                              140 T.C. No. 5



                     UNITED STATES TAX COURT



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 relinquished 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.
                                         -2-

      Donald Frederick Wood, J. Graham Kenney, Harry M. Reasoner, 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 petitioners (notice),

respondent determined an estate tax deficiency 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 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.
                                        -3-

                               FINDINGS OF FACT

Residence

      When they filed the petition, petitioners resided in Houston, Texas.

The Art

      Decedent (sometimes, Mr. Elkins) and Mrs. Elkins purchased 64 works of art

(sometimes, when referenced collectively, art) between 1970 and 1999. Mr. and

Mrs. Elkins purchased 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.
                                          -4-

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 undivided 50% interests in three of the works

in the collection: 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.


      1
      Mr. and Mrs. Elkins partitioned their community property interests in the
GRIT art before creating the GRITs.
                                           -5-

       Decedent and the Elkins children executed a lease agreement (art lease)

covering two of the three works of GRIT art (the Picasso drawing and the Pollock

painting), made effective "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 possession of those works. There was an initial lease term, with automatic

extensions, unless decedent opted out of an extension, 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 transferred 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,

successor and assigns."

       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
                                          -6-

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).
                                          -7-

      On February 14, 2000, shortly after decedent executed his partial disclaimer,

decedent and the Elkins children entered into a "Cotenants' Agreement" (cotenants'

or original cotenants' 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 "Cotenant" 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").

            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 Property 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.
                                 -8-

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 Cotenant 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 percentage 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.
                                          -9-

      After decedent's GRIT terminated on July 13, 2000, the parties to the

cotenants' agreement amended it (amended cotenants' 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, 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 residuary 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 residuary estate. Thus, any additional estate taxes payable by

the estate as a result of this case will correspondingly reduce the distribution to
                                         - 10 -

the Elkins Foundation and the charitable contribution 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

Miscellaneous 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 determined 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

disclaimer art and $10,600,000 for the GRIT art.2 A list of the 64 works of art, their



      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.
                                          - 11 -

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

$18,488,5043 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 artwork" so that, pursuant to section 2703(a)(1) and

(2), respectively, decedent's interests in the art covered by those agreements "should

be valued without regard to" those restrictions; (2) "the discounts used in calculating

the fair market value of Decedent's fractional interests in * * * [the art] are


      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 disclaimer 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.
                                         - 12 -

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 charitable bequest to

that foundation by the amount of the proposed estate tax deficiency, i.e., by the

amount of additional estate tax payable by the estate.

Petition

      In response to the notice, petitioners timely filed the petition. 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




      4
      The estate's entitlement to an additional deduction for administration
expenses is not at issue herein.
                                         - 13 -

Petitioners' Experts

      In defense of their proposed discounts in valuing decedent's fractional

interests in the art, petitioners offered the testimony 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 testimony.

      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 convinced 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 interest in each work "rather than viewing the

collection as a whole."
                                          - 14 -

       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

purchasers. 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 potential 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 fractional

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 comparable

works by the same artist that he could purchase outright. Mr. Nash states that the

collector's only motivation for buying a fractional interest in one of the works of art,
                                          - 15 -

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 fractional 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 assurance * * * [of ever acquiring] full ownership."

He notes, however, 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, however, that museums would not be interested in

purchasing 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 fractional interests, mainly because of the

difficulty in reselling them to collectors or museums, and that the "logistical

difficulties 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
                                          - 16 -

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 purchased interest or

using it as collateral for a loan. Nonetheless, he concludes that speculators "would

be willing to purchase * * * [decedent's] interests if appropriately discounted."

       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
                                        - 17 -

#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

      Category II consists of 196 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 recognized." Mr. Nash concludes that,

for those works, "a potential 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


      5
       For two of the works, Mr. Nash determines a range of discounted values for
decedent's fractional interests therein. Mark L. Mitchell is another 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 petitioners rely herein. For each of the
two works for which Mr. Nash determined 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 interests.
      6
       Mr. Nash lists one 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 category 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.
                                          - 18 -

demand a discount 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 category." He does

single out five of the works as having "relatively 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 discounted fair market value

of decedent's interests in the art to be as follows:

                    Category I                         $4,336,859
                    Category II                           976,451
                    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
                                         - 19 -

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 evidence 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 agreement, 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 alienation". 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 Cotenants 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
                                          - 20 -

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

determining costs and attorneys' fees."

      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 appropriate, (3) the
                                         - 21 -

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 determine 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 9-1/2 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 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.
                                         - 22 -

      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 litigation 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 collection, 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,
                                         - 23 -

Washington. He holds a B.S. and an M.B.A. degree from Southern Methodist

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 intangible

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 undivided interests in property, but not including (until this assignment

on behalf of petitioners) works of art. The Court accepted Mr. Mitchell as an expert

in the valuation of undivided 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 conclusions, 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 Undivided

Interests", and on Mr. Miller's report regarding partitioning 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.
                                          - 24 -

      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 discounts 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."
                                         - 25 -

      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 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 undivided 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 benefit, 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 fractional 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.,
                                          - 26 -

financial return) means that his financial 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 partition 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 speculator, 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 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
                                         - 27 -

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 marketability 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 additional 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 purchase 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.
                                        - 28 -

      Relying on Mr. Nash's opinion of the category I works, Mr. Mitchell

differentiates them from his baseline return estimates 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 Frances 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 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 premium to 18% and reduces the financial
                                         - 29 -

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 follows: 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.
                                              - 30 -

         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:

                         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 discounted 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 petitioners' 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

         7
             With respect to all but two of the works of art, the option 1 discount is
lower.
                                         - 31 -

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 purposes, 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 written report in this case, although she

conferred with Jacqueline Silverman, president of Associates, who edited,

proofread, and cosigned the report. The Court accepted Ms. Hanus-McManus as
                                          - 32 -

an expert appraiser of modern and contemporary art and received her written report

into evidence 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 secondary 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 markets 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 fractional 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
                                           - 33 -

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. The Court accepted Mr. Cahill

as an expert in art transactions 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

Agreement, Amendment to Cotenants Agreement and Art Lease are not
                                         - 34 -

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 purposes. 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 testimony, 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 valuation 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


      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.
                                          - 35 -

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 $23,257,3939),

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 section 7491(a)(2)

requirements, and petitioners argue that, through the expert testimony of Messrs.


      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 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 valuations on audit, as an inadvertent oversight, and we give it no
credence. See supra note 3.
                                         - 36 -

Nash, Miller, and Mitchell and through Ms. Sasser's testimony, they have presented

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

III.   Law

       A.    General Principles

       Section 2001(a) imposes a tax on "the transfer of the taxable 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, tangible or intangible, wherever situated."




       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 supplemented solely by expert witness testimony. Here,
there is disputed fact testimony furnished by Ms. Sasser.
                                         - 37 -

      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 includible 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 regulation 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 hypothetical 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
                                        - 38 -

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 opinions of expert

witnesses. Nonetheless, we are not bound by the opinion of any expert witness, and

we may accept or reject expert testimony in the exercise of our sound judgment.

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. Commissioner, T.C.

Memo. 2001-167 (citing Silverman v. Commissioner, 538 F.2d 927, 933 (2d Cir.

1976), aff'g T.C. Memo. 1974-285), aff'd, 390 F.3d 1210 (10th Cir. 2004).
                                          - 39 -

      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 restriction if it meets certain

requirements, and (3) petitioners concede 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 neither the
cotenants' agreement nor the art lease provides an option, agreement, 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 decision is whether sec. 2703(a)(2)
applies herein.
                                          - 40 -

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
      fractional 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'
      Agreement 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
      Artwork to his children at a reduced transfer tax rate--a purpose which
      section 2703 was specifically intended to prevent.
                                          - 41 -

      Respondent concludes that the restrictions on sale in paragraph 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 Valuing
                    Decedent's Interests in the Art

      In support of his valuation argument, in which he concludes that no discount

is warranted with respect to decedent's interests in the art, respondent states that the

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 testimony 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."
                                          - 42 -

       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 proceeds. 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
                                         - 43 -

required to value decedent's fractional interests in the art pursuant to section

20.2031-1(b), Estate Tax Regs.

      Although his principal argument is that, as a matter of law, no discount is

permissible in valuing undivided fractional interests in art, respondent also argues

that, as a factual 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 discounts 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 partition

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 likelihood of and the

costs associated with a single action for partitioning the entire collection in kind.

On a more fundamental level, respondent rejects the notion of any discount from fair
                                         - 44 -

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, uninterested 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 discount 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 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.
                                          - 45 -

       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.
                                         - 46 -

             2.     Propriety of Petitioners' Discounts With Respect to the Art

      Petitioners argue that they have fully supported the discounts 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 valuation

conclusions fully take into account the risks and impairments to value" inherent in

the hypothetical buyer's alternative options (i.e., option 1: hold the purchased

fractional 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.
                                           - 47 -

       Presumably in defense of Mr. Miller's cost analysis based upon a separate

partition action for each work of art, petitioners state that the applicable regulations

mandate that decedent's fractional interest in each work be valued separately, 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 purchasing 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 cotenant art in paragraph

7 of the cotenants' agreement constitutes 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.
                                          - 48 -

              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 cotenants' agreement

was entered into in February 2000, six years before decedent's death in February

2006, and paragraph 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 cotenants' agreement does

not restrict the sale of decedent's fractional 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
                                          - 49 -

term "property" in the cotenants' agreement, which, in pertinent part, states that

"[e]ach cotenant 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' undivided fractional interests in the cotenant art.

      We think that both petitioners' and respondent's analyses miss the mark.

During trial, we queried Mr. Miller, petitioners' expert on partition, about paragraph

7 of the cotenants' 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
                                           - 50 -

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 exceptions 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 property." 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 important. It is clear that,

pursuant to paragraph 7 of the cotenants' 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 difference 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.
                                          - 51 -

             3.     Conclusion

      We hold that section 2703(a)(2) is applicable to the restriction, in paragraph 7

of the cotenants' agreement, on sales of cotenant art.

      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 cotenants' agreement, coupled with petitioners'

concession that section 2703(a)(2) negates the restriction on sales of the lessor's

and lessee's interests in the leased art contained in section 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 children's) agreement to a sale of the underlying art and a pro rata
                                          - 52 -

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 question 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 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

       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 status 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 decedent'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.
                                          - 53 -

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' proffered 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 coowners'

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

concluded 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 District Court did, however, decide

that "some discount is appropriate to allow for the uncertainties involved in waiting
                                          - 54 -

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 appropriate 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 hypothetical buyer would refuse to buy the decedent's interest in

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% undivided 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 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.
                                          - 55 -

       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
       reduction. 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 discount from pro rata fair market

value for the decedent's fractional interest in an art collection in order to account

for various 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
                                         - 56 -

any regulatory prohibition against discounts for art that is normally sold at retail.

Moreover, the District Court in Stone agreed with the plaintiffs that, "contrary to the

government's 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 nineteen paintings

among the co-owners." Id. at 2007-2997 through 2007-2998. The District Court's

refusal to personalize 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. * * *
                                          - 57 -

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 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 sentimental 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 fractional 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 specifically communicated to Mr. Nash.


      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, executor, 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 Appeals for the Ninth Circuit in Propstra, was that, in the
absence of a showing that such parties, if related, were likely to sell their interests
separately, "one can reasonably assume" that those interests, including the
decedent's interest, will be sold as a unit. Propstra, 680 F.2d at 1251-1252.
                                         - 58 -

In this case, it is not necessary 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 preparatory to his inspection of the art. That being so, the hypothetical

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 hostility 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
                                          - 59 -

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 premised upon the

requirement in section 20.2031-1(b), Estate Tax Regs., that the value of "an item of

property * * * generally 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 interests in art (as well as for other types of

personal property) 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
                                         - 60 -

alternatives, none of which would entail a fractional 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 personal and reflective of the idiosyncracies of particular

individuals."

      Although respondent's approach to the valuation of personal 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 partition 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
appreciation of one or more works would allow the fractional interest holders to
realize a greater economic benefit than would have resulted from an immediate sale
of the art at its fair market value on the valuation date.
                                          - 61 -

       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 fractional 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 prospect of a fair market value sale of the art followed by a pro rata

division of the proceeds among the coowners is manifestly 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 hypothetical

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 coshareholder family members intended to maintain
                                         - 62 -

the company "as a privately held, family-controlled company" thereby rendering 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 precedent 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 valuation 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 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 anticipated 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
                                         - 63 -

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 property 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. Commissioner, 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 determining fair market value. See Estate of Smith v.

Commissioner, T.C. Memo. 1993-236.

      Lastly, we reject respondent's argument that the Commissioner's rulings

policy (reflected in both revenue rulings and private letter rulings), whereby

undiscounted pro rata fair market value deductions are allowed for charitable
                                          - 64 -

contributions of fractional interests in art, controls the valuation of decedent's

fractional interests in the art.

       Respondent cites two revenue rulings in which the taxpayer 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 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
                                          - 65 -

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 "common situation" in which the donor "makes a series of fractional
donations and ultimately donates the entire work of art in full." Neither effort to
distinguish the Commissioner's rulings from the facts of this case is persuasive.
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 purposes, 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 identical to that provided by sec. 20.2031-1(b), Estate
Tax Regs.); and we fail to see the basis for petitioners' assumption that respondent's
allowance of an undiscounted fair market value deduction for the contribution of an
undivided 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 contribution was one in a
series of contributions ultimately providing the donee with complete ownership and
possession of the art. Thus, although we decline to apply the rulings to the facts of
                                                                            (continued...)
                                          - 66 -

       Respondent also cites two cases decided by this Court in which we permitted

undiscounted fair market value deductions 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 possible application of a pro rata

deduction for the donated fractional interest. The parties did not raise the issue of a

fractional interest discount, and we did not consider it. Therefore, 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 discount from pro rata

fair market value in valuing, for estate tax purposes, decedent's undivided fractional

interests in the art.




       15
         (...continued)
this case, we do so on grounds other than those proffered by petitioners.
                                          - 67 -

             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 discount from pro rata fair market value for decedent's undivided 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 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 undivided 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

comparable 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.

      16
         Mr. Nash is in apparent agreement with that conclusion, but he nonetheless
opines that a collector or speculator might offer to purchase decedent'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 involved."
                                         - 68 -

                    b.     Analysis

      Having decided that petitioners may introduce facts demonstrating 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 testimony 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


      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., 26.945% (3 x 8.98167%) of each year for 61 works and

                                                                           (continued...)
                                         - 69 -

period of annual possession and the expense and inconvenience of annually moving

the art from the hypothetical buyer's premises back to Houston most likely would

have caused the Elkins children to reassess their professed desire to cling, at all

costs, to the ownership status quo existing after decedent's death. Thus, the

hypothetical buyer would be in an excellent position to persuade the Elkins children,

who, together, had the financial wherewithal to do so, to buy the buyer's interest in

any or all of the works, thereby enabling them to continue to maintain absolute

ownership and possession of the art.18 Neither Mr. Nash nor Mr. Mitchell

considered 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 considering that the buyer would, most likely, not reside

in the Houston area, she "would be willing to pay * * * a fair price" to purchase

      17
       (...continued)
50% (3 x 16.667%) of each year for three works.
      18
        During her testimony, Ms. Sasser suggested that, as a means of reducing the
number of moves to which the art would be subject under the cotenants' 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.
                                         - 70 -

the hypothetical buyer's 73.055% or 50% interests in the art. Her testimony

confirms what both the hypothetical willing buyer and seller would reasonably

suspect during their negotiations: that the Elkins children's strong desire to retain

possession of the art in place would motivate them to purchase the hypothetical

buyer's interests, most likely in each case for an amount equal or close to the

undiscounted fair market value of the interest. It defies logic to assume that, as 27%

or 50% owners and possessors of the art, the Elkins children would spend millions

of dollars to retain their status as such, perhaps as defendants in multiple partition

actions that could drag on for many years, when they would be able to acquire

100% ownership and possession of the art, which, after all, is what they really

want.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.

      19
         As discussed infra, the Elkins children most likely would be willing to pay a
hypothetical buyer substantially more than the anticipated attorney's fees and related
costs they would incur to oppose the buyer's partition 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."
                                         - 71 -

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 a

much higher prices than a disinterested buyer would be willing to pay for the same

interests because of the children's added motivation of keeping the art within the

family as, in petitioners' words, "a memorial to their parents rather than [as] an

investment". That motivation is reflected in the following exchange:

      Q:     All right. So, most of the attachment to the art is as a memorial
             to your parents, and it means more to you than money in this
             instance?

      A:     Yes, it does.

      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 colloquy 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
      reluctant 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?
                                         - 72 -

      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 testified, Ms. Sasser obviously was aware of the sharply

discounted 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 monetize his or her investment in the art or to

obtain full possession of a pro rata portion thereof, circumstances that she knew

were irrelevant to her (and her siblings') potential purchase of decedent's interests,
                                          - 73 -

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 hypothetical 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 to sell the art to the Elkins children at

the sharply discounted 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 monetize those interests, but only on the assumption
                                         - 74 -

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 hypothetical buyers, and we see no evidence that she or they would limit their

offer to an amount not in excess of the discounted 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 "relevant facts" that we must deem to be considered by a

hypothetical 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 constructed in a

vacuum isolated from the actual facts that affect the value of the stock in the hands
                                         - 75 -

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 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 taxpayer'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 determined 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 follows:

      20
        For a general discussion of cases involving assemblage and other special
needs values, see John A. Bogdanski, Federal Tax Valuation, para. 2.01[2][c], at 2-
32 through 2-37 (2012).
                                         - 76 -

       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
       railroad 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
       assemblage.

       *            *           *          *           *           *            *

              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 hard bargain" in negotiating a

resale of that art to the children.21


       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 27-1/2% of the common stock
of a closely held corporation. Her surviving husband (Mr. Bright) also owned 27-
1/2%, and an unrelated party (Mr. Schiff) owned 30%. The Commissioner argued
that the decedent's 27-1/2% 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
                                                                           (continued...)
                                           - 77 -

          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
          purchasing 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 institution, nor do we see one. Moreover, we see no basis for concluding 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




          21
         (...continued)
constituted "relevant facts" that "might affect the value of * * * [the decedent's] 27-
1/2% minority interest which is to be valued." The Commissioner stressed that "the
'willing 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.
                                           - 78 -

bargaining position than a speculator or art dealer in negotiating a purchase price

with the Elkins children.

         In short, we find petitioners' experts' analyses and conclusions to be

unreliable because they are based, in large part, on the false or at least highly

dubious assumption that the Elkins children would mount an unrelenting defense of

the status quo, ignoring the very high probability that, instead, the children would

seek to purchase the hypothetical buyer's interests in the art. Because we reject that

assumption, we find Mr. Mitchell's discounted values for the art to be unrealistically

low.22




         22
         Our analysis renders moot the dispute between the parties over whether it is
proper to assume that the hypothetical buyer might be a collector purchasing
multiple works of art who opts to institute a partition in kind, which, if true, would
reduce the hypothetical buyer's potential partition costs. Because the hypothetical
willing buyer and seller would consider 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 potential
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.
                                          - 79 -

                    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 themselves 100% ownership and possession of the art. The

question 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 intentions, 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.

      We hold that, in order to account for the foregoing uncertainties, a

hypothetical buyer and seller of all or a portion of decedent's interests in the art
                                          - 80 -

would agree to a 10% discount from pro rata fair market value in arriving at a

purchase price for those interests. We believe that a 10% discount 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.
                                                                - 81 -
                                                            APPENDIX A

THE GRIT ART


                                                                                                                       Stipulated fair
 Item          Artist                                    Title/year/description/size                                   market value

   1    Pollock, Jackson     Untitled, Number 21, 1949 (Oil & enamel paper on masonite, 19-1/4" x 26-3/4")               $6,000,000

   2    Moore, Henry         Two-Piece Reclining Figure No. 3, 1961 (Bronze, 59" x 113" x 54")                            4,000,000

   3    Picasso, Pablo       Baigneuse debout, 1925 (Brush & ink on paper, 42" x 26-1/2")                                   600,000

         Total                                                                                                           10,600,000


THE DISCLAIMER ART


                                                                                                                       Stipulated fair
 Item          Artist                                     Title/year/description/size                                  market value

   4    Johns, Jasper        Figure 4, 1967 (Oil, encaustic & newspaper on canvas, 53-1/2" x 41-1/2")                   $8,000,000

   5    Francis, Sam         Green Gold, 1956 (Oil on canvas, 105" x 78")                                                2,500,000

   6    Motherwell, Robert   Elegy to Spanish Republic #134, 1976 (Acrylic on canvas, 72" x 84")                         1,500,000

   7    Twombly, Cy          Untitled, 1971 (Oil-based house paint, wax crayon, & pencil on canvas, 69" x 49-1/2")       1,500,000

   8    Hockney, David       Pool on Sprayed Blue Paper...1978 (Colored & pressed paper pulp in 6 sheets, 72" x 85")       900,000

   9    Kelly, Ellsworth     Yellow Panel, 1985 (Oil on canvas, 108" x 104-1/2")                                           800,000

  10    Moore, Henry         Standing Figure (Internal Form) (Bronze w/green patina, 57-1/2" high)                         600,000

  11    Cezanne, Paul        Pot de geraniums, ca. 1885 (Watercolor on paper, 12-3/4" x 10-1/4")                           550,000

  12    Soulages, Pierre     8 June 61, 1961 (Oil on canvas, 81-1/2" x 57-1/2")                                            550,000
                                                                  - 82 -


                                                                                                                Stipulated fair
Item         Artist                                        Title/year/description/size                          market value

13     Magritte, Rene         La lecon des tenebres, 1964 (Gouache on paper, 13-1/2" x 21-1/2")                     450,000

14     Albers, Joseph         Study for Homage to a Square in White Light, 1968 (Oil on masonite, 24" x 24")        400,000

15     Johns, Jasper          Three Flags, 1977 (Ink on plastic, image: 6-7/8" x 9-7/8"; 12-1/2" x 18-1/8")         400,000

16     Hofmann, Hans          Adagio, 1962 (Oil on canvas, 48" x 36")                                               375,000

17     Louis, Morris          Delta Epsilon, 1960 (Acrylic on canvas, 103" x 150")                                  375,000

18     Ernst, Max             The Elements..., 1962 (Oil on canvas, 45-1/4" x 35")                                  350,000

19     Moore, Henry           Family Group, 1944 (Bronze w/green patina, height 6")                                 350,000

20     De Kooning, William    Woman in a Garden, 1968 (Oil on paper on canvas, 24-3/8" x 19-3/8")                   300,000

21     Louis, Morris          Achenar, 1962 (Acrylic on canvas, 79-1/2" x 13-3/4")                                  220,000

22     Moore, Henry           Working Model for Thin Reclining Figure, 1978 (Bronze w/brown patina, 29" long)       200,000

23     Frankenthaler, Helen   Fathom, 1983 (Acrylic on canvas, 79" x 93")                                           180,000

24     Bravo, Claudio         Blue and Brown Package, 1971 (Oil on canvas, 59" x 78")                               950,000

25     Bravo, Claudio         Wrapped Canvas, 1973 (Oil on canvas, 79" x 47")                                       950,000

26     Bravo, Claudio         Silver and Gold, 1972 (Oil on canvas, 44" x 57")                                      300,000

27     Rickey, George         Untitled (Open Rectangles), ca. 1985 (Stainless steel, 180" x 34" x 34")              300,000

28     Botero, Fernando       Parrot, 1981 (Bronze w/green patina, 58" high)                                        200,000

29     Kline, Franz           The Hill, 1959 (Oil on paper, 11-5/8" x 9")                                           200,000

30     Hofmann, Hans          Untitled (M-418), 1964 (Oil on canvas, 30" x 25")                                     150,000
                                                                    - 83 -


                                                                                                                               Stipulated fair
Item          Artist                                         Title/year/description/size                                       market value

31     Olitski, Jules          Carnegie Hall, ca. 1962-64 (Acrylic on canvas, 64" x 76-1/2")                                       150,000

32     Hockney, David          Nichols Canyon Road, Hollywood Boulevard, 1979 (Watercolor and ink on paper, 23-1/4" x 18")         140,000

33     Heizer, Michael         Untitled, ca. 1985 (Cast stone, 24' x 20')                                                          100,000

34     Di Suvero, Mark         Untitled, ca. 1968 (Steel on mirror plate, sculpture: 18-1/2" x 42"; Plate: 1/8" x 46" x 22")        90,000

35     Bertoia, Harry          Sunburst, 1972 (Brass & bronze suspended mobile, 28" x 28" x 28")                                    80,000

36     Frankenthaler, Helen    Untitled, ca. 1975 (Watercolor on paper, 59" x 78")                                                  60,000

37     Bertoia, Harry          Untitled (Sounding Sculpture), 1968 (Bronze, 84" x 10" x 10")                                        50,000

38     Motherwell, Robert      In green with Two Scarlet Spots, 1967 (Paper collage, acrylic & charcoal on paper, 30" x 22")        50,000

39     Held, Al                North by Northwest, 1973 (Acrylic on canvas, 72" x 96")                                              42,000

40     Hofmann, Hans           Untitled, 1949 (Oil and ink on paper, 17" x 14")                                                     40,000

41     Dine, Jim               Tie, 1961 (Oil & pastel on paper, 23-1/2" x 16")                                                     35,000

42     Bertoia, Harry          Untitled (Stainless & steel wire, 37" x 20")                                                         30,000

43     Frankenthaler, Helen    Canal Street VIII, 1987 (Watercolor & gouache on paper, 25-1/2" x 19-3/4")                           25,000

44     Craig-Martin, Michael   Safety Pin, circa 1990 (Painted steel & wood, 100" x 88" x 13")                                      22,000

45     Hofmann, Hans           Untitled (N-677-2), 1956 (Gouache on paper, 22-1/4" x 28-1/4")                                       20,000

46     Hofmann, Hans           Fluse #12 (M-1351), 1962 (Oil on canvas board, 13-1/4" x 11-1/2")                                    20,000

47     Nagare, Masayuki        Destination, 1996 (Granite, 26-1/2" x 12" x 8")                                                      18,000

48     Motherwell, Robert      Je t'aime avec noir, 1978 (Ink & pencil on tracing paper, 13-1/2" x 16-3/4")                         15,000
                                                                 - 84 -


                                                                                                                          Stipulated fair
Item         Artist                                        Title/year/description/size                                    market value

49     Graves, Nancy          Four Times Four, 1977 (Acrylic on canvas, 64" x 64")                                               8,000

50     Hofmann, Hans          Untitled, 1954 (Gouache on paper, 12-1/2" x 9-1/2")                                                6,000

51     Frankenthaler, Helen   Thanksgiving Day, 1980 (Hand-painted ceramic tile, 13-1/2" x 19")                                  4,000

52     Frankenthaler, Helen   Thanksgiving Day, ca. 1980 (Hand-painted, ceramic tile, 13-1/2" x 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" x 23")                                              4,000

54     Frankenthaler, Helen   Hand Painted Book Cover #11, 1970 (Acrylic on canvas, 11" x 12")                                   3,500

55     Graves, Nancy          Omon (Series E) 1976 (Wax crayon on paper, 35" x 47-1/4")                                          3,000

56     Meadmore, Clement      Untitled, 1992 (Bronze, Height: 8-1/2")                                                            3,000

57     Noland, Kenneth        Hand Painted Bookcover, 1977 (Acrylic on canvas, 11" x 12")                                        2,000

58     Hamilton, Juan         Abstract Form #52, 1975 (Height: 14-1/2")                                                          1,750

59     Love, Jim              Monday Morning: What to do...What to do, 1992 (Welded Steel, 8" x 8")                              1,200

60     Love, Jim              Looking for Santa Claus (welded steel, 9-3/8" x 8")                                                1,200

61     Stella, Frank          Pastel Stack, 1970 (28" x 41")                                                                       900

62     Fuller, Sue            String Composition #213, 1963 (Nylon & Saran thread with Plexiglas, 36" x 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: 69-1/2";
                              Width: 14")                                                                                          100

        Total                                                                                                              24,580,650
                                                                - 85 -
                                                              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, R.   Elegy to Spanish Republic #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
                                                                      - 86 -


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

   II      Hofmann, H.         Adagio, 1962                                      71.08%    100.00%     71.08%        79,237I

   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, W.      Woman in a Garden, 1968                           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      Frankenthaler, H.   Fathom, 1983                                      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

   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
                                                                     - 87 -


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

   III     Frankenthaler, H.   Untitled, ca. 1975                              79.74%    100.00%     79.74%          8,883

   III     Bertoia, H.         Untitled (Sounding Sculpture), 1968             79.74%    100.00%     79.74%          7,402

   III     Motherwell, R.      In green with Two Scarlet 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     Frankenthaler, H.   Canal Street VIII, 1987                         79.74%    100.00%     79.74%          3,701

   III     Craig-Martin, M.    Safety Pin, ca. 1990                            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, R.      Je t'aime avec noir, 1978                       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     Frankenthaler, H.   Thanksgiving Day, 1980                          79.74%    100.00%     79.74%            592

   III     Frankenthaler, H.   Thanksgiving Day, ca. 1980                      79.74%    100.00%     79.74%            592
                                                                   - 88 -


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

   III     N/A                 Japanese Painted and Silvered Paper Four-Panel
                               Screen, 3d Quarter, 19th Century                  79.74%    100.00%     79.74%            592

   III     Frankenthaler, H.   Hand Painted Book Cover #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
                                                       - 89 -
                                                    APPENDIX C

       VALUES OF DECEDENT'S INTERESTS IN THE 64 WORKS OF ART FOR FEDERAL ESTATE TAX PURPOSES
                                                                                                       Fair market value of
                                                                                 Decedent's pro rata    decedent's interest
                                                                                 share of stipulated    after application of
Item          Artist                           Title/year                        fair market value1       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

 6     Motherwell, Robert    Elegy to Spanish Republic #134, 1976                     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
                                                       - 90 -

                                                                                                     Fair market value of
                                                                               Decedent's pro rata    decedent's interest
                                                                               share of stipulated    after application of
Item          Artist                           Title/year                      fair market value1       10% discount

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, William    Woman in a Garden, 1968                                219,165                 197,249

21     Louis, Morris          Achenar, 1962                                          160,721                 144,649

22     Moore, Henry           Working Model for Thin Reclining Figure, 1978          146,110                 131,499

23     Frankenthaler, Helen   Fathom, 1983                                           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 Boulevard, 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
                                                           - 91 -

                                                                                             Fair market value of
                                                                       Decedent's pro rata    decedent's interest
                                                                       share of stipulated    after application of
Item          Artist                            Title/year             fair market value1       10% discount

35     Bertoia, Harry          Sunburst, 1972                                  58,444                 52,600

36     Frankenthaler, Helen    Untitled, ca. 1975                              43,833                 39,450

37     Bertoia, Harry          Untitled (Sounding Sculpture), 1968             36,528                 32,875

38     Motherwell, Robert      In green with Two Scarlet Spots, 1967           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, Helen    Canal Street VIII, 1987                         18,264                 16,438

44     Craig-Martin, Michael   Safety Pin, ca. 1990                            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, Masayuki        Destination, 1996                               13,150                 11,835

48     Motherwell, Robert      Je t'aime avec noir, 1978                       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, Helen    Thanksgiving Day, 1980                           2,922                  2,630

52     Frankenthaler, Helen    Thanksgiving Day, ca. 1980                       2,922                  2,630
                                                                             - 92 -

                                                                                                                                      Fair market value of
                                                                                                                Decedent's pro rata    decedent's interest
                                                                                                                share of stipulated    after application of
      Item                 Artist                                   Title/year                                  fair market value1       10% discount

       53          N/A                             Japanese Painted and Silvered Paper Four-Panel                            2,922              2,630
                                                   Screen, 3d Quarter, 19th Century

       54          Frankenthaler, Helen            Hand Painted Book Cover #11, 1970                                         2,557              2,301

       55          Graves, Nancy                   Omon (Series E), 1976                                                     2,192              1,973

       56          Meadmore, Clement               Untitled, 1992                                                            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

       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                              183                 165
                                                   Century

       64          N/A                             Sepik River Carved and Polychrome-Painted Wood                              73                   66
                                                   Shield, 20th Century


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%.
