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The Importance of Hiring the Right Valuation Expert in an Estate Tax Case

By Joel N. Crouch on August 6, 2019

Expert testimony in litigation is very important. It is even more important in an estate tax case where the only issue is the value of the decedent’s assets and the case will likely turn on valuation expert testimony.  The 9th Circuit's recent unpublished affirmation of the Tax Court’s decision in Estate of Kollsman v. Commissioner highlights the importance of vetting and hiring the right valuation expert.    

In Kollsman, the Tax Court disregarded the estate’s valuation report and essentially adopted the IRS’ valuation report regarding two valuable paintings.  The estate’s expert, George Wachter, was “vice president of Sotheby’s North America and South America and cochairman of Sotheby’s Old Master Paintings Worldwide.”  He had known the decedent for a number of years and was very familiar with the paintings at issue in the case.  On the date of death,  Mr. Wachter wrote a letter to the executor with a preliminary estimate valuing the two paintings at approximately $600,000.  Four weeks later, Mr. Wachter wrote a second letter again valuing the paintings at $600,000, which was attached to the estate’s return. At the same time, the estate entered into an agreement for the sale of the paintings through Mr. Wachter’s auction house.   The IRS also retained an art appraiser who valued the paintings at $2,600,000.  In deciding the value of the paintings was $2,400,000, the Tax Court rejected Mr. Wachter’s appraisal due to a conflict of interest and absence of objective support. 

With regard to Mr. Wachter’s conflict of interest the Tax Court said:

“We find Mr. Wachter’s valuations unreliable and unpersuasive for several reasons.  First, he had a significant conflict of interest that could cause a reasonable person to questions his objectivity.  Mr. Wachter first gave his fair market value estimates for the paintings at the time of decedent’s death (in amounts that remained unchanged in his expert report prepared for trial).  His correspondence with Mr. Hyland [the executor] during that period demonstrates that the two had previously discussed the disposition of Maypole and Orpheus upon decedent’s death and that Mr. Hyland was considering selling the paintings.  Mr. Wachter provided his fair market value estimates at the same time he was soliciting Mr. Hyland for the exclusive rights for five years to auction the paintings in the event they were sold….  Thus, Mr. Wachter, on behalf of his firm, had a direct financial incentive to curry favor with Mr. Hyland by providing fair market value estimates that benefited his interests as the estate’s residual beneficiary – that is to say, ‘lowball’ estimates that would lessen the Federal estate tax burden borne by the estate…. The fact that Mr. Wachter simultaneously presented Mr. Hyland with these fair market value estimates and his pitch for exclusive auction rights for Sotheby’s gives rise to an inference that the latter affected the former.”

With regard to the absence of objective support, the Court noted that Mr. Wachter failed to provide comparable sales supporting his valuation.  Mr. Wachter testified that when he arrived at his valuations, he was “not interested” in comparables and had only reviewed comparables after the IRS challenged his methodology.  The Court stated that “we have repeatedly found sale prices for comparable works quite important to determining the value of art” and characterized the omission as “remarkable”. 

There are some obvious lessons from the Kollsman decision, first and foremost being that a valuation expert should not have a financial conflict of interest which would cause a court to disregard the expert’s testimony and report. I imagine the IRS attorney was gleefully anticipating the cross examination of Mr. Wachter about his financial interest in the outcome of the case.   Second, the estate’s representative should carefully review the expert’s report to confirm it uses a valuation methodology recognized by the Tax Court. Third, while Mr. Wachter’s letter was probably adequate for filing the Form 706, it should have been obvious that the estate needed a new valuation expert and new valuation report once the IRS examined the return and challenged the values on the return.  

To be fair to the estate’s representative, they may have tried to obtain a new appraisal and could not find a suitable one for trial, especially since one of the paintings sold at auction for $2,400,000 in January 2009,  11 months before the Tax Court petition was filed. 

For any questions on this or any other tax-related matters, please feel free to contact Joel Crouch at (214) 749-2456 or jcrouch@meadowscollier.com.