Purchases, sales and gifts of valuable artworks should include invoices, bills of sale, deeds, and canceled checks.

Issues surrounding property held in a private holding company have flared up in a new lawsuit filed against the IRS. The case, which might have important repercussions for estate planners nationwide, highlights some of the pitfalls of owning highly valuable pieces of art.

The high-profile suit involves artworks by such renowned artists as Paul Cezanne, Pablo Picasso and Vincent Van Gogh. The case also concerns the estate of Joe Allbritton, who was the owner of banks and media properties, including the political website Politico.

Allbritton’s family owned a private holding company named Perpetual Corp., which held Allbritton Communications Corp. In 1999 and 2001, Perpetual purchased a 95 percent interest in several pieces of art from Allbritton, in exchange for debts that he owed to the company. Those sales were fully disclosed on the Allbrittons’ tax return.

The IRS later claimed that Perpetual made a constructive distribution of several of the artworks to Joe Allbritton between 2005 and 2008. In 2013, Allbritton’s widow received a “notice of deficiency,” claiming that 33 works of art had been distributed to Joe Allbritton, who died in 2012. The total value of the artwork transferred, according to the IRS, was $139 million.

Because of those distributions and supposed taxable dividends, the IRS presented Barbara Allbritton with a tax bill for $40.6 million in 2013. Mrs. Allbritton paid that bill “under protest,” she says, and now she has filed suit in the U.S. District Court for the Southern District of Texas in hopes of recouping that money.

She claims that the artwork remained in the possession of the holding company and never became her husband’s property. “There is not a single bill of sale, sales slip, invoice, purchase agreement, ownership transfer document, or anything else reflecting a sale or transfer of the art from Perpetual to Joe L. Allbritton in 2005,” the court filing says.  

But there was something that triggered this dispute. Perpetual made payments to the Allbrittons of $364,000, which the IRS considered “taxable dividends,” although the Allbrittons claim that this money was paid to defray the cost of insuring the artworks. Barbara Allbritton additionally assets the money was spent on property that belonged to Perpetual and for Perpetual’s benefit.

According to the complaint she filed, there was a single insurance policy taken out to insure artworks jointly owned by Perpetual and the Albrittons, with each partner paying its own share of the premiums.

The IRS, as usual, won’t comment on the ongoing dispute, so it’s hard to gauge what chance the Allbrittons have of recovering the money they paid. But there’s no doubt about it: Art in anyone’s estate is tricky. Some things for your clients to keep in mind:

  • All purchases, sales and gifts of valuable artworks should include invoices, bills of sale, deeds, canceled checks. They should be treated like real estate or any other investment asset.

  • If there are questions of ownership, title insurance may be the best evidence to present to the IRS, as well as documents related to estate, gift or sales tax issues.

  • The annual gift tax exclusion of $14,000 or the lifetime exclusion of $5,250,000 is available for giving ownership of artworks, but givers may not discount the value of the artwork through fractional gifts, family limited partnerships, or limited liability companies.

  • However, artworks can be transferred outright to an LLC, and family members can take ownership of interest in the LLC rather than interest in the artwork itself.

  • If an art collector’s heirs aren’t knowledgeable about the artwork in question, consider recommending that they appoint an art executor. This person can develop, sell, exhibit, or market the artwork, as well as determine which pieces are worth holding and which should be sold or discarded.