A Look at the IRS Art Advisory Panel

Fellow appraiser Xillary Twill, ASA sent me this Wall Street Journal on the IRS Art Review Panel.  It is very timely as I (as the ISA representative) along with AAA, ASA and RICS meet today (Friday) with the head of the Art Appraisal Services.  There are some interesting items to share from that meeting (comps for estates and mediation), and I will do so in the next day or so.

Although the WSJ states the panel is little-known, we as appraisers certainly know differently. Although much of what is in the article is not new to appraisers, it is always nice to refresh your knowledge.

The WSJ reports (I posted the full article as at times AW readers cant get through a potential pay wall)

The IRS relies on a little-known panel of volunteers to decide the value of valuable artwork.

THEY GATHER TWICE a year in a simple conference room, amid stacks of documents and artwork photos. They are the cream of the crop in the art world, with years of experience at major museums, prestigious New York City galleries or high-end auction houses. For two days, they debate, discuss and render judgment.

Officially, they are merely volunteers, members of the obscure-sounding Art Advisory Panel of the Commissioner of Internal Revenue. In reality, they are the taxman’s art police, and anyone with art worth more than $50,000 may end up on their radar. Whenever a U.S. taxpayer dies or gives away valuable art—or any time it changes hands other than through a sale—Uncle Sam has an interest in knowing its true value. The art panel protects that interest, by vetting values submitted by taxpayers or executors; in other words, they make sure the deduction for the donation of that Jackson Pollock masterpiece is accurate.

It is a powerful job, since the panel’s decisions are rarely overruled and are highly secretive. Members are not allowed to discuss any cases, which is why no one would comment, but their identities are a matter of public record. Recent members include officials drawn from many walks of the art world life, from a painting and sculpture curator at the Amon Carter Museum in Fort Worth, Texas, to the president of the prestigious Pace Gallery in New York.

The panel was first formed in 1968, and its own stats help show how much the value of art has shot up over the years. Indeed, the average value of the works it assessed rose almost fourfold from 1992 to 2010, to $545,000. Not surprisingly, the IRS had to raise the cutoff for consideration a couple years ago from $20,000 per object to $50,000; last year, the panel pegged the total value of the 444 works it investigated at $348 million, or an average of $784,000 per piece.

The taxpayer’s goal, of course, is to pay as little tax as possible. Donors of works to museums often prefer high values, to reap a large charitable deduction, while estate executors often prefer low ones, to reduce estate taxes. So the appraisals they submit are often shaded in their favor. “The panel detects those shadings, because its members know the markets,” says Jay Cantor, an American art appraiser, formerly with Christie’s, who served on the panel for 20 years, until 2009.

At their meetings, the experts consider each work and the taxpayer’s appraisal without knowing whether it’s for a donation or an estate. Then they offer their consensus, which—no surprise here—often runs counter to taxpayers’, though not as often as you might think. Last year, the panel agreed with the taxpayers 51 percent of the time, in fact. At the same time, it also raised the values of 171 artworks in estates by two-thirds.

According to the panel’s reports, the IRS usually adopts its recommendations. The courts often accept their judgments as well, says Ralph Lerner, a noted art-law expert with Withers Bergman in New York. But here’s something to consider: One client paid $2,500, as allowed by the IRS, to get the panel’s advance ruling on a painting he had donated to a museum but hadn’t yet deducted on his taxes, says Mark Nash, a partner with PricewaterhouseCoopers in Dallas. The panel decided the painting was worth $100,000, double the taxpayer’s appraisal. “The client said it was the best $2,500 he ever spent,” Nash says.

The panelists, who aren’t paid but are reimbursed for some travel expenses, will also reconsider their judgments. But taxpayers shouldn’t expect much change. In 2012, after agreeing to reconsider an earlier $82.2 million in various valuations, the panel revised its estimate—to $82.7 million.

Source: The Wall Street Journal