Estate of Scull v. Comm'r

[Editor’s Note: This case can also be found under the titles “Estate of Scull” and “Scull v. Commissioner.”] Robert and Ethel Scull collected art. In 1975, Ethel divorced Robert, and the question of how to divide ownership of their art collection became a sticking point in the divorce litigation. In 1985, the trial court awarded Ethel a 35 percent undivided interest in the collection, leaving Robert with a 65 percent undivided interest. As owners of undivided interests, both parties were empowered to access the entire collection and each possessed a fractional interest in its total value. Robert appealed the decision immediately. On January 1, 1986, Robert died. On January 31, 1986, Ethel also appealed the decision, seeking to increase her interest to 50 percent. After Robert’s estate (plaintiff) paid tax on his interest in the collection, the Internal Revenue Service (IRS) (defendant) determined a deficiency of over $1 million. Robert’s estate challenged the deficiency in tax court. The estate argued that the fair market valuation of Robert’s interest in the shared art collection was depressed by the uncertainties attending fractional ownership and that the estate was therefore entitled to a valuation discount. At trial, the court determined that the entire shared collection had a fair market value of $12,228,006 at the time of Robert’s death. The court considered whether this valuation should be discounted because of the fractionality of Robert’s interest, and, if so, how much of a discount to award. The court also considered the impact of the pending litigations on the value of Robert’s interest.