## Facts

- Robert C. Scull died on January 1, 1986, a Connecticut resident.
- During marriage and before a 1975 divorce, Scull and his former wife, Ethel Redner Scull, accumulated a substantial contemporary art collection.
- A New York trial court decision (March 28, 1985) awarded Ethel a 35% share of the art collection; Scull retained a 65% undivided interest.
- At Scull’s death, both Scull (before death) and Ethel (after death) had pending appeals seeking to change the 65/35 allocation.
- The estate filed an estate tax return reporting a value for Scull’s interest in the collection; the IRS issued a deficiency and later increased it in an amended answer, and also asserted an addition to tax for late filing under I.R.C. § 6651(a).
- The Tax Court found the fair market value (FMV) of the entire art collection on the date of death was $12,228,006.
- The remaining disputes included (i) FMV of the decedent’s 65% undivided interest (including any discount), (ii) liability for the § 6651(a) late-filing addition, and (iii) whether taxable gifts should be increased by $5,000 due to two 1985 checks to a son ($10,000 and $5,000).

## Issues

1. What was the FMV of the decedent’s 65% undivided interest in the art collection on January 1, 1986, including whether a fractional-interest discount (and any litigation-related risk) applied?
2. Whether the estate was liable for the I.R.C. § 6651(a) addition to tax for late filing of the estate tax return.
3. Whether taxable gifts had to be increased by $5,000 based on the 1985 checks to the decedent’s son.

## Decision

- The court valued the entire art collection at $12,228,006 as of the date of death.
- The court held the decedent’s 65% undivided interest was worth less than 65% of the collection’s total FMV and allowed a fractional-interest (co-ownership) discount based on market consequences of undivided ownership.
- The court treated the pending divorce-related appeals as a valuation factor creating uncertainty, but not as a basis to disregard the existing 65/35 interests determined by the trial court as of the valuation date.
- The court sustained the § 6651(a) late-filing addition to tax to the extent recalculated based on the court’s determinations, finding the estate failed to prove reasonable cause.
- The court increased taxable gifts by $5,000 with respect to the 1985 transfers to the son.

## Legal Principles

- Estate-tax FMV is the price at which property would change hands between hypothetical willing buyer and willing seller, neither under compulsion and both informed of relevant facts.
- An undivided fractional interest in property may be worth less than its pro rata share because co-ownership can impose lack-of-control, marketability, and transaction/coordination costs, including potential partition or negotiated buyout expenses and delays.
- Ongoing litigation affecting property rights may be considered as a valuation risk, but existing enforceable interests on the valuation date are generally respected in determining what the hypothetical buyer would acquire.
- Under I.R.C. § 6651(a), a late-filing addition applies unless the taxpayer proves the failure was due to reasonable cause and not willful neglect; ordinary business care and prudence must be shown.
- Transfers by check may constitute taxable gifts to the extent they exceed the annual exclusion; such excess increases adjusted taxable gifts for transfer-tax computation.

## Conclusion

The Tax Court discounted the value of a decedent’s 65% undivided interest in a co-owned art collection below simple pro rata value due to fractional-ownership constraints, treated pending appeals as part of valuation risk rather than as negating existing rights, imposed the late-filing addition absent proof of reasonable cause, and increased taxable gifts by $5,000 for excess transfers reflected in two checks.


Estate of Scull v. Comm’r, 67 T.C.M. (CCH) 2953 (U.S. Tax Ct. 1994)