140 T.C. 86 (T.C. 2013), 16597-10, Estate of Elkins v. Commissioner of Internal Revenue
|Citation:||140 T.C. 86|
|Opinion Judge:||Halpern, Judge:|
|Party Name:||Estate of James A. Elkins, Jr., Deceased, Margaret Elise Joseph and Leslie Keith Sasser, Independent Executors, Petitioners v. Commissioner of Internal Revenue, Respondent|
|Attorney:||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.|
|Case Date:||March 11, 2013|
|Court:||United States Tax Court|
Downed 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.
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.
FINDINGS OF FACT
When they filed the petition, petitioners resided in Houston, Texas.
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.
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). Each trust was for a 10-year period, during which the grantor retained the ''use'' of the transferred interests in the art. At the conclusion of the 10-year period, each grantor's interests were to go to the Elkinses' three children, which, in effect, would give them 100% ownership of the GRIT art, one-third each.
Mrs. Elkins died on May 19, 1999, before the expiration of the 10-year period of her GRIT. Pursuant to the terms of her GRIT, her 50% undivided interests in the GRIT art passed to Mr. Elkins. Because Mr. Elkins survived the 10-year term of his GRIT, his original 50% undivided interests in the GRIT art passed to his three children in equal shares so that each received 16.667% interests in the GRIT art. Decedent retained the 50% interests in the GRIT art that he received upon Mrs. Elkins' death, which constitute part of his gross estate.
Decedent and the Elkins children executed a lease 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 finding of rent due of $841,688 for the period from July 13, 2000, through the valuation date. The estate sought to deduct its payment of that amount to the Elkins children. On audit, the parties agreed to reduce the amount of that deduction to $10,000, the propriety of which is not at issue herein.
The Disclaimer Art
Under Mrs. Elkins' will, her 50% community property interests in the other 61 works of art passed outright to decedent. Mr. Elkins decided, however, to disclaim a portion of those interests equal in value to the unused unified credit against estate tax, see sec. 2010, available to Mrs. Elkins' estate so that the disclaimed portion could pass to the Elkins children free of estate tax. On the basis of appraisals obtained by Mrs. Elkins' estate, decedent disclaimed a 26.945% interest in each of the 61 works (disclaimer art). Pursuant to Mrs. Elkins' will, those fractional interests passed to the Elkins children, one-third each. As a result, each child received an 8.98167% interest in each item of the disclaimer art, and the balance, a 23.055% interest in each item, passed to decedent. Thus, decedent retained a 73.055% interest in each item of the disclaimer art (his original 50% interest plus the additional 23.055% interest received from Mrs. Elkins that he did not disclaim).
On February 14, 2000, shortly after decedent executed his partial disclaimer, decedent and the Elkins children entered into a ''Cotenants' Agreement'' (cotenants' or original 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.
2. Each Cotenant, with respect to the exercise of his or her right of possession, dominion, and control, shall request possession of an item of the Property by giving 30 days' written notice of such request to the Co-tenant in possession of such item. The notice shall specify the number of days to which such Cotenant is entitled to possession and the number of days remaining thereof during the twelve month period (or a fewer number of months for a short calendar year). In the event of a conflict among the Cotenants at any time as to which Cotenant is entitled to possession of an item of the Property, Cotenant James A. Elkins, Jr. shall determine which Cotenant is entitled to possession and the number of days remaining thereof.
3. The Cotenant requesting possession (the ''Receiving Cotenant'') of an item of the Property shall be responsible for arranging and paying for the transport of such item to the Receiving Cotenant's residence.
* * * * * * *
6. Each Cotenant shall be responsible, to the extent of his or her percentage interest in the Property, for the cost of maintaining and restoring...
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