts found that the Sotheby’s specialist “had a significant conflict of interest.”

The fact that Sotheby’s is an auction house significantly hurt the Estate’s case. Because the specialist would receive commission rewards for procuring the consignment and Sotheby’s Auction House would benefit from the sale of the paintings, the Tax Court found “a significant conflict of interest.” Additionally, the Court determined that the specialist “had a direct financial incentive to curry favor with [the executor] by providing ‘lowball’ estimates that would lessen the Federal estate tax burden borne by the estate.”

The IRS first issued a notice of deficiency asserting values of $1.75 million and $300,000.  After the Estate’s petition was filed, the IRS revised the values to $2.1 million and $500,000.  Sotheby’s sold the Elder’s painting for over $2.4 million.  Nonetheless, the specialist did not adjust his valuation opinion.

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Exaggerated Condition Issues

The appraisal noted the works were dirty and there were risks involved in cleaning them. The specialist lowered the fair market value of the works because of their “dirtiness.” However, the Court noted that the paintings were cleaned with relative ease. Sotheby’s also did not raise these concerns with the Estate when they were pitching to gain the consignment. According the Commissioner’s case, Sotheby’s valuation report did not seem to match reality.

The IRS has its own experts

The IRS relies upon the expertise of its own, unbiased team of appraisers, the Art Panel, to review suspicious appraisals. With the help of these appraisers, the Tax Court determined that the Estate of Kollsman were off in their estate tax valuation by 1.77 Million, nearly four times the amounts they reported.

Auction house estimates are not appraisal reports.

Clients are frequently confused when my appraisal document Fair Market Value differs from an auction house estimate. I explain to them that an auction house establishes auction sales estimates, typically a range of values, to procure consignments and encourage bidding.  My duty as an independent appraiser is to give them an objective Fair Market Valuation, reinforced by comparable, recent sales data. Sometimes they are not the same.

An appraisal report prepared in compliance with the Uniform Standards of Professional Appraisal Practice, the generally recognized performance standards for the appraisal profession in the U.S., includes a certification that the opinions expressed in those reports are the appraiser’s unbiased professional opinions, and that the appraiser has no present or prospective interest in the property being appraised or personal interest with respect to the parties involved (or if such interests exist, they must be disclosed). These certifications serve to clarify the parties’ relationship and create a paper trail that can help estates avoid problems down the road.

For independent appraisals, contact The Magnusson Group at 973-425-1550.


Co-Authors: Lynn Magnusson, ASA, AAA and Becky Lipnick, Communications Coordinator

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