Written by William E. Keenen
Under U.S. law, a tax generally is imposed whenever one individual gratuitously transfers an interest in property to another. This tax is computed on the value of the property interest transferred, whether during one’s life (to which the gift tax applies) or at one’s death (to which the estate tax applies). In some instances, a discount in the value of an interest in property may be taken by a donor or the executor of an estate when filing a gift or estate tax return, as the case may be. The 5th Circuit Court of Appeals recently decided Estate of Elkins v. Commissioner [767 F.3d 443 (5th Cir. 2014)] in which the court considered discounts to establish the value of fractional interests in artwork.
When James Elkins, son of the founding partner of the Vinson and Elkins law firm, died, he owned fractional interests in 64 very valuable works of art. Mr. Elkins and his wife had accumulated the artwork over the course of their marriage, which constituted the couple’s community property under the laws of Texas, where they resided during their marriage. Prior to Mr. Elkins’ death, the artwork had been maintained in his home, his office, the homes and offices of his children as well as on display in various public places. Mr. and Mrs. Elkins each settled a so-called grantor retained income trust (a GRIT) to which each of them transferred his or her respective interests in three works of art, which the Tax Court termed the “GRIT Art”. The other 61 pieces, which, for the reasons discussed next, were referred to by the Tax Court as the “Disclaimer Art”, were owned outright by Mr. and Mrs. Elkins.