Why do valuation discounts for fractional art interests vary?
Key takeaway
Valuation discounts for fractional art interests vary because no bright-line rule has emerged and each outcome depends on the proof offered. Practitioners say court cases on undivided interests in personal property offer little guidance on fair market value. Fair market value is measured at transfer as the price between hypothetical willing parties, neither compelled and both reasonably informed.
The fair market value standard
Neither is compelled to act and both are reasonably informed.
Discounts practitioners describe
Practitioners say fractional interests in personal property may be valued with reductions for lack of control and lack of marketability.
Authors describe the IRS as having long resisted valuation discounts for fractional undivided interests in art. They say the Tax Court and the Fifth Circuit later decided that the no-discount position was wrong.
The Fifth Circuit noted the IRS expert's testimony that no recognized market exists for fractional art interests, which supports a greater discount and not a zero discount.
Why results differ
In one decision the Tax Court allowed a 10 percent discount and rejected an estate's 45 percent discount as unrealistically high.
In another, the court allowed no discount for an undivided interest in personal property because the estate offered no supporting proof.
A different court used a small discount for uncertainty around an allocated art interest amid appeals, and not for fractional ownership.
Practitioners note courts weigh the qualifications, experience and independence of appraisers in closely held entity valuations.