Kollsman v. Comm'r, T.C. Memo. 2017-40
| Decision Date | 22 February 2017 |
| Docket Number | Docket No. 26077-09.,T.C. Memo. 2017-40 |
| Parties | ESTATE OF EVA FRANZEN KOLLSMAN, DECEASED, JEFFREY HYLAND, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
ESTATE OF EVA FRANZEN KOLLSMAN, DECEASED,
JEFFREY HYLAND, EXECUTOR, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
T.C. Memo. 2017-40
Docket No. 26077-09.
UNITED STATES TAX COURT
February 22, 2017
Kim E. Baptiste and Michael E. Swartz, for petitioner.
Jane J. Kim and Robert A. Baxer, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GALE, Judge: Respondent determined a $781,488 deficiency in the Federal estate tax of the Estate of Eva Franzen Kollsman (estate).1 The deficiency arises
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principally from respondent's determination that the estate underreported the values of two paintings held by decedent at her death on August 31, 2005 (valuation date). After concessions,2 the sole issue for decision is the fair market values of the paintings on the valuation date. The parties have each introduced expert reports and testimony to support their respective positions.
Some of the facts have been stipulated and, together with the exhibits attached thereto, are incorporated herein by this reference.
I. Background
Eva Franzen Kollsman (decedent), a resident of New York, died testate on August 31, 2005. Her estate was administered in New York. Her will designated Jeffrey Hyland as the executor of her estate and the distributee of its residual.3 Mr. Hyland resided in California at the time the petition was filed.
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II. The paintings
A. Description
The estate's assets included two 17th-century Old Master4 paintings: (1) Village Kermesse, Dance Around the Maypole (Maypole) by Pieter Brueghel the Younger (Pieter Brueghel), measuring approximately 21-1/2 by 29-7/8 inches, and (2) Orpheus Charming the Animals (Orpheus) by Jan Brueghel the Elder or Jan Brueghel the Younger or a Brueghel studio,5 measuring approximately 19 by 27 inches. Both are oil paintings on wood panels. Maypole depicts the revelry of a village festival: Some villagers dance around a maypole as others engage in similarly spirited pursuits. Orpheus depicts the musician of Greek mythology by that name playing a lyre, surrounded by an assortment of paired animals in a sylvan setting. Mr. Hyland inherited Maypole and Orpheus from decedent's estate.
B. The estate's expert's experience with the paintings
The estate's expert, George Wachter, vice president of Sotheby's North America and South America and cochairman of Sotheby's Old Master Paintings
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Worldwide, first saw the paintings at issue in 1981 during a visit to decedent's residence. He visited her residence on several subsequent occasions over the years and saw the paintings each time.
Around the date of decedent's death, in a letter dated August 31, 2005, Mr. Wachter wrote to Mr. Hyland outlining proposed terms under which Sotheby's would handle the auctioning of Maypole and Orpheus. He stated that the "preliminary estimates" of the sale prices the paintings would bring at Sotheby's January 2006 auction in New York City were $600,000 to $800,000 for Maypole and $100,000 to $150,000 for Orpheus.
C. Mr. Wachter's fair market value letter and proposed consignment rights agreement
A few weeks later a Sotheby's employee sent a letter to Mr. Hyland dated September 28, 2005, enclosing two documents prepared by Mr. Wachter and signed on his behalf, both dated September 23, 2005. The first took the form of a letter from Mr. Wachter to Mr. Hyland in which he stated that the fair market values of Maypole and Orpheus, "based on firsthand inspection of the property" (and without further elaboration), were $500,000 and $100,000, respectively. This letter was subsequently attached to the estate's estate tax return.
The second document was a letter agreement, sent by Mr. Wachter to Mr. Hyland, providing terms under which Mr. Hyland would agree to give
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Sotheby's exclusive rights to auction Maypole and Orpheus for five years (consignment rights agreement). The consignment rights agreement stated:
In consideration of the work that we [Sotheby's] have done with you and Mrs. Kollsman over the past years and also our help with the donation process for the Circle of Cranach altarpiece,6 this letter certifies that you [Mr. Hyland] agree that, if you should decide during the 5-year period beginning on the date this letter agreement is mutually executed, to offer the two pictures listed below [Maypole and Orpheus] for sale, you shall consign such property exclusively and only to Sotheby's to be offered for sale at an auction to be conducted by us.
The values of Maypole and Orpheus were described in the consignment rights agreement as $600,000 to $800,000 and $100,000 to $150,000, respectively. At some time between September 28 and October 24, 2005, Mr. Hyland signed the agreement. During the period in which the agreement was proposed and executed, Sotheby's imposed a buyer's premium that it collected and retained on any auction
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sale equal to 20% of the first $200,000 of the "hammer price"7 and 12% of any excess amount.8
D. Cleaning of the paintings
1. Engagement
Approximately three to four weeks after decedent's death, Mr. Hyland consulted with Brad Shar, vice president and general manager of Julius Lowy Frame and Restoring Co. (Lowy), regarding work to be done to the paintings. Lowy is (and was at all relevant periods) a preeminent fine art services firm specializing in fine art restoration and framing, with a client list that has included the auction houses Sotheby's and Christie's; museums such as the Metropolitan Museum of Art, the Museum of Modern Art, and the Guggenheim Museum, all in New York City, as well as the National Gallery of Art in Washington, D.C., and the Art Institute of Chicago; numerous art galleries in New York City; architects and interior designers; and the private collections of David Rockefeller, Ralph Lauren, Richard Manoogian, and Millicent Hearst.
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On September 27, 2005, Mr. Hyland emailed Mr. Shar, confirming that he wished to have Lowy put new frames on Maypole and Orpheus. By that time, the paintings had been moved from decedent's residence to Sotheby's; Mr. Hyland asked Mr. Shar to examine them there. Mr. Hyland noted that one of the paintings had a signature in the lower left-hand corner and the other had a slight bow along the bottom and possibly the top as well.
On October 6, 2005, Lowy obtained a certificate of insurance from its insurer, which Mr. Shar forwarded to Mr. Hyland that same day to demonstrate that Lowy had insurance coverage for Maypole and Orpheus while it had custody of them. The certificate indicated that Lowy had insurance with respect to any damage that might occur to the paintings in transit to or from, or while on, Lowy's premises. The coverage was effective from October 6, 2005, to February 10, 2006, and insured Maypole for $1 million and Orpheus for $200,000. Mr. Hyland determined the amounts for which Lowy was to insure Maypole and Orpheus.9
2. Examination by Lowy personnel
After examining Maypole and Orpheus Mr. Shar concluded that they were dirty and should be cleaned. He found the paintings to be covered with a heavy
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layer of dirt and grime that nonetheless "looked like it could be removed with relative ease". The chief conservator at Lowy, Bill Santel, who performed an initial examination of both paintings before they had been cleaned or any testing on them had been done, likewise believed on the basis of that examination that cleaning would be appropriate for both and "reasonably safe"--something he would certainly have done if he owned them. In his judgment, Maypole appeared to have been previously cleaned, though not recently. He considered Maypole "not the dirtiest painting" he had seen in his work and "a pretty good painting to be cleaned". Mr. Shar therefore suggested to Mr. Hyland that he have the paintings cleaned before framing; Mr. Hyland agreed and engaged Lowy for that purpose.
3. Lowy condition and treatment reports
a. Maypole
Lowy prepared a "condition and treatment report" concerning Maypole. The section of the report devoted to the painting's pretreatment condition (condition report), dated November 28, 2005, states that Maypole had a surface coating of "discolored natural resin" varnish. The condition report has an entry for degrees of "Surface Dirt", with the options of "Light", "Apparent", or "Heavy". "Heavy" is circled. The immediately following entry is for degrees of "Embedded Dirt", with
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the same three options. None of the options is circled. Under the "Signature" entry, the condition report notes that the signature was "[b]arely visible".
The condition report was based on a two-step process Lowy employs to determine the condition of a painting: (1) a visual examination using various forms of light and (2) a chemical detergent window test (window test) whereby detergent is applied to a small section or sections of the painting's surface. The visual examination is nonintrusive, using ultraviolet light, x rays, and an infrared scope. It typically enables a conservator to detect damage within a painting or previous restorations. The window test, performed only with the client's permission, typically reveals further information about a painting's condition, including how it will clean and whether any dirt is surface or embedded.
Maypole was cleaned on December 6, 2005. The section of the report devoted to the painting's treatment (treatment report) states that the cleaning took three hours. The treatment report further states that the Lowy conservator used Wolbers and naphtha detergents to remove "a heavy layer of surface dirt-grease-grime-nicotine". The treatment report notes that the conservator "did not remove varnish".
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b. Orpheus
Lowy also prepared a condition report and a treatment report concerning Orpheus. The condition report,10 dated November 28, 2005, states that the surface coating of Orpheus was "varnished" with a "natural" (as opposed to "synthetic") varnish, with discoloration that was "apparent". The "Surface Dirt" entry has "Heavy" circled, and the...
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