The Ups And Downs Of Estate Valuations Of Artwork

First published on WealthManagement.com

Last month, in Estate of Newberger v. Commissioner,1 the U.S. Tax Court found that a collector's estate grossly underreported the value of an artwork for estate tax purposes by ignoring the fact that, in early 2010, less than seven months after the collector's death, the artwork fetched at auction more than twice the amount the estate was claiming the work was worth at the time the collector died in mid-2009. The court rejected the estate's claim that the post-death sale, which occurred when the art market was rebounding from a recession, was irrelevant because the art market rebound wasn't foreseeable at the time of the decedent's death. The court sided with the estate on the valuation of two lower-priced works, finding that the IRS' appraisals overvalued the works by failing to account for the adverse market conditions that existed at the time of the collector's death. The court's decision is a cautionary tale illustrating that valuations should account for post-valuation date sales and market conditions if they are reasonably proximate in time. Here's what you need to know about the case.

The Estate and Its Form 706 Filing

Art collector Bernice Newberger died on July 28, 2009. Her estate included the following three artworks: Tête de Femme (Jacqueline) by Pablo Picasso (the Picasso), Untitled by Robert Motherwell (the Motherwell), and Elément Bleu XV by Jean Dubuffet (the Dubuffet) (collectively, the artwork). At the time of her death, the U. S. economy was in a recession, and the art market had suffered a significant downturn. In October 2008, 44 percent (double the October 2007 rate) of the artwork at auction failed to reach the minimum or guaranteed price, and in 2009 the top auction houses' revenues were halved from the prior year.2 By 2010, the art market rebounded, with auction revenue nearly doubling the 2009 total and almost matching the 2007 revenue figures.3

In December 2009, the estate consigned the Picasso to Christie's for a Feb. 2, 2010 auction in London. The consignment agreement provided the estate with a guarantee of $4,784,689 and 60 percent of the hammer price (that is, the amount of the winning auction bid) exceeding that amount.4 In its sales catalogue, Christie's sales estimates for the Picasso ranged from $4,784,689 to $6,379,585. Christie's also provided the estate with an appraisal report indicating that the Picasso had a $5 million date of death value. At auction, the...