Owning a fractional interest in a piece of highly valued art has never been a simple matter where estate taxes are concerned. How the IRS values and applies the estate tax for estates that include fractional interests in art may be changing due to a recent Fifth Circuit Court of Appeals ruling.
Owning a world-class art collection is something most of us only dream of. For wealthy families and individuals, art collections are a valuable and treasured part of their family’s history. But when the owners pass away, these collections often trigger huge estate taxes. Because they are not liquid assets, heirs must use funds to pay the estate taxes from somewhere else in the estate or sell the art to pay for the taxes.
To complicate matters, valuable pieces of art that have been passed down for generations are often owned by multiple family members, with each owning a fractional interest in the art. This makes it even more difficult to handle estate tax issues.
If an estate owns only 10% of a piece of art, it can be difficult to find a buyer for the estate's ownership interest because potential buyers will rightly be concerned about having a say in how the piece will be handled.
Despite the difficulty of finding a buyer willing to pay full price for only a fractional ownership stake in artwork, the IRS has traditionally refused to give valuation discounts for estate tax purposes for fractional art ownership.
However, as reported by Artnet News in "Art Law on Estate Tax on Inherited Collection," the Tax Court and the Fifth Circuit Court of Appeals have overruled the IRS' position and ruled that a valuation discount is appropriate. The exact amount of that discount is currently not known, but it seems likely that new rules and regulations will need to be drafted and litigated.
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