Valuing Art for Tax Purposes

Beauty may be in the eye of the beholder, but art valuation requires reason and objectivity.

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). 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. A record of sales of similar items (comparables) must be available from a gallery, auction house or by private sale memoranda to substantiate this valuation. Fair market value has occasionally relied on the income approach, where the object is either in the process of or can reasonably be expected to be leased or rented to a user by an institution or individual in the business of leasing or renting art. Fair market value is a gross valuation that includes all fees and sales commissions.



In certain situations where taxpayers need or desire a degree of certainty that the IRS will accept their art valuation before filing a return, they may have the IRS value it beforehand. As with a private letter ruling, taxpayers may rely on such a statement of value, as long as it is issued to them and not to another taxpayer and it does not reflect any misrepresentations or material inaccuracies on the part of the taxpayer.


This process is available for items of art appraised at $50,000 or more that were or will be transferred as charitable contributions or included in the taxable value of an estate or taxable gift. The IRS may issue a statement for items appraised at less than $50,000 if the request includes at least one item appraised at $50,000 or more and the IRS determines that such a statement would be in the best interest of efficient tax administration. See Revenue Procedure 96-15 for full details; general requirements include a $2,500 filing fee for up to three items and $250 per each additional item. The request must include a taxpayer’s qualified appraisal and may not be submitted more than 60 days before a charitable donation or estate or gift valuation date. Taxpayers must attach the statement of value to the relevant return, whether or not the IRS agrees with their appraisal. The taxpayer may submit the return with a different value than that of the IRS statement but must include additional information supporting it.



Artwork valuations are reviewed by the IRS’ Office of Art Appraisal Services and may be referred to the Commissioner’s Art Advisory Panel. The Art Advisory Panel assists the IRS by reviewing and evaluating appraisals submitted in support of the fair market value claimed for works of art involved in income, estate and gift tax cases. All taxpayer cases selected for audit that contain artwork with a taxpayer-claimed appraised value of $20,000 or more per item must be referred to the panel (see Internal Revenue Manual §§ 4.48.2 and The panel consists of 25 non-compensated art experts who are not told of the tax consequences, that is, whether an item is a charitable contribution (for which the taxpayer would benefit from a higher appraisal) or from an estate (for which the taxpayer would benefit from a lower appraisal). The panel’s determinations become the position of the IRS (see sidebar, “IRS Panel’s Valuation Often Differs From Taxpayers’,” below).



Volatile markets. While the “old masters” continue to have a gradual and orderly increase in value, a significant number of contemporary prints, paintings and installations have fallen to less than half their value from previous years, with the current auction market having also lost 30% or more of its sales volume (more pieces are being left unsold at the auction block). Appraisers must be keenly aware of the market, for the sake of clients, as well as themselves, considering the penalties they could now face with the addition to the IRC of section 6695A by the Pension Protection Act of 2006. See “The Appraiser” later in this article.


Authenticity. It’s not uncommon for a taxpayer and the IRS to disagree whether an artwork is genuine. Donors or CPAs are not necessarily expected to spot fakes, so they should, where indicated, check to see that the appraiser has consulted scholars, museum curators, dealers, auction houses, families of artists and catalogues raisonnés (a comprehensive list of works by an artist). The appraiser is required to make every reasonable effort to gather all available information relative to the appraised object. But in some cases, taxpayers, the IRS and courts have been unable to agree on whether a work is authentic.


In George O. Doherty and Emelia A. Doherty v. Commissioner, 16 F.3d 338 (9th Cir., 1994), two of the foremost authorities on the paintings of Charles M. Russell could not resolve the question of authenticity of a donated painting. In 1969, the Dohertys bought “Attacking Stagecoach,” which may or may not have been painted by Russell, for $10,000. They donated an undivided 40% interest in the painting to the Charles M. Russell Museum in Great Falls, Mont., in tax year 1982 and the remaining 60% in tax year 1983. In those years, they claimed charitable contribution tax deductions in the amounts of $140,000 and $210,000. The IRS, backed by its expert, maintained that the painting was a forgery and worth only $100. The court noted that the credentials of the two sides’ experts were beyond question, yet they had reached different conclusions. The court said that it could not rule on authentication and concluded that the painting had a value of $30,000, recognizing the fact that even if the painting were authentic, the dispute had affected its fair market value.


Many methods are available to determine and support declarations of authenticity, some of them highly scientific. An article in the Chronicle of Higher Education (Sept. 5, 2008) described the work of C. Richard Johnson Jr., a Cornell professor of electrical and computer engineering who has developed high-resolution scans of a painter’s work that allow appraisers to analyze features such as texture and brushstroke patterns. Also, carbon dating can support or rule out the credibility of many “old dynasty” Buddhas and other wooden icons or plant- or animal-based artifacts.


Provenance and title. Appraisers and tax advisers shouldn’t overlook the necessity that the taxpayer possess a clear title of ownership for the art being donated, to show that it didn’t, for instance, mysteriously disappear from a gallery years ago. Owners have in many cases unwittingly purchased previously stolen artworks. In even less straightforward situations, art can also be subject to claims of cultural patrimony; for example, it might be claimed that an artwork was illegally imported, plundered from an archaeological site or even illegally seized by a government, such as works confiscated by the Nazi regime during the Holocaust. Again, it is not the responsibility of the appraiser to judge the validity of the dispute. However, if appraisers, while pursuing their due diligence, learn of such a claim, they must report it to the appropriate authorities and cease the appraisal process immediately. It is appropriate to check with the International Foundation for Art Research ( and The Art Loss Register ( if there is a questionable provenance or break in the chain of title.


Blockage discount. The concept of a blockage discount in art is borrowed from business valuation. It describes the reduction in value when similar items are presented for sale at the same time. In art, the concept was first applied to the estate of artist David Smith, who left as part of his estate assets over 400 sculptures. The estate convinced the Tax Court that, as a group, the sculptures should be devalued, as there would not be enough ready and able buyers willing to pay full price if the items were offered for sale at the same time. The agreed-upon discount was 37%. Since that decision in 1975, the Service or the Tax Court has recognized blockage discounts of artworks for gift tax purposes (Calder v. Commissioner, 85 TC 713 (1985)). It was also applied in Estate of Georgia T. O’Keeffe v. Commissioner, TC Memo 1992-210. The executors of the artist’s estate sought a 75% discount for the artworks remaining in her estate under the rationale that, with their large number and range in values, monetizing the estate would result in “flooding the market,” thereby reducing their overall instant fair market value. The Service agreed with the estate’s undiscounted valuation of the remaining collection at $72.76 million but applied a much smaller discount based on a three-tiered formula developed by the Art Advisory Panel. The Service allowed no discount for works valued at more than $500,000; a 20% discount for works valued between $500,000 and $200,000; and a 50% discount on all other works in the estate. The court rejected this approach and came up with its own valuation of $36.4 million, for an overall discount of 50% of the agreed-upon collection’s value.



For appraisals that result in a substantial tax valuation misstatement, substantial estate or gift tax undervaluation (within the meaning of section 6662(g)) or gross valuation misstatement (within the meaning of section 6662(h)), the appraiser can be liable for a penalty. The amount is the lesser of:

(1) The greater of $1,000 or 10% of the amount of an underpayment attributable to the misstatement, or

(2) 125% of the gross income received by the appraiser for preparing the appraisal.

Although personal property appraising has no legally established licensure, the professional associations act as the general accrediting bodies, while amendments by the Pension Protection Act of 2006 heightened requirements for a qualified appraisal and appraiser for tax purposes (see “Life Insurance: What’s It Worth? (And Who Says?)” JofA, Jan. 2008, page 32). The appraisers of fine art who are most acceptable to insurance companies and the IRS carry credentials that they have earned through prescribed academic study, experience and apprenticeship, during which many of their appraisals have been peer-evaluated and examined. Upon completing this process they are awarded certification and membership in a professional association such as the Appraisers Association of America, the International Society of Appraisers or the American Society of Appraisers.


All professional appraisal associations endorse the use of the Uniform Standards of Professional Appraisal Practice (USPAP). Qualified appraisals for tax purposes must be conducted in a manner “consistent with [USPAP’s] substance and principles” (IRS Notice 2006-96). These standards were developed by the Appraisal Foundation, in Washington, D.C., which oversees all appraisal disciplines, including real property, personal property and business valuation. It was founded in 1987 and was named by Congress in 1989 as the source for appraisal standards and appraiser qualifications in the aftermath of the savings and loan crisis. USPAP compliance is now required by all of the major fine arts appraisal associations, with a compulsory 15-hour course of study as well as required examinations with recertification every five years.



Most appraisal professionals set their fees on an hourly or per-diem basis. In most cases, the appraiser is able to give the client a broad idea of the time needed to complete the job. Professional appraisers may choose other methods of billing, such as on a per-object basis, but all professional associations prohibit their members from billing based on a percentage of the eventual appraised value of the piece or collection. Percentage billing is also prohibited by the IRS (Treas. Reg. § 1.170A-13(c)(6)).



The professional art and artifact appraiser must produce a complete analysis of artwork for tax purposes to establish its value and thus minimize the potential of an IRS challenge. The volatility and unpredictable nature of the art market, with its ever-changing tastes and styles, as well as price and value corrections, can make agreeing on a valuation challenging. However, understanding the appraisal process allows both the taxpayer who owns art and his or her CPA tax adviser the opportunity to make the most informed decision.



IRS Panel’s Valuation Often Differs From Taxpayers’

In 2008, the most recent year for which a report is available (, the IRS Art Advisory Panel reviewed 179 cases involving 973 items with an aggregate taxpayer valuation of $230 million. The panel recommended acceptance of 41.4% of the appraisals reviewed and recommended adjustments of 56.2% of the appraisals. Another 2.4% of the reviewed items required postponement of a determination pending additional study by the panel’s staff. The panel reported aggregate results of its reviews for estate and gift cases separately from charitable deduction cases:


Estate and Gift Cases

The panel reviewed 803 total items with total taxpayer claims of $114.5 million. Of these, it concluded reviews of 782 items (percentages are of total estate and gift items):


Reviews Concluded

Taxpayers claimed ...............   $110 million
Panel recommended ...............   $148.51 million
Accepted 267 (33%)   $54.1 million
Adjusted 515 (64%)

Adjusted up

456 (57%)   $46.42 million to $88.47 million


...............   $42.05 million

Adjusted down

59 (7%)   $9.5 million to $6 million


...............   –$3.54 million

Charitable Contributions

The panel reviewed 170 total items with total taxpayer claims of $115.4 million. Of these, it concluded reviews of 168 items (percentages are of total charitable contribution items):


Reviews Concluded


Taxpayers claimed ...............   $114.5 million
Panel recommended ...............   $114.7 million
Accepted 136 (80%)   $91.5 million
Adjusted 32 (19%)

Adjusted up

10 (6%)   $5.5 million to $14.6 million


...............   $9.1 million

Adjusted down

22 (13%)   $17.49 million to $8.64 million


...............   –$8.85 million





 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.


Alan Breus ( is principal of The Breus Group of San Jose, Calif.


To comment on this article or to suggest an idea for another article, contact Paul Bonner, senior editor, at or 919-402-4434.





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Life Insurance: What’s It Worth? (And Who Says?)” Jan. 2008, page 32


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