A panel of museum directors, curators, art scholars and dealers (the “Panel”) helps the Internal Revenue Service value artwork gifts. At stake are income tax deductions for charitable donors and gift and estate taxes for gifts to family members and other non-charities. The Panel reviews artworks valued at $50,000 or more. If the Panel rejects a taxpayer’s appraisal, it may suggest a different value, get additional information or consult a specialist. The Panel provides advice and makes recommendations to the Art Appraisal Services unit in the Office of Appeals for the IRS.
The Panel’s specialty areas include paintings and sculpture, decorative arts, and antiques. The Panel has two subcommittees: the Fine Arts Panel, which reviews paintings, sculpture, watercolors, prints and drawings; and the Decorative Arts Panel, which reviews items such as antique furniture, decorative art, ceramics, textiles, carpets and silver.
In Fiscal Year 2016, the AAS unit adopted 70 percent of the Panel’s recommendations.
How The Panel Operates
The Panel takes steps to ensure objectivity and taxpayer privacy. Information provided to the panelists doesn’t include the taxpayer’s name, the type of tax, the tax consequences of any adjustments to the value or who did the appraisal. To minimize the possibility that panelists recognize a taxpayer’s entire collection, the artworks are usually discussed in alphabetical order by artist or, in the case of decorative art, by object type. If there’s a conflict of interest with a panelist and a work of art under review, that panelist doesn’t participate in the discussion and is excused from that portion of the meeting.
Before Panel Meetings
The AAS appraisers send photographs and written materials to the panelists about the works of art under review. The materials include information from the taxpayer’s appraisal, such as size, medium, physical condition, provenance, any comparable sales and appraised value and the AAS appraiser’s own research, including available information on public and private sales of relevant art work.
During the Panel Meetings
The Panel reviews the information provided, along with the research and findings of both the panelists and the AAS appraisers. After discussing each item individually, the Panel reaches consensus on the value of a subject work. Panel discussions are lively and serious, says the IRS. Despite the different perspectives of dealers, museum curators and scholars, substantial disagreements are rare. When disagreements happen, they generally result from insufficient information. In these cases, the Panel may recommend additional research, such as inspecting the property or consulting with additional experts, before making a recommendation as to value. Once the AAS appraiser completes the additional work, the item may be brought up for review at a subsequent Panel meeting.
Advisory Recommendations
The AAS staff reviews all the Panel’s recommendations, which become the position of the IRS only with AAS concurrence.
The Panel’s 2016 Annual Report
The Panel reviewed 555 items with an aggregate taxpayer valuation of $503,135,185 on 63 taxpayer cases under examination. The average claimed value for an item reviewed by the Panel was $906,550.
The Panel recommended accepting the value of 222 items or 40 percent of the items presented. It adjusted 333 items or 60 percent of the appraisals it reviewed. On the 333 items adjusted, the Panel recommended total net adjustments of $102,406,967 to the appraised values, a 17 percent increase.
The Panel reconsidered three items originally valued at $1.65 million by the taxpayers and $3.6 million by the Panel. After reviewing the additional information, the Panel revised their recommendations to $2.9 million. The items reconsidered weren’t included in the above information. AAS accepted the Panel’s recommendations on 386 items. In charitable contribution cases, AAS not only considers the Panel’s recommendations, but also the substantiation requirements set forth in the Internal Revenue Code and corresponding regulations.
In an intentional break from prior year reports, beginning with the 2015 Annual Report, the items reviewed and adjusted aren’t broken down to show which adjustments were for estate and gift tax appraisals and which were for charitable contributions. The 2016 Annual Report noted: “This format .. avoids potential Internal Revenue Code Section 6103 [Confidentiality and Disclosure of Returns and Return Information] disclosure concerns in situations where there may be too few items in a particular category (estate, gift or charitable contribution) to report separately.”
In prior reports, when a breakdown of the adjustments was given, it was the immutable pattern year after year: IRS viewed taxpayers’ valuations as high for charitable transfers (for which income tax deductions are claimed), and low for noncharitable transfers (on which IRS wants estate and gift taxes). Not surprisingly, taxpayers saw it just the other way around. Although the specific breakdown wasn’t given in this report, it can be presumed that this view of valuations by the IRS hasn’t changed and the pattern of adjustments continues.
Binding Valuation Agreement
By paying a user fee, a donor of a work of art appraised at $50,000 or more can get a Statement of Value from the IRS, which establishes the value of art gifts for income, gift and estate tax purposes. Taxpayers may obtain an SOV from the IRS for an advance review of art valuation claims before filing the return. The SOV may then be used to complete the taxpayer’s return. The donor must request the SOV after making the gift, but before filing a tax return claiming the charitable deduction. The fee is $5,700 for an SOV for one to three items, plus $290 for each additional item. (See Revenue Procedure 2017-1, Appendix A (Jan. 3, 2017); Rev. Proc. 96-15.)
Method of payment. User fees for SOV requests pursuant to Rev. Proc. 96-15 must be made by direct debit from a checking or savings account through the Pay.gov website. Payment confirmations are provided through the Pay.gov portal and should be submitted with the SOV request. AAS won’t consider an SOV request complete, and will hold the request in suspense, until the correct user fee is paid through the Pay.gov website. Use of the Pay.gov website replaces the mailing or hand delivering of user fees. The use of the Pay.gov website to submit SOV user fees is mandatory.
Address for SOV requests. Send requests to: Internal Revenue Service/Art Advisory Services, 1111 Constitution Avenue, Suite 700, C:AP:SO:ART, Washington, D.C. 20004, ATTN: AAS.
Note from the IRS: It’s recommended that a private delivery service be utilized, as packages sent via U.S. Postal Service are subject to irradiation which may damage professional photographs.
Private Delivery Services—Be Careful Out There
Gifts by check. Under the “mailbox rule,” the date of mailing for charitable contributions to a charity is deemed the date of delivery if there are no restrictions on the time or manner of payment and the check is honored when presented. Thus, a donor will get a deduction on a 2017 income tax return for a check mailed on Dec. 31, even though it isn’t received by the charity until January 2018. The delivered-when-mailed rule only applies to the U.S. Postal Service, not to private delivery services.
For securities mailed by a donor to a charity or to its broker or other agent (or delivered to the donor’s broker or agent who then mails them to the charity), the delivery date is the day the securities are mailed to the charity or to its agent, provided the securities are then received by the charity or its agent in the “ordinary course of the mails.” Caveat Donor: The delivered-when-mailed rule only applies to the U.S. Postal Service, not to private couriers. This can be crucial for year-end gifts and year-round gifts for determining fair market value.
© Conrad Teitell 2017. This is not intended as legal, tax, financial or other advice. So, check with your adviser on how the rules apply to you.