Artwork, Estate Tax, and Capital Gain

On the settlor's death, the IRS Art Advisory Panel appraised the artwork in his estate as having a fair market value of $36,636,630. However, the IRS agreed to value the artwork at $14,500,000 for estate tax purposes.

After the trust termination in 1995, the distributees sold the artwork and used the Art Advisory Panel’s appraisal of $36,636,630 as their cost basis. The Tax Court stated that this amount was inconsistent with the discount used to calculate the estate tax value. The Court ruled that the distributees should have used a cost basis of $14,500,000 instead.

The court stated that “[t]he Janises [distributes] succeeded in ‘getting through the IRS audit a low valuation of their property,’ perhaps an unreasonably low one, and thus have deprived themselves of the full step-up basis to which they may have otherwise been entitled.”

Robert L. Moshman, Esq., The Janis Art Gallery, Est. Analyst (Nov. 2007), analyses this tax quandary as follows:

Considering the range of 464 assets, each with a different cost basis, some with greater potential for appreciation, some destined for museum contribu- tions, some part of the gallery business, some to be kept in the family perhaps, a more customized combination of gifts, trusts, and a family limited partnership might have been more effective at minimizing future tax consequences. Janis v. Comm'r., 469 F.3d 256 (2nd Cir. 2006).