Conrad Teitell ()
“I don’t know much about art, but I know what I like.”
Attributed to Orson Welles
(but likely said by others much earlier)
“He knows all about art, but he doesn’t know what he likes.”
The New Yorker, Nov. 4, 1939
IRS’s Art Advisory Panel knows what it likes and what it doesn’t like—and it places dollar values on contributed artworks.
Before discussing the IRS Art Advisory Panel, here’s quick background on the tax rules for deductibility of art gifts. For gifts of appreciated artworks, antiques, books, and other tangible personal property held long-term, the deduction depends on how the public charity uses the gift. Reg. §1.170A-4.
Related-Use Gifts. When the charity’s use of the property is related to its exempt function (e.g., a painting given to an art museum or to a school for its art gallery), the donor can deduct the full present fair market value. IRC §170(e)(1)(B)(i).
Deductibility Ceilings. These gifts are deductible up to 30 percent of adjusted gross income (AGI), with a five-year carryover for any “excess.” IRC §170(b)(1)(D)(i); IRC §170(d)(1).
Proof of Use. A donor may treat a gift as put to a related use by the donee if: (1) the donor establishes that the property is not in fact put to an unrelated use by the donee; or (2) at the time of the contribution, it is reasonable to anticipate that the property will not be put to an unrelated use by the donee. Reg. §1.170A-4(b)(3)(ii). A letter from the donee stating its intended use can help a donor show that he or she reasonably anticipates that the charity’s use will be related.
In the case of a contribution of tangible personal property to or for the use of a museum, if the object donated is of a general type normally retained by such museum or other museums for museum purposes, it will be reasonable for the donor to anticipate, unless he has actual knowledge to the contrary, that the object will not be put to an unrelated use by the donee, whether or not the object is later sold or exchanged by the donee. Reg. §1.170A-4(b)(3)(ii)(b).
Charitable gifts of artworks almost always present valuation issues. An appraisal by a respected, unbiased qualified expert is key to substantiating a charitable deduction for a donated work of art.
Art Advisory Panel
IRS has its own experts— the Art Advisory Panel. When a claimed valuation of an artwork exceeds $50,000, IRS must send information to the panel about the artwork. Smaller claimed values may be referred to the panel. The panel’s specialty areas include paintings and sculpture, decorative arts, and antiques. There are currently two subcommittees: the Fine Arts Panel, which reviews paintings, sculpture, watercolors, prints, and drawings, and the Decorative Arts Panel, which reviews antique furniture, decorative art, ceramics, textiles, carpets, and silver.
Here’s how the panel works:
Art valuation issues arising from audits of income, gift or estate tax returns in IRS district offices may be referred to the national office for review. Appraisals involving art works valued at $50,000 or more must be referred.
At panel meetings, the members discuss and make recommendations on the acceptability of taxpayers’ appraisals of artworks. If the panel recommends rejection of a taxpayer’s appraisal, it may also recommend a different valuation, or the securing of additional information, or consultation with some specialist.
Prior to the meetings, IRS National Office art appraisers send photographs and written materials to the panelists about the artworks they will be evaluating. The written materials incorporate information from the taxpayer’s appraisal reports and the results of the staff’s own authentication and market research.
On a number of items, one or more of the panelists or staff will have seen the property itself and may comment on the adequacy of the taxpayer’s photograph and description. The panelists are sent all available probative information on each work—e.g., size, medium and support, physical condition, history of ownership, public exhibitions, and citations in literature. Panelists are also given information on public and private sales of apparently similar works by the same artists. They are also informed about the valuation date and the value actually claimed on the taxpayer’s tax return.
Other information, however, is not sent to the panelists but may be orally introduced if and when necessary. For example, if a work’s physical condition or aesthetic quality is uncertain, its location may be disclosed to facilitate planning an inspection of the work by either one or more panelists. That location information would be introduced even though it would tend to reveal whether the work was involved in a contribution or estate tax situation.
The effect and amount of the tax consequence of raising or lowering a valuation typically is not disclosed to the panelists. However, since charitable contribution items are virtually never valued conservatively, it is often obvious to the panelists as to whether the appraisal is for a contribution deduction or for gift and estate tax purposes for artworks not given to charity but to family members or other noncharities.
The identity of the taxpayer’s appraiser is revealed to the panelists only after they have reached their consensus, unless before then, the panel recommends Internal Revenue Service consultation with an outside specialist whom the taxpayer has already utilized.
Although taxpayers’ names are not sent out to the panelists, the prominence in the art world of many of the works being valued, or discussed as comparable sales, often results in the identities of taxpayers, and even other art buyers, being recognized by the panelists. This is the primary reason why panel meetings are closed to the public. To minimize recognition of taxpayers’ identities, the appraisal review discussion is held in alphabetical order by the artists’ last names. Appraisals of any one taxpayer’s collection are thereby interspersed with the appraisals of other taxpayers. The commingling of the collections purportedly minimizes the likelihood of recognition of a taxpayer’s entire collection.
After a panel meeting, the IRS National Office’s art appraisers prepare a valuation report on each rejected appraisal. The reports are sent to the IRS District Office which initially referred the taxpayer’s valuation. The reports are then made available to the taxpayers whose appraisals have been rejected. The referring districts are notified on those cases having acceptable appraisals.
In some cases, a taxpayer may then secure additional information to better support the valuation. That information, if deemed substantive by the staff, is submitted to the panel for reconsideration at a subsequent meeting.
The IRS recently issued the Art Panel’s 2013 annual report. The panel reviewed 291 items with an aggregate taxpayer valuation of $444.3 million on 31 taxpayer cases it considered. The average claimed value of a charitable contribution item was $2.4 million; the average claimed value for an estate and gift item not given to charity but to others was $1.2 million. The panel recommended acceptance of 44 percent of the appraisals reviewed and adjustments on 56 percent.
On the adjusted items, the panel recommended total net adjustments of $54.6 million on estate and gifts tax appraisals for artworks given to noncharities, a 33 percent increase. Net adjustments for charitable contribution appraisals totaled $51.1 million, a 32 percent reduction. This has been the immutable pattern year after year: IRS views taxpayers’ valuations as high for charitable transfers (for which income tax deductions are claimed), and low for non-charitable transfers (on which IRS wants gift or estate taxes). Not surprisingly, taxpayers see it just the other way around.
Statement Establishing Value
Binding Valuation Agreement Between the IRS and the Donor. By paying a user fee, a donor of a work of art appraised at $50,000 or more, can get a statement from the IRS that establishes the value of art gifts for income, gift, and estate tax purposes. The donor must request the statement after making the gift, but before filing a tax return claiming the charitable deduction. The fee is $5,400 for a statement for up to three items, plus $270 for each additional item. See Rev. Proc. 2014-1, Appendix A, 2014-1 I.R.B. 1 (Jan. 2, 2014); Rev. Proc. 96-15, 1996-1 CB 627.
Address for Valuation Agreement Requests. Requests for Statement of Value: Internal Revenue Service, Attn: Art Appraisal Services (C:AP:SO:AAS), P.O. Box 27720, McPherson Station, Washington, D.C. 20038.