• <b>Sotheby’s London: English Literature, History, Children’s Books and Illustrations, including The Garrett Herman Collection: The Age of Darwin. July 11, 2017</b>
    <b>Sotheby’s, Jul 11:</b> Austen, Jane. Autograph letter, written in the third person, to her niece Anna Austen (later Lefroy), 1812. £80,000 to 100,000
    <b>Sotheby’s, Jul 11:</b> Smith, Adam. <i>An Inquiry Into the Nature and Causes of the Wealth of Nations</i>. London: Printed for W. Strahan; And T. Cadell, 1776. £50,000 to 70,000
    <b>Sotheby’s, Jul 11:</b> Darwin, Charles. <i>On the Origin of Species By Means of Natural Selection, or the Preservation of Favoured Races in the Struggle for Life</i>. John Murray, 1859. £50,000 to 70,000
    <b>Sotheby’s London: English Literature, History, Children’s Books and Illustrations, including The Garrett Herman Collection: The Age of Darwin. July 11, 2017</b>
    <b>Sotheby’s, Jul 11:</b> Dickens, Charles. Autograph draft manuscript of "Mrs Gamp with the Strolling Players,” 1847. £40,000 to 60,000
    <b>Sotheby’s, Jul 11:</b> Shepard, E.H. Two drawings from <i>Winnie-The-Pooh</i> comprising “Why, what’s the matter?” and “He was taking the balloon out…” £40,000 to 60,000
    <b>Sotheby’s, Jul 11:</b> Blake, William. <i>Illustrations of the Book of Job. Invented and Engraved by William Blake. Published as the Act Directs...By William Blake, 8 March 1825</i> [1826]. £20,000 to 30,000
  • <b>Potter & Potter Auctions, July 8: Rare Books & Manuscripts</b>
    <b>Potter & Potter Auctions July 8:</b><br> Walter Gibson's Complete Run of The Shadow. 48 bound volumes, 1931-44. $8,000-12,000
    <b>Potter & Potter Auctions July 8:</b><br> Frederic Shoberl, The World in Miniature: Hindoostan. 6 volumes. $2,000-4,000
    <b>Potter & Potter Auctions July 8:</b><br> A Rare Copy of the Earliest Chicago Newspaper to Report on the Great Fire of 1871. $6,000-8,000
    <b>Potter & Potter Auctions, July 8: Rare Books & Manuscripts</b>
    <b>Potter & Potter Auctions July 8:</b><br> Broadside Proclamation by Mayor Roswell B. Mason for the Preservation of Good Order Following the Great Fire of 1871. Chicago. $4,000-6,000
    <b>Potter & Potter Auctions July 8:</b><br> Peter Force Engraving of the Declaration of Independence. One page. Scarce and highly collectable. $15,000-20,000
    <b>Potter & Potter Auctions July 8:</b><br> John Quincy Adams. The Jubilee of the Constitution. A Discourse. First edition. Inscribed. 1839. $3,000-5,000
    <b>Potter & Potter Auctions, July 8: Rare Books & Manuscripts</b>
    <b>Potter & Potter Auctions July 8:</b><br> Cuban Revolution: Expedicion y Desembarco del “Granma.” Havana, ca. 1959. With portraits of the Castro brothers & Che Guevara. $150-250
    <b>Potter & Potter Auctions July 8:</b><br> Osuna Ramos. A group of 28 photographs of the Mexican Revolution & aftermath in Mexico City, 1910-1920. 4½ x 6”. $400-600
    <b>Potter & Potter Auctions July 8:</b><br> Charles Bukowski. Hot Water Music. First edition with original signed painting. 1983. $2,000-4,000
    <b>Potter & Potter Auctions, July 8: Rare Books & Manuscripts</b>
    <b>Potter & Potter Auctions July 8:</b><br> Alan Ginsberg. Five Page Autographed Letter. Signed. February 10, 1971. $3,000-5,000
    <b>Potter & Potter Auctions July 8:</b><br> Andy Warhol’s Children’s Book. Featuring 12 color illustrations. Signed 5 times. 1983. $5,000-7,000
    <b>Potter & Potter Auctions July 8:</b><br> Albrecht Durer. The Martyrdom Saint John the Evangelist. Woodcut, 1511 edition. $1,000-2,000
  • <b>Swann Auction Galleries: Inviting Quality Consignments</b>
    <b>Swann Auction Galleries Mar 30:</b> Carte-de-visite album featuring a previously unrecorded image of Harriet Tubman, 1860s. Sold for $161,000.
    <b>Swann Auction Galleries Jun 7:</b> Hovhannes Amira Dadian, first world atlas in Armenian, Venice, 1849. Sold for $37,500.
    <b>Swann Auction Galleries May 16:</b> T.E. Lawrence, <i>Seven Pillars of Wisdom</i>, privately printed edition, inscribed, London, 1926. Sold for $62,500.
    <b>Swann Auction Galleries: Inviting Quality Consignments</b>
    <b>Swann Auction Galleries, Feb 14:</b> 22 large-format photographs from NASA missions, 1965-84. Sold for $43,750.
    <b>Swann Auction Galleries Mar 21: </b> Charles M. Schulz, <i>Here Comes the Big Polar Bear</i>, pen & ink, 4-panel Peanuts comic strip, 1957. Sold for $12,500.
    <b>Swann Auction Galleries May 4:</b> Elliott Erwitt, photograph of JFK & Eisenhower, signed by both, 1960. Sold for $32,500.
    <b>Swann Auction Galleries: Inviting Quality Consignments</b>
    <b>Swann Auction Galleries, Mar 9:</b> John Milton, <i>Paradise Lost</i>, first edition, London, 1668. Sold for $22,500.
    <b>Swann Auction Galleries Mar 30:</b> Frederick Douglass, Autograph Letter Signed to George Alfred Townsend, Washington, 1880. Sold for $100,000.
    <b>Swann Auction Galleries, Jan 26:</b> <i>Les Maîtres de l'Affiche</i>, 5 volumes, Paris, 1896-1900. Sold for $47,500.
    <b>Swann Auction Galleries: Inviting Quality Consignments</b>
    <b>Swann Auction Galleries May 16:</b> James Joyce, <i>Ulysses</i>, first edition, number 724 on handmade paper, Paris, 1922. Sold for $33,750.
    <b>Swann Auction Galleries, Mar 9:</b> Single leaf of the Gutenberg Bible, Mainz, 1455, in a copy of Newton's <i>A Noble Fragment</i>. Sold for $52,500.
    <b>Swann Auction Galleries Apr 27:</b> The Book of Mormon, first edition, Palmyra, NY, 1830. Sold for $52,500.
  • <b>Forum Auctions: Online Sale of Cricket Books and Works on Paper. Now through July 5, 2017</b>
    <b>Forum Auctions, now thru Jul 5:</b> Wisden (John). <i>Cricketers' Almanack for 1896</i>, original cloth, 1896. £15,000 to 20,000
    <b>Forum Auctions, now thru Jul 5:</b> Wisden (John). <i>The Cricketers' Almanack for the year 1869</i>, excellent copy of the scarce sixth edition, 1869. £10,000 to 15,000
    <b>Forum Auctions, now thru Jul 5:</b> Wisden (John). <i>Cricketers' Almanack for 1916</i>, with tribute to W.G. Grace by Lord Harris, original cloth, 1916. £5,000 to 6,000
    <b>Forum Auctions: Online Sale of Cricket Books and Works on Paper. Now through July 5, 2017</b>
    <b>Forum Auctions, now thru Jul 5:</b> Lillywhite (Frederick) and Arthur Haygarth. <i>Cricket Scores and Biographies of Celebrated Cricketers</i>, vol. 1 - 16 [a complete run], 1862-2003. £750 to 1,000
    <b>Forum Auctions, now thru Jul 5:</b> Trumper (Victor). Postcard of Victor Trumper, signed by Trumper on image, 1905. £300 to 400
    <b>Forum Auctions, now thru Jul 5:</b> Crombie (Charles). <i>Laws of Cricket</i>, 1907; and 29 others. £150 to 200

Rare Book Monthly

Articles - November - 2014 Issue

How Can Collectors Save $14 Million on Their Estate Taxes?

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Well, for starters, you better begin with a lot of money. A recently decided appeals court case has been labeled a major victory for wealthy collectors with regards to reducing their estate tax liability. A $14 million judgment against the IRS can elicit a giddy response. Nonetheless, we recommend a dose of caution be taken by those who may see this as a slam dunk for high end collectors. Not everything is quite so cut and dried, and every estate is unique.

 

This notable case involved works of art, but there is no reason why it would not apply to books or other valuable collections. Lawyers, and we should all be thankful for lawyers, have found many ways for people of means to legally avoid part of their tax liability. If you have enough money to be subject to significant estate tax liability, you likely have sought out professional advice already, but if not, and you own valuable “collectibles,” here is a case of which you should be aware. But, please do not make any decisions based on this brief review. Seek professional help now!

 

James A. Elkins, Jr., died in 2006. His wife predeceased him. He was a very wealthy man. Mr. Elkins also had access to the best legal advice. His father was a founder of Vinson & Elkins, a law firm based in Houston but with offices all over the world. It is one of the nation's most prestigious law firms. Mr. Elkins was also an art collector, owning a few very valuable pieces of art, and many others of significant, though more modest value. Many pieces were hanging from the walls of his Houston home.

 

At this point we should note two of the ways you can reduce the amount of estate tax you owe. Mr. Elkins used both. One is to transfer some of that estate to others before you die. The other is to show why the assets in your estate are worth less than people might think. The lower the value of your estate, the less it will have to pay in taxes when you die.

 

In 1990, Mr. Elkins created a trust that effectively gave his 50% interest in three very valuable works to his children. Texas is a community property state, which means that (for the most part) each spouse owns a 50% share of the couple's property. When Mrs. Elkins died, he got back her 50%, but he did something else with her 50% share of the other 61 pieces of art. Those 61 would have gone to Mr. Elkins, and he would not have paid any estate tax. Transfers to your spouse on death are not subject to estate tax, but transfers to anyone else are. However, all of the value of those 61 pieces of art would have been subject to tax later when Mr. Elkins died.

 

Now, there is an exemption from estate tax for a significant amount of money. This is why the average person's estate is not subject to tax. Currently, that amount is a little over $5 million, though it was considerably less when Mrs. Elkins died in 2000. Nonetheless, Mrs. Elkins' exemption was about to be wasted. So, Mr. Elkins declined his wife's bequest of a portion of her 50% interest in those other 61 works of art, allowing it to go the secondary heirs, their children, instead. He declined just enough to fully use up her estate tax exemption, but not enough to generate any tax liability. This way, there would be less in his estate to tax when he died. The result was that each of his three children immediately received an 8.98167% interest in each of the 61 pieces of art. Yes, we are serious about that share percentage.

 

Now, you may wonder why Mr. Elkins didn't just give each child a couple of paintings until enough was given to reach the exemption threshold. The reason is that Mr. Elkins, or his lawyers, were way too savvy for that. They were creating something called a “fractional ownership” in each piece, and eventually, this would end up saving the kids $14 million. This is why, if you are wealthy, you need a good tax lawyer.

 

The parties (father and children) then did a few more things. They signed an agreement saying none of them could sell their fractional interests in the art without the consent of all of the others. They also created the terms of how they would “share” the art. Each party was entitled to hang the art on their wall for a percentage of the year based on their percentage of ownership. To exercise this right, they had to give the current possessor 30 days notice and pay all expenses in moving the art. So, one of the offspring could possess these items for 33 days per year, providing he/she wanted to pay the expenses involved in moving 64 pieces of valuable artwork. Not surprisingly, and to keep this an “arm's length” transaction, the children all agreed to lease their 33 days worth back to their father so they could remain on his wall.

 

Now if all this sounds like insanity, there is a reason for this madness. Its name is “fractional share discount.” It is a concept widely known among the very wealthy and their lawyers, though perhaps not by most others. It applies to all sorts of things – real estate, a family business, and art. What it says, in effect, is that the sum of the parts aren't worth as much as the whole. Here is how it works. Items in an estate are valued for tax purposes based on the market value – the price a free and independent buyer and seller would exchange to buy or sell the item. To determine the fair market value, the estate hired an appraiser from Sotheby's. Independent transactions take place at Sotheby's practically everyday. All parties, including the IRS, agreed his values were fair.

 

Now, here is where the fractional discount comes into play. Say one of these paintings was fairly valued at $10 million. What is an 8.98167% share of it worth? Did you say $898,167? Guess again. Courts have regularly said no. It is less. What can you do with this fractional share? You have no real control over the art. If you bought it, you would have to deal with the co-owners. Ideally, you would all get together to sell your interests jointly, so that the painting could be sold for the $10 million it is worth. However, one of the children testified that all three of them so liked these works, and they had such deep sentimental value, that there was no way they would ever part with their shares. On top of that, there was an agreement requiring all owners agree to a sale, each one having a veto power. Anyone buying a fractional share would have their money tied up, and no practical way to sell what they had purchased. And, if the fractional owner wanted to hang the art on his walls, the cost of yearly shipping for limited use would be prohibitive. Naturally, those shares are worth far less than $898,167 in the open market. The estate's appraiser said 50% - 80% less. That in turn means the estate is worth less and the estate tax it must pay is less.

 

Think about it. No art dealer is going to agree to sell such an interest in their gallery. One of the estate's witnesses testified that no auction house would sell such a fractional interest either. This is why the estate's valuation expert witness testified that the market value of the artworks, because of these fractional ownerships, was 50% - 80% less than it would be if held by a single owner.

 

The estate next brought in a legal expert who estimated the cost of legal help to go to court to try to force a sale because of the divided ownership. He estimated that would cost a ton of money, and for most of the works, the cost of forcing a sale was more than the value of the pieces themselves.

 

The IRS put all its eggs in one basket, a decision that turned out to be a mistake. It argued against the concept of a fractional share discount. Their argument, in a sense borrowed from the estate's claim, was that there was no recognizable market for fractional shares, since they never come up for sale at auction or elsewhere. Therefore, it reasoned, the standard valuation, as presented by the Sotheby's expert, should prevail, but with no discount for the ownership being divided. The first court to hear the case, the U.S. Tax Court, disagreed, and upheld the legitimacy of fractional share discounts. However, it then threw the Elkins' daughter's testimony back at the estate. She had testified how the children would never part with the artwork. The court took that perhaps a bit more seriously then the estate would have liked. They concluded that, if the children loved the art so much, they would pay up to be able to fully control it, and prevent the possibility of an outside fractional owner forcing a sale. Therefore, the Tax Court concluded the estate was only entitled to a 10% discount for the ownership being divided, rather than the 50% - 80% their expert had testified.

 

The Elkins' estate appealed the Tax Court's ruling to the Fifth Circuit U.S. Court of Appeals, and it is their ruling that has tax lawyers abuzz. The Appeals Court overturned the Tax Court decision. It upheld the part about fractional share discounts being legitimate, but overturned the 10% amount. Instead, it opted for the far greater discounts proposed by the estate.

 

While the Appeals Court felt the large discounts sought by the estate were “eminently correct,” which should hearten wealthy collectors and their lawyers, that wasn't the reason behind the reversal. They concluded that a legal case must be determined by the evidence presented. There was no evidence to support the 10% discount – the Tax Court just made that figure up based on its own beliefs of what is reasonable. The only evidence of value presented was that provided by the estate. The IRS, relying entirely on having the concept of fractional discount rejected, gave no evidence of what it believed a correct fractional discount would be. The estate's evidence of an appropriate discount went unrefuted. Since it was not, in the Appeals Court's eyes, an unreasonable amount, the Court concluded it had no choice but to accept the estate's conclusion. Slam dunk? For the Elkins' estate yes, but for the next case, not so fast.

 

Next time, the IRS can be expected to present its own estimate of a fair fractional discount, and it is likely to be less than 50% - 80%. It is unlikely the next estate will get a free pass. The Fifth Circuit Appeals Court may have found the discount “eminently correct,” but perhaps they would have been less certain if a reasonable contrary opinion were raised. Besides which, these cases are usually heard in Tax Court first. These judges deal with nothing but tax cases, and perhaps have a more jaundiced eye towards lawyerly schemes. Certainly, there was no purpose to this bizarre, convoluted transaction other than to reduce taxes. Courts tend to prefer a transaction have some legitimate other purpose. So, while there is nothing to lose and at least something to gain from sharing ownership of valuable collectibles with your heirs, you should not assume the discounts will always be quite so large. Maybe they will, and maybe they won't.

 

This case really should have been brought before Judge Judy. She would have had a more commonsense solution, like the one King Solomon applied so many years ago. If they don't want to pay their taxes, let the kids hang their 8.98167% of each painting on the wall.


Posted On: 2014-11-18 21:30
User Name: Fattrad1

Bruce,

You just wasted a lot of your readership's time. As you noted, the next cases before the IRS and the tax court will have additional evidence presented and tried differently. This article, while interesting, was a waste of bandwidth.

Jeff Elfont CPA
Swan's Fine Books


Rare Book Monthly

  • <b>19th Century Shop’s Catalog 170 Great Books and Photos. Please inquire for a copy.</b>
    <b>19th Century Shop:</b> Exodus 10:10 to 16:15. Complete Biblical scroll sheet in Hebrew, a Torah scroll panel. Middle East, ca. 10th or 11th century.
    <b>19th Century Shop:</b> Copernicus Refuted. (Astronomy.). Scientific manuscript of a course of studies at Collège de la Trinité, Lyon. 1660s.
    <b>19th Century Shop:</b> Israel’s War of Independence and the Early Days of the IDF. 58 photographs presented to Israel Ber, IDF officer and later convicted spy.
    <b>19th Century Shop’s Catalog 170 Great Books and Photos. Please inquire for a copy.</b>
    <b>19th Century Shop:</b> Early Unpublished Darwin letter on the races of man. Autograph Letter Signed [to Henry Denny]. Down, Kent, June 1, [1844].
    <b>19th Century Shop:</b> Classic Image of American Slavery. Kimball, M. H. <i>Emancipated Slaves</i>. New York: George Hanks, 1863.
    <b>19th Century Shop:</b> (Underground Railroad.) Scaggs, Isaac. Important Runaway Slave Poster: $500 Reward Ran away, or decoyed from the subscriber…
  • <b>Pierre Bergé and Associés in association with Sotheby’s:<br>De la musique avant toute chose… June 28, 2017</b>
    <b>Pierre Bergé and Associés in association with Sotheby’s, Jun 28:</b> Roland de Lassus. [Songs and madrigals]. Album gathering three collections of secular music for tenor. 15.000-20.000 €
    <b>Pierre Bergé and Associés in association with Sotheby’s, Jun 28:</b> Richard Wagner. <i>Die Meistersinger von Nürnberg.</i> Original edition corrected and annotated by Wagner. 60.000-80.000 €
    <b>Pierre Bergé and Associés in association with Sotheby’s, Jun 28:</b> Claude Debussy. <i>La Damoiselle élue</i>. Lyrical poem, after D.-G. Rossetti. Limited edition of 160 copies. 6.000-8.000 €
    <b>Pierre Bergé and Associés in association with Sotheby’s:<br>De la musique avant toute chose… June 28, 2017</b>
    <b>Pierre Bergé and Associés in association with Sotheby’s, Jun 28:</b> Stéphane Mallarmé. Handwritten notebook made by Geneviève Mallarmé. No place or date [circa 1910]. 10.000-15.000 €
    <b>Pierre Bergé and Associés in association with Sotheby’s, Jun 28:</b> Henri Sauguet. <i>Les Forains</i>. Ballet. Reduction for piano. Original edition. 20.000-30.000 €
    <b>Pierre Bergé and Associés in association with Sotheby’s, Jun 28:</b> Athanasius Kircher. <i>Musurgia Universalis sive Ars Magna Consoni et Dissoni in X. Libros digesta.</i> 1650. 30.000-40.000 €
    <b>Pierre Bergé and Associés in association with Sotheby’s:<br>De la musique avant toute chose… June 28, 2017</b>
    <b>Pierre Bergé and Associés in association with Sotheby’s, Jun 28:</b> François Villon, & Clément Marot. <i>Les Œuvres de François Villon de Paris, Reviewed and gathered by Clement Marot.</i> 15.000-20.000 €
    <b>Pierre Bergé and Associés in association with Sotheby’s, Jun 28:</b> Rainer Maria Rilke. <i>Larenopfer</i> (Offrande aux dieux Lares). The second collection of Rainer Maria Rilke, containing ninety poems. 6.000-8.000 €
    <b>Pierre Bergé and Associés in association with Sotheby’s, Jun 28:</b> Paul Éluard. <i>Capitale de la douleur.</i> One of the most beautiful poetic collections from the first surrealist wave. 15.000-20.000 €
    <b>Pierre Bergé and Associés in association with Sotheby’s, Jun 28:</b> Pierre de Ronsard. <i>Les Amours</i> ... newly augmented by him, and commented by Marc Antoine de Muret. 40.000-60.000 €
  • <b>Bonhams, inviting consignments for Sep 27:</b> Newton. <i>Philosophiae naturalis principia mathematica</i>. London, 1687.
    <b>Bonhams, inviting consignments for Sep 27:</b> Josephus. <i>De antiquitate Judaica.</i> Lubeck, 1475-76.
    <b>Bonhams, inviting consignments for Sep 27:</b> Carlerius. <i>Sporta fragmentorum, Sportula fragmentorum</i>. Brussels, 1478-79.
    <b>Bonhams, inviting consignments for Sep 27:</b> Fridolin. <i>Der Schatzbehalter</i>. Nuremberg, 1491.
    <b>Bonhams, inviting consignments for Sep 27:</b> Pinder. <i>Der beschlossen gart des rosenkrantz marie</i>. Nuremberg, 1505.
    <b>Bonhams, inviting consignments for Sep 27:</b> Isidorus Hispalensis. <i>Synonyma de Homine</i>. Nuremberg, 1470-71.
    <b>Bonhams, inviting consignments for Sep 27:</b> Durer. Sammelband including <i>Underweysung der messing</i>. Nuremberg, 1525-29.

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