Art collectors can use fractional-interest ownership to reduce the value of their estate to save on federal estate taxes. In Elkins v. Commissioner of Internal Revenue, 767 F.3d 443 (5th Cir. Sept. 15, 2014), a case that originated in U.S. Tax Court, the U.S. Court of Appeals for the Fifth Circuit ruled that the value of an estate can be significantly lowered by allowing a discount on the value of fractional-ownership interests in artwork. By setting up an ownership structure where several people own varying ownership interests in one piece of art, savvy collectors can avoid paying large estate tax fees.

In Elkins, two daughters who were the executors of their father’s estate filed suit in Tax Court over a dispute they had with the IRS. The primary disagreement between the IRS commissioner and the estate was whether the estate could apply fractional-ownership interest discounts when determining the taxable value of the estate’s share of the artwork. To put it simply, fractional ownership, typically used in real estate holdings, is a situation where two or more people own a part of an undivided piece of property. In putting a value on a fractional-ownership interest for estate tax purposes, the IRS typically applies a discount to those interests because, unlike something that is owned outright, a fractional-ownership interest is typically less marketable and, therefore, less valuable. Further, an owner of a fractional interest in property typically has less control over the property than someone who owns it outright.

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