A common point of contention between wealthy estates and the IRS is the value of artwork at the time the deceased passes away. The estate wants lower valuations for estate tax purposes, but the IRS does not always accept them.
The value of artwork in an estate is difficult to determine. A true value cannot be given, until a piece is sold. However, for many reasons, the estate might not wish to sell the art right away to determine the value.
The value has to be determined for wealthy estates, however, for estate tax purposes.
To do this, estates employ expert appraisers who give their estimates for what the art would likely fetch at auction. This can create problems, if the art later sells for much more than the appraised value.
This was the case in a recent tax court matter discussed by The New York Times in "Don't Blame the Russians, Tax Judge Tells Sotheby's Expert."
It seems a painting was valued by Sotheby's at $500,000 and that was the value given to the IRS. However, four years later, the same painting sold at auction by Sotheby’s for $2.1 million.
The appraiser explained that the primary reason for the discrepancy was that Russian collectors bid the piece up, as they are attempting to get their hands on artwork.
The judge did not believe that and instead determined that Sotheby's had intentionally low-balled the appraisal value to curry favor with the estate, so the auction house would be used when the painting was later sold.
Needless to say, it would have been better for the estate in the long run to have just been given the correct appraisal value from the beginning.
Reference: New York Times (April 23, 2017) "Don't Blame the Russians, Tax Judge Tells Sotheby's Expert."