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140 T.C. No. 5

UNITED STATES TAX COURT

ESTATE OF JAMES A. ELKINS, JR., DECEASED, MARGARET ELISE

JOSEPH AND LESLIE KEITH SASSER, INDEPENDENT EXECUTORS,

Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16597-10.

Filed March 11, 2013.

D owned undivided fractional interests in 64 works of

contemporary art.

1. Held: In valuing certain of those fractional interests,

pursuant to I.R.C. sec. 2703(a)(2) we disregard D's agreement by

which he waived his right to institute a partition action with respect to

some of the works of art and thereby relinquished an important use of

his fractional interests in those works.

2. Held, further, the total fair market value of D's interests in

the art determined. See I.R.C. sec. 2031.

SERVED MAR 112013

-2Donald Frederick Wood, J. Graham Kenney, Harry M. Reasoner, Stacey N.

Vu, and Juliana D. Hunter, for petitioners.

Warren P. Simonsen, Sharyn M. Ortega, and Susan S. Hu, for respondent.

HALPERN, Judge: By notice of deficiency issued to petitioners (notice),

respondent determined an estate tax deficiency of $9,068,265. Petitioners (Ms.

Sasser and Ms. Joseph) are the coexecutors of the Estate of James A. Elkins, Jr.

(estate), and are decedent's daughters. Their brother, James A. Elkins III (James

III), who was also a coexecutor of the estate, died on June 10, 2010, less than a

month after respondent issued the notice, and will not be replaced as a coexecutor.

The issue to be decided is the total fair market value of decedent's undivided

fractional interests in 64 works of art, which interests are includable in decedent's

gross estate.

Unless otherwise indicated, all section references are to the Internal

Revenue Code in effect for 2006, the year in which decedent died, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

-3FINDINGS OF FACT

Residence

When they filed the petition, petitioners resided in Houston, Texas.

The Art

Decedent (sometimes, Mr. Elkins) and Mrs. Elkins purchased 64 works of

art (sometimes, when referenced collectively, art) between 1970 and 1999. Mr.

and Mrs. Elkins purchased all 64 works during their marriage. The art became

community property under Texas law. The-art principally consists of works of

contemporary art. The collection includes works by a number of famous artists,

including Pablo Picasso, Henry Moore, Jackson Pollock, Paul Cezanne, Jasper

Johns, Ellsworth Kelly, Cy Twombly, Robert Motherwell, Sam Francis, and David

Hockney. Both before and since decedent's death, on February 21, 2006

(valuation date), the art has been displayed.primarily in decedent and Mrs. Elkins'

family home and -at the family office, both in Houston, Texas. Some works are at

various óther locations in the Houston area or, in one instance, Galveston, Texas.

Those other locations are homes belonging to petitioners and to Virginia Arnold

Elkins, the widow of James III. One work is on loan to the Museum of Fine Arts,

Houston. None of the 64 works have been sold since decedent's death.

-4Creation of Fractional Interests in the Art

The GRIT Art

On July 13, 1990, Mr. and Mrs. Elkins each created a grantor retained

income trust (GRIT) funded by each's undivided 50% interests in three of the

works in the collection: a large Henry Moore sculpture, a Pablo Picasso drawing,

and a Jackson Pollock painting (GRIT art).1 Each trust was for a 10-year period,

during which the grantor retained the "use" of the transferred interests in the art..

At the conclusion of the 10-year period, each grantor's interests were to go to the

Elkinses' three children, which, in effect, would give them 100% ownership of the

GRIT art, one-third each.

Mrs. Elkins died on May 19, 1999, before the expiration of the 10-year

period of her GRIT. Pursuant to the terms of her GRIT, her 50% undivided

interests in the GRIT art passed to Mr. Elkins. Because Mr. Elkins survived the

10-year term of his GRIT, his original 50% undivided interests in the GRIT art

passed to his three children in equal shares so that each received 16.667% interests

in the GRIT art. Decedent retained the 50% interests in the GRIT art that he

received upon Mrs. Elkins' death, which constitute part of his gross estate. . . '

'Mr. and Mrs. Elkins partitioned their community property interests in the

GRIT art before creating the GRITs.

-5Decedent and the Elkins children executed a lease agreement (art lease)

covering two of the three works of GRIT art (the Picasso drawing and the Pollock

painting), made effective "as of the 13th day of July, 2000" (the expiration date of

decedent's GRIT). Under the art lease, the Elkins children leased their combined

50% interests in the two works to decedent, in effect allowing him to retain year-

round possession of those works. There was an initial lease term, with automatic

extensions, unless decedent opted out of an extension, which he never did.

Section 10 of the art lease provides, in relevant part, as follows: ."Sale. Lessors

and Lessee each agrees not to sell his or her percentage interest in any item of the

* * * [leased artwork] during the Initial Term or any Additional Term without the

joinder of * * * [the parties to the art lease] for the purpose of selling the item

* * * in its entirety." Section 13 states that the lease and the parties' "rights, duties

and.obligations" under it "may not be transferred or assigned" without the consent

of all parties and that, subject to that restriction on assignment, the lease "shall be

binding upon and inure to the benefit of Lessors and Lessee and their respective

heirs, representatives, successor and assigns."

The rent due under the lease was left blank in the original agreement and

was not computed until May 16, 2006, when Deloitte LLP.made a determination

of the appropriate monthly rental for the two works. That determination resulted

-6in a finding of rent due of $841,688 for the period from July 13, 2000, through the

valuation date. The estate sought to deduct its payment of that amount to the

Elkins children. On audit, the parties agreed to reduce the amount of that

deduction to $10,000, the propriety of which is not at issue herein.

The Disclaimer Art

Under Mrs. Elkins' will, her 50% community property interests:in the other

61 works of art passed outright to decedent. Mr. Elkins decided, however, to

disclaim a portion of those interests equal in value to the unused unified credit

against estate tax, see sec. 2010, available to Mrs. Elkins' estate so that the

disclaimed portion could pass to the Elkins children free of estate tax. On the

basis of appraisals obtained bÿ Mrs. Elkins' estate, decedent disclaimed a 26.945%

interest in each of the 61 works (disclaimer art). Pursuant to Mrs. Elkins' vvill,

those fractional interests passed to the Elkins children, one-third each. As a result,

each child received an 8.98167% interest in each item of the disclaimer art, and

the balance, a 23.055% interest in each item, passed to decedent. Thus, decedent

retained a 73.055% interest in each item of the disclaimer art (his original 50%

interest plus the additional 23.055% interest received from Mrs. Elkins that he did

not disclaim).

-7On February 14, 2000, shortly after decedent executed his partial disclaimer,

decedent and the Elkins children entered into a "Cotenants' Agreement"

(cotenants' or original cotenants' agreement) relating to the disclaimer art. In

relevant part, the cotenants' agreement provides as follows:

This Agreement is made as of the 25th day of February, 2000,

by and among James A. Elkins, Jr., Margaret Elise Joseph, James A.

Elkins, III and Leslie Keith Elkins (hereinafter referred to

individually as "Cotenant" and collectively as "Cotenants"), all of

Houston, Texas.

WHEREAS, each Cotenant is the owner of an undivided

interest in each item of property described in Exhibit A attached

hereto and made a part hereof (hereinafter, all of such property or any

part thereof shall be referred to as the "Property").

WHEREAS, Cotenants desire to clarify certain of their

responsibilities and duties related to the use, possession and care of

the Property.

NOW THEREFORE, in consideration of the above and of the

mutual covenants contained herein, Cotetants hereby agree as

follows:

Beginning on the date of this Agreement, each Cotenant shall

have the right of possession, dominion, and control of each

item of the Property for a total number of days out [of] a twelve

month period that is equal to his or her percentage interest in

such item times the number of days in such twelve month

period. During a short calendar year, the number of days to

which a Cotenant is entitled to possession, dominion and

control of each item of the Property shall be prorated. .

-82.

Each Cotenant, with respect to the exercise of his or her right

of possession, dominion, and control, shall request possession

of an item of the Property by giving 30 days' written notice of

such request to the Cotenant in possession of such item. The

notice shall specify the number of days to which such Cotenant

is entitled to possession and the number of days remaining

thereof during the twelve month period (or a fewer number of

months for a short calendar year). In the event of a conflict

among the Cotenants at any time as to which Cotenant is

entitled to possession of an item of the Property, Cotenant

James A. Elkins, Jr. shall determine which Cotenant is entitled

to possession and the number of days remaining thereof.

The Cotenant requesting possession (the "Receiving Cotenant")

of an item of the Property shall be responsible for arranging

and paying for the transport of such item to the Receiving

Cotenant's residence.

Each Cotenant shall be responsible, to the extent of his or her

percentage interest in the Property, for the cost of maintaining

and restoring the Property.

An item of the Property may only be sold with the unanimous

consent of all of the Cotenants. Any net proceeds from the sale

of such item shall be payable to the Cotenants in accordance

with their respective percentage interests in the Property.

This Agreement shall be binding on Cotenants and on their

respective heirs, personal representatives, successors and

assigns.

This Agreement shall be governed and construed under the

laws of the State of Texas.

-.9-After decedent's GRIT terminated on July 13, 2000, the parties to the

cotenants' agreement amended it (amended cotenants' agreement or, when not

differentiating between the original and amended agreements, cotenants'

agreement), effective as of that date, by incorporating therein one of the three

works of GRIT art (the large rHenry Moore sculpture that was not included in the

art lease). On February 17, 2006, the Elkins children signed the amended . .

cotenants' agreement, both for themselves and (under a January 28, 2000, power of

attorney) for decedent.

Decedent's Will

Decedent's will provides that his descendants inherit his personal and

household effects, which.included his undivided fractional ownership interests in.

the art. Decedent's residuary estate passed'to the James A. Elkins, Jr. and

Margaret W. Elkins Family Foundation (Elkins Foundation), a bequest that entitles

the estate to a charitable contribution deduction under section 2055. The will

provides,that all estate taxes, plus any interest and penalties, due by reason of

decedent's death (but not including.taxes due with respect to the assets in Mrs.

Elkins' marital trust includable in decedent's gross estate under section 2044) shall

be charged against his residuary estate. Thus, any additional estate taxes payable

by the estate as a result of this case will cori·espondingly reduce the distribution to

- 10 the Elkins Foundation and the charitable contribution deduction with respect

thereto.

Decedent's Estate Tax Return

Petitioners timely filed a Form 706, United States Estate (and Generation-

Skipping Transfer) Tax Return (estate tax return), on May 21, 2007, in which they

reported a Federal estate tax liability of $102,332,524. Schedule F, Other

Miscellaneous Property Not Reportable Under Any Other Schedule, included in

decedent's gross estate his 73.055% interests in the 61 works of disclaimer art that

were subject to the original cotenants' agreement, valued at $9,497,650, and his

50% interests in the three works of GRIT art (two of which remained subject to the

art lease on the valuation date), valued at $2,652,000. Those amounts were

derived by, first, determining decedent's pro rata share of the fair market value of

the art as determined by Sotheby's, Inc., and, then, applying a 44.75% combined

fractional interest discount (for lack of control and marketability), as determined

by Deloitte LLP, to those pro rata share amounts. The parties have stipulated a

total (undiscounted) fair market value, as of the valuation date, of $24,580,650 for

the disclaimer art and $10,600,000 for the GRIT art.2 A list of the 64 works of art,

2Sotheby's had derived a date-of-death fair market value of $23,530,650 for

the disclaimer art and $9,600,000 for the GRIT art.

- 11 their status as GRIT art or disclaimer art, and the stipulated fair market value of

each work is attached to this Opinion as appendix A.

Notice

In the notice, respondent determined that decedent's gross estate included

his 73.055% interests in the disclaimer art at an undiscounted fair market value of

$18,488,5043 and his 50% interests in the GRIT art at an undiscounted fair market

value of $5,300,000. As alternative bases for his using undiscounted values of

decedent's fractional interests in the art in computing decedent's taxable estate,

respondent determined that (1) the restrictions on the sale of art subject to the

cotenants' agreement and fractional interests in art subject to the art lease

constituted "an option, agreement, or other right to acquire or use such artwork at

a price less than the fair market value" and, alternatively, "a restriction on the right

to sell or use the decedent's interest in such artwork" so that, pursuant to section

2703(a)(1) and (2), respectively, decedent's interests in the art covered by those

agreements "should be valued without regard to" those restrictions; (2) "the

discounts used in calculating the fair market value of Decedent's fractional

3That amount is 73.055% of $25,307,650 rather than of $24,580,650, which

is the parties' stipulated undiscounted fair market value for the disclaimer art.

Thus, the parties now appear to agree that the undiscounted fair market value of

decedent's 73.055% interests in the disclaimer art is $17,957,393 (73.055% of

$24,580,650), not the $18,488,504 determined in the notice.

- 12 interests in * * * [the art] are overstated and no discount is appropriate." In

addition, because decedent's will provided that all estate taxes were to be paid out

of his residuary estate passing to the Elkins Foundation, the notice reduces the

deduction for the charitable bequest to that foundation by the amount of the

proposed estate tax deficiency, i.e., by the amount of additional estate tax payable

by the estate.

Petition

In response to the notice, petitioners timely filed the petition. In it,

petitioners, in addition to assigning error to the deficiency determined by

respondent, seek a refund of estate tax based upon the estate's (1) overvaluation of

the art, (2) entitlement to a greater charitable contribution deduction than claimed

on the return in an amount equal to the estate tax refund arising out of its

overvaluation of the art, and (3) entitlement to deductions for attorney's,

accountant's, and appraisal fees and other administration expenses in excess of the

amounts estimated on decedent's estate tax return.4

4The estate's entitlement to an additional deduction for administration

expenses is not at issue herein.

- 13 Petitioners' Experts

In defense of their proposed discounts in valuing decedent's fractional

interests in the art, petitioners offered the testimony of three expert witnesses.

David Nash

The first, David Nash, has been an appraiser and seller of fine art for over

48 years. He worked at Sotheby's, Inc., for 35 years, was a member of the IRS Art

Advisory Panel, and has appraised works for collectors and museums, including

the Metropolitan Museum of Art, the Museum of Modern Art, the Art Institute of

Chicago, and the National Gallery of Art. The Court accepted Mr. Nash as an

expert in the art market, the marketability of art, and art valuation, and we received

his written report into evidence as his direct testimony.

In November 2008, before attempting to value decedent's fractional interests

in the art as of the valuation date, Mr. Nash viewed each of the 64 works in

Houston and met with the Elkins children. He came away from that meeting

convinced that any buyer of decedent's interests in the art would have to take into

account the fact that the children (whom he refers to as "the other shareholders")

are "committed to retaining the art in the family until the last shareholder dies."

He was asked to assess the marketability of decedent's interest in each work

"rather than viewing the collection as a whole."

- 14 He states, preliminarily, that collectors, museums, dealers, art funds, and

other investors or speculators constitute the categories of potential buyers for a

work of art. He describes auction houses as retailers on consignment, not as

purchasers. He then considers each as a potential buyer of decedent's fractional

interests in the art. His analysis is informed by the expert report submitted by

William T. Miller (discussed infra), regarding the expense and likelihood of a

successful partition action with respect to the works subject to the cotenants'

agreement.

In general, Mr. Nash concludes that all categories of potential buyers of fine

art would demand steep discounts from pro rata fair market value for decedent's

fractional interests in the art and that auction houses simply do not market

fractional interests in fine art, a fact that, in and of itself, would have "a significant

[adverse] impact on the marketability of * * * [decedent's fractional] Interests."

Mr. Nash reasons that a collector would be put off by the uncertainty of his

ever being able to acquire the whole work, potential disputes with the Elkins

children over periods of possession or, alternatively, over his right to sell a

particular'work and his recognition that, probably, there would be comparable

works by the same artist that he could purchase outright. Mr. Nash states that the

collector's only motivation for buying a fractional interest in one of the works of

- 15 art, even at a steep discount, would be "the expectation or hope that the work is so

desirable that it will increase in value over time-and that-eventually.it will be

possible to sell the whole or acquire all of the outstanding shares".

042 .

Mr. Nash states that it is "highly unlikely'' that a museum would pay

"anything close [to] the pro rata value of the fractional share where they will never

know if or when they will be able to obtain full c'ontrol" and that he did not "know

of any situation where a museum has ever paid for a fractional interest in a work

of art or a collection'* * * [with] no assurance * * * [of ever acquiring] full

ownership." He notes, however, that it is common for two museums to jointly

purchase a work (or works) of art and take turns exhibiting the work(s) in

proportion to their interests. He concludes, however, that museums would not be

interested in púrchasing joint interests in art where the coowners would be the

Elkins children rather than another museum or institution.

Mr. Nash similarly concludes that dealers, investors, and art'funds would

have little interest in buying decedent's fractional interests, mainly because of the

difficulty in reselling them to collectors or museums, and that the "logistical.

difficulties and potential litigation.would also be unappealing." He notes that it is

"common practice" among dealers to jointly purchase artworks with the goal of

reselling the works in their entirety but that, because of the Elkins children's

- 16 determined refusal to sell any of the works outside the family, that option is

essentially a nonstarter in this case.

Mr. Nash summarizes the "key factors" making decedent's fractional

interests in the art "unappealing" to potential buyers as follows: (1) the inability to

sell the art at auction houses, (2) the lack of exclusive possession and the inability

to force a sale of the art without litigation against the Elkins children as coowners,

(3) possible litigation involving time of possession and proper care, storage or

transportation of the art, and (4) the difficulty or impossibility of insuring the

purchased interest or using it as collateral for a loan. Nonetheless, he concludes

that speculators "would be willing to purchase * * * [decedent's] interests if

appropriately discounted."

In determining the discounted fair market value of decedent's fractional

interest in each of the 64 works of art, Mr. Nash divides those works into three

categories, which he identifies as categories I-III.

Category I consists of five works that he characterizes as "highly desirable".

He states: "Collectors, Dealers, Investors and Museums might be willing to invest

in * * * [those] works * * * due to * * * [their] rarity and importance". The five

works range in stipulated fair market value from a high of $8 million (Jasper

Johns' Figure 4) to a low of $1.5 million (Robert Motherwell's Elegy to Spanish

. -,17 Republic #134), and Mr. Nash's discounts from the pro rata fair market value of

decedent's interests in those works are between 50% and 80%.5

042

Category II consists of 196 works for which, according·to Mr. Nash,

"alternate choices could be found and purchased outright * * * [noting that the

artworks] are good examples, but not masterpieces by the artist and the artist's

reputation is more or less on the same level as in Category I, but will include some

artists who might not be so internationally recognized." Mr..Nash concludes that,

for those works, "a potential buyer would demand a discount of approximately 80-

90% of the pro rata value."

Mr. Nash describes the remaining 40 works, which he places in category III,

as "not worth the risk at any level", and he opines that "a potential buyer would

5For two of the works, Mr. Nash determines a range of discounted values for

decedent's fractional interests therein. Mark L. Mitchell is another of petitioners'

expert witnesses, whose valuations of the 64 works of art (based, in part, on Mr.

Nash's report) are the valuations upon which petitioners rely herein. For each of

the two works for which Mr. Nash determined a range of values, Mr. Mitchell

adopts the mean between the high and low ends of the range as Mr. Nash's

discounted value of decedent's interests.

6Mr. Nash lists one of thé 19 works (Franz Kline's The Hill) as a category II

work on an exhibit listing and categorizing all 64 works, but he inexplicably omits

that work from an exhibit separately listing the category II works. He does,

however, state that "40 interests are in Category III", and, because 5 category I, 19

category II, and 40 category III works total the 64 works under consideration, we

conclude that Mr. Nash did, in fact, intend to include the Kline in category II.

- 18 demand a discount of approximately 95% of the pro rata value" so that "[a]s a

result, these interests have only a nominal value." In reaching that conclusion he

notes that, although the works "have a real international value, * * * neither the

works themselves nor their creators are in the masterpiece category." He does .

single out five of the works as having "relatively high underlying values" but

concludes that decedent's fractional interests in them still had only nominal values

because comparable works by the same artists were readily available, in some

cases for less money than the stipulated pro rata fair market values of the examples

contained in the Elkins family collection.

On the basis of the foregoing, Mr. Nash finds the discounted fair niarket

value of decedent's interests in the art to be as follows:

Category I.

$4,336,859

Category II

976,451

Category III

Total

149,056

5,462.,366

William T. Miller

William T. Miller is licensed to practice law in Texas, and he has been a

member of the Texas Bar since 1968. As an attorney he has been involved in a

number of partition actions in Texas and has had experience with rbceivers and

agents for liquidating personal property, including works of art. The Court

- 19 accepted Mr. Miller as an expert on the nature, procedure, time, and cost of

partition actions litigated in the Texas courts and received his written report into

evidence as his direct testimony, with modifications agreed to by the parties.

Mr. Miller is of the opinion that, in Texas, the "right to partition is absolute"

and protected by statute but that "it is also well settled that cotenants 'may

expressly or impliedly agree not to partition'". (Citation omitted.) He assumes, for

purposes of his report, that paragraph 7 of the cotenants' agreement, requiring

unanimous consent of the coovvners to the sale of any art, "is, in essence, an

agreement * * * not to partition", that, therefore, the coowners "impliedly waived

their right [under Texas law] to partition", that that agreement, under Texas law,

would be binding on the coowners of the art, but that a Texas court would strike

paragraph 8 of the agreement, which binds "heirs, personal representatives,

successors and assigns" to the terms thereof (leaving the rest of the agreement

intact), as "an invalid restraint on alienation". Alternatively, he notes that the

court might choose to "reform" paragraph 8 so that it would "terminate after a

reasonable period of time", e.g., the lives of the coowners. Mr. Miller opines that,

in any event, "the enforceability of the Cotenants Agreement will be a litigated

issue in the Partition Actions." He does not view that fact as a "material element",

however, as regards "the procedure, time and costs of a * * * partition action."

- 20 Like Mr. Nash, Mr. Miller was "instructed that the interests in each Work of Art

must be valued individually", with the result that he assumes a separate partition

action for each work to be "the standard in determining costs and attorneys' fees."

Mr. Miller states that, if the cotenants' agreement is held to be enforceable,

"any further partition action would be prohibited", but he assumes, for purposes of

his report, that it would be held to be unenforceable so that partition actions

"would proceed through a sale of the Work of Art." He describes the various steps

and procedures of Texas partition actions and concludes that a partition by sale of

the art (with a division of the proceeds among the coowners) is more likely than a

partition in kind (which would involve a time-sharing agreement among the

coowners) because the latter "would mean * * * indefinite court supervision." He

posits that an adversarial partition action would culminate in a public or private

sale of the art by a court-appointed receiver, although the buyer of decedent's

fractional interests in the art would be "subject to the risk that his interest could be

sold at a sheriffs sale * * * [, which] would substantiálly reduce the amount that

might be recovered".

Mr. Miller states that, most likely, any partition action with respect to the art

would entail a two-step procedure: a trial to determine (1) the enforceability of the

cotenants' agreement, (2) whether partition by sale or in kind is appropriate, (3) the

- 21 coowners' interests, (4) whether the art is susceptible to partition, and (5) whether

to appoint a receiver for any sale of the art, followed by a second trial to determine

the terms of any proposed sale, the property to be sold, the method of sale, ánd the

distribution of proceeds among the coowners. He opines that the first trial would

take 18 to 24 months and the second, an.additional-12 to 18 months. He states that

both decisions would be appealable, that each appeal could take an additional 18

to 24 months, and that it was possible, under Texas law, to suspend the sale of any

piece of art subject to litigation during the entire appeal process. Thus, assuming

appeals (and, worst case, assuming an appeal of the first decision to the Texas

Supreme Court, which could take an additional 6 to 12 months), the entire process

before the Texas courts could take anywhere from 6 to 9-1/2 years for each

partition action, averaging 7 years in duration. Mr. Miller limits that timeframe to

litigation involving "the more expensive Works of Art" (pro rata value in excess of

$650,000, which would encompass 9 of the 64 works and 8 of the 62 works of

cotenant art), reasoning that "a second appeal would not occur" with respect to the

less valuable works (pro rata value below $650,000) because litigation costs

would exceed the values of the works. For those works, he estimates a timeframe

of three to four years for each partition action.

- 22 Mr. Miller estimates that a buyer of decedent's fractional interest in any of

the more expensive works would have $650,000 in total legal and receiver fees in

a partition action for a court-ordered sale of the works. For works with a pro rata

fair market value between $250,000 and $650,000, Mr. Miller reduces that amount

to $250,000. For the rest of the works, he assumes fees equal to the pro rata value

of each work "because no 'willing buyer' would expend more in litigation than the

value of * * * [the purchased fractional interest]". Mr. Miller notes that there

would be additional costs for sales commissions, appraisal fees, and auction house

fees. Lastly, Mr. Miller assumes that a receiver would take possession of the art

so that there would be additional costs for crating, moving, and storing the art, as

well as costs for insurance.

In summary, Mr. Miller assumes that, for a hypothetical buyer instituting a

partition actiön with respect to any one of the more valuable works of art in the

Elkins family collection, the total costs for legal fees and other expenditures, could

be anywhere from $25,000 to over $1,100,000 (for Jasper Johns' Figure 4) from

trial through the appeal process.

Mark L. Mitchell

Petitioners' third and final expert witness, Mark L. Mitchell, testified in his

capacity as director of valuation services for Clothier & Head, P.S., of Seattle,

- 23 Washington. He holds a B.S. and an M.B.A. degree from Southern Methodist

University and is experienced in providing valuation consulting services in

litigation support situations, including tax litigation. He has testified on behalf of

the Commissioner and has completed numerous assignments in valuing intangible

assets; e.g., patents, trademarks, and trade names. His work has included the

valuation of assets where there was no active or,regular market, including the

valuation of undivided interests in property, but not including (until this

assignment on behalf of petitioners) works of art. The Court accepted Mr.

Mitchell as an expert in the valuation of undivided interests in personal property

and received the Clothier & Head, P.S. report, prepared by Mr. Mitchell, in

evidence as Mr. Mitchell's direct testimony.

Mr. Mitchell states that, in reaching his valuation conclusions, he relied on

Mr. Nash's report as the source for the stipulated, undiscounted fair market values

of the 64 works of art and for "insight into the potential market for the Undivided

Interests", and on Mr. Miller's report regarding partitioning rights and costs related

to partition actions including "costs associated with a legal challenge of the

Cotenants' Agreement". His fmal valuation conclusions are based upon those two

reports, his analysis of the economics of the art market, and his quantitative

methodology.

- 24 Mr. Mitchell states that, unlike pure consumption or pure financial assets,

art provides both a psychic and financial return to the investor, and, because of

that, an art buyer will accept lower financial returns, including less liquidity and

certain additional costs (e.g., insurance, maintenance), than will buyers of pure

f'mancial assets. He reasons that that is truer of collectors than it is of speculators,

who do not seek a psychic benefit and, therefore, normally, will pay less than

collectors.

After describing the cotenants' agreement and the nature of an:undivided

(fractional) interest in a work of art, Mr. Mitchell notes that the limitations that

both have on the owner of an undivided interest in any of the 62 works subject to

the (amended) cotenants' agreement (e.g.,.lack of control, limited use of the art as

collateral, the need for a lengthy and expensive partitioning process before any

sale, a limited market for such interests) justify "substantial" discounts. He also

states that "the absence of transaction data involving the fractional ownership of

art does not suggest that discounts do not exist for undivided interests in art."

Instead, he views the circumstance as "evidence * * * that there are very few

willing buyers of such interests, not that there is a limited number of willing

sellers."

- 25 Mr. Mitchell states that there are two options for the holder of an undivided

interest in art (holder) to monetize his holding (absent unanimous consent of all

undivided interest holders): option 1, a sale of his undivided interest or, option 2,

a successful partition action ultimately leading to a sale of the work and pro rata

distribution of the proceeds among all interest holders.

According to Mr. Mitchell, under option 1, the holder and the hypothetical

willing buyer would consider a number of adverse factors in arriving at a price for

the holder's undivided interest in any one of the 62 works of art subject to the

amended cotenants' agreement, including the need to obtain unanimous consent of

all cotenants to sell the work of art, limited possession of the art and, hence,

reduced psychic benefit, the cost of transporting the art from another cotenant,

joint responsibility for insurance, maintenance or restoration costs with respect to

the work of art, and risk of damage to the art by other cotenants, all of which

would induce a prospective collector-buyer to demand a substantial return

premium (i.e., discount) related to the reduction of both the buyer's psychic and

financial returns attributable to fractional ownership. The need for an enhanced

return premium would mean a substantial reduction in value from pro rata fair

market value. The speculator-buyer's exclusive reliance on marketability (i.e.,

- 26 financial return) means that his financial return premium would be significantly

higher than the collector's.

With respect to option 2, Mr. Mitchell concludes that the dollar amount of

any discount must exceed anticipated partition litigation costs to make the

investment worthwhile. He also notes that, because a partition action will most

likely provide a strictly financial outcome (share of proceeds of a court-ordered

sale of the art), the buyer will have abandoned any psychic benefit and, therefore,

is necessarily a speculator, not a collector.

In valuing decedent's undivided interest in each work of art, Mr. Mitchell

assumes, on the basis of the Nash and Miller reports, that the other interest holders

have no desire to sell the art so that, under option 1, the hypothetical buyer "faces

the prospect of holding a non-marketable interest * * * [indefinitely], with no

prospects for * * * [monetizing his interest] and no ability to control decisions

regarding the underlying * * * Art", and, under option 2, he is, in effect,

purchasing a "litigation claim".

Mr. Mitchell then notes that, because art collectors do not purchase art with

the primary intent to profit on a later sale thereof, despite the greater volatility and

risk associated with art as compared with alternative investments (e.g.,

Government bonds or stock), the financial returns on the former are generally

- 27 lower than they are on the latter. That apparent anomaly is explained by the

psychic benefit that the art collector derives from the art.

On the basis of his analysis of the Nash report, the expected holding period

for the art, rates of return data from various art research studies, and anticipated

inflation, Mr. Mitchell determines thát an option 1 hypothetical buyer of an

undivided interest in art would expect a nominal financial return for art in general

of 6% and, in this case, need an 8% "consumption return" in order to compensate

for diminished psychic benefit. To that 14% incremental return Mr. Mitchell

would add "an increment to account for impaired marketability and other risk

factors." He concludes that an assumed 10-year holding period "is a reasonable

basis on which to assess discounts" and, in general, would require-an additional

2% rate of return resulting in a 16% total required rate of return for the

hypothetical option 1 buyer (10% "return premium" and 6% financial return),

assuming a 10-year holding period for the purchased interest in the art.

Mr. Mitchell modifies the 16% overall rate of return he deems necessary for

an option 1 hypothetical buyer's pùrchase of an interest in art subject to the

restrictions the buyer would face in this case in order to account for the varying

quality of the works included in the Elkins collection. For that purpose, he adopts

Mr. Nash's division of those works into three categories.

- 28 Relying on Mr. Nash's opinion of the category I works, Mr. Mitchell

differentiates them from his baseline return estimates by reducing his .10% return

premium to 8% for works by Jackson Pollock and Henry Moore and increasing it

to 12%.for works by Sam Frances and Robert Motherwell and 14% for a work by

Jasper Johns. He also reduces the required financial return for the Johns work

from 6% to 4% because of its fragile condition and the potential ill effects,0f

shared ownership on such a work. Those adjustments result in an overall 14%

required rate of return for the Pollock ánd the Moore and an overall 18% required

rate of return for the other three category I works. Using those rates of return, Mr.

Mitchell arrives at a 51.7% discount from pro rata fair market value for decedent's

interests in the Pollock and the Moore, a 65.8% discount for decedent's interests in

the Francis and the Motherwell, and a 71.7% discount for decedent's interests in

the Johns.

Relying on Mr. Nash's description of the category II works, Mr. Mitchell

increases the return premium from 10% to 14% and the overall required rate of

return from 16% to 20% resulting in a 71.1% discount from pro rata fair.market

value for decedent's interests in the 19 category II works.

Again, relying on Mr. Nash's description of the remaining (category III)

works, Mr. Mitchell increases the return premium to 18% and reduces the

- 29 financial return to 4% resulting in an overall 22% required rate of return and a

79.7% discount from pro rata fair market value for decedent's interests in those

works.

For option 2 buyers, Mr. Mitchell, relying on Mr. Miller's report, factors in

the added costs and anticipated duration of partition litigation and posits a 14%

required annual rate of return for all category I works (except for the Johns work)

and for five of the category II works. For the Johns work, Mr. Mitchell posits an

18% required rate of return, again because of its fragility (which he states "would

tend to make the issues * * * with respect to shared ownership [e.g., in-transit

damage to the work] more severe") and the high cost of the investment. On the

basis of those required rates of return, he computes the option 2 discounts for the

art as follows: for decedent's interests in the category I works and five of the

category II works, discounts ranging from 60% to 85%; for his interests in the

balance of the category II works, a discount of 90% plus, and for his interests in

all category III works a 100% discount, presumably on the theory that the costs of

litigation would exceed the sale price of all category III works.

- 30 Finally, Mr. Mitchell selects the lesser of the option 1 versus option 2

discounts as the appropriate discount for decedent's interest in each work of art

On the basis of those discounts, he determines the discounted fair market value for

decedent's interest in each work of art. Mr. Mitchell fimds the total discounted fair

market value of decedent's interests in the art to be as follows:

Category I

Category II

Category III

Total

$5,150,420

1,904,117

604,108

7,658,645

That total, although greater than the $5,462,366 total discounted fair market value

computed by Mr. Nash, is much less than the $12,149,650 total discounted value

for decedent's interests in the art reported on Schedule F of decedent's estate tax

return. It is the difference between that last amount and Mr. Mitchell's discounted

total fair market value amount that constitutes the basis for the bulk of petitioners'

claim for refund in the petition, the balance being attributable to the increase in the

charitable contribution deduction arising by virtue of the refund relating to the

estate's alleged overvaluation of the art on its return.

A copy of Mr. Mitchell's table of all 64 works of art, the Nash category of

each work, Mr. Mitchell's option 1 and option 2 discounts, his concluded discount

7With respect to all but two of the works of art, the option 1 discount is

lower.

- 31 for each work, and the resulting discounted fair market value of each is attached to

this Opinion as appendix B.

Respondent's Experts

Karen Hanus-McManus

Since 2006, Karen Hanus-McManus has been employed by Jacqueline

Silverman & Associates, Inc. (Associates), as an associate appraiser. Before that,

she held several positions with the Museum of Contemporary Art, Los Angeles,

and, since 2009, she has been an adjunct professor at the New York University

School of Continuing & Professional Studies, teaching a course entitled

"Essentials of Appraising" for which she developed the course materials. She has

a B.A. degree in art history from the University of California, Los Angeles, and

two M.A. degrees (in art history and museum studies) from Syracuse University.

Since 1977, her employer, Associates, has specialized in the appraisal of modern

and contemporary art, preparing thousands of appraisals in numerous contexts

including appraisals for estate tax purposes, dónations to museums, and legal

disputes. Ms. Hanus-McManus has also conducted a study on secondary markets

for fractional interests in art. She is the sole author of her written report in this

case, although she conferred with Jacqueline Silverman, president of Associates,

who edited, proofread, and cosigned the report. The Court accepted Ms. Hanus-

- 32 McManus as an expert appraiser of modern and contemporary art and received her

written report into evidence as her direct testimony.

Ms. Hanus-McManus testified that the market for modern and contemporary

art operates on two levels: the primary market, created by the artist or his or her

agent, and the secondary market, controlled by art galleries and dealers and

auction houses. On the basis of (1) Associates' more than 30 years' experience

observing the primary and secondary markets for modern and contemporary art,

(2) conversations with art gallery personnel, dealers, auction houses, banks, and

art world professionals, and (3) her survey of 40 art dealers and galleries in New

York, Los Angeles and other U.S. cities, Ms. Hanus-McManus concludes that

"there is no established marketplace for the sale of a partial interest in a work of

art." She notes that there are dealer-to-dealer sales of fractional interests in art in

what she refers to as "the wholesale market" but that such a sale would be made in

connection with an agreement between the dealers to sell the whole work at a

profit and split the proceeds. She further concludes that, while there are sales of

fractional interests in art, they involve coowners who intend to sell or donate the entire work of art at a later date and, therefore, are not germane to the hypothetical

sale of fractional interests in this case. She admits, however, to having no

- 33 experience with the buying or selling habits of pure speculators who deal in art

without regard to its aesthetic quality.

John R. Cahill

John R. Cahill is an attorney practicing in New York as a partner in the law

firm Lynn & Cahill. More than 80% of his practice is devoted to legal matters

concerning clients involved in art including auction houses, museums, artists, art

galleries, art collectors and dealers, appraisers, banks, insurance companies, and

foundations. He represents clients in both litigation and transactional planning

and counsels them on a variety of art-related matters. He also chairs the Art Law

Committee of the New York City Bar Association. The Court accepted Mr. Cahill

as an expert in art transactions and received his written report into evidence as his

direct testimony.

On the basis of caselaw and his own.observations of museum-related and

commercial transactions involving joint ownership of art, Mr. Cahill concludes:

"In my opinion, the Sale Restriction and related terms in the Cotenant's

Agreement, Amendment to Cotenants Agreement and Art Lease are not

- 34 comparable to similar arrangements entered into by persons in arms length art

markettransactions."8

OPINION

Introduction

We must determine the fair market value of decedent's interest in each of 64

works of art for Federal estate tax purposes. Those interests were included in

decedent's gross estate and reported on decedent's estate tax return at a total value

of $12,149,650. On the basis of the expert testimony of three experts, and, in

particular, Mr. Mitchell's expert testimony, petitioners now argue that that total

value must be reduced to $7,658,645. The parties have stipulated that the total,

undiscounted fair market value of the art on the valuation date was $35,180,650

($24,580,650 for the disclaimer art and $10,600,000 for the GRIT art), and

respondent bases his proposed deficiency herein on his view that that

8Mr. Cahill's conclusion supports respondent's argument that the sale

restrictions in the cotenants' agreement and the art lease do not satisfy the

requirements of sec. 2703(b)(3). That provision constitutes one of the three

requirements of the sec. 2703(b) exception to the application of sec. 2703(a)(2),

which generally mandates that "any restriction on the right to sell or use

* * * property" be ignored in determining the value of any property for estate and

gift tax purposes. See discussion infra. Petitioners concede that neither the

cotenants' agreement nor the art lease satisfies the sec. 2703(b) exception.

Therefore, we agree with petitioners that Mr. Cahill's report is not germane to the

issues in this case.

-,35 undiscounted value, to the extent it is allocable pro rata to decedent's interest in

each of the 64 works of art (i.e., to the extent of 73.055% of the disclaimer art, or

$17,957,393, and 50% of the GRIT art, or $5,300,000, a total of $23,257,39391

constitutes the value of decedent's interests in the art for Federal estate tax

purposes.

II.

Burden of Proof

In general, a taxpayer bears the burden of proof. Rule 142(a)(1). However,

section 7491(a) shifts the burden of proof to the Commissioner in certain

situations if the taxpayer raises the issue, introduces credible evidence with respect

to any factual issue relevant to ascertaining the proper tax liability, and

demonstrates compliance with the applicable requirements of section 7491(a)(2).

The parties stipulate that the estate has satisfied the section 7491(a)(2)

requirements, and petitioners argue that, through the expert testimony of Messrs.

9On brief, respondent argues that the total stipulated fair market value of

decedent's interests in the art on the valuation date is $23,788,504. But, given the

parties' stipulated agreement that the value of 100% of the art on that date was

$35,180,650 divided between $10,600,000 for the GRIT art and $24,580,650 for

the disclaimer art, the undiscounted fair market value of decedent's interests in the

art cannot exceed $23,257,393 (50% of $10,600,000, or $5,300,000, plus 73.055%

of $24,580,650, or $17,957,393). Therefore, we view respondent's argument for a

greater stipulated value for decedent's interests in the art, presumably based upon

the agent's valuations on audit, as an inadvertent oversight, and we give it no

credence. See supra note 3.

- 36 Nash, Miller, and Mitchell and through Ms. Sasser's testimony, they have

presented credible evidence of value, thereby shifting the burden of proof to

respondent pursuant to section 7491(a).

Because we base our decision regarding the value of decedent's interests in

the art upon a preponderance of the evidence, it is not necessary that we assign the

burden of proof. See, e.g., Estate of Black v. Commissioner, 133 T.C. 340, 359

(2009); Estate of Bongard v. Commissioner, 124 T.C. 95, 111 (2005).1°

III.

Law

General Principles

Section 2001(a) imposes a tax on "the transfer of the taxable estate of every

decedent who is a citizen or resident of the United States." Section 2031(a)

provides: "The value of the gross estate of the decedent shall be determined by

including to the extent provided for in this part, the value at the time of his death

of all property, real or personal, tangible or intangible, wherever situated."

Although we agree with respondent that it is unnecessary to assign the

burden of proof, we reject respondent's reliance on Estate of Jelke v.

Commissioner; T.C. Memo. 2005-131 (and cases cited therein), vacated and

remanded on another issue, 507 F.3d 1317 (11th Cir. 2007), as requiring that

result. In those cases, there was deemed to be no need to assign the burden.of

proof because the operative facts were fully stipulated and supplemented solely by

expert witness testimony. Here, there is disputed fact testimony furnished by Ms.

Sasser.

- 37 Fair market value is the standard for determining the value of property for

Federal estate tax purposes. United States v. Cartwright, 411 U.S. 546, 550-551

(1973). Section 20.2031-1(b), Estate Tax Regs., defines fair market value as "the

price at which the property would change hands between a willing buyer and a

willing seller, neither being under any compulsion to buy or to sell and both

having reasonable knowledge of relevant facts." It then states that the fair market

value of an item of property is not "to be determined by the sale price of the item

in a market other than that in which such item is most commonly sold to the

public" and that, "in the case of an item of property includible in the decedent's

gross estate, which is generally obtained by the public in the retail market, the fair

market value of such an item of property is the price at which the item or a

comparable item would be sold at retail." The regulation requires that "[a]ll

relevant facts and elements of value as of the applicable valuation date shall be

considered in every case." The willing buyer and willing seller are hypothetical

persons, rather than specific individuals or entities, and their characteristics are not

necessarily the same as those of the actual buyer or seller. See Estate of

Newhouse v. Commissioner, 94 T.C. 193, 218 (1990) (citing Estate of Bright v.

United States, 658 F.2d 999, 1006 (5th Cir. 1981)). The hypothetical willing

-38 buyer and seller are presumed to be dedicated to achieving the maximum

economic advantage. Id.

Expert Opinions

In deciding valuation cases, courts often look to the opinions of expert

witnesses. Nonetheless, we are not bound by the opinion of any expert witness,

and we may accept or reject expert testimony in the exercise of our sound

judgment. Helvering v. Nat'l Grocery Co., 304 U.S. 282, 295 (1938); Estate of

Newhouse v. Commissioner, 94 T.C. at 217. Although we may largely accept the

opinion of one party's expert over that of the other party's expert, see Buffalo Tool

& Die Mfg. Co. v. Commissioner, 74 T.C. 441, 452 (1980), we may be selective in

determining what portions of each expert's opinion, if any, to accept, Parker v.

Commissioner, 86 T.C. 547, 562 (1986). Finally, because valuation necessarily

involves an approximation, the figure at which we arrive need not be directly

traceable to specific testimony if it is within the range of values that may be

properly derived from consideration of all the evidence. Estate of True v.

Commissioner, T.C. Memo. 2001-167 (citing Silverman v. Commissioner, 538

F.2d 927, 933 (2d Cir. 1976), af_fg T.C. Memo. 1974-285), affd, 390 F.3d 1210

(10th Cir. 2004).

2 39 -

Section 2703

As noted supra note 8: (1) section 2703(a)(2) provides that, for estate and

gift tax purposes, the value of any property is determined without regard to any

restriction on the right to sell or use such property, (2) section 2703(b) provides

that section 2703(a) does not apply to disregard a right or restriction if it meets

certain requirements, and (3) petitioners concede that neither the cotenants'

agreement nor the art lease satisfies the section 2703(b) exception. Thus, the

section 2703 issue herein is whether the restrictions on transferability in the

cotenants' agreement and the art lease are restrictions "on the right to sell or use

* * * property" within the meaning of section 2703(a)(2).

"Although the notice invokes both sec. 2703(a)(1) and (2) as alternative

bases for denying any discount in valuing decedent's fractional interests in the art,

and although respondent generally invokes the application of sec. 2703, he

emphasizes the application of sec. 2703(a)(2). In fact, because neither the

cotenants' agreement nor the art lease provides an option, agreement, or other right

to acquire property at a bargain price, sec. 2703(a)(1), by its terms, is inapplicable.

Therefore, the only sec. 2703 issue for our decision is whether sec. 2703(a)(2)

applies herein.

- 40 IV.

Summary of the Parties' Arguments

Respondent

Introduction

. ·Respondent argues that no discount from the pro rata fair market value of

decedent's interest in each of the 64 works of art is warranted. Respondent sets

forth two grounds for that argument: (1) the restrictions on sale in the cotenants'

agreement and the art lease are restrictions that must be disregarded under section

2703(a)(2), and (2) because the proper market in which to determine the fair

market value of fractional interests in works of art is the retail market in which the

entire work (consisting of all fractional interests) is commonly sold at full fair

market value, a fractional interest holder (being entitled to a pro rata share of the

sale proceeds) is not entitled to any discount for his or her interest.

Application of Section 2703(a)(2)

In support of the application of section 2703(a)(2) respondent states:

In view of the irrefutable evidence that the only way to sell a

fractional interest in artwork is by selling the entire art by agreement

or through a partition action filed with the court, the only apparent

reason for including the restriction on sale language in the Cotenants'

Agreement and the Art Lease Agreement * * * was to reduce the

value of Decedent's retained fractional interests in the Artwork as part

of a plan to make a testamentary transfer of his remaining interests in

the Artwork to his children at a reduced transfer tax rate-a purpose

which section 2703 was specifically intended to prevent.

- 41 Respondent concludes that the restrictions on sale in paragraph 7 of the

cotenants' agreement and section 10 of the art lease "are restrictions that are

controlled by section 2703" and, accordingly, they must be disregarded in

determining the value of decedent's fractional interests in the art.

Use of Undiscounted Pro Rata Fair Market Value in Valuing

Decedent's Interests in the Art

In support of his valuation argument, in which he concludes that no

discount is warranted with respect to decedent's interests in the art, respondent

states that the Elkins children's opposition to any sale of the art "is not material" in

the light of section 20.2031-1(b), Estate Tax Regs. In so arguing, respondent

focuses on that regulation's admonition that "an item of property includible in the

decedent's gross estate, which is generally obtained by the public in the retail

market", must be valued at "the price at which the item or a comparable item

would be sold at retail." Respondent finds additional support for his view in the

testimony of Ms. Hanus-McManus, who concludes that, as of the valuation date,

"the sale of an undivided fractional interest in a work of art was not an established

practice in the art market, and no service, venue or marketplace exists today for an

owner of an undivided fractional interest in a work of art to sell his/her share in

that work."

- 42 Respondent also cites Mr. Nash's testimony that he could not recall ever

advising a client to sell a fractional interest in art at a discount, and that he himself

had never done so. Respondent states, however, that "[j]ust because there is no

direct market for fractional interests in artwork * * * does not mean that * * *

fractional interests in artwork are not bought and sold every day." Respondent

concludes that the lack of evidence of discounted sales of fractional interests in art

supports his position that "fractional interests in artwork are only sold as part of a

sale where the entire interest in the artwork is sold", typically by coowners who

know each other and who act in concert when purchasing and selling their

respective fractional interests, either by direct sale to a buyer who acquires 100%

ownership of the art or, assuming coownership of several works, after a partition

in kind or by sale. In either event, the sale results (or, if several works are

involved, the sales result) in a fair market value price, and each coowner receives a

pro rata share of the proceeds. Thus no fractional interest discounts are warranted.

Respondent does note that, in the case of a particularly valuable item of

personal property, "a stranger/speculator could perhaps be found to buy a

fractional interest * * * for a deeply discounted price." He argues, however, that

"this type of a transaction simply does not occur and even if there have been a few

of these unrecorded transactions", they do not reflect the retail market in which we

- 43 are required to value decedent's fractional interests in the art pursuant to section

20.2031-1(b), Estate Tax Regs.

Although his principal argument is that, as a matter of law, no discount is

permissible in valuing undivided fractional interests in art, respondent also argues

that, as a factual matter, petitioners' proffered discounts are unsupported by the

evidence; i.e., by the testimony of their three experts.

He views Mr. Nash's discounts as having been based on unrealistic

scenarios, faulty methodology, and a failure to properly account for the interests of

the hypothetical seller by improperly positing the seller's position in the context of

a forced sale. Because he views Mr. Nash's proposed discounts as without any

justifiable basis, respondent concludes that they are essentially guesses.

He argues that, by referring to "general court statistics" not specific to the

timespan for partition actions relating to art and by basing his opinions on a "worst

case scenario", Mr. Miller overstated both the time for and costs of a partition

action with respect to the art. Respondent further argues that Mr. Miller, because

he was instructed to consider partition-related costs in terms of a separate partition

action for each work of art, improperly failed to consider the likelihood of and the

costs associated with a single action for partitioning the entire collection in kind.

On a more fundamental level, respondent rejects the notion of any discount from

- 44 fair market value based upon anticipated partition costs, arguing that such costs

are selling expenses, which, if shown to exist, may constitute deductible

administration expenses under section 2053(a).

He criticizes Mr. Mitchell's valuations principally on the ground that Mr.

Mitchell considered the hypothetical buyer of decedent's interests in the art to be a

speculator, uninterested in obtaining the psychic benefits of owning art, thereby,

eliminating "approximately 60 percent of the value of the Artwork that a normal

purchaser would pay for the Artwork."

Finally, respondent argues that a determination that a discount is appropriate

in valuing decedent's fractional interests in the art would be inconsistent with the

Commissioner's longstanding position that fractional interests in art are not

discounted for purposes of valuing charitable contributions thereof under section

170. See, for example, Rev. Rul. 58-455, 1958-2 C.B. 100, and Rev. Rul. 57-293,

1957-2 C.B. 153, both of which involve the transfer of either a fractional interest

or a remainder interest in a work of art to a section 170(c) organization, and both

of which determine the value of the gift without requiring any discount.

-45B.

Petitioners

Application of Section 2703(a)(2)

Petitioners argue that section 2703(a)(2) does not apply to the cotenants'

agreement because paragraph 7 thereof restricts only the sale of any of the 62

works of art covered by that agreement (cotenant art). It does not restrict the sale

of a cotenant's or coowner's fractional interest in the work, and it is decedent's

fractional interests in the cotenant art, not the art itself, that must be valued for

Federal estate tax purposes:

As respondent notes in his opening brief, petitioners do not oppose the

application of section 2703(a)(2) to the two works of GRIT art subject to the art

lease (leased art); i.e., they do not argue that the restriction on sale provision in

section 10 of the art lease gives rise to a discounted value for those two works.

Petitioners' failure to so argue is based, presumably, on the fact that that restriction

(unlike the restriction in paragraph 7 of the cotenants' agreement) is a restriction

on the sale of each party's "percentage interest in" the two works; i.e., it is a

restriction, on the right to·sell property that must be valued for Federal estate tax

purposes. We interpret petitioners' silence in this regard as an admission that,

pursuant to section 2703(a)(2), we must value decedent's interests in the leased art

without regard to the restriction on sale provision in section 10 of the art lease.

- 46 2.

Propriety of Petitioners' Discounts With Respect to the Art

Petitioners argue that they have fully supported the discounts they seek

herein for decedent's interests in the art as they have "provided extensive evidence

of facts that would be known to a hypothetical willing buyer and * * * seller with

reasonable knowledge of relevant facts, as required by * * * [section 20.2031-1(b),

Estate Tax Regs.]". Petitioners reject respondent's assertion that a_n_y discount. .·

would contravene the cited regulation. They argue that "Mr. Mitchell's valuation

conclusions fully take into account the risks and impairments to value" inherent in

the hypothetical buyer's alternative optiops (i.e., option 1: hold the purchased

fractional interest for enjoyment, appreciation, and eventual sale of the art; option

2: .institute an immediate partition action against the Elkins children), and that "he

properly relied on the expert reports of Mr. Nash and Mr. Miller in doing so."

Petitioners argue that caselaw (and, in particular, caselaw arising in the

Court of Appeals for the Fifth Circuit, to which an appeal of this case normally

would lie) mandates the application of discounts when valuing fractional interests

in personal property, including art. Petitioners also argue that, in determining the

appropriate valuation discount, the cases take into consideration anticipated costs

associated with a partition of the property.

- 47 Presumably in defense of Mr. Miller's cost analysis based upon a separate

partition action for each work of art, petitioners state that the applicable

regulations mandate that decedent's fractional interest in each work be valued

separately, citing section 20.2031-1(b), Estate Tax Regs. (value determined with

reference to "each unit of property"), and section 20.2031.-6(a), Estate Tax Regs.

(stating the need to provide a separate valuation for "each article" of household

and personal effects). Therefore, petitioners conclude that decedent's fractional

interests in the art "cannot be valued * * * as a collection; separate hypothetical

buyers and sellers must be posited for each Work." They further state that,

because the art does not form "a cohesive collection * * * [with a] unifying theme,

there is no factual basis * * * for assuming that a single buyer would be interested

in purchasing all of the art."

Analysis

A. 042 Application of Section 2703(a)(2) to the Cotenant Art

Introduction

Should we determine that the restriction on sales of cotenant art in

paragraph 7 of the cotenants' agreement constitutes a restriction on the right to sell

or use "property" within the meaning of section 2703(a)(2), we must disregard that

restriction in valuing decedent's interests in that art.

-482.

Analysis

As noted supra, respondent argues that the foregoing restriction on sales of

cotenant art constitutes a restriction that must be disregarded under section

2703(a)(2) on the ground that "the only apparent reason for * * * [its inclusion in

the cotenants' agreement] was to reduce the value of Decedent's retained fractional

interests in the Artwork as part of a plan * * * [to reduce estate taxes]", which

respondent characterizes as "a purpose which section 2703 was specifically

intended to prevent."

The evidence with respect to intent is inconclusive. The cotenants'

agreement was entered into in February 2000, six years before decedent's death in

February 2006, and paragraph 7 may have been intended only to keep the art in the

family unless there was a work that no one wished to retain. Of greater

significance, however, is the fact that section 2703(a)(2) does not refer to intent as

a controlling or even relevant factor. The only question is whether the property to

be valued, for estate or gift tax purposes, is subject to a restriction on sale or use.

Petitioners argue that, because paragraph 7 of the cotenants' agreement does

not restrict the sale of decedent's fractional interests in the cotenant art (the

property to be valued for estate tax purposes), section 2703(a)(2) is inapplicable.

In connection with that argument, petitioners point to the definitional reference to

- 49 the term "property" in the cotenants' agreement, which, in pertinent part, states that

"[e]ach cotenant is the owner of an undivided interest in each item of property

described in Exhibit A [listing the works of art] * * * (hereinafter, all of such

property or any part thereof shall be referred to as the 'Property')". Petitioners

argue that, although "property" under the foregoing definition "could refer to one,

several, or all of the 62 Works in their entirety, under no interpretation does * * *

[it] refer to a fractional interest in the Works.". Respondent disagrees. He reads

the foregoing language, and, in particular, the reference to "any. part" of the

property as a reference to the cotenants' undivided fractional interests in the

cotenant art.

We think that both petitioners' and respondent's analyses miss the mark.

During trial, we queried Mr. Miller, petitioners' expert on partition, about

paragraph 7 of the cotenants' agreement. We pointed out to him that, for a sale of

any of the jointly owned properties (i.e., works of art) to occur, all of the cotenants

would have to agree, and that would be so independent of the language of

paragraph 7 of the cotenants' agreement. He agreed. We added: "So that the

statement that an item of property may only be sold with the unanimous consent of

all of the cotenants is a rather unremarkable statement of the obvious." He

responded: "I do agree." With respect to what the language of paragraph 7

- 50 accomplished, he testified: "If this language was not in the co-tenancy agreement,

any individual interest owner would have the right to commence a partition

action." That is in accord with his direct, written testimony, wherein he states that

the right to partition is absolute, although cotenants may expressly or impliedly

agree not to partition, and that he has "assumed that Provision 7 * * * is, in

essence, an agreement by the Co-Owners not to partition." .With exceptions not

here relevant, section 2703(a)(2) instructs that "the value of any property shall be

determined without regard to * * * any restriction on the right to sell or use such

property." Whether paragraph 7 of the cotenants' agreement is a restriction on

decedent's right to sell the cotenant art or is a restriction on his right to use the

cotenant art is not important. It is clear that, pursuant to paragraph 7 of the

cotenants' agreement, decedent, in effect, waived his right to institute a partition

action, and, in so doing, he relinquished an important use of his fractional interests

in the cotenant art. While, as we shall explain, it makes little or no difference to

our conclusion as to the value of the art, we shall, in determining the value of each

of the items of cotenant art, disregard any restriction on decedent's right to

partition.

-513.

. Conclusion

We hold that section 2703(a)(2) is applicable to the restriction, in.paragraph

7 of the cotenants' agreement, on sales of cotenant art.

Whether and the Extent to Which the Estate Is Entitled To Discount

Decedent's Interests in the Art

Introduction

Our determination that section 2703(a)(2) negates the restriction on sales of

cotenant art in paragraph 7 of the cotenants' agreement, coupled with petitioners'

concession that section 2703(a)(2) negates the restriction on sales of the lessor's

and lessee's interests in the leased art contained in section 10 of the art lease,

leaves the hypothetical willing seller and buyer in the same negotiating position

with respect to decedent's interests in all 64 works of art. That is because, as a

result of those section 2703(a)(2) determinations, neither the cotenants' agreement

nor the art lease may be read as restricting the hypothetical seller's right to sell

decedent's interests in the subject art, but the hypothetical buyer's ability to

monetize those interests on an undiscounted basis remains subject either to the

coowners' (i.e., the Elkins children's) agreement to a sale of the underlying art and

- 52 a pro rata splitting of the proceeds of sale or to the need to institute a partition

action in order to achieve that result.

In resolving the parties' dispute over the proper valuation of decedent's

interests in the art, we first address the question of whether any discount from pro

rata fair market value is permissible under section 20.2031-1(b), Estate Tax Regs.,

and, if the answer to that question is yes, we must then determine the proper

amount, if any, of that discount.

Whether Any Discount Is Permissible

Analysis

Respondent's argument that no discount is warranted in valuing decedent's

fractional interests in the art is premised essentially on his view that, (1) under

section 20.2031-1(b), Estate Tax Regs., the fair market value of tangible personal

property must be determined with reference to the market in which the property is

most commonly sold to the public and, (2) in the case of art, that market is the

The parties have not addressed whether the hypothetical seller would

constitute a "successor" to decedent's interests in the disclaimer art and the leased

art pursuant to sec. 8 of the cotenants' agreement and sec. 13 of the art lease. Nor

have they addressed how the hypothetical seller's status as such might affect the

value of his or her interests in the art. We do not consider that to be a significant

valuation issue, however, because, whether or not the hypothetical seller

constitutes a "successor" to decedent's interests under either agreement, no sale of

the underlying art can occur without either the consent of the Elkins children,

which, presumably, would not be forthcoming, or a successful partition action.

- 53 retail market whereby all fractional interest holders agree to sell (or sell after a

partition action) the underlying art, i.e., where the art is sold for its undiscounted

fair market value, after which each fractional interest holder receives his or her pro

rata share of the proceeds.

In support of his position, respondent cites Estate of Scull v. Commissioner,

T.C. Memo. 1994-211, and Stone v. United States, 99 A.F.T.R.2d (RIA) 20072992 (N.D. Cal. 2007), supplemented by 100 A.F.T.R.2d (RIA) 2007-5512 (N.D.

Cal. 2007), affd, Stone ex rel. Stone Trust Agreement v. United States, 103¯

A.F.T.R.2d (RIA) 2009-1379 (9th Cir. 2009).

In Stone, the District Court rejected the plaintiffs' proffered 44% fractional

interest discount for the decedent's 50% interest in 19 paintings on the ground that

a hypothetical seller would seek to sell each entire work of art (with the coowners'

consent or via partition) and take his or her pro rata share of the proceeds or sell

the partial interest at a price equivalent thereto. On that basis, the District Court

concluded that, "because an undivided interest holder has the right to partition, a

hypothetical seller under no compulsion to sell would not accept any less for his.or

her undivided interest than could be obtained by splitting proceeds in this

manner." Stone, 99 A.F.T.R.2d (RIA) at 2007-2996. The District Court did,

however, decide that "some discount is appropriate to allow for the uncertainties

- 54 involved in waiting to sell the collection until after a hypothetical partition action

is resolved".' Id. at 2007-2998 (citing Estate of Scull v. Commissioner, T.C.

Memo. 1994-211). In its supplemental opinion, the District Court determined that

the "relatively low" 5% discount proposed by the Government was appropriate in

the absence of proof by.the plaintiffs that.they were entitled to more than·a 2%

discount to account for selling costs plus a $50,000 discount tö account.for the

hypothetical seller's legal fees in connection with any partition action. Moreover,

the District Court was nöt persuaded that a hypothetical buyer would refuse to buy

the decedent's interest in the collection unless the discount were greater than 5%.

Stone, 100 A.F.T.R.2d (RIA) at 2007-5514.

In Estate of Scull, the decedent died owning a 65% undivided interest in a

"pop" and minimalist art collection that he and his wife had accumulated before

their divorce. In connection with divorce-related litigation in the New York State

courts, there was a court-ordered in-kind division of the collection (65% to

decedent, 35% to Mrs. Scull) that did not go into effect before the decedent's

death. Thirty days after the decedent's death, Mrs. Scull appealed that decision,

seeking a 50% share of the collection. Just before his death, the decedent had also

appealed an earlier New York State appellate court decision sustaining the

imposition of constructive trusts on the collection for Mrs. Scull's benefit.

- 55 The estate argued that the value of the decedent's 65% interest in the

collection was less than 65% of the entire collection. :We noted that "[a]ny

purchaser of * * * [the estate's] interest in the collection as of * * * [the date.of the

decedent's death] would consider * * * [Mrs.] Scull's rights in the collection and

* * * [the decedent's] pending appeal on the date of death." We then stated as

follows:

However, since * * * [the decedent's] appeal, if successful, would

have increased his share, that appeal does not provide any basis for a

reduction. Moreover, since * * * [Mrs.] Scull's appeal came later, it

probably should not be taken into account. In any event, given the

trial court's detailed explanation of its basis for its determination of

the 65-35 split, we think that a purchaser would not require a

reduction in excess of 5 percent for any uncertainties involved in

acquiring decedent's 65-percent interest, despite one or both appeals.

***

Thus, on the facts of that case, we allowed a 5% valuation discount from pro ratà

fair market value.

We fail to see how either Stone or Estate of Scull supports respondent's

position. In both cases, the court approved a discount from pro rata fair market

value for the decedent's fractional interest in an art collection in order to account

for various uncertainties that would confront a hypothetical buyer of the art.

Although the 5% discount approved in each case was essentially nominal, that was

because of a lack of proof that any greater discount was warranted, not because of

- 56 any regulatory prohibition against discounts for art that is normally sold at retail.

Moreover, the District Court in Stone agreed with the plaintiffs that, "contrary to the government's assertions, the costs of a court-ordered partition must be

considered in determining the fair market value of the Estate's interest in the

collection." Stone, 99 A.F.T.R.2d (RIA) at 2007-2997. That position was based,

primarily, on the District Court's view that it could not "assume that the Estate's

co-owner in the [art] collection [the estate's trustees actually owned the entire

collection] would agree either to a sale of the collection as a whole or to a division

of the nineteen paintings among the co-owners." Id. at 2007-2997 through 20072998. The District Court's refusal to personalize the circumstances surrounding a

hypothetical sale was based upon the admonition of the Court of Appeals for the

Ninth Circuit in Propstra v. United States, 680 F.2d 1248, 1251-1252 (9th Cir.

1982), that the willing seller must be "a hypothetical seller rather than the estate or

any of decedent's beneficiaries" and that defining fair market value in terms of that

"objective standard" will serve to avoid

the uncertainties that would otherwise be inherent if valuation

methods attempted to account for the likelihood that estates, legatees,

or heirs would sell their interests together with others who hold

undivided interests in the property. Executors will not have to make

delicate inquiries into the feelings, attitudes, and anticipated behavior

of those holding undivided interests in the property in question. * * *

- 57 -

Accord Estate of Bonner v. United.States, 84 F.3d 196, 198 (5th Cir. 1996); Estate

of Bright v. United States, 658 F.2d at 1006;° see also Holman v; Commissioner,

601 F.3d 763, 775 (8th Cir.,2010), affg 130 T.C:s170 (2008). .

In this case, not only, as stated by the District Court in Stone, 99 A.F.T.R.2d

(RIA) at 2007-2998, are we not entitled to assume that the Elkins children "would

agree either to a sale of * * * .[the art] or to a division * * * [thereofj among the coowners", but, unlike the circumstances in Propstra and Estate of Bright, we are

presented with unchallenged facts demonstrating that the Elkins children had

strong sentimental and emotional ties to each of the 64 works of art so that they

treated the art as "part of the family". Those facts strongly suggest that a

hypothetical buyer of decedent's fractional interests in the art would be confronted

by coowners who were resistant to any sale of the art, in whole or in part, to a new

owner, a resistance that the Elkins children specifically communicated to Mr.

"Propstra v. United States, 680 F.2d 1248 (9th Cir. 1982), and Estate of

Bright v. United States, 658 F.2d 999 (5th Cir. 1981), both constitute a rejection,0f

the "family attribution" or "unity of ownership" principle, which takes into

account the close relationship among the decedent, executor, or legatee,.on the one

hand, and the other coowners of real or personal property, on the other hand, in

valuing the decedent's minority interest in the property. The Government's

argument, rejected by the Court of Appeals for the Ninth Circuit in Propstra, was

that, in the absence of a showing that such parties, if related, were likely to, sell

their interests separately, "one can reasonably assume" that those interests,

including the decedent's interest, will be sold as a unit. Propstra, 680 F.2d at

1251-1252.

- 58 Nash. In this case, it is not necessary for the executors to speculate or "make

delicate inquiries into the feelings, attitudes and anticipated behavior" of the other

owners. It is clear that they have a deep and abiding love for the art and, therefore,

could be expected to be hostile to a joint sale of any one or all of the 64 works to a

new owner, a hostility that they explicitly expressed to Mr. Nash during their

meeting with him preparatory to his inspection of the art. That being so, the

hypothetical seller and buyer necessarily would be faced with uncertainties

regarding the latter's ability to,monetize his or her investment in the art. As in

Stone, "some discount is appropriate to allow for * * * uncertainties". Stone, 99

A.F.T.R.2d (RIA) at 2007-2998.

We also reject respondent's argument that consideration of the Elkins

children's probable hostility to any sale of the art to a new owner violates the

requirement to consider the hypothetical, not the actual, seller. The Elkins

children, as coowners of the art, would not be the sellers of decedent's interests

therein and cannot be viewed as such. Their hostility would be to any sale to a

new owner of one or more of the works in which they, like the hypothetical seller,

owned a fractional interest. That probable hostility constitutes one of the "relevant

facts and elements of value as of the * * * valuation date [that] shall be considered

- 59 [by the hypothetical seller and buyer] in every case", as mandated by section

20.2031-1(b), Estate Tax Regs.

As noted supra, respondent's no-discount argument is premised upon the

requirement in section 20.2031-1(b), Estate Tax Regs., that the value of "an item

of property * * * generally obtained by the public in the retail market * * * is the

price at which the item or a comparable item would be sold at retail." Respondent

describes the market for fractional interests in art (as well as for other types of

personal property) as one in which the holder of the fractional interest either

purchases or inherits the interest under circumstances in which the holder and the

other coowners (who may.be family members, friends, or, in the case of art, art

dealers) hold, or simultaneously acquire, their interests with a shared goal of

selling (or, if the fractional interests are purchased, of reselling) the entire item of

property at retail, either directly or after a partition of the property. Respondent

posits that, under any of those scenarios, the interest holders would each receive a

pro rata share of the property or of the proceeds from the sale thereof, and no

fractional discounts would be applied. Focusing specifically on the facts of this

case, respondent argues that it would be in the financial interests of both the

Elkins children and the hypothetical buyer to agree to (1) sell the art and divide the

proceeds pro rata, (2) divide the art pro rata, or*(3) some combination of those two

- 60 alternatives, none of which would entail a fractional interest discount. Respondent

cites Holman v. Commissioner, 601 F.3d at 775, and its affirmation of caselaw..

describing the hypothetical buyer and seller as rational economic actors lacking

"motivations that are personal and reflective of the idiosyncracies of particular

individuals."

Although respondent's approach to the valuation of personal property would

have merit in the absence of "relevant facts" that would render that approach

unrealistic and, therefore, inapplicable, here such facts exist in the form of the

Elkins children's probable resistance to any sale or partition of the art that would

result in new ownership; and although, by opposing such a sale, the Elkins

children might not be acting in their best economic interests," they undoubtedly

would view continued retention ofthe entire collection as acting (to paraphrase

Mr. Mitchell) in their best psychic interests; i.e., they would be willing to forgo

the financial gain from a sale of the art in order to keep the collection intact and

continue to enjoy it.

"It is, of course, possible that, by holding on to the art, subsequent

appreciation of one or more works would allow the fractional interest holders to

realize a greater economic benefit than would have resulted from an immediate .

sale of the art at its fair market value on the valuation date.

- 61 We do not interpret section 20.2031-1(b), Estate Tax Regs., as mandating

reference to the retail market for entire works of art in determining the fair market

value of decedent's fractional interests in the art. As both Mr. Nash (implicitly)

and Ms. Hanus-McManus·(explicitly) agree, there is no market (retail or

otherwise) in which undivided fractional interests in art are "commonly sold to the

public". Secondly, the prospect of a fair market value sale of the art followed by a

pro rata division of the proceeds among the coowners is manifestly uncertain in

this case. The fact that there exists a retail market for works of art with multiple

owners does not necessarily mean that all fractional interests in art must be valued

as if it is certain that the art will be sold in that market. The regulation should not

be read in a vacuum, without reference to actual circumstances. See, e.g., Estate

of Baird v. Commissioner, T.C. Memo. 2001-258 (agreeing to "an increased

discount" in valuing the decedent's interest in jointly owned timberland because of

the uncertainty of whether the family-member coowners would force a

hypothetical willing buyer to institute a partition action with respect to the

property); Estate of Lauder v. Commissioner, T.C. Memo. 1994-527 (approving a

40% discount for lack of liquidity with respect to the decedent's interest in a

family-owned corporation on the basis of a finding that the coshareholder family

members intended to maintain the company "as a privately held, family-controlled

- 62 company" thereby rendering the sale of the decedent's shares on a public market

"remote").

Moreover, respondent's approach ignores the willingness of the courts in

Stone and Estate of Scull to permit discounts for fractional interests in art,

provided there is adequate proof of entitlement thereto. Respondent also ignores

precedent in the Court of Appeals for the Fifth Circuit permitting valuation

discounts for fractional interests in property. ,, Estate of Bonner, 84 F.3d 196;

Estate of Bright, 658 F.2d 999.

We also reject respondent's argument that partition costs may be deductible

as administration expenses under section 2053(a)(2) but may not be cited as

justification for a valuation discount. To begin with, respondent's position is

directly contrary tö the caselaw permitting discounts in the light of uncertainties

regarding the possibility of and/or costs associated with partition actions. E3,

Estate of Bonner, 84 F.3d at 197-198; Estate of Baird v. Commissioner, T.C.

Memo. 2001-258; Stone, 99 A.F.T.R.2d at 2007-2997, 2007-2999; accord Estate

of Baird v. Commissioner, 416 F.3d 442, 452-453 (5th Cir. 2005) (citing Estate of

Bonner, 84 F.3d at 197-198), rev'g T.C. Memo. 2002-299. Secondly, the

anticipated expense of a partition action is not an anticipated expense of the

estate's sale of property to be valued. Rather, as petitioners note, it is an expense

- 63 that the hypothetical buyer might have to incur after purchasing that property. As

we have held, such costs are costs that a potential buyer would have to "take into

account in determining the price he would be willing to pay. This, of course, is

consistent with the definition of fair market value. See sec. 20.2031-1(b), Estate

Tax Regs." Estate of Smith v. Commissioner, T.C. Memo. 1993-236. Lastly, the

cases upon which respondent relies are inapposite. The court in each of those

cases rejected taxpayer claims that the fair market value of property was the net

amount received by the seller after payment of excise taxes, sales commissions, or

other expenses of sale and held the fair market value to be the gross amount paid

by the buyer to the seller. See Estate of Smith v. Commissioner, 57 T.C. 650, 659

(1972), affd, 510 F.2d 479 (2d Cir. 1975); Estate of Gould v. Commissioner, 14

T.C. 414, 417 (1950); Payne v. United States, 35 A.F.T.R.2d 75-1623 (M.D. Fla.

1975). The costs involved in each of those cases were the seller's costs associated

with the sale whereas here, as we have noted, the anticipated partition costs are

anticipated costs of the buyer, which are properly considered in determining fair

market value. See Estate of Smith v. Commissioner, T.C. Memo. 1993-236.

Lastly, we reject respondent's argument that the Commissioner's rulings

policy (reflected in both revenue rulings and private letter rulings), whereby .

undiscounted pro rata fair market value deductions are allowed for charitable

- 64 contributions of fractional interests in art, controls the valuation of decedent's

fractional interests in the art.

Respondent cites two revenue rulings in which the taxpayer donated to a

section 170(c) organization either all or a portion of the taxpayer's remainder

interest in the art with the taxpayer retaining sole right of possession for life, or an

undivided fractional interest in the art resulting in shared possession. .Those

rulings state that the donor is entitled to a deduction for either the present value of

the remainder interest or for the undiscounted pro rata fair market válue of the

undivided fractional interest transferred. See Rev. Rul. 58-455, supra; Rev. Rul.

57-293, supra. Respondent argues that any discount in valuing fractional interests

in art for estate tax purposes would conflict impermissibly with the position taken

in the rulings.

We are not bound by revenue rulings, and the weight (if any) that we afford

them depends upon their persuasiveness and the consistency of the

Commissioner's position over time. Taproot Admin. Servs., Inc. v. Commissioner,

133 T.C. 202 (2009), affd, 679 F.3d 1109 (9th Cir. 2012). In the earlier ruling,

the Commissioner does not provide a rationale for his failure to discount (other

than to present value) the value of the charitable contributions of the remainder or

fractional interests in the art, and the later ruling cites only the prior ruling as

- 65 authority. In neither ruling is there any indication of an impediment to a joint, fair

market value sale of the art or, if such an impediment does exist, that the

Commissioner took it into account. Moreover, in the.light of precedent in both

this Court and the Court of Appeals for the Fifth Circuit allowing discounts in

valuing a fractional interest in property for Federal estate tax purposes where there

are potential impediments to a fair market value sale of the interest (e.g., the

possible need for a partition action), the rulings do not persuáde us to deny any

discount for decedent's fractional interests in the art.15

15Petitioners distinguish the Commissioner's ruling position on the ground

that it deals with income rather than estate taxes (a position that finds support in

Stone v. United States, 99 A.F.T.R.2d (RIA) 2007-2992, 2007-2997 n.9 (N.D. Cal.

2007), supplemented by 100 A.F.T.R.2d (RIA) 2007-5512 (N.D. Cal. 2007), affd,

Stone ex rel. Stone Trust Agreement v. United States, 103 A.F.T.R.2d (RIA) 20091379 (9th Cir. 2009)) and on the further ground that it should be interpreted as

applying only to the "common situation" in which the donor "makes a series of

fractional donations and ultimately donates the entire work of art in full." Neither

effort to distinguish the Commissioner's rulings from the facts of this case is

persuasive. There is no basis for concluding that the term "value" has a meaning

for income tax purposes different from the one it has for estate tax purposes, i.e.,

fair market value is fair market value (see sec. 1.170A-1(c)(1), Income Tax Regs.,

which provides a definition of fair market value identical to that provided by sec.

20.2031-1(b), Estate Tax Regs.); and we fail to see the basis for petitioners'

assumption that respondent's allowance of an undiscounted fair market value

deduction for the contribution of an undivided fractional interest in art (in Rev.

Rul. 57-293, 1957-2 C.B. 153, 154-155, Ex. 2) is best read to apply to a situation

in which the contribution was one in a series of contributions ultimately providing

the donee with complete ownership and possession of the art. Thus, although we

decline to apply the rulings to the facts of this case, we do so on grounds other

(continued:..)

- 66 Respondent also cites two cases decided by this Court in which we

permitted undiscounted fair market value deductions for charitable contributions

of, in one case, undivided fractional interests in an art collection and, in the other

case, a collection of "antique stereoscopic" equipment and related material. See

Winokur v. Commissioner, 90 T.C. 733 (1988); Mast v. Commissioner, T.C.

Memo. 1989-119. In both cases, the sole valuation issue was the undiscounted

fair market value of the collection, there being no dispute over the possible

application of a pro rata deduction for the donated fractional interest. The parties

did not raise the issue of a fractional interest discount, and we did not consider it.

Therefore, we do not view those cases as,precedent for denying a valuation

discount in this case.

Conclusion

There is no bar, as a mattér of law, to an appropriate discount from pro rata

fair market value in valuing, for estate tax purposes, decedent's undivided

fractional interests in the art.

"(...continued)

than those proffered by petitioners.

- 67 3.

The Extent to Which Petitioners Are Entitled To

Discount the Pro Rata Fair Market Value of

Decedent's Interests in the Art

Introduction

Only petitioners' valu'ation experts, Mr. Nash and Mr. Mitchell (both of

whom based their reports, in part, on Mr. Miller's expert testimony), analyze the

extent to which a discount from pro rata fair market value for decedent's undivided

fractional interests in the art is warranted. Ms. Hanus-McManus essentially opines

that there is no market for an undivided interest in art other than in connection

with an agreement or understanding among the coowners that they will agree to a

joint sale of the art at some future time.16 Respondent offers her testimony solely

in support of his argument that no discount is warranted in valuing an undivided

fractional interest in art. .As noted supra, Mr. Cahill also does not address the

subject of discounts, opining only that the restrictions on sales of cotenant art "are

not comparable to similar arrangements entered into by persons in arms length art

market transactions." Respondent offers that report solely in support of his

application of section 2703 to the cotenant art.

16Mr. Nash is in apparent agreement with that conclusion, but he

nonetheless opines that a collector or speculator might offer to purchase decedent's

interests in the art at an appropriate discount, i.e., "at a price that was deeply

discounted from the actual market value to justify the risks involved."

-68b.

Analysis

Having decided that petitioners may introduce facts demonstrating the

estate's entitlement to a discount from pro rata fair market value for the art, the

issue before us is whether and to what extent we should sustain the discounts

proffered by Mr. Mitchell on the basis of the expert testimony of Messrs. Nash and

Miller.

The overriding flaw in Mr. Nash's and (derivatively) Mr. Mitchell's analyses

is their failure to consider not only the Elkins children's opposition to selling any

of the art but also their ownership position vis-a-vis that of the hypothetical

willing buyer and the impact that the 73.055-26.945 or 50-50 ownership split

would have on the negotiations between seller and buyer. Both experts should

have considered the fact that the Elkins children, cumulatively, were entitled to

possession of 61 works of cotenant art for a little over three months each year, and

to possession of the three works of GRIT art for six months of each year." The

"The Elkins children were before, and have been since, decedent's death

content to leave all but the smaller works of art (which they have rotated among

themselves) in place in the Houston area (primarily in Mr. and Mrs. Elkins' family

home) where each has ready access to all of the art. Thus, despite their separate,

individual rights of exclusive possession, we assume for purposes of this analysis

that possession by any one child may be treated as possession by all three.

Therefore, we consider their rights of possession as a cumulative or combined

right of possession, i.e., 26.945% (3 x 8.98167%) of each year for 61 works and

(continued...)

- 69 relatively brief period of annual possession and th~e expense and inconvenience of

annually movirig the art from the hypothetical buyer's premises back to Houston

most likely would have caused the Elkins children to reassess their professed

desire to cling, at all costs, to the ownership status quo existing after decedent's

death. Thus, the hypothetical buyer would be in an excellent position to persuade

the Elkins children, who, together, had the financial wherewithal to do so, to buy

the buyer's interest in any or all of the works, thereby enabling them to continue to

maintain absolute ownership and possession of the art.18 Neither Mr. Nash nor

Mr. Mitchell considered that possibility

Ms. Sasser testified that, in the light of a relatively short period of

possession of the art to which she and her siblings would be entitled vis-a-vis-a'

in the Houston area, she "would be willing to pay * * * a fair price" to purchase

"(...continued)

50% (3 x 16.667%) of each yéar for three works.

'8During her testimony, Ms. Sasser suggested that, as a means of reducing

the number of moves to which the art would be subject under the cotenants'

agreement, she might opt.to revisé the agreement so that the art would be moved

only once every three years, i.e., she and her siblings could retain 61 works for

some 9 months and 3 works for 18 months every three years. But even if we

assume that a hypothetical buyer would agree to such an arrangement, the

perennial back-and-forth movement of the art would remain an expensive and

undesirable option for the Elkins children.

- 70 the hypothetical buyer's 73.055% or 50% interests in the art. Her testimony

confirms what both the hypothetical willing buyer and seller would reasonably

suspect during their negotiations: that the Elkins children's strong desire to retain

possession of the art in place would motivate them to purchase the hypothetical

buyer's interests, most likely in each case for an amount equal or close to the

undiscounted fair market value of the interest. It defies logic to assume that, as

27% or 50% owners and possessors of the art, the Elkins children would spend

millions of dollars to retain their status as such, perhaps as defendants in multiple

partition actions that could drag on for many years, when they would be able to

acquire 100% ownership and possession of the art, which, after all, is what they

really want.''

Petitioners argue that the "fair price" referred to by Ms. Sasser would not

exceed "fair market value", meaning the discounted values determined by Messrs.

19As discussed infra, the Elkins children most likely would be willing to pay

a hypothetical buyer substantially more than the anticipated attorney's fees and

related costs they would incur to oppose the buyer's partition action simply

because the outcome of a purchase by them would be so much more satisfactory.

Moreover, because of their desire to preserve intact and continue to have

uninterrupted access to the entire collection, it is reasonable to assume that the

Elkins children would be as motivated to purchase the hypothetical buyer's

interests in Mr. Nash's category III works as they would be to purchase the buyer's

interests in Mr. Nash's category I and category II works. Indeed, Mr. Nash

testified that he had met with the Elkins children, who are "committed to retaining

the art in the family until the last * * * [of them] dies."

- 71 Nash and Mitchell. We disagree. Ms. Sasser's testimony confirms that the Elkins

children would be willing to purchase the hypothetical buyer's interests in the art

at a much higher prices than a disinterested buyer would be willing to pay for the

same interests because of the children's added motivation of keeping the art within

the family as, in petitioners' words, "a memorial to their parents rather than [as] an

investment". That motivation is reflected in the following exchange:

All right. So, most of the attachment to the art is as a memorial

to your parents, and it means more to you than money in this

instance?

Yes, it does.

Ms. Sasser further testified that by a "fair price" she meant the price

determined by "an expert or somebody who knew something about it". Then,

during a subsequent colloquy between Ms. Sasser and the Court, Ms. Sasser shed

further light on what she considered to be a "fair price":

THE COURT: Now, I want you to explain to me why you would be

reluctant to sell * * * [the art], to sell your piece?

THE WITNESS: I guess honestly that I would be'hoping that some

day that I could buy, or * * * [maybe] we could buy, me, my brother,

and sister, could buy the 73[%] back in some way.

THE COURT: Well, would you be willing to pay a pro rata portion,

* * * [73] percent, of the fair market value of the whole piece of art,

of each of the ones that you liked, to get back that * * * [73] percent

interest that somebody else had?

- 72 THE WITNESS: I would be willing to pay if somebody told me that

it was a fair price to get that, and I can't say what is fair.

Later, in reference to a particular painting (Pool on Sprayed Blue Paper by David

Hockney), the following exchange took place:

THE COURT: The Pool? Okay. They say that the sales value of it is

$900 thousand. Would you then be willing to pay * * * [73] percent

of that to get it back, assuming that you were convinced that was a

fair price?

THE WITNESS: If somebody who knew the art market assured me

that was a fair price, then yes, I would.

We infer from the foregoing exchange that the "fair price" Ms. Sasser was

willing to pay was decedent's pro rata share of an expert-verified undiscounted fair

market value of the art, as exemplified by her willingness to pay 73% of the

$900,000 stipulated fair market value of the Hockney painting were that still a

"fair price". At the time she testified, Ms. Sasser obviously was aware of the

sharply discounted values posited by Messrs. Nash and Mitchell for decedent's

interests in the art and of the fact that those values were based upon the

hypothetical buyer's having to confront the Elkins children's unrelenting

opposition to any attempt by the buyer to employ a partition action to monetize his

or her investment in the art or to obtain full possession of a pro rata portion

thereof, circumstances that she knew were irrelevant to her (and her siblings')

- 73 potential purchase of decedent's interests, which would give them 100%

ownership of the art. Had she had those sharply discounted values in mind when

responding to the Court's questioning, she would not have left open the possibility

that 73% of the $900,000 undiscounted fair market value of the Hockney painting

might constitute a "fair price" for decedent's interest therein. Moreover, the

hypothetical willing buyer and seller would suspect the Elkins children's

willingness to pay pro rata fair market value, or something close to it, and they

would price decedent's interests in the art accordingly. Therefore, we reject

petitioners' conclusion that a hypothetical owner of decedent's fractional interests

in the art, cognizant of the Elkins children's "staying power", i.e., their

determination "to outlast any third party who attempted to force a sale of a

Fractional Interest by litigation", would have to sell the art to the Elkins children

at the sharply discounted values determined by Messrs. Nash and Mitchell

"because he or she could not expect to 'out-negotiate' the Elkins Children and

because no one else would offer any more than * * * [those discounted] values."

We fail to see the connection between the Elkins children's so-called staying

power and the fair market value of decedent's interests in the art in the context of

the children's purchase of those interests. Ms. Sasser testified that she would opt

to preserve her minority interests in the.art, rather than monetize those interests,

- 74 but only on the assumption that she could not "buy it back". Clearly, then, her

preference (and, presumably, that of her siblings) was to repurchase decedent's

fractional interests in the art from the hypothetical buyers, and we see no evidence

that she or they would limit their offer to an amount not in excess of the

discounted values posited by Messrs. Nash and Mitchell.

The actual bargaining position that a hypothetical buyer of decedent's

interests in the art would have vis-a-vis the interests of the Elkins children

constitutes one of the "relevant facts" that we must deem to be considered by a

hypothetical buyer and seller pursuant to section 20.2031-1(b), Estate Tax Regs.

See Estate of Winkler v. Commissioner, T.C. Memo. 1989-231, where, in valuing

a 10% block of voting stock in a closely held corporation, we took into account

the fact that the hypothetical buyer thereof would represent the "swing vote"

between the two families that owned the other 90% (50% and 40%) of the voting

stock. On that basis, we held that a buyer, unrelated to either family, "would be

willing to pay a premium for a 10 percent block of voting stock that could be

pivotal as between the two families" and that "a minority discount would be

inappropriate here." See also Estate of Andrews v. Commissioner, 79 T.C. 938,

956 (1982)("Certainly, the hypothetical sale should not·be constructed in a

vacuum isolated from the actual facts that affect the value of the stock in the hands

- 75 of the decedent[.]"); True v. Unitéd States, 547 F. Supp. 201, 203 (D. Wyo. 1982)

("Hypothetical analysis can be a valuable tool; however, when real considerations

exist, those realities should not and cannot be ignored.").

The logic of assuming that the Elkins children would pay a hypothetical

buyer of decedent's interests in the art more than a disinterested collector or

speculator would have paid for those interests is also confirmed by cases

recognizing that certain properties possess an enhanced "assemblage" value. ,

eg, Pittsburgh Terminal Corp. v. Commissioner, 60 T.C. 80, 90 (1973) (dicta:

"[W]e do not quarrel with * * * [the taxpayer's] assertion that aggregation

increases the value of coal lands[.]"), affd without published opinion, 500 F.2d

1400 (3d Cir. 1974); Serdar v. Cornmissioner, T.C.-Memo.:1986-504.20 In Serdar,

the taxpayer gave two pa'rcels of real property to Smith in exchange for a single .

parcel valued at more than what the Commissionèr considered to be the combined

value of the taxpayer's two properfies. Thë Commissioner determined that the

difference constituted ordinary income to the taxpayer attributable to a prepayment

penalty, owed by Smith to the taxpayer, relatéd to a prior transaction. In rejecting

the Commissioner's argument, we reasoned as fòllows:

20For a general discussion of cases involving assemblage and other special

needs values, see John A. Bogdanski, Federal Tax Valuation, para. 2.01[2][c], at

2-32 through 2-37 (2012).

- 76 We think that * * * [the Commissioner's] appraisal failed to

adequately take into account factors that made the properties

peculiarly adaptable to Smith's use, and that their fair market value

equaled the value of the consideration received for them. The factors

that the appraisal failed to adequately take into account are the value

to Smith of the road and railroad access that the properties provided

and their assemblage value, and, with respect to the Wadsworth

Property, the value to Smith of eliminating a tract of land that would

have jutted north into his assemblage.

In sum, we believe that Smith was convinced that it was

essential to acquire * * * [the two properties] to enable him to

develop his property as he planned, that he was therefore willing to

pay a high price for those properties, and that * * * [the taxpayer]

knew of Smith's plans and drove a hard bargain.

In this case, the hypothetical willing buyer (whether he be a collector or a

speculator) and seller of decedent's fractional interests in the art would know of

the Elkins children's strong desire to own the art in whole. Therefore, the buyer

and seller would recognize the former's ability to drive "a hard bargain" in

negotiating a resale of that art to the children.

We note that the Commissioner made a similar argument in Estate of

Bright, 658 F.2d at 1007. In that case, the decedent owned 27-1/2% of the

common stock of a closely held corporation.. Her surviving husband (Mr. Bright)

also owned 27-1/2%, and an unrelated party (Mr. Schiff) owned 30%. The

Commissioner argued that the decedent's 27-1/2% interest "offered by the 'willing

seller' would provide the margin of control for either Mr. Bright or Mr. Schiff, and

that the 'willing buyer' might negotiate a resale to either". The Commissioner

argued that those facts constituted "relevant facts" that "might affect the value of

(continued...)

- 77 Moreover, the hypothetical buyer-collector might very well be content to

possess the art for 73.055% (or 50%) of each year. In his written report, Mr. Nash

states:

It is not uncommon for two museums, acting together, to buy a work

of art. * * * They each take turns in exhibiting the works in

proportion to their interests. This would not work in this

circumstance because the other owners would be the Elkins Children,

and not another museum or institution. Consequently, museums

would not be interested in purchasing the interest.

Mr. Nash offers no reason for his conclusion that a museum would not be as

willing to share ownership with the Elkins children as it would with another

museum or institution, nor do we see one. Moreover, we see no basis for

concluding that only a museum jointly owning art with another museum would be

content to retain its fractional interest and shared right of possession with another

joint owner for an indefinite period. The point, of course, is that a hypothetical

buyer-collector, in no rush to sell his or her acquired interests in the art, would be

(...continued)

* * * [the decedent's] 27-1/2% minority interest which is to be valued." The

Commissioner stressed that "the 'willing buyer-seller' rule renders irrelevant only

the real seller and buyer, not the other stockholders." Id. The Court of Appeals

for the Fifth Circuit, after noting that "a few cases have acknowledged the

relevance of such facts", declined to consider the Commissioner's argument

because he made it for the first time on appeal. Id. at 1007-1008.

- 78 in an even stronger bargaining position than a speculator or art dealer in

negotiating a purchase price with the Elkins children.

In short, we find petitioners' experts' analyses and conclusions to be

unreliable because they are based, in large part, on the false or at least highly

dubious assumption that the Elkins children would mount an unrelenting defense

of the status quo, ignoring the very high probability that, instead, the children

would seek to purchase the hypothetical buyer's interests in the art. Because we

reject that assumption, we find Mr. Mitchell's discounted values for the art to be

unrealistically low.22

22Our analysis renders moot the dispute between the parties over whether it

is proper to assume that the hypothetical buyer might be a collector purchasing

multiple works of art who opts to institute a partition in kind, which, if true, would

reduce the hypothetical buyer's potential partition costs. Because the hypothetical

willing buyer and seller would consider a resale of decedent's interests in the art to

the Elkins children to be the most likely alternative in arriving at a price for those

interests, and because that price, in our view, would exceed even Mr. Miller's

worst case estimate of total partition costs ($11 million plus), it is unlikely that

potential partition costs would become a significant factor in the negotiations. For

the same reason, the probability, discussed by Mr. Miller, that, under Texas law,

the restriction on sales provision in para. 7 of the cotenants' agreement will

constitute an implied waiver of the right to partition, is not a significant factor in

valuing the cotenant art.

-79c.

Conclusion

Petitioners argue that the Elkins children would spend whatever was

necessary to retain their minority (or 50%) interests in the art. It is much more

likely, however, that, given their undisputed financial resources to do so, they

would be willing to spend even more to acquire decedent's fractional interests

therein and thereby preserve for themselves 100% ownership and possession of

the art. The question is how much more.

-We believe that a hypothetical willing buyer and seller of decedent's

interests in the art would agree upon a price at or fairly close to the pro rata fair

market value of those interests. Because the hypothetical seller and buyer could

not be certain, however, regarding the Elkins children's intentions, i.e., because

they could not be certain that the Elkins children would seek to purchase the

hypothetical buyer's interests in the art rather than be content with their existing

fractional interests, and because they could not be certain that, if the Elkins

children did seek to repurchase decedent's interests in the art, they would agree to

pay the full pro rata fair market value for those interests, we conclude that a

nominal discount from full pro rata fair market value is appropriate.

We hold that, in order to account for the foregoing uncertainties, a

hypothetical buyer and seller of all or a portion of decedent's interests in the art

- 80 would agree to a 10% discount from pro rata fair market value in arriving at a

purchase price for those interests. We believe that a 10% discount would enable a

hypothetical buyer to assure himself or herself of a reasonable profit on a resale of

those interests to the Elkins children.

VI.

Conclusion

Petitioners are entitled to a 10% discount from pro rata fair market value

with respect to decedent's interests in the art.

A list of the 64 works of art, decedent's pro rata share of the stipulated fair

market value of each work, and the resulting fair market value of each work, for

Federal estate tax purposes, after applying the 10% discount permitted herein, is

attached to this Opinion as appendix C.

Decision will be entered under

Rule 155.

- 81 -

APPENDIX A

THE GRIT ART

Stipulated fair

market value

Item

Artist

Title/year/description/size

Pollock, Jackson

Untitled, Number 21, 1949 (Oil & enamel paper on masonite, 19-l/4" x 26-3/4")

$6,000,000

Moore, Henry

Two-Piece Reclining Figure No. 3, 1961 (Bronze, 59" x 113" x 54")

4,000,000

Picassó, Pablo

Baignéuse debout, 1925 (Brush & ink on paper, 42" x 26-1/2")

600,000

Total

10,600,000

THE DISCLAIMER ART

Stipulated fair

Item

Artist

Title/year/description/size

market value

Johns, Jasper

Figure 4, 1967 (Oil, encaustic & newspaper on canvas, 53-l/2" x 41-1/2")

$8,000,000

Francis, Sam

Green Gold, 1956 (Oil on canvas, 105" x 78")

2,500,000

Motherwell, Robert

Elegy to Spanish Republic #134, 1976 (Acrylic on canvas, 72" x 84")

1,500,000

Twombly, Cy

Untitled,.1971 (Oil-based house paint, wax crayon, & pencil on canvas, 69" x 49-1/2")

1,500,000

Hockney, David

Pool on Sprayed Blue Paper...1978 (Colored & pressed paper pulp in 6 sheets, 72" x 85")

900,000

Kelly, Ellsworth

Yellow Panel, 1985 (Oil on canvas, 108" x 104-1/2")

800,000

Moore, Henry

Standing Figure (Internal Form) (Bronze w/green patina, 57-l/2" high)

600,000

Cezanne, Paul

Pot de geraniums, ca. 1885 (Watercolor on paper, 12-3/4" x 10-l/4")

Soulages, Pierre

8 June 61, 1961 (Oil on canvas, 81-1/2" x 57-l/2")

550,000

- 82 -

Item

Artist

Stipulated fair

market value

Title/year/description/size

Magritte, Rene

La lecon des tenebres, 1964 (Gouache on paper, 13-1/2" x 21-1/2")

450,000

Albers, Joseph

Study for Homage to a Square in White Light, 1968 (Oil on masonite, 24" x 24")

400,000

Johns, Jasper

Three Flags, 1977 (Ink on plastic, image: 6-7/8" x 9-7/8"; 12-1/2" x 18-1/8")

400,000

Hofmann, Hans

Adagio, 1962 (Oil on canvas, 48" x 36")

375,000

Louis, Morris

Delta Epsilon, 1960 (Acrylic on canvas, 103" x 150")

375,000

Ernst, Max

The Elements..., 1962 (Oil on canvas, 45-1/4" x 35")

350,000

Moore, Henry

Family Group, 1944 (Bronze w/green patina, height 6")

350,000

De Kooning, William

Woman in a Garden, 1968 (Oil on paper on canvas, 24-3/8" x 19-3/8")

Louis, Morris

Achenar, 1962 (Acrylic on canvas, 79-l/2" x 13-3/4")

220,000

Moore, Henry

Working Model for Thin Reclining Figure, 1978 (Bronze w/brown patina, 29" long)

200,000

Frankenthaler, Helen

Fathom, 1983 (Acrylic on canvas, 79" x 93")

180,000

Bravo, Claudio

Blue and Brown Package, 1971 (Oil on canvas, 59" x 78")

950,000

Bravo, Claudio

Wrapped Canvas, 1973 (Oil on canvas, 79" x 47")

950,000

Bravo, Claudio

Silver and Gold, 1972 (Oil on canvas, 44" x 57")

300,000

Rickey, George

Untitled (Open Rectangles), ca. 1985 (Stainless steel, 180" x 34" x 34")

300,000

Botero, Fernando

Parrot, 1981 (Bronze w/green patina, 58" high)

200,000

Kline, Franz

The Hill, 1959 (Oil on paper, I l-5/8" x 9")

200,000

Hofmann, Hans

Untitled (M-418), 1964 (Oil on canvas, 30" x 25")

150,000

042

300,000

- 83 -

Stipulated fair

market value

Item

Artist

Title/year/description/size

Olitski, Jules

Carnegie Hall, ca. 1962-64 (Acrylic on canvas, 64" x 76-1/2")

150,000

Hockney, David

Nichols Canyon.Road, Hollywood Boulevard, 1979 (Watercolor and ink on paper, 23-1/4" x 18")

140,000

Heizer, Michael

Untitled, ca. 1985 (Cast stone, 24' x 20')

100,000

Di Suvero, Mark

Untitled, ca. 1968 (Steel on mirror plate, sculpture: 18-1/2" x 42"; Plate: 1/8" x 46" x 22")

90,000

Bertoia, Harry

Sunburst, 1972 (Brass & bronze suspended mobile, 28" x 28" x 28")

80,000

Frankenthaler, Helen

Untitled, ca. 1975 (Watercolor on paper, 59" x 78")

60,000

Bertoia, Harry

Untitled (Sounding Sculpture), 1968 (Bronze, 84" x 10" x 10")

50,000

Motherwell, Robert

In green with Two Scarlet Spots, 1967 (Paper collage, acrylic & charcoal on paper, 30" x 22")

50,000

Held, Al

North by Northwest, 1973 (Acrylic on canvas, 72" x 96")

42,000

Hofmann, Hans

Untitled, 1949 (Oil and ink on paper, 17" x 14")

40,000

Dine, Jim

Tie, 1961 (Oil & pastel on paper, 23-1/2" x 16")

35,000

Bertoia, Harry

Untitled (Stainless & steel wire, 37" x 20")

30,000

Frankenthaler, Helen

Canal Street VIII, 1987 (Watercolor & gouache on paper, 25-l/2" x 19-3/4")

25,000

Craig-Martin, Michael

Safety Pin, circa 1990 (Painted steel & wood, 100" x 88" x 13")

Hofmann, Hans

Untitled (N-677-2), 1956 (Gouache on paper, 22-1/4" x 28-1/4")

20,000

Hofmann, Hans

Fluse #12 (M-1351), 1962 (Oil on canvas board, 13-1/4" x 11-1/2")

20,000

Nagare, Masayuki

Destination, 1996 (Granite, 26-1/2" x 12" x 8")

I 8,000

Motherwell, Robert

Je t'aime avec noir, 1978 (Ink & pencil on tracing paper, 13-1/2" x 16-3/4")

15,000

22,000

- 84 -

Item

Artist

Title/year/description/size

Stipulated fair

market value

Graves, Nancy

Four Times Four, 1977 (Acrylic on canvas, 64" x 64")

8,000

Hofmann, Hans

Untitled, 1954 (Gouache on paper, 12-1/2" x 9-1/2")

6,000

Frankenthaler, Helen

Thanksgiving Day, 1980 (Hand-painted ceramic tile, 13-1/2" x 19")

4,000

Frankenthaler, Helen

Thanksgiving Day, ca. 1980 (Hand-painted, ceramic tile, 13-l/2" x 17")

4,000

N/A

Japanese Painted and Silvered Paper Four-Panel Screen, 3d Quarter, 19th Century (Silvered paper

with silk-framed border; each panel: 52" x 23")

4,000

Frankenthaler, Helen

Hand Painted Book Cover #11, 1970 (Acrylic on canvas, 11" x 12")

3,500

Graves, Nancy

Omon (Series E) 1976 (Wax crayon on paper, 35" x 47-1/4")

3,000

Meadmore, Clement

Untitled, 1992 (Bronze, Height: 8-1/2")

3,000

Noland, Kenneth

Hand Painted Bookcover, 1977 (Acrylic on canvas, I I" x 12")

2,000

Hamilton, Juan

Abstract Form #52, 1975 (Height: 14-1/2")

1,750

Love, Jim

Monday Morning: What to do...What to do, 1992 (Welded Steel, 8" x 8")

1,200

Love, Jim

Looking for Santa Claus (welded steel, 9-3/8" x 8")

1,200

Stella, Frank

Pastel Stack, 1970 (28" x 41")

900

Fuller, Sue

String Composition #213, 1963 (Nylon & Saran thread with Plexiglas, 36" x 36")

750

N/A

Sepik River Carved Polychrome Wood Mask, 20th Century (Height: 64"; Width: 22")

250

N/A

Sepik River Carved and Polychrome-Painted Wood Shield, 20th Century (Height: 69-1/2";

Width: 14")

100

Total

24,580,650

- 85 -

APPENDIX B

Nash

Title/year

Option 1

Option 2

Concluded

discount

Fair market

value of

interest