New York Estate Planning & Elder Law Blog
A lawsuit recently filed in the U.S. District Court in the Southern District of Texas has challenged the Internal Revenue Service’s (IRS) assessment that a family owes the government millions in taxes for artwork that they claim is actually owned by a company. The estate of Joe Allbritton and his widow, Barbara Allbritton, are disputing the $40.7 million tax assessment on an alleged distribution of around $140 million worth of company-owned art to the Allbritton family.
Facts of the Case
The complaint was filed by the Allbritton family on January 30, 2015 which states that the art in question is owned by Perpetual Corporation (the Company), a corporation that is owned by the Allbritton family that held their art, real estate, and other assets on behalf of the family. The Company has been investing on behalf of the Allbritton family for over fifty years and in 1999 it was the sole owner of 26 pieces of artwork. It also owned another six pieces with a 95% interest, the other five percent belongings to Joe Allbritton.
In 2001, Joe transferred 95% interest to the company in another twelve pieces of artwork, retaining the five percent interest in those pieces. The family reported the tax gain those years for the transfers. The Company held the artwork in various corporate residential properties that were also owned by it, in offsite storage, or occasionally in the Allbritton home. The Allbritton family paid the Company fair rental value whenever family members occupied the residential properties.
The insurance policies on the artwork were paid by Joe Allbritton and the Company according to their percentage ownership interests in the pieces. The IRS assessed the tax bill in question on all of the artwork under the theory of “constructive property distribution” for the art and insurance premium expenses. The IRS also submitted an alternative argument of constructive property distribution for the fair rental value of the artwork.
Argument by the Allbrittons
Joe Allbritton’s estate and his widow argue that there was no constructive distribution of the art in question. They argue in the complaint that they did not possess any ownership rights over the art beyond what any corporate officer in the Company would have. In addition, the Allbritton family paid fair rental value for the residential properties owned by the Company, which included the value of the furnishings and artwork in the home.
The Allbrittons argue that the IRS cannot claim that there was both constructive property distribution of the art in addition to constructive distribution of the fair rental value of the art. Furthermore, the family argues that the IRS should be treating the artwork as separate corporate assets, despite the fact that the art can be movable and enjoyable. The IRS is required to submit an answer to the Allbritton family’s complaint by May 20, 2015, and experts are interested to see how the IRS will expound upon its theory of constructive distribution to these types of assets.