2017-04-23 17:03:02
Don’t Blame the Russians, Tax Judge Tells Sotheby’s Expert

When a Sotheby’s official appraised a painting by Pieter Bruegel the Younger in 2005, he set its value at $500,000. But when the owner of the 17th-century work, “St. George’s Kermis With the Dance Around the Maypole,” sold it at a Sotheby’s auction in 2009, it drew more than four times that amount, or $2.1 million.

What explains the wide gap between the estimated and actual value of the work?

The expert from Sotheby’s would later say that, after the appraisal, there had been a spike in prices created by a “large influx of Russian buyers” eager to obtain old masters and that the painting had been cleaned before being sold.

But the United States Tax Court took issue with that account in a recent decision.

In February, Judge Joseph H. Gale ruled instead that the expert had most likely placed a “lowball” estimate on that painting and a second work so as to “curry favor” with the owner, an estate facing a potentially large tax bill, and thus win the business of selling the works at auction.

His ruling came in a case where the estate challenged a determination by the Internal Revenue Service that the paintings had been valued too low.

Sotheby’s said in a statement that the estate is appealing Judge Gale’s decision and that it expects its expert’s valuations to be accepted by a higher court.

The paintings in question — the Pieter Bruegel, which depicts the revelry of a rustic village festival, and a lesser work by a relative — had been owned by Eva Franzen Kollsman until her death, in 2005. She left the paintings to Jeffrey Hyland, who was also the executor of her estate.

Shortly after Ms. Kollsman died, George Wachter, chairman of Sotheby’s North America and South America and co-chairman of Sotheby’s old master paintings worldwide, wrote a letter evaluating the works. He set the value of the second painting, identified by the court as “Orpheus Charming the Animals,” and attributed to either Jan Brueghel the Elder or the Younger, at $100,000. Eventually, the I.R.S. challenged the values set for both works and the matter ended up in tax court.

The I.R.S. has long viewed the valuations given for artworks in income, estate and gift tax returns as a “potentially high abuse area,” as described in several recent reports. It sometimes uses a group of dealers, museum curators and scholars, known as the Art Advisory Panel of the Commissioner of Internal Revenue, to advise the agency on works worth more than $50,000. According to annual reports by the panel, about 58 percent of the 1,840 works it reviewed from 2011 to 2015 were valued improperly. The data showed that taxpayers tend to underestimate the value of art that was given as gifts or bequeathed and, conversely, tend to overestimate the value of art donated as a charitable contribution.

In a report and testimony to the court, Mr. Wachter defended his initial valuation of “Maypole” by saying that Russian collectors had driven a significant surge in the market demand for old master paintings after 2005. He also said that when he inspected it, the value of the work had been diminished by a dense film of dirt and grime that covered its surface as well as an extreme yellow discoloration, caused in part by years of exposure to tobacco smoke. Cleaning the painting posed a substantial risk, he said, because the process might reveal hidden flaws or cause damage that would render it unsellable.

In rebuttal, the I.R.S., which was seeking an additional $781,488 in taxes from the estate, presented an analysis by Paul Cardile, an art historian who had served as museum director of the Denison Art Gallery in Granville, Ohio, from 1978 to 1984. He suggested that “Maypole” was worth $2.1 million, comparing it to other works by Bruegel featuring similar scenes that were sold between 1986 and 2005 for prices ranging from $538,000 to $7.1 million.

Judge Gale ultimately sided with the I.R.S., finding that the estate had undervalued both works and that Mr. Wachter had operated under a “significant conflict of interest.”

“Mr. Wachter provided his fair market value estimates at the same time he was soliciting Mr. Hyland for the exclusive rights for five years to auction the paintings in the event they were sold,” he wrote. “Thus, Mr. Wachter, on behalf of his firm, had a direct financial incentive to curry favor with Mr. Hyland by providing fair market value estimates that benefited his interests as the estate’s residual beneficiary — that is to say, ‘lowball’ estimates that would lessen the federal estate tax burden borne by the estate.”

Judge Gale said the sales figures presented by Mr. Wachter to support his premise that Russian buyers had inflated the old masters’ market were unpersuasive. He added that a leading fine arts conservator who had examined “Maypole” said that cleaning it “seemed ‘reasonably safe.’”

While saying he was “convinced that Mr. Wachter exaggerated the dirtiness of the paintings on the valuation date and the risks involved in cleaning them,” the judge acknowledged that “Maypole” had been dirtier in 2005 than it was when it was put up for sale in 2009, and lowered Mr. Cardile’s estimate of its value to $1,995,000 to reflect that.

“We are satisfied that on the valuation date Maypole was quite dirty and needed to be cleaned by a conservator,” the judge wrote.

He set the value of the second painting at $375,000. Lawyers for the estate and Mr. Hyland did not respond to a request for comment.