Business Valuation Resources reported recently on Estate of Kollsman v. Commissioner, TC Memo 2017-40, in which the government rejected Sotheby’s appraisals of two significant artworks, citing inherent conflict and resulting bias, and the U.S. Tax Court agreed. After all, Sotheby’s valued one painting at $500,000.00, then sold it at auction for $2,400,000.00 (“buyer’s premium” included), just four years later. The court rejected Sotheby’s claim that the near five-fold appreciation was due to a good cleaning, and an uptick in Russian buyers.
Finding the valuations “unreliable and unpersuasive”, the court noted Sotheby’s inherent conflict of interest: lure in the customer with a favorable “lowball” estate valuation, while soliciting the auction business.
It reminds us of two things from our divorce mediation practice as well as our other professional iterations as litigators, judge and arbitrator.
First, expert witnesses, however good and straight-laced, somehow deliver results that favor the hiring client 99.99 per cent of the time; and-
Second, “informal” experts such as real estate brokers, whose ulterior and ultimate interest is in obtaining sales inventory have, by definition, Sotheby’s-like conflicts.
That is why in all of our private dispute resolution processes, we encourage clients to use single, neutral experts who are hired by and paid equally by the clients, or on occasion, by us. And, where intimate market information may be gleaned from informal experts, their data should never be viewed in isolations, but with other vetted information to provide comparison and context.