## Facts

- A decedent’s estate included fractional, undivided interests in 64 original works of modern and contemporary art.
- The parties stipulated the full fair market value (FMV) of each work as a whole.
- On the estate tax return, the estate applied a uniform 44.75% fractional-ownership discount to the decedent’s pro rata share of the stipulated FMV, citing lack of control and marketability and co-ownership constraints.
- The IRS issued a deficiency notice on the theory that no fractional-interest discount was allowable (i.e., valuing each interest at a straight pro rata share of the whole).
- In the Tax Court, the IRS offered no expert evidence on discount magnitude because it maintained a zero-discount position.
- The estate presented three valuation experts supporting substantial discounts.
- The Tax Court rejected the IRS’s zero-discount theory but also rejected the estate experts’ proposed discount amounts and instead imposed a uniform 10% “nominal” discount without record support.
- The estate appealed.

## Issues

1. Whether FMV under I.R.C. § 2031 requires a fractional-ownership discount when valuing a decedent’s undivided interests in artwork, rather than using a straight pro rata share of whole-asset FMV.
2. Whether the Tax Court may reject unrebutted expert evidence on discount magnitude and substitute its own 10% discount without evidentiary support.
3. Whether I.R.C. § 2703 justified eliminating or materially reducing the fractional-interest discount for co-owned artwork.

## Decision

- The Fifth Circuit affirmed the rejection of the IRS’s zero-discount position, holding that some fractional-ownership discount was required.
- The court reversed the Tax Court’s use of a 10% “nominal” discount because it lacked record support.
- The court rendered judgment for the estate, adopting taxable values reflected in the Tax Court’s Exhibit B (derived from the estate’s evidence with supported adjustments) rather than the unsupported 10% figure.
- The court ordered a refund of $14,359,508.21 plus statutory interest.

## Legal Principles

- Under I.R.C. § 2031, FMV is determined by a hypothetical willing buyer and willing seller; the FMV of a fractional, undivided interest is not necessarily the same as a pro rata share of the whole asset’s FMV.
- Fractional interests in unique property (including art) may warrant discounts reflecting lack of control, limited marketability, transaction costs, holdout risk, and potential partition or litigation.
- A trial court may evaluate and partially reject expert valuation testimony, but it may not select a valuation figure with no evidentiary basis, especially where the only quantitative evidence is essentially unrebutted.
- I.R.C. § 2703 does not, by itself, eliminate fractional-interest discounts when the reduced value stems from economic consequences of co-ownership rather than disregarded restrictions.

## Conclusion

The Fifth Circuit held that estate-tax valuation of undivided fractional interests in artwork must reflect market realities through evidence-based discounts and that the Tax Court erred by imposing an unsupported 10% discount in place of unrebutted expert quantification.


Estate of Elkins v. Comm’r, 767 F.3d 443 (5th Cir. 2014)