Men, Boys, Price, Toys


How much is a classic bright-red Ferrari worth? Well, if it's the 1957 335 S Spider Scaglietti that the French Bardinon family auctioned earlier this month, the answer is €32 million, or around $35.8 million. But if there isn't a convenient auction to establish how much someone will pay for something, and you need to set a price, how exactly do you go about establishing a number?

Here's where this week's story starts: Pierre Bardinon was a French leather-goods heir whose family manufactured, among other items, bomber jackets for the U.S. Air Force. At a young age, Bardinon fell in love with car racing and Ferraris, and, over time, he amassed one of the world’s largest collections of the renowned luxury car. He even extended this passion to his family's chateau at Mas du Clos to the sport by adding a two-mile racetrack and car museum to the estate.

While Bardinon did sell many of his prized Ferraris over the course of his lifetime, there were still 20 remaining in his possession when he passed in 2012. His family valued those remaining in his collection at €70 million for estate-tax purposes. But since then, prices for the exotic Italian cars have accelerated nearly as fast as the cars themselves. Today, the collection could be worth around €200 million, which means that French tax authorities may feel inclined to take another look.

It should be noted that estate taxes are entirely different from income taxes. The rules themselves aren't especially complicated - the tax doesn't kick in until your taxable estate tops $5.45 million ($10.9 million for married couples) and the rate itself is a flat 40%. (French rates on Bardinon's Ferraris are even higher at 45%.) The real issue is assigning values to assets. How does one establish exactly how much an asset is worth?

If an estate consists of publicly-traded securities, that's easy to determine. But, throw in some real estate or a closely-held business and it gets a little tougher. And if there are collectibles or other hard-to-value assets — such as Bardinon's Ferraris — that's when things get really sticky.

In 2013, the IRS got just 33,719 estate tax returns. However, they audited a hearty 8.5% of them (versus just 0.9% for individual income tax returns). 3,359 of those returns reported assets over $10 million — and the IRS audited a whopping 27% of those. In fact, experienced estate-tax preparers go into the job assuming their returns will be audited.

Naturally, most families want to lowball the value of their assets and it's not necessarily hard to find an appraiser who will go along for the ride. But the IRS has their own resources to fight back. When it comes to art, for example, the Service keeps an in-house staff of appraisers and experts. When that's not enough firepower, they also maintain an Art Advisory Panel, made up of two dozen scholars, curators, and dealers with expertise in a variety of areas. In 2014, the panel looked at 159 items and adjusted their values up by $27.8 million. That's an extra $11 million or so in tax.