In Uncategorized on 03/11/2013 at 19:38

Administered by Judge James Halpern, both to IRS and to Estate of James A. Elkins, Jr., Deceased, Margaret Elise Joseph and Leslie Keith Sasser, Independent Executors, 2013 T. C. 5, filed 3/11/13.

The late James was a heavy hitter, Senior Chairman of First City National Bank and descendant of the founding partner of Vinson & Elkins, Houston, TX powerhouse law firm (some six of whose attorneys are in there fighting for the estate), and monumental art collector.

A not insubstantial portion of the late James’ estate consisted of around $24,500,000 worth of daubs and sculps by, among others, Jasper Johns, Jackson Pollock, Picasso, Henry Moore and Robert Motherwell. Definitely a collection to die for.

The late James and Mrs James, assisted by the V&E gunners, set up a Grantor Retained Income Trust, which metamorphosed into a lease on the death of Mrs late James for three pieces, and went to their kids on a disclaimer by the late James.

The late James dies, with a fractional interest. Who would buy it and at what price?

The lease has all kinds of restrictions, and the kids have a co-tenancy agreement in what was left of the GRIT art that might (or might not) constitute a valid waiver of partition. I’ve litigated those, but not in the estate tax context, and they’re not laydown winners. But don’t get me started.

So it all comes down to our friends, the willing buyer and willing seller (see my blogpost “The Man Who Never Was”, 1/25/13), and whether an appropriate discount has been made for the late James’ fractional interest.

First off, Section 2703(a)(2) says that in valuing property for estate or gift tax purposes, restrictions on sale or use don’t count. So the famous lease and the co-tenancy agreement among the kids don’t impact the worth of the late James’ property right in the paintings.

Now for the experts and their role. Judge Halpern: “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. Although we may largely accept the opinion of one party’s expert over that of the other party’s expert, we may be selective in determining what portions of each expert’s opinion, if any, to accept. 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.” 140 T.C. 5, at p. 38.

So out come the experts, including IRS’ artistic whiz, the poetically-named Ms. Karen Hanus-McManus. The experts on both sides agree that sales of fractional interests in artwork don’t happen, either by collectors (who are in it only partly for the money but also for psychic satisfaction) and speculators (who are in it for the cash).

IRS wants to leave out of consideration the late James’ kids objections to any sale and litigation over partition, but Judge Halpern says that’s not a restriction on the late James’ right to sell; that’s a factor any buyer would have to consider. So after much parsing of cases, Judge Halpern decides that he can award a discount to the late James’ share of the pretties.

IRS wants no discount, the late James’ crew from V&E want a big markdown.

Judge Halpern: “The overriding flaw in [the estate’s experts] 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 relatively brief period of annual possession and the expense and inconvenience of annually moving 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.” 140 T. C. 5, at pp. 68-69 (Footnotes omitted).

And the estate’s star witness, Ms. Leslie Keith Sasser, independent executor, torpedoes the V&E convoy. “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 hypothetical buyer, and considering that the buyer would, most likely, not reside in the Houston area, she ‘would be willing to pay * * * a fair price’ to purchase 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.” 140 T. C. 5, at pp. 69-70.

Ms. Sasser is the IRS’ best friend: “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:

“Q: 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?

“A: Yes, it does.” 140 T. C. 5, at p. 71.

Judge Halpern: “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.” 140 T. C. 5, at p. 78. “In short”, Judge?

So the Man Who Never Was meets the Kids That Are, and Judge Halpern hands the kids a 10% discount.

Great witness, right?

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