In 2005, a Sotheby’s expert valued a painting at $500,000 for the deceased owner’s estate. In 2009, the painting sold at a Sotheby’s auction for a $2.1 million hammer price ($2.4 million with the buyer’s premium). The IRS cried foul and demanded back taxes of almost $780,000 from the estate. The appraiser argued that a large influx of Russian buyers for this type of painting was one reason for the almost fivefold increase in value. But the Tax Court did not buy this and also cited a significant conflict of interest: The appraiser did the valuation at the same time he was soliciting the owner to sell other paintings. The owner was the estate’s residual beneficiary, so the “lowball” estimate would cut the estate’s federal tax bill.

If the valuation had occurred after 2006, the appraiser would likely have been penalized under section 6695A for a gross understatement of value. The case is Estate of Kollsman v. Commissioner, TC Memo 2017-40.