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Valuing Artwork for Federal Taxation Purposes: Income, Estate & Allowance Tax Issues1

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Valuing artwork is inherently subjective.  Appraisers can await on cold factors to bulk artwork, such as comparable sales of agnate pieces, but, clearly, two altered appraisers can access at altered values.   There may additionally be a variety of abstract factors that affect the bulk an client ascribes to a accurate assignment of art, whether it is because the assignment is a family antique or because the assignment was recovered from the Nazis.  On top of all this, the tax rules about actuate owners to overvalue or undervalue property, including artwork.

The Internal Revenue Code of 1986, as adapted (the “Code”), and the Treasury Regulations thereunder, authorize a coil of rules and requirements apropos the taxpayer’s accountability to actualize the bulk of acreage stated on a tax return.  For federal tax purposes, the accent of account acreage is credible in three accepted scenarios: (1) back an client donates acreage to a accommodating alignment and wishes to affirmation a accommodating addition answer beneath Section 170, (2) back a decedent’s gross acreage is admired for the purpose of artful the acreage tax, and (3) back a donor is accountable to the allowance tax beneath Section 2501. 

The Code incentivizes taxpayers to accept a college appraisement for artwork in the case of a accommodating addition and a lower appraisement in the case of the acreage or allowance tax.  What is an client to do if one adjudicator ethics a assignment at $25 million, while addition ethics it at $30 million?  Considering that the accomplished alone assets tax bulk is currently 39.6% and the accomplished acreage and allowance tax bulk is 40%, a taxpayer’s alternative for a low-side or high-side appraisement of artwork may affect his tax accountability by millions of dollars. 

The tax law makes bright that the aborigine has the accountability of substantiating the bulk of the property.  To this end, a aborigine charge not alone accede with the procedural requirements for valuation, but charge additionally actuate the trier of actuality that his claimed appraisement is correct.

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The Treasury Regulations ascertain “fair bazaar value” as “the bulk at which the acreage would change easily amid a accommodating client and a accommodating seller, neither actuality beneath any coercion to buy or advertise and both accepting reasonable ability of accordant facts.”2  Although this “willing buyer” and “willing seller” access appears workable, the parties complex in a donation or gift, for example, are not affected to accede on a adjourned bulk the way an actual client and agent are.  Accordingly, the alone obstacle to using a accurate appraisement for artwork is about the Internal Revenue Service (the “IRS”), accumulated with the abeyant for penalties and absorption in the case of a baloney of value. 

In an accomplishment to abetment taxpayers in account artwork, the IRS accustomed the Art Appraisement Services analysis (the “AAS”).  Above-mentioned to appointment an income, gift, or acreage tax return, a aborigine can appeal that the AAS accommodate a Statement of Bulk in which the IRS ethics the artwork for the taxpayer.  A aborigine charge abide such a appeal to the AAS above-mentioned to filing the tax acknowledgment that aboriginal letters the alteration of the item.3

After accepting a Statement of Bulk from the IRS, the taxpayer charge attach a archetype of it to his income, gift, or acreage tax return.  A aborigine who disagrees with the IRS’s Statement of Bulk may abide with the tax acknowledgment added admonition in abutment of a altered value.  A aborigine who submits a return above-mentioned to accepting the Statement of Bulk charge announce on the acknowledgment that a Statement of Bulk has been requested and attach a archetype of the appeal to the return. In such a case, aloft cancellation of the Statement of Value, the aborigine charge book an adapted assets or allowance tax return, or a added acreage tax return, with the Statement of Bulk attached. 

Pursuant to the Federal Advising Committee Act, the Art Advisory Panel (the “Panel”) was created in 1968 to abetment the AAS in appraising works of art admired at $50,000 or more.  The Panel’s associates are building admiral and curators, art dealers, and bargain assembly so that differing angle as to fair bazaar bulk are provided.  Back a tax acknowledgment called for analysis includes an art appraisement admired at $50,000 or more, the bounded IRS appointment refers the case to the AAS and orders a subsequent barometer to the Panel back applicable. The Panel’s recommendations are advisory. The AAS agents reviews all of the Panel’s recommendations, which become the position of the IRS alone with the AAS’s concurrence. For Fiscal Year (“FY”) 2012, the AAS adopted, in full, 96.5% of the Panel’s recommendations, and adopted the blow in part.  The Panel additionally reviews and evaluates the acceptability of property appraisals submitted by taxpayers in abutment of the fair market bulk claimed on works of art complex in federal income, estate, or allowance taxes.  In March 2014, the IRS renewed the Panel’s allotment for two years, answer that the Panel serves the public’s interest. 

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The Panel reviews appraisals after ability of whether the aborigine is bigger served by a aerial appraisement for a charitable addition or a low appraisement for acreage or allowance tax purposes.  In its Annual Arbitrary Report for FY 2012, released on January 23, 2013, the Panel appear that it recommended accepting 51% of all art appraisals it advised for FY 2012 and proposed adjustments to the actual 49%. During FY 2012, the Panel completed its analysis of 444 items with an accumulated taxpayer appraisement of $281,859,200 on 43 aborigine cases beneath audit. The boilerplate claimed bulk of a accommodating addition was $613,684, and the boilerplate claimed bulk of an acreage and allowance tax account was $628,890. The Panel recommended absolute net adjustments of $66,066,800, a net 52% abridgement on the accommodating contribution appraisals and a net 47% access on items in acreage and allowance tax appraisals.

There are several rules that a aborigine charge be acquainted of when claiming a accommodating addition answer for a donation of art to a charity.  Section 170(a)(1) about allows taxpayers to affirmation as a answer any accommodating addition fabricated during the taxable year.  Generally, the bulk of the answer is equal to the bulk of money or the fair bazaar bulk of the property contributed, bent at the time of the donation.  However, the answer charge be bargain by the bulk of accretion that would not accept been abiding basic accretion if the acreage contributed had been awash by the aborigine at its fair bazaar value.  For example, if a aborigine purchases artwork for $100,000 on January 1, 2001, again donates the artwork to a alms on December 31, 2001, back the acreage is admired at $300,000, the charitable addition is bound to $100,000, bent as follows: $300,000 fair bazaar bulk bare $200,000 non-long-term basic gain. Alternatively, if the aborigine waits until January 2, 2002 to accord the artwork, the “non-long-term capital gain” limitation would not administer and the answer would be $300,000, the artwork’s fair bazaar value.

The accoutrement of Section 170(f)(11) appoint advertisement obligations on taxpayers who affirmation accommodating addition deductions admired at added than $500.  Back the claimed donation is admired over $500 but beneath $5,000, the aborigine needs to complete Section A of Form 8283 in adjustment to accommodate the IRS with a description of the donated acreage and assertive added appropriate information.  Back the claimed donation is over $5,000, the aborigine needs to attach a “qualified appraisal” to his tax acknowledgment and complete Section B of Anatomy 8283, accepted as the “Appraisal Summary.” The Treasury Regulations accommodate abundant requirements for a “qualified appraisal” and for the analogue of a “qualified appraiser.”4  The almsman has no obligation to affirm or contrarily validate the donor’s claimed valuation.  For example, in 2004, the Smithsonian had no obligation to bulk the agreeable instruments it accustomed from Herbert Axelrod, who claimed a tax answer for $50 actor on the donation.  In 2005, Axelrod was bedevilled to 18 months in jail for altered tax fraud. 

One of the best alluring appraisement disputes in contempo memory complex the Acreage of Ileana Sonnabend and Robert Rauschenberg’s “Canyon.”  For acreage tax purposes, the aborigine admired “Canyon” at $0 because the collage independent a blimp baldheaded eagle, which meant the bargain of the assignment would accept been actionable beneath federal law and could have resulted in imprisonment for the seller.5  The IRS, however, afterward the admonition of the Panel, valued “Canyon” at $65 actor and adjourned a $29.2 million acreage tax, added $11.7 actor in penalties.  The IRS reasoned that addition may accept capital to acquirement “Canyon” on the atramentous market.  In backward November 2012, the parties acclimatized the tax dispute.  The brood agreed to accord the assignment to the Building of Modern Art in barter for the IRS bottomward its absence claim. The brood additionally agreed not to affirmation a accommodating addition answer with account to the donation.

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A 2011 accommodation by the 11th Circuit highlights the botheration when courts charge adjudge amid two altered “reasonable” valuations.  In U.S. v. Reinhard, 107 A.F.T.R.2d 2011-355, (11th Cir. 2011), the actor bootless to accommodate certain sculptures in his defalcation acreage in 2006.  To admeasurement the estate’s accident as a aftereffect of such failure, the government argued that the sculptures should be admired at $40,000 each, based on a 2004 appraisal.   The defendant, however, argued that a 2007 bargain bulk of $24,000 added accurately reflected the bulk of the sculptures in 2006.  Although the court accustomed that “there is commodity to be said for” the defendant’s argument, it bent that the lower court’s accepting of the college 2004 appraisement was not bright absurdity and was accordingly affirmed.

In Williams, III v. Comm’r, 110 A.F.T.R. 2d 2012-6904 (4th Cir. 2012), aff’g, T.C.M. 2011-89 (Apr. 21, 2011), the tax cloister had to actuate the date on which the aborigine acquired artwork for the purposes of free whether he endemic the assignment for added than one year.  The aborigine had accomplished an “Art Acquirement Agreement” that appropriate him to pay 5% at signing, with the antithesis due at the time of the accommodating contribution.  The absolute bulk payable by the aborigine to the agent was bound to 24% of the artwork’s fair bazaar bulk at the time of the donation.  The Tax Court found, and the 4th Circuit affirmed, that the “Art Purchase Agreement” did not admission aborigine buying of the artwork because, in substance, the acceding provided alone an advantage to acquirement artwork in the future.  The Cloister bent that the aborigine did not access the artwork until the time of the deduction.  Accordingly, beneath Section 170(e)(1)(A), the taxpayer’s answer was bound to his base because he did not own the assignment for added than a year. The Williams accommodation indicates that courts will accede the actuality of the transaction afore acceptance a taxpayer’s charitable addition deduction. Id. at 2012-6912 (quoting U.S. v. Heller, 866 F.2d 1336, 1341 (11th Cir. 1989) “Federal tax law disregards affairs defective an bread-and-er purpose which are undertaken alone to accomplish a tax savings. Federal tax law is anxious with the bread-and-er actuality of the transaction beneath analysis and not the anatomy by which it is masked.”).

The bulk of a accurate assignment of art depends on various cold and abstract factors, which about advance to varying opinions as to the work’s fair bazaar value.  The AAS and the Panel serve important roles in the administering of the tax laws by abbreviation some of the ambiguity and subjectivity of valuations, decidedly in cases area a aborigine may be addition the boundaries of reasonableness.

Combining the adversity of account artwork with the Code’s incentives and complication is a compound for connected tax litigation.  As accent in the altercation of contempo case law, applying the tax law to art appraisement issues is often acutely difficult.  For example, although the IRS may have been absurd to bulk “Canyon” at $65 million, the IRS was not absurd to altercate that the assignment had some value.  In cases area a accurate assignment of art may accept a reasonable ambit of value, the aborigine is acceptable to affirmation the bulk that is best tax favorable to him.  The IRS is then affected to claiming the claimed valuations in an accomplishment to protect tax revenues and anticipate abuses, such as in Williams.

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In chief how to bulk a assignment of art for U.S. tax purposes, a aborigine charge accede all the assorted rules and procedural requirements.  Appraisers and added experts may assist taxpayers in accession at a reasonable appraisement to use on tax returns; however, taxpayers may not blindly await on such experts.  As a allegorical principle, taxpayers should always accede the bulk that a “willing buyer” would pay for the acreage appear on a tax return. ?

Footnotes

1   IRS Circular 230 Disclosure: To ensure acquiescence with Treasury Department regulations, we acquaint you that any U.S. federal tax admonition independent in this certificate (including any attachments) was not advised or accounting to be used, and cannot be used, for the purpose of (i) alienated penalties that may be imposed beneath the U.S. Internal Revenue Code or (ii) promoting, marketing, or advising to addition affair any transaction or bulk addressed herein.

2   E.g., Treas. Reg. 1.170A-1(c)(2) (for accommodating contributions); Treas. Reg. 20.2031-1(b) (for acreage tax purposes); Treas. Reg. 25.2512-1 (for allowance tax purposes).

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3   The appeal charge accommodate the following: (1) a copy of an appraisement of the account of art; (2) a analysis or money order payable to the IRS in the bulk of $2,500 for a appeal for a Statement of Bulk for one, two, or three items of art, added $250 for anniversary added account of art for which a Statement of Bulk is requested; (3) a completed appraisement arbitrary (Section B of Form 8283, Noncash Accommodating Contributions); and (4) the area of the District Appointment that has or will accept assay jurisdiction over the return. See Rev. Proc. 96-15, 1996-1 CB 627, 12/28/1995.

4   See Treas. Reg. 1.170A-13(c)(3) and (5).

5   The Acreage reportedly paid $471 actor in accompaniment and federal acreage taxes alike with a $0 appraisement for “Canyon.”

The agreeable of this commodity is advised to accommodate a general adviser to the accountable matter. Specialist admonition should be sought about your specific circumstances.

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