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Federal Tax Court Claims Sotheby's Expert Knowingly Undervalued Estate Paintings

Another New York auction gallery has run afoul of the United States Tax Court.  According to a February 2017 Memorandum Opinion (E.F. Kollsman v. Commissioner, T.C. Memo. 2017-40), Judge Joseph H. Gale found that a Sotheby’s fine art expert purposely undervalued two 17th century Old Master paintings in order to reduce the federal tax liability of a multi-million dollar estate.  Incredibly, the Sotheby’s expert then sold the paintings at auction on behalf of the estate for more than four times their appraised value.   

 

The estate in question was that of Eva Franzen Kollsman, a New York art collector who died in 2005.  At the time of her death, Ms. Kollsman owned two important 17th century oils on panel: “Village Kermesse with the Dance Around the Maypole” by Pieter Brueghel the Younger (Flemish, 1564/1565-1637/1638) and “Orpheus Charming the Animals” attributed to either Jan Brueghel the Elder (Flemish, 1568-1625) or Jan Brueghel the Younger (Flemish, 1601-1678).  About the time of Ms. Kollsman’s death, George Wachter, Chairman of Sotheby’s North and South America and Co-Chairman of Old Master Paintings Worldwide, contacted the executor of the Kollsman estate, Jeffrey Hyland, seeking exclusive consignment rights for both 17th century paintings. 

 

According to court documents, Wachter told the executor that he had been interested in the paintings since first seeing them at the decedent’s residence in 1981.  He offered to place the paintings in a future Sotheby’s sale and estimated the Pieter Brueghel work at $600,000 to $800,000.  He also placed a pre-bid estimate of between $100,000 and $150,000 on the painting attributed to Jan Brueghel.  As a bonus, Wachter had the Sotheby’s staff send the Kollsman estate a letter, under his signature, that included fair market values of $500,000 and $100,000 for the paintings.  Wachter’s appraisal was then used by the Kollsman estate to determine its federal tax liability.       

 

When the Pieter Brueghel painting finally sold at Sotheby’s three years later for $2.4 million, or four times its appraised value, the IRS responded.  The Commissioner of Internal Revenue notified the Kollsman estate that it believed the fair market values of the two paintings were actually $2.1 million and $500,000 respectively, resulting in a $781.488 tax deficiency.  Although the Kollsman estate fought back, the United States Tax Court found for the IRS, primarily due to the estate appraiser’s testimony.  

 

Judge Gale called George Wachter’s appraisal “unreliable and unpersuasive”.  In addition to exhibiting a “significant conflict of interest” by soliciting the Kollsman estate paintings while simultaneously acting as the estate’s appraiser, the court found that Mr. Wachter intentionally “lowballed” his fair market values to curry favor with his client.  Moreover, the judge found it “remarkable” that Mr. Wachter offered “no comparables to support his valuations”.  Instead, the Sotheby’s expert asked the court to rely on “his experience and expertise”, unsupported opinions that the judge rejected.  Finally, Judge Gale reminded the Kollsman estate that the post-valuation sale of its Pieter Brueghel painting was not “necessarily irrelevant to a determination of fair market value.”  In the end, the court determined that the Kollsman estate underreported the value of the two paintings in question. 

You can read the entire T.C. Memo here: http://www.ustaxcourt.gov/USTCInOP/OpinionViewer.aspx?ID=11129

 

We urge all of our clients, and prospective clients, to do your research before hiring an appraiser to prepare a federal tax appraisal.  According to one source, the IRS considers art donation appraisals an area of “potentially high abuse” (See Colin Moynihan, “Don’t Blame the Russians…” The New York Times, 4/23/17), and mistakes can lead to audits and penalties.  We also suggest you read our posting of 2/1/2016 for more information.

 

 

 

 

 

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