The importance of appraisals when gifting art

Charitable deductions stand a much better chance of being upheld when taxpayers closely follow the qualified appraiser rules.
By Alistair M. Nevius

Carefully choosing an appraiser is one key to successful charitable giving of appreciated artwork. Cutting corners on this step can cause the disallowance of the entire value of the contribution. The Pension Protection Act of 2006 (PPA), P.L. 109-280, added Sec. 170(f)(11)(E), which codified the definition of a qualified appraiser and what it means to have a qualified appraisal. The PPA changes strengthened the professional requirements that a qualified appraiser must meet, including having certifications, experience, and formal professional-level coursework.

The PPA changes require that an appraiser be someone who regularly performs appraisals of the type of property being valued. Thus, the qualified appraiser must have some specialty in the line of property being appraised. That is, an art appraiser could be qualified to appraise a Van Gogh but not qualified to appraise ancient Egyptian pottery. By definition in Regs. Sec. 1.170A-17(b)(5), certain individuals cannot render a qualified appraisal. The list is detailed but generally excludes individuals who would have a conflict of interest in the appraisal's outcome or who would not be considered independent with respect to the value. The appraiser must be independent of the donor and the charitable institution receiving the donated artwork. Appraisers can also be subject to civil penalties for incorrect appraisals.

THE APPRAISAL

Ensuring a proper valuation of the artwork is a foundational step in the overall charitable giving plan. The IRS has a long history of challenging and litigating appraisal conclusions in court. While not exempt from challenge, if prepared by a qualified appraiser and thoroughly documented with solid facts and conclusions, an appraisal can go a long way toward a sustainable contribution deduction. The PPA added detail regarding the content and timing of appraisals and the professional standards, as developed by the Uniform Standards of Professional Appraisal Practice, that appraisals must meet. IRS Publication 561, Determining the Value of Donated Property, lists 11 points of information that each appraisal must contain. Specific to works of art, the appraisal must contain a complete physical description of the object, including size, subject matter, medium, name of artist, and date of creation. The cost, date, and means of acquisition, history of the item, and verification of authenticity must be included as well. Any deviation could call into question the whole appraisal.

With donations of artwork, the taxpayer often goes to great lengths to validate the deduction amount. A donor may want some assurance that the IRS will accept the value. For donations of an item of art appraised at $50,000 or more, a taxpayer can request a Statement of Value from the IRS. Rev. Proc. 96-15 outlines the requirements and steps for obtaining a Statement of Value, which a taxpayer can rely on for tax return purposes. The request for a Statement of Value involves a user fee and must be submitted to the IRS after the donation has been made but before filing the tax return.

For a detailed discussion of the issues in this area, see "Tax Clinic: Charitable Contributions of Artwork: An Important Primer," by Vicki R. Carney, CPA, in the April 2016 issue of The Tax Adviser.

Alistair M. Nevius, editor-in-chief, The Tax Adviser

Total charitable gifts by top 50 donors

Also in the April issue:

  • An analysis of common mistakes in life insurance arrangements.
  • A discussion of the streamlined procedures for disclosing foreign assets.
  • A look at powers of attorney.

The Tax Adviser is the AICPA's monthly journal of tax planning, trends, and techniques.

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