Jeffrey Hyland was the executor and residuary beneficiary of Eva Kollsman’s estate. At her death in August 2005, Eva owned two 17th century Old Masters paintings: Village Kermesse, Dance Around the Maypole by Pieter Brueghel the Younger and Orpheus Charming by Jan Brueghel the Elder. Soon after Eva’s death, Hyland was approached by George Wachter of Sotheby’s about the possibility of Sotheby’s handling the auction of the paintings. Wachter was an expert in Old Masters. In September 2005 Wachter sent Hyland a letter stating that the paintings were worth $500,000 and $100,000 respectively. The valuation was “based upon a firsthand inspection of the property” but gave no other basis for the values. At the same time, a consignment agreement was sent for Hyland’s signature, in which the values of the paintings were estimated to range from $600,000 to $800,000 and $100,000 to $150,000.
On Eva’s estate tax return, Hyland valued the two paintings at $600,000, attaching Wachter’s valuation letter as evidence.
Also that September, Hyland consulted with a fine art services firm about having the paintings reframed and, if appropriate, cleaned. After insuring the paintings for a combined $1.2 million, the restoration proceeded. By all accounts, the paintings were much improved in the process.
In January 2009, Sotheby’s sold the Maypole painting for $2.1 million. The IRS challenged the estate’s valuations of the paintings, at a date not specified in the decision. At trial, Wachter offered several reasons for the discrepancy between his valuation and the subsequent sale price. When he valued the Maypole it was quite dirty, and whether it could be cleaned was unknown. There is a risk that an attempt to clean an old work of art will damage it, even destroy it. That would depress the price a buyer would be willing to pay. The restoration, in this case, was very successful, which increased its value more than Wachter could have anticipated. Finally, the market for Old Masters paintings had improved significantly in the interim, due to an influx of Russian buyers.
However, Wachter presented the court with no comparables to justify his conclusions. Another Sotheby’s expert prepared a report with comparables, but she was not available to testify. Accordingly, her report was ruled inadmissible.
The Tax Court rejected Wachter’s valuation, believing that it was self-serving. He had a conflict of interest, in that he was seeking to be the agent for the auction of the paintings. The Court also felt that Wachter had exaggerated the dirtiness of the painting and the effect it would have on value [Estate of Eva Franzen Kollsman et al. v. Commissioner; T.C. Memo. 2017-40].
The IRS expert did use comparables, even though that can be problematic when it comes to art—when every piece is unique, what is truly comparable? Nevertheless, the IRA found the value at death to be $2.1 million. The Court accepted the IRS position, subject to a 5% discount to account for the dirtiness.
The Orpheus painting, which remains in Hyland’s possession, was valued by the Court at $395,000, after accepting the IRS’ methodology for that piece as well.
In a per curiam opinion, the Ninth Circuit Court of Appeals has now affirmed the Tax Court’s judgment. The Tax Court correctly applied the law and did not improperly rely upon the painting’s later sale price.
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