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Art collectors, art creators, legal and financial planners, executors and trustees should all have familiarity with the basic rules for appraising art, especially for charitable donation. An appraisal is used to determine the Fair Market Value (FMV) of an item for donation. FMV is defined by the IRS as the price that would be agreed on between a willing buyer and a willing seller on the open market, with neither being required to act, and both having reasonable knowledge of the facts.
Ethical and performance standards, appraiser qualifications, and guidance regarding valuation methods and techniques are established by The Appraisal Foundation (TAF). This organization was established in 1987 in order to implement the Uniform Standards of Professional Appraisal Practice, or USPAP.
Contributions of art objects and other personal property are reported on IRS Form 8283, Noncash Charitable Contributions, Section A, for all contributions for the year over $500.
For deductions of art objects and other personal property over $5,000, Form 8283 Section B must be completed. This is signed by the donor, the donee, and the appraiser. The $5,000 amount applies to both a single item of property valued over $5,000 or to the aggregated value of similar items of property donated during a calendar year, whether the items are donated to one or multiple donees. Thus, a gift of similar items such as books or stamps to multiple charitable recipients will be aggregated together, and if the total is over $5,000, the donated value must be substantiated. The donor should also obtain a separate qualified written appraisal of the donated property from a qualified appraiser.
For deductions of art objects and other personal property over $20,000, the same procedure must be followed, but the appraisal must be attached to Form 8283 when it is submitted to the IRS.
The weight given an appraisal depends on the completeness of the report, the qualifications of the appraiser, and the appraiser’s demonstrated knowledge of the donated property. An appraisal must give all the facts on which to base an intelligent judgment of the value of the property.
Generally, if the claimed deduction for an item or group of similar items of donated property is more than $5000, the deduction should be supported by a qualified appraisal made by a qualified appraiser, and you must attach Schedule B of form 8283 to the tax return. The phrase “similar items” means property of the same generic category or type (whether or not donated to the same donee), such as stamp collections, coin collections, lithographs, paintings, photographs, books, nonpublicly traded stock, nonpublicly traded securities other than nonpublicly traded stock, land, buildings, clothing, jewelry, furniture, electronic equipment, household appliances, toys, everyday kitchenware, china, crystal, or silver.
Appraisals should describe the individual items being appraised unless the item consists of a set, such as a set of dishes or elements of a complete costume. For items of very minor value, an appraiser can provide a group description for items totaling less than $100. (IRS Pub. 561 (2007) Determining the Value of Donated Property.)
Section 1219 of the Pension Protection Act of 2006 imposed new requirements for what constitutes a “qualified appraisal” by a “qualified appraiser” for a gift of non-cash property worth more than $5,000. (The Pension Protection Act of 2006 (P.L. 109-280))
The appraiser should have earned an appraisal designation from a recognized professional appraiser organization for demonstrated competency in valuing the type of property being appraised OR meet certain minimum education and experience requirements:
- The individual must regularly perform appraisals for which the appraiser receives compensation.
- The individual must demonstrate verifiable education and experience in valuing the type of property being appraised. To do this, the appraiser can make a declaration in the appraisal that, because of his or her background, experience, education and membership in professional associations, he or she is qualified to make appraisals of the type of property being valued.
- The individual has not been prohibited from practicing before the IRS under 31 USC §330(c) at any time during the past three-year period ending on the date of the appraisal.
- The individual is not a donor or done, party to a transaction in which the property was acquired, an employee, married to or related to another party, and other conflict of interest-based exclusions.
- The appraiser must sign the qualified appraisal and Form 8283, Noncash Charitable Contributions, Section B, Part III.
The Court is not bound by the opinion of any expert witness, including an appraiser.
The appraisal should provide a complete description of the item of art, including, if known:
(a) the name of the artist or culture;
(b) the title or subject matter;
(c) the medium, such as oil on canvas, or watercolor on paper;
(d) the date created;
(e) the size;
(f) any marks, signatures, or labels on the item of art, on the back of the item of art, or affixed to the frame;
(g) the history (provenance) of the item, including proof of authenticity, if such information is available;
(h) a record of any exhibitions at which the item was displayed;
(i) any reference source citing the item; and
(j) the physical condition of the item.
A Self-Contained Appraisal Report is the typical format used for appraisals submitted to the IRS.
The content of a Self-Contained Appraisal Report for personal property must be consistent with the intended use of the appraisal and, at a minimum state the identity of the client and any intended users, by name or type; state the intended use of the appraisal; sufficiently identify the property involved in the appraisal, including the physical and economic property characteristics relevant to the assignment; state the property interest appraised; state the type and definition of value; state the effective date of the appraisal and the report; describe the scope of work used to develop the appraisal; describe the information analyzed, the appraisal methods and techniques employed, and the reasoning that supports the analyses, opinions, and conclusions; exclusion of the sales comparison approach, cost approach, or income approach must be explained; state the use of the property on the date of value; and, when an opinion of the appropriate market was developed by the appraiser, describe the rationale for that opinion; clearly and conspicuously: state all extraordinary assumptions and hypothetical conditions; and state that their use might have affected the assignment results; and include a signed certification.
Each written personal property appraisal report should contain a signed certification that is similar in content to the following form:
- I certify that, to the best of my knowledge and belief:
- The statements of fact contained in this report arc true and correct.
- The reported analyses, opinions, and conclusions arc limited only by the reported assumptions and limiting conditions and are my personal, impartial, and unbiased professional analyses, opinions, and conclusions.
- I have no (or the specified) present or prospective interest in the property that is the subject of this report and no (or the specified) personal interest with respect to the parties involved.
- I have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment.
- My engagement in this assignment was not contingent upon developing or reporting predetermined results.
- My compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal.
- My analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice.
- I have (or have not) made a personal inspection of the property that is the subject of this report. (If more than one person signs this certification, the certification must clearly specify which individuals did and which individuals did not make a personal inspection of the appraised property.
- No one provided significant personal property appraisal assistance to the person signing this certification. (If there are exceptions, the name of each individual must be stated.)
PENALTIES FOR SUBSTANTIAL AND GROSS VALUATION MISSTATEMENTS
The donor may be liable for a penalty of 20% of the underpayment of tax related to an overstatement of value of donated property if the value or adjusted basis on the return is 150% or more of the correct amount and the donor underpaid his tax by more than $5000 because of the overstatement. There is a 40% penalty if the difference is 200% or more and the donor underpaid by more than $5000. (And vice versa for understatement on estate and gift tax.)
Section 1219 of the Pension Protection Act of 2006 added IRC 6695A, Substantial and Gross Valuation Misstatements Attributable to Incorrect Appraisals. This new penalty provision allows the IRS to assert a penalty against any person who prepared an appraisal of the value of property and who knew, or reasonably should have known, the appraisal would be used in connection with a return or claim for refund and that appraisal results in a substantial valuation misstatement (within the meaning of IRC 6662(e)), a substantial estate or gift tax valuation understatement (within the meaning of IRC 6662(g)), or a gross valuation misstatement (within the meaning of IRC 6662(h)) with respect to such property. (IRS Manual 18.104.22.168) The penalty imposed would equal the lesser of 10 percent of underpayment of tax resulting from the appraisal or 125 percent of the gross income received by the professional to prepare the report. Under prior law, appraisers could be barred from practice before the Department of the Treasury or the IRS after notice and a hearing if they had been assessed a penalty for aiding in an understatement; now the requirement that a penalty be assessed is no longer required before an appraiser can be barred from practice.
The Pension Protection Act created new limitations on the donation of fractional interests after August 17, 2006. (26 CFR 1.170 (f)(3))
Once a fractional gift is made, the value of any subsequent gifts is now limited to the lesser of the initial fair market value of the contribution or the later fair market value of the contribution. The gift must be completed within the earlier of 10 years or the death of the taxpayer. Since a charitable donation may be spread over 5 years, it would not make sense to donate less than a 50% interest. The donee institution must take substantial physical possession or make use of the property during the time represented by the fractional interest, i.e. a 50% interest gift means the institution must possess the item for ½ the year. If any of these conditions are not met, then the deduction previously taken by the taxpayer will be recaptured with interest at 10 percent.
CHARITABLE BARGAIN SALES
A bargain sale of personal property to a qualified charitable organization (a sale or exchange for less than the property’s fair market value) is partly a charitable contribution and partly a sale or exchange. This scenario can be particularly advantageous to an artist’s estate both through the charitable deduction and by enhancing the artist’s reputation (and the value of his remaining work) because of the presence of the artist’s work in museum collections. With the bargain sale, the client sells his or her art object or collection to the charitable organization at less than fair market value. The transaction gives your client cash, plus a charitable income tax deduction for the discount your client took from the market value.
An appraisal, which is reported in an appraisal summary (Form 8283), must be made within a narrow time frame, no earlier than 60 days prior to the date of gift or no later than the due date, including extensions, of the tax return on which a charitable deduction is first claimed. Unless the appraisal is completed and Form 8283 is filed timely, the charitable deduction is lost.
DONEE INFORMATION RETURNS 8282
Donee organizations must use Form 8282 to report information to the IRS and donors about dispositions of certain charitable deduction property. Original and successor donee organizations must file Form 8282 if they sell, exchange, consume, or otherwise dispose of (with or without consideration) charitable deduction property (or any portion) within 3 years after the date the original donee received the property.
The organization does not have to file Form 8282 if the item sold was valued at less than $500.
A $10,000 penalty may apply to any person who identifies in Part III tangible personal property the organization sold, exchanged, or otherwise disposed of, as having a use that is related to a purpose or function knowing that such property was not intended for such a use.
IRS ART APPRAISAL SERVICES
Art Appraisal Services (AAS) provides advice and assistance to the Service, other Government agencies, and taxpayers on valuation questions arising in connection with personal property and works of art. It also assists the Office of Chief Counsel and Department of Justice (DOJ) in the development of cases involving valuation issues for trial or pretrial settlement. At the request of the donor, the IRS will issue a Statement of Value that can be relied on by the donor of the object of art. This helps the donor in avoiding penalties. If your client is considering donating an object of art that has been appraised at $50,000 or more, you can recommend that he or she request a Statement of Value for that object from the IRS. (Internal Revenue Manual 22.214.171.124 (2012))
The donor must request the Statement of Value after the donor’s donation but before filing the tax return that reports the donation. The request must include a copy of the qualified appraisal of the artwork(s), the completed Form 8283 including Section B, and the $2,500 fee. (This fee is for one to three items, add $250 for each additional item over three.)
Art Appraisal Services (AAS) provides appraisal service on works of art including paintings, drawings, prints, sculptures, antiques, ceramics, decorative arts, textiles, carpets, silver, rare manuscripts, antiquities, ethnographic art, collectibles, classic automobiles, and historical memorabilia. If a Service employee has a case that involves a taxpayer’s appraisal of a single work of art with a claimed value of $50,000 or more, it must be referred to AAS for review and, subject to the discretion of AAS, may also be submitted for additional review by the Commissioner’s Art Advisory Panel. (Internal Revenue Manual 126.96.36.199 (2012)) A detailed description of the review and appraisal analysis process may be found at http://www.irs.gov/irm/part8/irm_08-018-001.html#d0e243. An AAS appraiser will review the complete referral file (request for valuation assistance with the essential information and material identified above) and conduct additional research as needed before referral to the Art Advisory Panel or an outside appraiser.
IRS ART ADVISORY PANEL
The Commissioner of the IRS maintains an Art Advisory Panel (the Panel) of nationally prominent art museum directors, curators, and art dealers to help review and evaluate appraisals submitted by taxpayers in support of the fair market value claimed for works of art on income, estate, and gift tax returns. The Art Advisory Panel meets three to four times per year to review valuations on paintings, sculpture, and decorative art and antiques. The Panel may question the taxpayer’s claimed value by substantiating and recommending a specific valuation. Such recommendations are submitted to AAS and may become the position of the IRS. Later, if agreement is not secured with a taxpayer, employees may contact AAS to get additional information and valuation data in support of the Service’s determined value. This is accomplished by requesting a reconsideration of the values through the SRS. (See IRM 188.8.131.52, Reconsideration and Dispute Procedures.)
The proportions of accepted and challenged appraisals is fairly consistent over time. The AAS adopted in full 96.5% of the Art Advisory Panel’s recommendations during fiscal year 2012; it adopted the rest in part. During fiscal year 2012, the Panel completed its review of 444 items with an aggregate taxpayer valuation of $281,859,200 on 43 taxpayer cases under audit. The average claimed value of a charitable contribution item was $613,684; the average claimed value for an estate and gift item was $626,890. The Panel recommended accepting 51% and adjustments to 49% of the appraisals it reviewed. Two percent of the appraisals reviewed require additional staff development before the Panel can make a value recommendation. The Panel recommended total net adjustments of $66,066,800. On the adjusted items, the Panel recommended a net 52% reduction on the charitable contribution appraisals and a net 47% increase on items in estate and gift appraisals.
Photographs can do much to document a collection in situ or an artist’s studio. While these locations and their contents should be documented periodically during life, it is even more important to take photographs after death, but before disturbing the collecting environment or studio. In the event that the collection or artist’s works are accepted for donation, these photographs will be of value for publication, exhibition, and the maintenance of an archive.
If possible, the artist’s inventory should include:
• a good digital photograph
• the medium, dimensions, title and description, and the mark or other signature
• signed copies of all agreements of sale, loan agreements, deeds of gift, publishing contracts, grants of rights to others to prepare derivative works or reproductions
• if produced in a limited edition, how many copies were produced and whether the plate or cast was destroyed
• records of all copyright registrations, deposits, notices and whether the work was created as a joint work, a work for hire, or a derivative work
• licenses, grants, and gifts
• exercises of termination rights and any other contractual rights
In addition to the records above, a collector’s inventory might include:
• the name of the seller, the date and place of the purchase, and the cost
• all information regarding provenance and/or prior ownership
• when and where the work has been exhibited
• insurance records
• if stolen, the circumstances of the theft
Gifts (particularly gifts of works of art) should always be documented by deeds of gift to avoid fraudulent postmortem claims by purported recipients. For artists, the inventory should record the expenses incurred in the production of each work to determine tax basis.
A sample inventory/catalog worksheet may include:
HOW ACQUIRED (PURCHASE/GIFT):
OTHER COSTS IN PRODICTION OR ACQUISITION:
(IMAGE OR DIGITAL FILE NAME)
CREATING AN INVENTORY/CATALOG WORKSHEET
An Excel worksheet is the simplest and most widely available inventory form.
- Use a numbering system and tag the item! Many artwork descriptions are virtually identical as to title, medium, or size; the assigned number enables identification. The same numbers should be used to identify photographs, digital files and other documentation relating to each piece.
2. Title: It is best to use quotation marks to distinguish an actual title from the same words used as comments or descriptions (e.g., “untitled” versus untitled).
3. Date: Even if the actual date is unknown, indicate a range or guess.
4. Medium: Generalizations (painting, drawing, etc.) should be avoided in favor of specifics such as “oil on canvas.”
5. Size: It is standard to list height x width x depth in that order.
6. Location: This should be as specific as possible and should be kept current by noting changes. It is helpful to add a “SHIPMENT” or “IN/OUT” column to indicate both temporary changes such as loans, and permanent changes such as sales and gifts.
7. Signature: It is important to record if and where each work is signed.
Even partial documentation can be enormously helpful. It is better to have something than nothing at all.