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Estate of Elkins v. Commissioner, 3/11/13
February 2, 2017

After respondent IRS determined deficiencies in estate tax paid by petitioner taxpayers, co-executors of the estate of a decedent who was their father, petitioners sought review. At issue was the total fair market value (FMV) of decedent’s undivided fractional interests in 64 works of art, which interests were includable in his gross estate, and the proper application in that context of various estate tax provisions including IRC ? 2703. Decedent and his wife owned 64 artworks. Three were transferred to a 10-year grantor retained income trust (GRIT). Various events, including the wife?s death, resulted in decedent inheriting her 50% interest in the GRIT while his original 50% interest passed to his three children. Decedent disclaimed a portion of the interest in his wife?s 50% community property interest in the remaining 61 pieces and enjoyed possession of the whole collection under various contracts with the children. When decedent died, the IRS challenged petitioners? claim that the FMV of the artwork in decedent?s gross estate was properly discounted to account for restrictions on decedent?s interests imposed by the contracts, arguing that ? 2703 required them to be disregarded for valuation purposes. Petitioners answered that as the agreements only restricted sales of the art, not of a co-owner?s fractional interest therein, ? 2703 did not apply. The court held that ? 2703(a)(2) applied; that there was no bar, as a matter of law, to an appropriate discount from pro rata FMV of the value of the undivided fractional interests for estate tax purposes; and that the FMV of each piece was properly discounted by 10 percent. The court held that petitioners were entitled to a 10 percent discount from pro rata FMV with respect to decedent?s interest in the art.