Estate of Elkins v. Commissioner of Internal Revenue

James Elkins and his wife lived in Texas. The Elkinses’ property, including 64 works of art, was communal spousal property. Elkins and his wife each created a trust. Each trust held one spouse’s 50 percent interest in three works of art (the trust art). Elkins’s wife died, and a 16.67 percent interest in each piece of her trust art passed to each of the Elkinses’ three children. Elkins’s wife bequeathed her interest in the 61 artworks not held in her trust to Elkins. Elkins disclaimed a 27 percent interest in these 61 artworks (the disclaimer art), leaving him with a 73 percent interest. Elkins and his children executed various agreements covering the trust art and the disclaimer art. The agreements provided that no co-owner could dispose of his or her interest in the artworks unless joined by the other co-owners. Elkins died. The tax return of Elkins’s estate (plaintiff) listed his fractional interests in the disclaimer art and the trust art at discounted values. The Internal Revenue Service (IRS) refused to accept the discounts and assessed a tax deficiency of about $9 million. The estate sued the commissioner of the IRS (defendant), challenging the ruling in tax court. Elkins’s children testified that they would not sell the artworks because of their sentimental value. The estate’s experts testified that the value of the estate’s fractional interests should be steeply discounted because there was no market for such fractional interests. The commissioner produced no evidence. The tax court ruled that the value of the estate’s fractional interests should be discounted by 10 percent.