At its best, a great work of art is an object which consoles the spirit in difficult times, and inspires one’s life in better times. Unfortunately, to a great extent it has now become a “commodity,” bought, sold, and donated primarily because of its inherent value.
If art is donated to a public charity, the donor will be seeking the highest possible tax valuation, full fair market deduction being available only when the donee charity accepts the donation of the work for use in its charitable programs (e.g., display in the case of museum); on the other hand, if the art is gifted or bequeathed to an individual, a lesser valuation is desired.
The Internal Revenue Service has an “Art Advisory Panel” (comprising museum curators, professional art dealers etc.), which assists in tax appraisals of a works of art or cultural property valued at $50,000 or more. According to the IRS, “fair market value” is the price that would be agreed upon between a willing buyer and willing seller, with neither being required to act by outside circumstances, and both having reasonable knowledge of the relevant facts. If the donor puts a restriction on the use of the property donated, the fair market value may be reduced to reflect that restriction; in some cases the restriction could adversely affect basic deductibility. Hence, accurate valuations (and proper tax advice) are essential both for charitable contribution, and estate and gift tax purposes. The panel on an aggregate basis generally increases the value of art given or bequeathed, and reduces the amount of the claimed charitable contribution deductions.
Better known is the requirement (for charitable contribution deduction purposes) that the donor obtain for the year of donation a timely written appraisal of the donated work from a “qualified appraiser,” prior to the filing of the tax return claiming the deduction, accompanied by a properly prepared IRS Form 8283 filed with the donor’s tax return.
The first step in determining the value of a work of art is called “authentication” — i.e., proof that the work of art was actually produced by the desired artist — it is well-known that clever reproductions are prevalent, particularly with regard to certain famous artists, such as Rembrandt. “Due diligence” for an authenticator is often a challenging assignment, involving careful examination of the item and some detective work.
Crucial is “provenance,” which is the history of ownership of the work of art, ideally from the time it left the artist’s studio, to the present. These processes are highly complex, but essential if a work of art is to be appropriately valued. Once the work is “authenticated,” it is then valued and the value falls within the test of the judgment of a “willing buyer or seller.”
Estimated value is also an issue when an art owner, or museum desires to obtain insurance against loss of a work of art, either by theft or destruction (e.g., a fire).
Not surprisingly the “authentication” of a great work of art can be conjectural, and the owner of the item may be dissatisfied with a negative authentication, as it unquestionably drastically reduces the value of the object for sale or charitable contribution purposes. In the case of some foundations focusing on the works of a particular artist, such as the Andy Warhol Foundation, authentications are no longer provided — in too many cases, the owner of the item has brought a legal action against the authenticator, where the judgment was negative, arguing that the value of the piece was diminished by perceived improper authentication.
The situation in New York State reached the level where in the 2014 legislative session a bill was introduced, providing that in any civil action brought against an authenticator that arises from or relates to the authenticator’s opinion or information concerning a work of fine art, the claimant shall be required to specify in the complaint “facts sufficient to support each element of the claim or claims asserted, . . . prove the elements of such claim by clear and convincing evidence,” and to the extent that the authenticator prevails, “the authenticator shall be entitled to recover his, her or its reasonable attorney fees, costs and expenses.”
All of the above demonstrates the complexities involved when a work of art is to be valued for any purpose, including gift, sale, donation, bequest and insurance. Attorneys should be fully informed of the facts and applicable law to render useful and correct advice.