Academic journal article Journal of Accountancy

Valuing Art for Tax Purposes: Beauty May Be in the Eye of the Beholder, but Art Valuation Requires Reason and Objectivity

Academic journal article Journal of Accountancy

Valuing Art for Tax Purposes: Beauty May Be in the Eye of the Beholder, but Art Valuation Requires Reason and Objectivity

Article excerpt

EXECUTIVE SUMMARY

* Artworks are often donated for a charitable deduction for income tax purposes or valued as a gift or part of a taxable estate. CPAs need to make sure that clients have obtained a qualified appraisal of a fair market value that can be successfully defended in a return examination.

* For items of art valued at $50,000 or more, taxpayers may rely upon a statement of value from the IRS, in a procedure similar to that for obtaining a private letter ruling.

* Tax returns selected for audit that involve artwork with a taxpayer-claimed appraised value of $20,000 or more are reviewed by the IRS Art Advisory Panel of experts. The panel may accept the taxpayer's qualified appraisal or recommend a different value. In 2008, the panel adjusted estate and gift valuations upward in the majority of the cases it considered, by an aggregate of 91% of taxpayer-submitted values.

* Causes of valuation disputes with the IRS can include art market volatility and questions of an artwork's authenticity and legitimacy of its provenance. Also, the IRS has challenged blockage discounts applied by taxpayers to collections of artworks,

* As with other tax-related valuations of personal property, a qualified appraisal prepared by a qualified appraiser is essential. Credentials for fine art appraising usually include membership in a professional association and adherence to the substance and principles of the Uniform Standards of Professional Appraisal Practice.

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Even people who don't collect art probably own a painting or sculpture or two. At some point, one of two things is likely to happen: One, the artwork will be given away, perhaps as a noncash charitable contribution for which the owner will claim an itemized deduction, or as a taxable gift. Or, two, it will wind up as part of the owner's estate, the value of which may be subject to estate tax.

In any case, if the item is worth more than $5,000, the IRS will require more than a casual listing of what the taxpayer originally paid for it or an uneducated guess as to its current value. And even the best researched taxpayer appraisal could be countered by the IRS' own appraisal, perhaps resulting in far different values. Thus it's important for CPAs advising taxpayers in such circumstances to be familiar with the requirements for appraisals and IRS policies and procedures for valuing artwork. The amounts at stake are often high. In 2006, U.S. individual taxpayers claimed itemized deductions for charitable contributions of 147,896 items of art and collectibles worth more than $1.22 billion, more than the value of donated mutual funds ("Individual Noncash Contributions, 2006," Statistics of Income Bulletin, Summer 2009, tinyurl.com/23uozel). The average value of an artwork contribution, at $8,263, was much greater than for other tangible personal property, including vehicles.

While the value of artwork and collectibles in taxable estates or those given as gifts subject to gift or generation-skipping transfer tax each year is unknown, it likely is many times greater than the amount claimed in income tax deductions for noncash contributions. Still other tax-related valuations crop up in the context of theft or casualty loss deductions. In all these circumstances, a qualified appraisal that can be successfully defended in a return examination is essential. CPAs may also be involved in valuing artwork in nontax situations, such as equitable division of property in a divorce or other settlement. While CPAs don't necessarily need to be up on the finer points of the market for late 19th or early 20th century Impressionist paintings, they do need to be able to assess whether an art appraisal is needed and if it will likely pass muster with the IRS.

In whatever context, tax-related appraisals determine fair market value, which is not necessarily the value that might be posted in a shop or gallery, since there is no certainty that an item would sell at the retail asking price. …

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