Fractional Interest Decision

The other day I posted on a couple of WealthManagement articles on recent issues and court decisions on fractional interest (click HERE to read).  Joesph Bothwell just sent me the link to one of the cases, Elkins v COMMISSIONER OF INTERNAL REVENUE, which was the subject of the posts.

The decision is long (90 plus pages), and I am still reading, although there certainly should be some good information for appraisers to know and learn about fractional interests within the document.

The court document states

Creation of Fractional Interests in the Art

The GRIT Art

On July 13, 1990, Mr. and Mrs. Elkins each created a grantor retained income trust (GRIT) funded by each's undivided 50% interests in three of the works in the collection: a large Henry Moore sculpture, a Pablo Picasso drawing, and a Jackson Pollock painting (GRIT art)Each trust was for a 10-year period, during which the grantor retained the "use" of the transferred interests in the art. At the conclusion of the 10-year period, each grantor's interests were to go to the Elkinses' three children, which, in effect, would give them 100% ownership of the GRIT art, one-third each.

Mrs. Elkins died on May 19, 1999, before the expiration of the 10-year period of her GRIT. Pursuant to the terms of her GRIT, her 50% undivided interests in the GRIT art passed to Mr. Elkins. Because Mr. Elkins survived the 10-year term of his GRIT, his original 50% undivided interests in the GRIT art passed to his three children in equal shares so that each received 16.667% interests in the GRIT art. Decedent retained the 50% interests in the GRIT art that he received upon Mrs. Elkins' death, which constitute part of his gross estate. Mr. and Mrs. Elkins partitioned their community property interests in the GRIT art before creating the GRITs.

Decedent and the Elkins children executed a lease agreement (art lease)covering two of the three works of GRIT art (the Picasso drawing and the Pollock painting), made effective "as of the 13th day of July, 2000" (the expiration date of decedent's GRIT). Under the art lease, the Elkins children leased their combined 50% interests in the two works to decedent, in effect allowing him to retain yearround possession of those works. There was an initial lease term, with automatic extensions, unless decedent opted out of an extension, which he never did. Section 10 of the art lease provides, in relevant part, as follows: "Sale. Lessors and Lessee each agrees not to sell his or her percentage interest in any item of the * * * [leased artwork] during the Initial Term or any Additional Term without the joinder of * * *[the parties to the art lease] for the purpose of selling the item * * * in its entirety." Section 13 states that the lease and the parties' "rights, duties and obligations" under it "may not be transferred or assigned" without the consent of all parties and that, subject to that restriction on assignment, the lease "shall be binding upon and inure to the benefit of Lessors and Lessee and their respective heirs, representatives,successor and assigns."

The rent due under the lease was left blank in the original agreement and was not computed until May 16, 2006, when Deloitte LLP made a determination of the appropriate monthly rental for the two works. That determination resulted in a finding of rent due of $841,688 for the period from July 13, 2000, through the valuation date. The estate sought to deduct its payment of that amount to the Elkins children. On audit, the parties agreed to reduce the amount of that deduction to $10,000, the propriety of which is not at issue herein.

Source: US Tax Court