Valuing Art for the IRS

Fellow appraiser Diane Mizell, ISA AM sent me a very good article from the Journal of Accountancy.  This is a good article to print out and save for both future reference and in marketing your appraisal practice to potential clients.

The article touches on an IRS statement of value on items of $50,000.00 or more where they review a qualified appraisal by a qualified appraiser for $2,500.00.  Yes it costs $2,500.00 for the IRS to review an appraisal, accept or adjust and then issue an IRS accepted statement of value.  Mention this IRS charge the next time a a client complains about a fee.

The article touches on common valuation issues in appraising art, such as volatile markets, authenticity, provenance and even blockage.  It mentions USPAP and qualified appraisers, fees and that an analysis of the artwork in order to avoid potential challenges.  It also reviews the 2008 Art Advisory Review panel findings (posted on the AW Blog, click HERE to read and for a link to review). 2008 is the last year the report has been published. Hopefully they will soon release the 2009 figures.

The Journal of Accountancy states

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.

To read the full article from the Journal of Accountancy, click HERE.

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