                                           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 relin-
                                               quished 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.

                                        Donald Frederick Wood, J. Graham Kenney, Harry M. Rea-
                                      soner, 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 peti-
                                      tioners (notice), respondent determined an estate tax defi-
                                      ciency 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
                                      86




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                        87


                                      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.

                                                                          FINDINGS OF FACT

                                      Residence
                                       When they filed the petition, petitioners resided in
                                      Houston, Texas.
                                      The Art
                                         Decedent (sometimes, Mr. Elkins) and Mrs. Elkins pur-
                                      chased 64 works of art (sometimes, when referenced collec-
                                      tively, art) between 1970 and 1999. Mr. and Mrs. Elkins pur-
                                      chased 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 other 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.
                                      Creation 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 undi-
                                      vided 50% interests in three of the works in the collection:




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                                      88                  140 UNITED STATES TAX COURT REPORTS                                     (86)


                                      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.
                                         Decedent and the Elkins children executed a lease agree-
                                      ment (art lease) covering two of the three works of GRIT art
                                      (the Picasso drawing and the Pollock painting), made effec-
                                      tive ‘‘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 posses-
                                      sion of those works. There was an initial lease term, with
                                      automatic extensions, unless decedent opted out of an exten-
                                      sion, 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 trans-
                                      ferred 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, suc-
                                      cessor and assigns.’’
                                        1 Mr. and Mrs. Elkins partitioned their community property interests in

                                      the GRIT art before creating the GRITs.




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                        89


                                        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 in 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 by Mrs. Elkins’ estate, decedent disclaimed a
                                      26.945% interest in each of the 61 works (disclaimer art).
                                      Pursuant to Mrs. Elkins’ will, 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).
                                         On February 14, 2000, shortly after decedent executed his
                                      partial disclaimer, decedent and the Elkins children entered
                                      into a ‘‘Cotenants’ Agreement’’ (cotenants’ or original coten-
                                      ants’ 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 ‘‘Coten-
                                           ant’’ 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’’).




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                                      90                  140 UNITED STATES TAX COURT REPORTS                                     (86)


                                             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:
                                           1. Beginning on the date of this Agreement, each Cotenant shall have
                                           the right of possession, dominion, and control of each item of the Prop-
                                           erty 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.
                                           2. 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 Co-
                                           tenant 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.
                                           3. 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.

                                                                 *  *  *   *    *   *   *
                                           6. 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.
                                           7. 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 percent-
                                           age interests in the Property.
                                           8. This Agreement shall be binding on Cotenants and on their respective
                                           heirs, personal representatives, successors and assigns.
                                           9. This Agreement shall be governed and construed under the laws of
                                           the State of Texas.

                                         After decedent’s GRIT terminated on July 13, 2000, the
                                      parties to the cotenants’ agreement amended it (amended co-
                                      tenants’ 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 Henry Moore sculpture
                                      that was not included in the art lease). On February 17,




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                        91


                                      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 resid-
                                      uary 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 resid-
                                      uary estate. Thus, any additional estate taxes payable by the
                                      estate as a result of this case will correspondingly reduce the
                                      distribution to the Elkins Foundation and the charitable con-
                                      tribution 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 Mis-
                                      cellaneous 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 deter-
                                      mined 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 dis-




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                                      92                  140 UNITED STATES TAX COURT REPORTS                                     (86)


                                      claimer art and $10,600,000 for the GRIT art. 2 A list of the
                                      64 works of art, 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 $18,488,504 3 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 art-
                                      work’’ so that, pursuant to section 2703(a)(1) and (2), respec-
                                      tively, decedent’s interests in the art covered by those agree-
                                      ments ‘‘should be valued without regard to’’ those restric-
                                      tions; (2) ‘‘the discounts used in calculating the fair market
                                      value of Decedent’s fractional 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 chari-
                                      table bequest to that foundation by the amount of the pro-
                                      posed estate tax deficiency, i.e., by the amount of additional
                                      estate tax payable by the estate.


                                           2 Sotheby’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.
                                        3 That 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 dis-
                                      claimer 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.




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                        93


                                      Petition
                                         In response to the notice, petitioners timely filed the peti-
                                      tion. 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
                                      Petitioners’ Experts
                                        In defense of their proposed discounts in valuing decedent’s
                                      fractional interests in the art, petitioners offered the testi-
                                      mony 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 testi-
                                      mony.
                                         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 con-
                                      vinced 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
                                        4 The estate’s entitlement to an additional deduction for administration

                                      expenses is not at issue herein.




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                                      94                  140 UNITED STATES TAX COURT REPORTS                                     (86)


                                      interest in each work ‘‘rather than viewing the collection as
                                      a whole.’’
                                         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 pur-
                                      chasers. 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 poten-
                                      tial 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 frac-
                                      tional 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 com-
                                      parable works by the same artist that he could purchase out-
                                      right. Mr. Nash states that the collector’s only motivation for
                                      buying a fractional interest in one of the works of 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’’.
                                         Mr. Nash states that it is ‘‘highly unlikely’’ that a museum
                                      would pay ‘‘anything close [to] the pro rata value of the frac-
                                      tional share where they will never know if or when they will
                                      be able to obtain full control’’ 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 assur-
                                      ance * * * [of ever acquiring] full ownership.’’ He notes, how-
                                      ever, 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, how-
                                      ever, that museums would not be interested in purchasing




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                        95


                                      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 frac-
                                      tional interests, mainly because of the difficulty in reselling
                                      them to collectors or museums, and that the ‘‘logistical dif-
                                      ficulties 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
                                      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 pur-
                                      chased interest or using it as collateral for a loan. Nonethe-
                                      less, he concludes that speculators ‘‘would be willing to pur-
                                      chase * * * [decedent’s] interests if appropriately dis-
                                      counted.’’
                                         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 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
                                           5 For
                                              two of the works, Mr. Nash determines a range of discounted val-
                                      ues for decedent’s fractional interests therein. Mark L. Mitchell is another
                                                                                                       Continued




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                                      96                  140 UNITED STATES TAX COURT REPORTS                                           (86)


                                         Category II consists of 19 6 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 rec-
                                      ognized.’’ Mr. Nash concludes that, for those works, ‘‘a poten-
                                      tial 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 demand a dis-
                                      count 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 cat-
                                      egory.’’ He does single out five of the works as having ‘‘rel-
                                      atively 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 dis-
                                      counted fair market value of decedent’s interests in the art
                                      to be as follows:
                                                Category I .............................................................   $4,336,859
                                                Category II ...........................................................       976,451

                                      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 peti-
                                      tioners rely herein. For each of the two works for which Mr. Nash deter-
                                      mined 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 in-
                                      terests.
                                         6 Mr. Nash lists 1 of the 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 cat-
                                      egory 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.




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                                      (86)                   ESTATE OF ELKINS v. COMMISSIONER                                               97


                                                Category III ..........................................................        149,056

                                                   Total ..................................................................   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 receivers and
                                      agents for liquidating personal property, including works of
                                      art. The Court 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 evi-
                                      dence 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 coowners 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 agree-
                                      ment, 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 alien-
                                      ation’’. 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 Co-
                                      tenants 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.’’ 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 deter-
                                      mining costs and attorneys’ fees.’’




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                                      98                  140 UNITED STATES TAX COURT REPORTS                                     (86)


                                         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
                                      sheriff ’s sale * * * [, which] would substantially 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 appro-
                                      priate, (3) the 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 deter-
                                      mine the terms of any proposed sale, the property to be sold,
                                      the method of sale, and 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 91⁄2 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




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                        99


                                      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.
                                         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 litiga-
                                      tion 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 action with respect to any one
                                      of the more valuable works of art in the Elkins family collec-
                                      tion, 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, Washington.
                                      He holds a B.S. and an M.B.A. degree from Southern Meth-
                                      odist 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 intan-
                                      gible 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 undi-
                                      vided interests in property, but not including (until this
                                      assignment on behalf of petitioners) works of art. The Court




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                                      100                 140 UNITED STATES TAX COURT REPORTS                                     (86)


                                      accepted Mr. Mitchell as an expert in the valuation of undi-
                                      vided 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 conclu-
                                      sions, 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 Undi-
                                      vided Interests’’, and on Mr. Miller’s report regarding parti-
                                      tioning rights and costs related to partition actions including
                                      ‘‘costs associated with a legal challenge of the Cotenants’
                                      Agreement’’. His final valuation conclusions are based upon
                                      those two reports, his analysis of the economics of the art
                                      market, and his quantitative methodology.
                                         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 financial 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 dis-
                                      counts 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.’’
                                         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




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                       101


                                      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 undi-
                                      vided 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 ben-
                                      efit, 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 frac-
                                      tional 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., financial return) means that his finan-
                                      cial 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 parti-
                                      tion 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 specu-
                                      lator, 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




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                                      102                 140 UNITED STATES TAX COURT REPORTS                                     (86)


                                      with art as compared with alternative investments (e.g.,
                                      Government bonds or stock), the financial returns on the
                                      former are generally 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 that 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 market-
                                      ability 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 addi-
                                      tional 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 pur-
                                      chase 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.
                                         Relying on Mr. Nash’s opinion of the category I works, Mr.
                                      Mitchell differentiates them from his baseline return esti-
                                      mates 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 Francis 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 of
                                      shared ownership on such a work. Those adjustments result
                                      in an overall 14% required rate of return for the Pollock and
                                      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




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                       103


                                      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 pre-
                                      mium to 18% and reduces the 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 fol-
                                      lows: 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.
                                         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. 7 On the basis of
                                      those discounts, he determines the discounted fair market
                                      value for decedent’s interest in each work of art. Mr. Mitchell
                                      finds the total discounted fair market value of decedent’s
                                      interests in the art to be as follows:
                                         7 With respect to all but two of the works of art, the option 1 discount

                                      is lower.




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                                      104                 140 UNITED STATES TAX COURT REPORTS                                              (86)


                                                Category I .............................................................      $5,150,420
                                                Category II ...........................................................        1,904,117
                                                Category III ..........................................................          604,108

                                                   Total ..................................................................    7,658,645

                                      That total, although greater than the $5,462,366 total dis-
                                      counted 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 peti-
                                      tioners’ 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 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 pur-
                                      poses, donations 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




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                       105


                                      written report in this case, although she conferred with Jac-
                                      queline Silverman, president of Associates, who edited, proof-
                                      read, and cosigned the report. The Court accepted Ms.
                                      Hanus-McManus as an expert appraiser of modern and
                                      contemporary art and received her written report into evi-
                                      dence 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 sec-
                                      ondary 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 mar-
                                      kets 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 frac-
                                      tional 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 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.




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                                      106                 140 UNITED STATES TAX COURT REPORTS                                     (86)


                                      The Court accepted Mr. Cahill as an expert in art trans-
                                      actions 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 Agree-
                                      ment, Amendment to Cotenants Agreement and Art Lease
                                      are not comparable to similar arrangements entered into by
                                      persons in arms length art market transactions.’’ 8

                                                                                  OPINION

                                      I. Introduction
                                        We must determine the fair market value of decedent’s
                                      interest in each of 64 works of art for Federal estate tax pur-
                                      poses. 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 testi-
                                      mony, 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 valu-
                                      ation 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
                                      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 $23,257,393 9),
                                           8 Mr.
                                               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.
                                        9 On 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




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                       107


                                      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 sec-
                                      tion 7491(a)(2) requirements, and petitioners argue that,
                                      through the expert testimony of Messrs. Nash, Miller, and
                                      Mitchell and through Ms. Sasser’s testimony, they have pre-
                                      sented 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). 10




                                      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 valu-
                                      ations on audit, as an inadvertent oversight, and we give it no credence.
                                      See supra note 3.
                                        10 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 sup-
                                      plemented solely by expert witness testimony. Here, there is disputed fact
                                      testimony furnished by Ms. Sasser.




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                                      108                 140 UNITED STATES TAX COURT REPORTS                                     (86)


                                      III. Law
                                           A. General Principles
                                         Section 2001(a) imposes a tax on ‘‘the transfer of the tax-
                                      able 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, tan-
                                      gible or intangible, wherever situated.’’
                                         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 includ-
                                      ible 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 regu-
                                      lation 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 hypo-
                                      thetical 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 buyer and seller are presumed to be
                                      dedicated to achieving the maximum economic advantage. Id.
                                           B. Expert Opinions
                                        In deciding valuation cases, courts often look to the opin-
                                      ions of expert witnesses. Nonetheless, we are not bound by
                                      the opinion of any expert witness, and we may accept or




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                       109


                                      reject expert testimony in the exercise of our sound judg-
                                      ment. 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. Commis-
                                      sioner, T.C. Memo. 2001–167 (citing Silverman v. Commis-
                                      sioner, 538 F.2d 927, 933 (2d Cir. 1976), aff ’g T.C. Memo.
                                      1974–285), aff ’d, 390 F.3d 1210 (10th Cir. 2004).
                                           C. 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 restric-
                                      tion if it meets certain requirements, and (3) petitioners con-
                                      cede 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). 11




                                         11 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 nei-
                                      ther the cotenants’ agreement nor the art lease provides an option, agree-
                                      ment, 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 de-
                                      cision is whether sec. 2703(a)(2) applies herein.




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                                      110                 140 UNITED STATES TAX COURT REPORTS                                     (86)


                                      IV. Summary of the Parties’ Arguments
                                           A. Respondent
                                           1. 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.
                                           2. 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 frac-
                                           tional 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’ Agree-
                                           ment 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 Art-
                                           work to his children at a reduced transfer tax rate—a purpose which sec-
                                           tion 2703 was specifically intended to prevent.

                                        Respondent concludes that the restrictions on sale in para-
                                      graph 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.
                                           3. Use of Undiscounted Pro Rata Fair Market Value in Val-
                                              uing Decedent’s Interests in the Art
                                        In support of his valuation argument, in which he con-
                                      cludes that no discount is warranted with respect to
                                      decedent’s interests in the art, respondent states that the




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                       111


                                      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 testi-
                                      mony 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.’’
                                        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 pro-
                                      ceeds. 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 are required to
                                      value decedent’s fractional interests in the art pursuant to
                                      section 20.2031–1(b), Estate Tax Regs.




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                                      112                 140 UNITED STATES TAX COURT REPORTS                                     (86)


                                         Although his principal argument is that, as a matter of
                                      law, no discount is permissible in valuing undivided frac-
                                      tional interests in art, respondent also argues that, as a fac-
                                      tual 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 dis-
                                      counts 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 parti-
                                      tion 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 likeli-
                                      hood of and the costs associated with a single action for
                                      partitioning the entire collection in kind. On a more funda-
                                      mental level, respondent rejects the notion of any discount
                                      from 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, uninter-
                                      ested 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 dis-
                                      count 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




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                       113


                                      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.
                                           B. Petitioners
                                           1. 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.
                                           2. Propriety of Petitioners’ Discounts With Respect to the
                                              Art
                                        Petitioners argue that they have fully supported the dis-
                                      counts 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 any discount would contravene
                                      the cited regulation. They argue that ‘‘Mr. Mitchell’s valu-
                                      ation conclusions fully take into account the risks and




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                                      114                 140 UNITED STATES TAX COURT REPORTS                                     (86)


                                      impairments to value’’ inherent in the hypothetical buyer’s
                                      alternative options (i.e., option 1: hold the purchased frac-
                                      tional 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.
                                         Presumably in defense of Mr. Miller’s cost analysis based
                                      upon a separate partition action for each work of art, peti-
                                      tioners state that the applicable regulations mandate that
                                      decedent’s fractional interest in each work be valued sepa-
                                      rately, 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 pur-
                                      chasing all of the art.’’
                                      V. Analysis
                                           A. Application of Section 2703(a)(2) to the Cotenant Art
                                           1. Introduction
                                        Should we determine that the restriction on sales of coten-
                                      ant art in paragraph 7 of the cotenants’ agreement con-
                                      stitutes 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.




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                       115


                                           2. 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 co-
                                      tenants’ agreement was entered into in February 2000, six
                                      years before decedent’s death in February 2006, and para-
                                      graph 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 coten-
                                      ants’ agreement does not restrict the sale of decedent’s frac-
                                      tional 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 the term ‘‘property’’ in the cotenants’
                                      agreement, which, in pertinent part, states that ‘‘[e]ach co-
                                      tenant 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’ undi-
                                      vided fractional interests in the cotenant art.
                                         We think that both petitioners’ and respondent’s analyses
                                      miss the mark. During trial, we queried Mr. Miller, peti-
                                      tioners’ expert on partition, about paragraph 7 of the coten-




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                                      116                 140 UNITED STATES TAX COURT REPORTS                                     (86)


                                      ants’ 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
                                      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 excep-
                                      tions 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 prop-
                                      erty.’’ 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 impor-
                                      tant. It is clear that, pursuant to paragraph 7 of the coten-
                                      ants’ 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 dif-
                                      ference 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.
                                           3. Conclusion
                                         We hold that section 2703(a)(2) is applicable to the restric-
                                      tion, in paragraph 7 of the cotenants’ agreement, on sales of
                                      cotenant art.




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                       117


                                           B. Whether and the Extent to Which the Estate Is Entitled
                                              To Discount Decedent’s Interests in the Art
                                           1. Introduction
                                         Our determination that section 2703(a)(2) negates the
                                      restriction on sales of cotenant art in paragraph 7 of the co-
                                      tenants’ agreement, coupled with petitioners’ concession that
                                      section 2703(a)(2) negates the restriction on sales of the les-
                                      sor’s and lessee’s interests in the leased art contained in sec-
                                      tion 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 chil-
                                      dren’s) agreement to a sale of the underlying art and a pro
                                      rata splitting of the proceeds of sale or to the need to
                                      institute a partition action in order to achieve that result. 12
                                         In resolving the parties’ dispute over the proper valuation
                                      of decedent’s interests in the art, we first address the ques-
                                      tion 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.
                                           2. Whether Any Discount Is Permissible
                                           a. Analysis
                                        Respondent’s argument that no discount is warranted in
                                      valuing decedent’s fractional interests in the art is premised
                                        12 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 sta-
                                      tus 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 dece-
                                      dent’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.




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                                      118                 140 UNITED STATES TAX COURT REPORTS                                     (86)


                                      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 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) 2007–2992 (N.D. Cal. 2007),
                                      supplemented by 100 A.F.T.R.2d (RIA) 2007–5512 (N.D. Cal.
                                      2007), aff ’d, 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’ prof-
                                      fered 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 co-
                                      owners’ 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 con-
                                      cluded 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 Dis-
                                      trict Court did, however, decide that ‘‘some discount is appro-
                                      priate to allow for the uncertainties 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 appro-
                                      priate 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 to account for the hypothetical
                                      seller’s legal fees in connection with any partition action.
                                      Moreover, the District Court was not persuaded that a hypo-
                                      thetical buyer would refuse to buy the decedent’s interest in




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                       119


                                      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% undi-
                                      vided 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 the 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.
                                        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 reduc-
                                           tion. 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 rata 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 dis-
                                      count from pro rata fair market value for the decedent’s frac-
                                      tional interest in an art collection in order to account for var-
                                      ious 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 any
                                      regulatory prohibition against discounts for art that is nor-
                                      mally sold at retail. Moreover, the District Court in Stone
                                      agreed with the plaintiffs that, ‘‘contrary to the government’s




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                                      120                 140 UNITED STATES TAX COURT REPORTS                                     (86)


                                      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 nine-
                                      teen paintings among the co-owners.’’ Id. at 2007–2997
                                      through 2007–2998. The District Court’s refusal to person-
                                      alize 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. * * *

                                      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; 13 see also Holman v. Commissioner, 601 F.3d 763,
                                      775 (8th Cir. 2010), aff ’g 130 T.C. 170 (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 * * * [thereof] among
                                        13 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 of the ‘‘family attribution’’ or ‘‘unity of ownership’’ principle,
                                      which takes into account the close relationship among the decedent, execu-
                                      tor, 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 Ap-
                                      peals for the Ninth Circuit in Propstra, was that, in the absence of a show-
                                      ing that such parties, if related, were likely to sell their interests sepa-
                                      rately, ‘‘one can reasonably assume’’ that those interests, including the de-
                                      cedent’s interest, will be sold as a unit. Propstra, 680 F.2d at 1251–1252.




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                       121


                                      the co-owners’’, but, unlike the circumstances in Propstra and
                                      Estate of Bright, we are presented with unchallenged facts
                                      demonstrating that the Elkins children had strong senti-
                                      mental 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 frac-
                                      tional 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 specifi-
                                      cally communicated to Mr. Nash. In this case, it is not nec-
                                      essary 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 pre-
                                      paratory to his inspection of the art. That being so, the hypo-
                                      thetical 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 hos-
                                      tility 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 [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 pre-
                                      mised upon the requirement in section 20.2031–1(b), Estate
                                      Tax Regs., that the value of ‘‘an item of property * * * gen-
                                      erally 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




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                                      122                 140 UNITED STATES TAX COURT REPORTS                                     (86)


                                      interests in art (as well as for other types of personal prop-
                                      erty) 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 alternatives, none of which would entail a frac-
                                      tional 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 per-
                                      sonal and reflective of the idiosyncracies of particular
                                      individuals.’’
                                         Although respondent’s approach to the valuation of per-
                                      sonal 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 parti-
                                      tion 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, 14 they
                                      undoubtedly would view continued retention of the 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.
                                           14 It
                                              is, of course, possible that, by holding on to the art, subsequent ap-
                                      preciation of one or more works would allow the fractional interest holders
                                      to realize a greater economic benefit than would have resulted from an im-
                                      mediate sale of the art at its fair market value on the valuation date.




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                       123


                                         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 frac-
                                      tional 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 pros-
                                      pect of a fair market value sale of the art followed by a pro
                                      rata division of the proceeds among the coowners is mani-
                                      festly 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 hypo-
                                      thetical 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 coshare-
                                      holder family members intended to maintain the company
                                      ‘‘as a privately held, family-controlled company’’ thereby ren-
                                      dering 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 prece-
                                      dent in the Court of Appeals for the Fifth Circuit permitting
                                      valuation discounts for fractional interests in property. E.g.,
                                      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 valu-
                                      ation discount. To begin with, respondent’s position is
                                      directly contrary to the caselaw permitting discounts in the
                                      light of uncertainties regarding the possibility of and/or costs
                                      associated with partition actions. E.g., Estate of Bonner, 84




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                                      124                 140 UNITED STATES TAX COURT REPORTS                                     (86)


                                      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 antici-
                                      pated 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 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 prop-
                                      erty 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. Commis-
                                      sioner, 57 T.C. 650, 659 (1972), aff ’d, 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 deter-
                                      mining fair market value. See Estate of Smith v. Commis-
                                      sioner, T.C. Memo. 1993–236.
                                         Lastly, we reject respondent’s argument that the Commis-
                                      sioner’s rulings policy (reflected in both revenue rulings and
                                      private letter rulings), whereby undiscounted pro rata fair
                                      market value deductions are allowed for charitable contribu-
                                      tions of fractional interests in art, controls the valuation of
                                      decedent’s fractional interests in the art.
                                         Respondent cites two revenue rulings in which the tax-
                                      payer 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




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                       125


                                      a deduction for either the present value of the remainder
                                      interest or for the undiscounted pro rata fair market value
                                      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), aff ’d, 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 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
                                      persuade us to deny any discount for decedent’s fractional
                                      interests in the art. 15
                                         15 Petitioners 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), aff ’d, Stone ex rel. Stone Trust Agreement v.
                                      United States, 103 A.F.T.R.2d (RIA) 2009–1379 (9th Cir. 2009)) and on the
                                      further ground that it should be interpreted as applying only to the ‘‘com-
                                      mon situation’’ in which the donor ‘‘makes a series of fractional donations
                                      and ultimately donates the entire work of art in full.’’ Neither effort to dis-
                                      tinguish the Commissioner’s rulings from the facts of this case is persua-
                                      sive. 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 pur-
                                      poses, 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 iden-
                                      tical to that provided by sec. 20.2031–1(b), Estate Tax Regs.); and we fail
                                                                                                       Continued




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                                      126                 140 UNITED STATES TAX COURT REPORTS                                     (86)


                                         Respondent also cites two cases decided by this Court in
                                      which we permitted undiscounted fair market value deduc-
                                      tions 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 pos-
                                      sible application of a pro rata deduction for the donated frac-
                                      tional interest. The parties did not raise the issue of a frac-
                                      tional interest discount, and we did not consider it. There-
                                      fore, we do not view those cases as precedent for denying a
                                      valuation discount in this case.
                                           b. Conclusion
                                        There is no bar, as a matter of law, to an appropriate dis-
                                      count from pro rata fair market value in valuing, for estate
                                      tax purposes, decedent’s undivided fractional interests in the
                                      art.
                                           3. The Extent to Which Petitioners Are Entitled To Discount
                                              the Pro Rata Fair Market Value of Decedent’s Interests
                                              in the Art
                                           a. Introduction
                                        Only petitioners’ valuation 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 dis-
                                      count from pro rata fair market value for decedent’s undi-
                                      vided 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

                                      to see the basis for petitioners’ assumption that respondent’s allowance of
                                      an undiscounted fair market value deduction for the contribution of an un-
                                      divided 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 contribu-
                                      tion was one in a series of contributions ultimately providing the donee
                                      with complete ownership and possession of the art. Thus, although we de-
                                      cline to apply the rulings to the facts of this case, we do so on grounds
                                      other than those proffered by petitioners.




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                       127


                                      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 undi-
                                      vided 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 com-
                                      parable 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.
                                           b. Analysis
                                        Having decided that petitioners may introduce facts dem-
                                      onstrating 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 testi-
                                      mony 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. 17 The relatively brief
                                           16 Mr.
                                                Nash is in apparent agreement with that conclusion, but he none-
                                      theless opines that a collector or speculator might offer to purchase dece-
                                      dent’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 in-
                                      volved.’’
                                        17 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.,
                                                                                                       Continued




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                                      128                 140 UNITED STATES TAX COURT REPORTS                                     (86)


                                      period of annual possession and the expense and inconven-
                                      ience 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 posses-
                                      sion of the art. 18 Neither Mr. Nash nor Mr. Mitchell consid-
                                      ered 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 hypothetical buyer, and consid-
                                      ering 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 sus-
                                      pect 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 mul-
                                      tiple partition actions that could drag on for many years,
                                      when they would be able to acquire 100% ownership and


                                      26.945% (3 × 8.98167%) of each year for 61 works and 50% (3 × 16.667%)
                                      of each year for three works.
                                         18 During her testimony, Ms. Sasser suggested that, as a means of reduc-

                                      ing the number of moves to which the art would be subject under the co-
                                      tenants’ agreement, she might opt to revise 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.




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                       129


                                      possession of the art, which, after all, is what they really
                                      want. 19
                                        Petitioners argue that the ‘‘fair price’’ referred to by Ms.
                                      Sasser would not exceed ‘‘fair market value’’, meaning the
                                      discounted values determined by Messrs. 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 much higher prices than a dis-
                                      interested 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.

                                        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 col-
                                      loquy 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 reluc-
                                           tant 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?

                                           19 As
                                               discussed infra, the Elkins children most likely would be willing to
                                      pay a hypothetical buyer substantially more than the anticipated attor-
                                      ney’s fees and related costs they would incur to oppose the buyer’s parti-
                                      tion 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.’’




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                                      130                 140 UNITED STATES TAX COURT REPORTS                                     (86)


                                           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 testi-
                                      fied, Ms. Sasser obviously was aware of the sharply dis-
                                      counted 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 mone-
                                      tize his or her investment in the art or to obtain full posses-
                                      sion of a pro rata portion thereof, circumstances that she
                                      knew were irrelevant to her (and her siblings’) potential pur-
                                      chase 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 hypo-
                                      thetical 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




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                       131


                                      to sell the art to the Elkins children at the sharply dis-
                                      counted 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 mone-
                                      tize those interests, 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 hypo-
                                      thetical buyers, and we see no evidence that she or they
                                      would limit their offer to an amount not in excess of the dis-
                                      counted 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 ‘‘rel-
                                      evant facts’’ that we must deem to be considered by a hypo-
                                      thetical 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 con-
                                      structed in a vacuum isolated from the actual facts that
                                      affect the value of the stock in the hands of the decedent[.]’’);
                                      True v. United 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




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                                      132                 140 UNITED STATES TAX COURT REPORTS                                     (86)


                                      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.
                                      See, e.g., Pittsburgh Terminal Corp. v. Commissioner, 60 T.C.
                                      80, 90 (1973) (dicta: ‘‘[W]e do not quarrel with * * * [the tax-
                                      payer’s] assertion that aggregation increases the value of coal
                                      lands[.]’’), aff ’d without published opinion, 500 F.2d 1400 (3d
                                      Cir. 1974); Serdar v. Commissioner, T.C. Memo. 1986–504. 20
                                      In Serdar, the taxpayer gave two parcels of real property to
                                      Smith in exchange for a single parcel valued at more than
                                      what the Commissioner considered to be the combined value
                                      of the taxpayer’s two properties. The Commissioner deter-
                                      mined that the difference constituted ordinary income to the
                                      taxpayer attributable to a prepayment penalty, owed by
                                      Smith to the taxpayer, related to a prior transaction. In
                                      rejecting the Commissioner’s argument, we reasoned as fol-
                                      lows:
                                           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 rail-
                                           road 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 assem-
                                           blage.

                                                                 *  *    *    *   *   *    *
                                             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

                                        20 For a general discussion of cases involving assemblage and other spe-

                                      cial needs values, see John A. Bogdanski, Federal Tax Valuation, para.
                                      2.01[2][c], at 2–32 through 2–37 (2012).




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                       133


                                      hard bargain’’ in negotiating a resale of that art to the chil-
                                      dren. 21
                                        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 pur-
                                           chasing 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 institu-
                                      tion, nor do we see one. Moreover, we see no basis for con-
                                      cluding 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 in an even stronger bargaining
                                      position than a speculator or art dealer in negotiating a pur-
                                      chase price with the Elkins children.
                                         In short, we find petitioners’ experts’ analyses and conclu-
                                      sions 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,
                                         21 We note that the Commissioner made a similar argument in Estate of

                                      Bright, 658 F.2d at 1007. In that case, the decedent owned 271⁄2% of the
                                      common stock of a closely held corporation. Her surviving husband (Mr.
                                      Bright) also owned 271⁄2%, and an unrelated party (Mr. Schiff) owned 30%.
                                      The Commissioner argued that the decedent’s 271⁄2% 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 * * * [the decedent’s] 271⁄2% minority
                                      interest which is to be valued.’’ The Commissioner stressed that ‘‘the ‘will-
                                      ing 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.




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                                      134                 140 UNITED STATES TAX COURT REPORTS                                     (86)


                                      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 unreal-
                                      istically low. 22
                                           c. 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 them-
                                      selves 100% ownership and possession of the art. The ques-
                                      tion 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 inten-
                                      tions, 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.
                                         22 Our analysis renders moot the dispute between the parties over

                                      whether it is proper to assume that the hypothetical buyer might be a col-
                                      lector purchasing multiple works of art who opts to institute a partition
                                      in kind, which, if true, would reduce the hypothetical buyer’s potential par-
                                      tition costs. Because the hypothetical willing buyer and seller would con-
                                      sider 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 poten-
                                      tial 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.




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                                      (86)                  ESTATE OF ELKINS v. COMMISSIONER                                       135


                                         We hold that, in order to account for the foregoing
                                      uncertainties, a hypothetical buyer and seller of all or a por-
                                      tion of decedent’s interests in the art would agree to a 10%
                                      discount from pro rata fair market value in arriving at a pur-
                                      chase price for those interests. We believe that a 10% dis-
                                      count 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.



                                                                                APPENDIX A

                                      THE GRIT ART

                                                                                                                           Stipulated
                                                                                                                          fair market
                                      Item              Artist                 Title/year/description/size                   value
                                           1    Pollock,                Untitled, Number 21, 1949 (Oil &
                                                  Jackson                enamel paper on masonite, 191⁄4’’
                                                                         × 263⁄4’’)                                        $6,000,000
                                           2    Moore, Henry            Two-Piece Reclining Figure No. 3,
                                                                         1961 (Bronze, 59’’ × 113’’ × 54’’)                 4,000,000
                                           3    Picasso, Pablo          Baigneuse debout, 1925 (Brush &
                                                                          ink on paper, 42’’ × 261⁄2’’)                       600,000
                                                   Total                                                                   10,600,000

                                      THE DISCLAIMER ART

                                                                                                                           Stipulated
                                                                                                                          fair market
                                      Item              Artist                 Title/year/description/size                   value
                                           4    Johns, Jasper           Figure 4, 1967 (Oil, encaustic &
                                                                          newspaper on canvas, 531⁄2’’ ×
                                                                          411⁄2’’)                                         $8,000,000




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                                      136                  140 UNITED STATES TAX COURT REPORTS                                     (86)


                                                                                                                            Stipulated
                                                                                                                           fair market
                                      Item               Artist                 Title/year/description/size                   value
                                           5     Francis, Sam            Green Gold, 1956 (Oil on canvas,
                                                                           105’’ × 78’’)                                     2,500,000
                                           6     Motherwell,             Elegy to Spanish Republic #134,
                                                  Robert                   1976 (Acrylic on canvas, 72’’
                                                                           × 84’’)                                           1,500,000
                                           7     Twombly, Cy             Untitled, 1971 (Oil-based house
                                                                           paint, wax crayon, & pencil on
                                                                           canvas, 69’’ × 491⁄2’’)                           1,500,000
                                           8     Hockney,                Pool on Sprayed Blue Paper...1978
                                                  David                    (Colored & pressed paper pulp in
                                                                           6 sheets, 72’’ × 85’’)                              900,000
                                           9     Kelly,                  Yellow Panel, 1985 (Oil on canvas,
                                                  Ellsworth                108’’ × 1041⁄2’’)                                   800,000
                                           10    Moore, Henry            Standing Figure (Internal Form)
                                                                           (Bronze w/green patina, 571⁄2’’
                                                                           high)                                               600,000
                                           11    Cezanne, Paul           Pot de geraniums, ca. 1885 (Water-
                                                                           color on paper, 123⁄4’’ × 101⁄4’’)                  550,000
                                           12    Soulages,               8 June 61, 1961 (Oil on canvas,
                                                   Pierre                  811⁄2’’ × 571⁄2’’)                                  550,000
                                           13    Magritte, Rene          La lecon des tenebres, 1964
                                                                           (Gouache on paper, 131⁄2’’ ×
                                                                           211⁄2’’)                                            450,000
                                           14    Albers, Joseph          Study for Homage to a Square in
                                                                           White Light, 1968 (Oil on mason-
                                                                           ite, 24’’ × 24’’)                                   400,000
                                           15    Johns, Jasper           Three Flags, 1977 (Ink on plastic,
                                                                           image: 67⁄8’’ × 97⁄8’’; 121⁄2’’ ×
                                                                           181⁄8’’)                                            400,000
                                           16    Hofmann,                Adagio, 1962 (Oil on canvas, 48’’ ×
                                                   Hans                    36’’)                                               375,000
                                           17    Louis, Morris           Delta Epsilon, 1960 (Acrylic on can-
                                                                           vas, 103’’ × 150’’)                                 375,000
                                           18    Ernst, Max              The Elements..., 1962 (Oil on can-
                                                                           vas, 451⁄4’’ × 35’’)                                350,000
                                           19    Moore, Henry            Family Group, 1944 (Bronze w/
                                                                           green patina, height 6’’)                           350,000
                                           20    De Kooning,             Woman in a Garden, 1968 (Oil on
                                                  William                  paper on canvas, 243⁄8’’ ×
                                                                           193⁄8’’)                                            300,000
                                           21    Louis, Morris           Achenar, 1962 (Acrylic on canvas,
                                                                           791⁄2’’ × 133⁄4’’)                                  220,000
                                           22    Moore, Henry            Working Model for Thin Reclining
                                                                           Figure, 1978 (Bronze w/brown
                                                                           patina, 29’’ long)                                  200,000
                                           23    Frankenthaler,          Fathom, 1983 (Acrylic on canvas,
                                                   Helen                   79’× 93’’)                                          180,000
                                           24    Bravo, Claudio          Blue and Brown Package, 1971 (Oil
                                                                           on canvas, 59’’ × 78’’)                             950,000
                                           25    Bravo, Claudio          Wrapped Canvas, 1973 (Oil on can-
                                                                           vas, 79’’ × 47’’)                                   950,000
                                           26    Bravo, Claudio          Silver and Gold, 1972 (Oil on can-
                                                                           vas, 44’’ × 57’’)                                   300,000
                                           27    Rickey, George          Untitled (Open Rectangles), ca. 1985
                                                                           (Stainless steel, 180’’ × 34’’ × 34’’)              300,000
                                           28    Botero,                 Parrot, 1981 (Bronze w/green pat-
                                                   Fernando                ina, 58’’ high)                                     200,000
                                           29    Kline, Franz            The Hill, 1959 (Oil on paper, 115⁄8’’
                                                                           × 9’’)                                              200,000
                                           30    Hofmann,                Untitled (M–418), 1964 (Oil on can-
                                                   Hans                    vas, 30’’ × 25’’)                                   150,000
                                           31    Olitski, Jules          Carnegie Hall, ca. 1962–64 (Acrylic
                                                                           on canvas, 64’’ × 761⁄2’’)                          150,000




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                                      (86)                   ESTATE OF ELKINS v. COMMISSIONER                                       137


                                                                                                                            Stipulated
                                                                                                                           fair market
                                      Item               Artist                 Title/year/description/size                   value
                                           32    Hockney,                Nichols Canyon Road, Hollywood
                                                  David                    Boulevard, 1979 (Watercolor and
                                                                           ink on paper, 231⁄4’’ × 18’’)                       140,000
                                           33    Heizer,                 Untitled, ca. 1985 (Cast stone, 24’ ×
                                                   Michael                 20’)                                                100,000
                                           34    Di Suvero,              Untitled, ca. 1968 (Steel on mirror
                                                   Mark                    plate, sculpture: 181⁄2’’ × 42’’;
                                                                           Plate: 1⁄8’’ × 46’’ × 22’’)                          90,000
                                           35    Bertoia, Harry          Sunburst, 1972 (Brass & bronze
                                                                           suspended mobile, 28’’ × 28’’ × 28’’)                80,000
                                           36    Frankenthaler,          Untitled, ca. 1975 (Watercolor on
                                                   Helen                   paper, 59’’ × 78’’)                                  60,000
                                           37    Bertoia, Harry          Untitled (Sounding Sculpture), 1968
                                                                           (Bronze, 84’’ × 10’’ × 10’’)                         50,000
                                           38    Motherwell,             In green with Two Scarlet Spots,
                                                  Robert                   1967 (Paper collage, acrylic &
                                                                           charcoal on paper, 30’’ × 22’’)                      50,000
                                           39    Held, Al                North by Northwest, 1973 (Acrylic
                                                                           on canvas, 72’’ × 96’’)                              42,000
                                           40    Hofmann,                Untitled, 1949 (Oil and ink on
                                                   Hans                    paper, 17’’ × 14’’)                                  40,000
                                           41    Dine, Jim               Tie, 1961 (Oil & pastel on paper,
                                                                           231⁄2’’ × 16’’)                                      35,000
                                           42    Bertoia, Harry          Untitled (Stainless & steel wire, 37’’
                                                                           × 20’’)                                              30,000
                                           43    Frankenthaler,          Canal Street VIII, 1987 (Watercolor
                                                   Helen                   & gouache on paper, 251⁄2’’ ×
                                                                           193⁄4’’)                                             25,000
                                           44    Craig-Martin,           Safety Pin, circa 1990 (Painted steel
                                                   Michael                 & wood, 100’’ × 88’’ × 13’’)                         22,000
                                           45    Hofmann,                Untitled (N–677–2), 1956 (Gouache
                                                   Hans                    on paper, 221⁄4’’ × 281⁄4’’)                         20,000
                                           46    Hofmann,                Fluse #12 (M–1351), 1962 (Oil
                                                   Hans                    on canvas board, 131⁄4’’ ×
                                                                           111⁄2’’)                                             20,000
                                           47    Nagare,                 Destination, 1996 (Granite, 261⁄2’’
                                                  Masayuki                 × 12’’ × 8’’)                                        18,000
                                           48    Motherwell,             Je t’aime avec noir, 1978 (Ink &
                                                  Robert                   pencil on tracing paper, 131⁄2’’ ×
                                                                           163⁄4’’)                                             15,000
                                           49    Graves, Nancy           Four Times Four, 1977 (Acrylic on
                                                                           canvas, 64’’ × 64’’)                                   8,000
                                           50    Hofmann,                Untitled, 1954 (Gouache on paper,
                                                   Hans                    121⁄2’’ × 91⁄2’’)                                      6,000
                                           51    Frankenthaler,          Thanksgiving Day, 1980 (Hand-
                                                   Helen                   painted ceramic tile, 131⁄2’’ × 19’’)                  4,000
                                           52    Frankenthaler,          Thanksgiving Day, ca. 1980 (Hand-
                                                   Helen                   painted, ceramic tile,
                                                                           131⁄2’’× 17’’)                                         4,000
                                           53    N/A                     Japanese Painted and Silvered
                                                                           Paper Four-Panel Screen, 3d
                                                                           Quarter, 19th Century (Silvered
                                                                           paper with silk-framed border;
                                                                           each panel: 52’’ × 23’’)                               4,000
                                           54    Frankenthaler,          Hand Painted Book Cover #11, 1970
                                                   Helen                   (Acrylic on canvas, 11’’ × 12’’)                       3,500
                                           55    Graves, Nancy           Omon (Series E) 1976 (Wax crayon
                                                                           on paper, 35’’ × 471⁄4’’)                              3,000
                                           56    Meadmore,               Untitled, 1992 (Bronze, Height:
                                                  Clement                  81⁄2’’)                                                3,000
                                           57    Noland,                 Hand Painted Bookcover, 1977
                                                  Kenneth                  (Acrylic on canvas, 11’’ × 12’’)                       2,000




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                                      138                    140 UNITED STATES TAX COURT REPORTS                                                  (86)


                                                                                                                                          Stipulated
                                                                                                                                         fair market
                                      Item                Artist                    Title/year/description/size                             value
                                           58     Hamilton,                  Abstract Form #52, 1975 (Height:
                                                    Juan                       141⁄2’’)                                                         1,750
                                           59     Love, Jim                  Monday Morning: What to do...What
                                                                               to do, 1992 (Welded steel, 8’’ × 8’’)                            1,200
                                           60     Love, Jim                  Looking for Santa Claus (Welded
                                                                               steel, 93⁄8’’ × 8’’)                                             1,200
                                           61     Stella, Frank              Pastel Stack, 1970 (28’’ × 41’’)                                     900
                                           62     Fuller, Sue                String Composition #213, 1963
                                                                               (Nylon & Saran thread with
                                                                               Plexiglas, 36’’ × 36’’)                                            750
                                           63     N/A                        Sepik River Carved Polychrome
                                                                               Wood Mask, 20th Century
                                                                               (Height: 64’’; Width: 22’’)                                        250
                                           64     N/A                        Sepik River Carved and
                                                                               Polychrome-Painted Wood Shield,
                                                                               20th Century (Height: 691⁄2’’;
                                                                               Width: 14’’)                                                       100
                                                    Total                                                                                 24,580,650

                                                                                     APPENDIX B
                                                                                                                                           Fair market
                                        Nash                                                          Option 1     Option 2   Concluded      value of
                                       category          Artist              Title/year               discount     discount    discount      interest

                                           I       Johns, J.         Figure 4, 1967                     71.72%       70.31%     70.31%      $1,735,188
                                           I       Pollock, J.       Untitled, Number 21, 1949          51.69        59.68      51.69        1,449,210
                                           I       Moore, H.         Two-Piece Reclining Figure
                                                                       No. 3, 1961                      51.69        66.89      51.69         966,140
                                           I       Francis, S.       Green Gold, 1956                   65.78        68.95      65.78         624,926
                                           I       Motherwell,       Elegy to Spanish Republic
                                                     R.                #134, 1976                       65.78        84.64      65.78         374,956
                                           II      Twombly, C.       Untitled, 1971                     71.08        84.64      71.08         316,948
                                           II      Hockney, D.       Pool on Sprayed Blue
                                                                       Paper..., 1978                   71.08       100.00      71.08         190,169
                                           III     Bravo, C.         Blue and Brown Package,
                                                                       1971                             79.74       100.00      79.74         140,640
                                           III     Bravo, C.         Wrapped Canvas, 1973               79.74       100.00      79.74         140,640
                                           II      Kelly, E.         Yellow Panel, 1985                 71.08        67.43      67.43         190,350
                                           II      Moore, H.         Standing Figure (Internal
                                                                       Form)                            71.08        75.70      71.08         126,779
                                           II      Cezanne, P.       Pot de geraniums, ca. 1885         71.08        79.90      71.08         116,214
                                           II      Soulages, P.      8 June 61, 1961                    71.08        80.00      71.08         116,214
                                           II      Magritte, R.      La lecon des tenebres, 1964        71.08        91.19      71.08          95,084
                                           II      Picasso, P.       Baigneuse debout, 1925             71.08        96.83      71.08          86,770
                                           II      Albers, J.        Study for Homage to
                                                                       a Square in White Light,
                                                                       1968                             71.08        98.98      71.08          84,519
                                           II      Johns, J.         Three Flags, 1977                  71.08        98.98      71.08          84,519
                                           II      Hofmann, H.       Adagio, 1962                       71.08       100.00      71.08          79,237
                                           II      Louis, M.         Delta Epsilon, 1960                71.08       100.00      71.08          79,237
                                           II      Ernst, M.         The Elements..., 1962              71.08       100.00      71.08          73,954
                                           II      Moore, H.         Family Group, 1944                 71.08       100.00      71.08          73,954
                                           II      De Kooning,       Woman in a Garden, 1968
                                                     W.                                                 71.08       100.00      71.08          63,390
                                           II      Louis, M.         Achenar, 1962                      71.08       100.00      71.08          46,486
                                           II      Moore, H.         Working Model for Thin
                                                                       Reclining Figure, 1978           71.08       100.00      71.08          42,260
                                           II      Frankenthal-      Fathom, 1983
                                                     er, H.                                             71.08       100.00      71.08          38,034
                                           III     Bravo, C.         Silver and Gold, 1972              79.74       100.00      79.74          44,413
                                           III     Rickey, G.        Untitled (Open
                                                                       Rectangles), ca. 1985            79.74       100.00      79.74          44,413
                                           III     Botero, F.        Parrot, 1981                       79.74       100.00      79.74          29,608
                                           III     Kline, F.         The Hill, 1959                     79.74       100.00      79.74          29,608
                                           III     Hofmann, H.       Untitled (M–418), 1964             79.74       100.00      79.74          22,206
                                           III     Olitski, J.       Carnegie Hall, ca. 1962–64         79.74       100.00      79.74          22,206




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                                      (86)                              ESTATE OF ELKINS v. COMMISSIONER                                                   139


                                                                                                                                                   Fair market
                                        Nash                                                               Option 1     Option 2     Concluded       value of
                                       category                Artist               Title/year             discount     discount      discount       interest

                                               III       Hockney, D.       Nichols Canyon Road,
                                                                             Hollywood Boulevard,
                                                                             1979                           79.74        100.00         79.74            20,726
                                               III       Heizer, M.        Untitled, ca. 1985               79.74        100.00         79.74            14,804
                                               III       Di Suvero, M.     Untitled, ca. 1968               79.74        100.00         79.74            13,324
                                               III       Bertoia, H.       Sunburst, 1972                   79.74        100.00         79.74            11,843
                                               III       Frankenthal-      Untitled, ca. 1975
                                                           er, H.                                            79.74       100.00         79.74             8,883
                                               III       Bertoia, H.       Untitled (Sounding Sculp-
                                                                             ture), 1968                     79.74       100.00         79.74             7,402
                                               III       Motherwell,       In green with Two Scarlet
                                                           R.                Spots, 1967                    79.74        100.00         79.74             7,402
                                               III       Held, A.          North by Northwest, 1973         79.74        100.00         79.74             6,218
                                               III       Hofmann, H.       Untitled, 1949                   79.74        100.00         79.74             5,922
                                               III       Dine, J.          Tie, 1961                        79.74        100.00         79.74             5,181
                                               III       Bertoia, H.       Untitled                         79.74        100.00         79.74             4,441
                                               III       Frankenthal-      Canal Street VIII, 1987
                                                           er, H.                                            79.74       100.00         79.74             3,701
                                               III       Craig-Martin,     Safety Pin, ca. 1990
                                                           M.                                                79.74       100.00         79.74             3,257
                                               III       Hofmann, H.       Untitled (N–677–2), 1956          79.74       100.00         79.74             2,961
                                               III       Hofmann, H.       Fluse #12 (M–1351), 1962          79.74       100.00         79.74             2,961
                                               III       Nagare, M.        Destination, 1996                 79.74       100.00         79.74             2,665
                                               III       Motherwell,       Je t’aime avec noir, 1978
                                                           R.                                                79.74       100.00         79.74             2,221
                                               III       Graves, N.        Four Times Four, 1977             79.74       100.00         79.74             1,184
                                               III       Hofmann, H.       Untitled, 1954                    79.74       100.00         79.74               888
                                               III       Frankenthal-      Thanksgiving Day, 1980
                                                           er, H.                                            79.74       100.00         79.74               592
                                               III       Frankenthal       Thanksgiving Day, ca. 1980
                                                           er, H.                                            79.74       100.00         79.74               592
                                               III         N/A             Japanese Painted and
                                                                             Silvered Paper Four-
                                                                             Panel Screen, 3d Quarter,
                                                                             19th Century                    79.74       100.00         79.74               592
                                               III       Frankenthal-      Hand Painted Book Cover
                                                           er, H.            #11, 1970                       79.74       100.00         79.74               518
                                               III       Graves, N.        Omon (Series E), 1976             79.74       100.00         79.74               444
                                               III       Meadmore, C.      Untitled, 1992                    79.74       100.00         79.74               444
                                               III       Noland, K.        Hand Painted
                                                                             Bookcover, 1977                 79.74       100.00         79.74               296
                                               III       Hamilton, J.      Abstract Form #52, 1975           79.74       100.00         79.74               259
                                               III       Love, J.          Monday Morning: What to
                                                                             do...What to do, 1992           79.74       100.00         79.74               178
                                               III       Love, J.          Looking for Santa Claus           79.74       100.00         79.74               178
                                               III       Stella, F.        Pastel Stack, 1970                79.74       100.00         79.74               133
                                               III       Fuller, S.        String Composition
                                                                             #213, 1963                      79.74       100.00         79.74               111
                                               III       N/A               Sepik River Carved
                                                                             Polychrome Wood Mask,
                                                                             20th Century                    79.74       100.00         79.74                37
                                               III       N/A               Sepik River Carved and
                                                                             Polychrome-Painted Wood
                                                                             Shield, 20th Century            79.74       100.00         79.74                15


                                                                                            APPENDIX C

                                           VALUES OF DECEDENT’S INTERESTS IN THE 64 WORKS OF ART
                                                     FOR FEDERAL ESTATE TAX PURPOSES
                                                                                                                                                   Fair market
                                                                                                                             Decedent’s pro       value of dece-
                                                                                                                           rata share of stip-    dent’s interest
                                                                                                                            ulated fair mar-     after application
                                           Item             Artist                            Title/year                       ket value1        of 10% discount

                                           1         Pollock, Jackson        Untitled, Number 21, 1949                            $3,000,000         $2,700,000
                                           2         Moore, Henry            Two-Piece Reclining Figure No. 3, 1961                2,000,000          1,800,000
                                           3         Picasso, Pablo          Baigneuse debout, 1925                                  300,000            270,000
                                           4         Johns, Jasper           Figure 4, 1967                                        5,844,400          5,259,960
                                           5         Francis, Sam            Green Gold, 1956                                      1,826,375          1,643,738




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                                      140                        140 UNITED STATES TAX COURT REPORTS                                                  (86)

                                                                                                                                              Fair market
                                                                                                                        Decedent’s pro       value of dece-
                                                                                                                      rata share of stip-    dent’s interest
                                                                                                                       ulated fair mar-     after application
                                           Item             Artist                       Title/year                       ket value1        of 10% discount

                                           6      Motherwell, Rob-       Elegy to Spanish Republic #134, 1976
                                                    ert                                                                     1,095,825              986,243
                                        7         Twombly, Cy            Untitled, 1971                                     1,095,825              986,243
                                        8         Hockney, David         Pool on Sprayed Blue Paper...1978                    657,495              591,746
                                        9         Kelly, Ellsworth       Yellow Panel, 1985                                   584,440              525,996
                                       10         Moore, Henry           Standing Figure (Internal Form)                      438,330              394,497
                                       11         Cezanne, Paul          Pot de geraniums, ca. 1885                           401,803              361,623
                                       12         Soulages, Pierre       8 June 61, 1961                                      401,803              361,623
                                       13         Magritte, Rene         La lecon des tenebres, 1964                          328,748              295,873
                                       14         Albers, Joseph         Study for Homage to a Square in White
                                                                           Light, 1968                                        292,220              262,998
                                       15         Johns, Jasper          Three Flags, 1977                                    292,220              262,998
                                       16         Hofmann, Hans          Adagio, 1962                                         273,956              246,560
                                       17         Louis, Morris          Delta Epsilon, 1960                                  273,956              246,560
                                       18         Ernst, Max             The Elements..., 1962                                255,693              230,124
                                       19         Moore, Henry           Family Group, 1944                                   255,693              230,124
                                       20         De Kooning, Wil-       Woman in a Garden, 1968
                                                    liam                                                                      219,165              197,249
                                       21         Louis, Morris          Achenar, 1962                                        160,721              144,649
                                       22         Moore, Henry           Working Model for Thin Reclining Fig-
                                                                           ure, 1978                                          146,110              131,499
                                       23         Frankenthaler,         Fathom, 1983
                                                    Helen                                                                     131,499              118,349
                                       24         Bravo, Claudio         Blue and Brown Package, 1971                         694,023              624,621
                                       25         Bravo, Claudio         Wrapped Canvas, 1973                                 694,023              624,621
                                       26         Bravo, Claudio         Silver and Gold, 1972                                219,165              197,249
                                       27         Rickey, George         Untitled (Open Rectangles), ca. 1985                 219,165              197,249
                                       28         Botero, Fernando       Parrot, 1981                                         146,110              131,499
                                       29         Kline, Franz           The Hill, 1959                                       146,110              131,499
                                       30         Hofmann, Hans          Untitled (M–418), 1964                               109,583               98,625
                                       31         Olitski, Jules         Carnegie Hall, ca. 1962–64                           109,583               98,625
                                       32         Hockney, David         Nichols Canyon Road, Hollywood Bou-
                                                                           levard, 1979                                       102,277               92,049
                                       33         Heizer, Michael        Untitled, ca. 1985                                    73,055               65,750
                                       34         Di Suvero, Mark        Untitled, ca. 1968                                    65,750               59,175
                                       35         Bertoia, Harry         Sunburst, 1972                                        58,444               52,600
                                       36         Frankenthaler,         Untitled, ca. 1975
                                                    Helen                                                                      43,833               39,450
                                       37         Bertoia, Harry         Untitled (Sounding Sculpture), 1968                   36,528               32,875
                                       38         Motherwell, Rob-       In green with Two Scarlet Spots, 1967
                                                    ert                                                                        36,528               32,875
                                       39         Held, Al               North by Northwest, 1973                              30,683               27,615
                                       40         Hofmann, Hans          Untitled, 1949                                        29,222               26,300
                                       41         Dine, Jim              Tie, 1961                                             25,569               23,012
                                       42         Bertoia, Harry         Untitled                                              21,917               19,725
                                       43         Frankenthaler,         Canal Street VIII, 1987
                                                    Helen                                                                      18,264               16,438
                                       44         Craig-Martin, Mi-      Safety Pin, ca. 1990
                                                    chael                                                                      16,072               14,465
                                       45         Hofmann, Hans          Untitled (N–677–2), 1956                              14,611               13,150
                                       46         Hofmann, Hans          Fluse #12 (M–1351), 1962                              14,611               13,150
                                       47         Nagare,                Destination, 1996
                                                    Masayuki                                                                   13,150               11,835
                                       48         Motherwell, Rob-       Je t’aime avec noir, 1978
                                                    ert                                                                        10,958                9,862
                                       49         Graves, Nancy          Four Times Four, 1977                                  5,844                5,260
                                       50         Hofmann, Hans          Untitled, 1954                                         4,383                3,945
                                       51         Frankenthaler,         Thanksgiving Day, 1980
                                                    Helen                                                                        2,922               2,630
                                       52         Frankenthaler,         Thanksgiving Day, ca. 1980
                                                    Helen                                                                        2,922               2,630
                                       53         N/A                    Japanese Painted and Silvered Paper
                                                                           Four-Panel Screen, 3d Quar-
                                                                           ter, 19th Century                                     2,922               2,630
                                       54         Frankenthaler,         Hand Painted Book Cover #11, 1970
                                                    Helen                                                                        2,557               2,301
                                       55         Graves, Nancy          Omon (Series E), 1976                                   2,192               1,973
                                       56         Meadmore, Clem-        Untitled, 1992
                                                    ent                                                                          2,192               1,973
                                       57         Noland, Kenneth        Hand Painted Bookcover, 1977                            1,461               1,315
                                       58         Hamilton, Juan         Abstract Form #52, 1975                                 1,278               1,150




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                                      (86)                        ESTATE OF ELKINS v. COMMISSIONER                                                  141


                                                                                                                                            Fair market
                                                                                                                      Decedent’s pro       value of dece-
                                                                                                                    rata share of stip-    dent’s interest
                                                                                                                     ulated fair mar-     after application
                                           Item          Artist                         Title/year                      ket value1        of 10% discount

                                       59         Love, Jim              Monday Morning: What to do...What
                                                                           to do, 1992                                          877                  789
                                       60         Love, Jim              Looking for Santa Claus                                877                  789
                                       61         Stella, Frank          Pastel Stack, 1970                                     657                  591
                                       62         Fuller, Sue            String Composition #213, 1963                          548                  493
                                       63         N/A                    Sepik River Carved Polychrome Wood
                                                                           Mask, 20th Century                                   183                  165
                                       64         N/A                    Sepik River Carved and Polychrome-
                                                                           Painted Wood Shield, 20th Century                      73                   66

                                       1 Decedent’s share of agreed fair market value with respect to items 1 through 3 is 50%. For all other items, it is
                                     73.055%.


                                                                                     f




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