Estate tax is often a confusing and difficult field in normal circumstances, but things can really get complicated when an estate’s holdings are unusual. One of those unusual holdings is art, which is notoriously difficult to value. A recent ruling by the Fifth Circuit Court may serve to clarify the way that art can be treated under estate tax law
Affluent families that hold valuable pieces of art are often loath to part with them. If sentimental reasons aren’t enough, frequently, the 28 percent capital gains tax on any appreciation of value is, according to Forbes
. However, if an estate breaks the federal estate tax exemption, these pieces of art are included in the estate tax bill at full market value.
James Elkins Jr., a prominent Houston, Texas businessman, and his wife who died before him gave partial shares of their art to their children, according to The New York Times
. This tactic is common for more typical assets, like real estate or private business holdings
. By transferring shares out of their names, but retaining a controlling share in many, Elkins and his wife were able to keep their art on their walls but reduce their eventual tax liability upon death.
However, the IRS avoids giving discounts on art, because it is difficult to sell shares independently, the news source explained. Art can only be in one place at a time, and a severe discount would be necessary to sell less than a controlling share to a non-family member, as this new owner would have little say in where the art is displayed, for example. For this reason, the IRS claimed that no discount should apply to the art.
Now, in a major victory for the estate and art collectors across the nation, the Fifth Circuit has ordered that the IRS return $14.4 million to the Elkins family and said that the estate’s initial 47.5 percent discount should be applied, according to Forbes.
Confused about your own estate taxes? Talk to a Scarinci Hollenbeck tax attorney