Wednesday, June 4, 2014
While valuing artwork is intrinsically subjective, appraisers can rely on objective factors such as comparable sales of similar pieces. Tax rules also motivate owners to overvalue or undervalue artwork.
The Internal Revenue Code and the Treasury Regulations establish rules and requirements regarding the taxpayer’s burden to substantiate the value of property stated on a tax return. The Code incentivizes taxpayers to choose a higher valuation for artwork in the case of a charitable contribution and a lower valuation in the case of the estate or gift tax. The tax law makes clear that the taxpayer has the burden of substantiating the value of the property. Thus, a taxpayer must comply with the procedural requirements for valuation and persuade the trier of fact that his claimed valuation is correct.
To assist taxpayers value artwork, the IRS established the Art Appraisal Services division (AAS). Before submitting an income, gift, or estate tax return, a taxpayer can request that the AAS provide a Statement of Value in which the IRS values the artwork for the taxpayer. The taxpayer must submit this request to the AAS prior to filing the tax return that reports the transfer of the item.
When claiming a charitable contribution deduction for a donation of art to charity, there are several rules that a taxpayer must consider. Section 170(a)(1) typically allows taxpayers to claim as a deduction any charitable contribution made during the taxable year. Generally, the amount of the deduction is equal to the amount of money or the fair market value of the property contributed, which is determined at the time of donation. Yet, the deduction must be reduced by the amount of gain that would not have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value.
Applying the tax law to art valuation issues is extremely difficult. Combining this difficulty with the Code’s incentives and intricacies is “a recipe for constant tax litigation.” Deciding how to value a work of art for U.S. tax purposes encompasses a consideration of various rules and procedural requirements.
See Nicholas Montorio, Valuing Artwork For Federal Taxation Purposes: Income, Estate & Gift Tax Issues, Mondaq, June 3, 2014.