What can take a good bit of the fun out of your Picasso going for more than twice the expected price at Christies? Having it happen while the estate you inherited it from does not have its estate tax resolved might do it. Bernice Newberger died on July 28, 2009. Included in her estate were three paintings which were the subject of a recent Tax Court decision – Tete de Femme (Jacqueline) by Pablo Picasso, Untitled by Robert Motherwell and Element Bleu XV by Jean Dubuffet.
Not Just Houses Having A Down Market In 2008
According to the decision the art market had dropped precipitously in 2008. In 2009 Sotheby’s and Christies experienced auction revenue decreases of 53% and 46% respectively. Things were looking up in 2010, though, when the Picasso went to auction on February 2. The estate had a guarantee of $4,784,689 and 60% of the hammer price exceeding that amount.
The Picasso is a signed and dated 35.5- by 23-inch oil on canvas work created in May 1963. It depicts Pablo Picasso’s second wife, Jacqueline, whom he portrayed in over 400 paintings. On February 10, 1981, Ms. Newberger acquired the Picasso for $195,000. It was purchased from the Saidenberg Gallery in New York, New York, and previously owned by Daniel-Henry Kahnweiler of Paris, France, and Mr. and Mrs. Leigh Block of Chicago, Illinois.
Looks Like Art Recovered Faster Than My Portfolio
The Picasso ended up selling for $12,297.874 (hammer price of $11,484,000 plus $1,443,874 paid by the buyer to Christies). Here is a video of the auction – In the Saleroom: Pablo Picasso’s Tete de femme (Jacqueline). It strikes me as pretty subdued and the numbers are a little less dramatic being in pounds and all. I found the bidding for Volume III of The Dial at Elizabeth’s Auctions more exciting, but of course it was my own seven hundred bucks that was in play there.
In case you can’t do compound interest in your head, that is appreciation of over 15% since 1981.
And Then The Return Is Filed
In October, the Estate filed Form 706 reporting a date of death value of $5,000,000 for the Picasso, $450,000 for the Motherwell and $500,000 for the Dubuffet. A month later a similarly sized Motherwell “In Black and White No. 5” sold for $1,426,500.
In 2013, the IRS sent a notice of deficiency to the estate valuing the Picasso at $13 million, the Motherwell at $1.5 million and the Dubuffet at $750,000.
Dueling Experts
The estate’s expert argued that the February Christies auction was a fluke. The IRS expert considered it carving back the price to $10 million to reflect 2009 conditions. Not that it matters, but that would yield a value a bit over what the estate cleared on the auction with the 60% deal. The Tax Court went with the revised IRS value
The estate’s experts ask us to disregard this sale because “t was a fluke”, and the estate unconvincingly contends that this sale is not relevant because it could not have been reasonably anticipated on the date of death. To the contrary, the sale of the Picasso may “be taken into account as evidence of fair market value as of the valuation date.” Indeed, no evidence is more probative of the Picasso’s fair market value than its direct sale price. (Citations omitted)
On the Motherwell, the experts agreed that the November sale for $1,426,500 was the best comparable, but the estate’s expert carved it back to $800,000 to represent 2009 conditions. The Tax Court went with the estate on that one.
Judge Foley really gave the IRS a hard time on the Dubuffet valuation.
The estate and respondent, respectively, contend that the Dubuffet had a date of death value of $500,000 and $900,000. The best comparable relating to the Dubuffet was the November 14, 2007, sale of Jean Dubuffet’s Element Bleu XIII (i.e., a similarly sized work from the same series) for $825,000. Respondent’s expert’s contention that the Dubuffet’s value was higher during the market downturn than Element Bleu XIII’s value before the market downturn is, in short, nonsensical. We agree with the estate that Sotheby’s $500,000 appraisal (i.e., the value the estate reported on its Form 706) reflects the Dubuffet’s date of death value. (Emphasis added)
You could say that the estate won on two out of three paintings, but it lost on the big dollars.
Some Commentary
Matt Erskine runs a boutique legal practice focusing on unique assets. He thinks the Tax Court got it right.
I agree with the Court. On the Piccaso, sale at a public auction is the ultimate authority on fair market value, especially where there is a price guaranty by the auction house. To argue that it is a fluke is nonsensical, especially when you are dealing with a one-of-a-kind work of art by a well-known artist. Auction houses want such works of art just because they bring attention, and outsized results, during sales. The discount from the actual sale price reflects the uncertainty of the art market after 2008.
I also feel that the appraiser for the estate was talking out of both sides of his or her mouth, since at the same time the opinion was given, the auction house was willing to give a much higher price guaranty.
I also feel that the court was right in rejecting the IRS claims on the value of the other two works. That is the correct application is to take the sale price ($1.4 MM) and work backwards to the Date of Death value (for the one that sold) and correctly for the one that did not sell.
Gary S. Castle, principal and member of the Art Specialty practice group at Anchin, Block & Anchin LLP was impressed by the IRS blowing the Dubufett valuation.
Challenging the Art Panel of the IRS is an expensive and time consuming process. It is therefore imperative that the valuation obtained for the estate tax return is comprehensive in its approach, using current “comps” both at and before the date of death together with any that occurred thereafter. The IRS has an inherent advantage in that it is auditing returns a year or two after they have been filed, and therefore have a larger population of “comps” to review. Also, in the valuation process, both the estate and the IRS must take into account overall economic conditions as well as the art market in particular. In the Estate of Newberger, this clearly did not happen in the Dubuffet work, as the IRS disregarded the economic downturn between 2007 “comp” and the 2009 valuation for the estate tax return, and for that reason the IRS valuation was found to be “nonsensical” by the Tax Court.
Other Coverage
Bloomberg BNA had a brief piece on the case, but I did not find much else. The Christies auction of the Picasso did get a good amount of coverage in 2010 as in this piece titled – Rarely Seen Picasso Surfaces at $112 Million Christie Sale of Much, Van Gough, and Others
Still, the sale of his “Tête de Femme (Jacqueline)” (detail, above), a 1963 portrait of his second wife, Jacqueline Roque, managed to send quite a stir through the art world yesterday.
Too bad for the estate, that somebody at IRS also seems to keep up with the art news.
Happy New Year
This may be my last post of 2015, so let me wish you a Happy New Year.