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Inheritance Dispute: Family Claims IRS Overvalued Artwork

Estate tax rates at both the federal and state level are set by lawmakers, and there is little that any individual can do on thee law. However, residents can significantly alter their tax burden with smart estate planning–like prioritizing tax free transfers (to a spouse), using protected trusts, and more.

But there is also another aspect to the estate bill that is often overlooked–the appraisal. The tax burden is based on applying a tax rate to the value of an asset. But who decides the value? Actual laws which set the rates cannot account for this detail, and so disputes about appraisals are quite common, often with millions of dollars on the line.

Theoretically, the value of many different assets can be disputed. But in practical terms there are some types of property that are open to far more value uncertainty, often spurring challenge. Perhaps the most obvious example is that of high-end artwork. There may be significant disagreement about how much each piece of art is worth.

New York Appraisal Complaint
DNA New York recently ran a story that shared information on a real-world example of this situation involving the family of Jean-Michel Basquiat.

Basquiat was a well-known New York “graffiti artist” who had exhibits in world famous museums before his untimely death over twenty five years ago, in 1988. Basquiat was only twenty seven when he died and all of his assets were left to his parents. Basquiat’s mother passed away in 2011. She died without a will, and so after her passing, a large amount of artwork she owned passed via intestacy rules to her heirs–Basquiat’s father and sisters.

According to reports, the family was initially forced to pay $8.5 million in estate taxes on the inheritance. Not long after making payment, the IRS allegedly then demanded that the family pay an additional $10 million because the art collection was worth much more than the family claimed.

The initial value of the work was based on an appraisal by the Sotheby’s auction house, reaching the conclusion that the mother’s share of the artwork was worth $36 million. However, the IRS conducted its own audit and found the share to be more than twice as high, $69 million. Who is right?

A lawsuit was recently filed by the family in which the IRS appraisal was contested. One of the main issues of contention is application of a “blockage discount.” The idea is that the art markets are quite sensitive, and flooding the market with so many pieces in a sale at one time would drastically lower the value of the work. As a result, when estate taxes are applied to these assets a blockage discount is applied so the taxable amount is lower.

The case is set for trial next year.

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