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Tighter IRS Rules Keep Collectors And Donors on Their Toes

“In recent years, there have been many important changes in substance and in procedure in how appraisals of works of art are treated for tax purposes,” Gilbert Edelson, administrative vice president and counsel of the Art Dealers Association of America (ADAA), told audience members at the Oct. 14–15 “Visual Arts and the Law” conference in

NEW YORK—“In recent years, there have been many important changes in substance and in procedure in how appraisals of works of art are treated for tax purposes,” Gilbert Edelson, administrative vice president and counsel of the Art Dealers Association of America (ADAA), told audience members at the Oct. 14–15 “Visual Arts and the Law” conference in Chicago.

Among those changes are the establishment of more specific qualifications for those submitting an appraisal for tax purposes, as well as increased penalties for appraisals identified by the Internal Revenue Service’s Art Advisory Panel as being more than 20 percent above or below fair market value.

In general, a donated object must be a capital asset—held for at least one year before being given away—and donated to a nonprofit institution to be used for its tax-exempt purposes. A fund-raising auction “is not one of the exempt purposes of a not-for-profit organization,” Edelson stated. If the institution decides to sell a donated item, it may not do so for at least three years after acquiring it. Charitable contributions may not exceed one-third of a taxpayer’s adjusted gross income. Since 1985, donors to charitable institutions have been required to include a valid appraisal on their tax returns when the gift is worth $5,000 or more if it is an object, or when it is worth $10,000 or more if it is a closely held stock.

Congress has paid particular attention to appraisers, and Edelson cited both the American Jobs Creation Act of 2004 and the Pension Protection Act of 2006 as having introduced “new standards for the appraisal of donated work.” The IRS has drawn up guidelines, which await the final approval of the Treasury Department.

Under the proposed rules, the appraiser must be designated as competent by a recognized professional appraisers organization or must have passed professional or college-level courses in valuing relevant objects. In addition, the appraiser must be paid to perform appraisals on a regular basis. Neither the donor, the person from whom the donor obtained the item nor someone employed by the institution receiving the donation may perform the appraisal. The appraiser’s fee may not be based on the estimated value of the object.

Valuations found to be grossly out of line by the 18-member Art Advisory Panel may trigger a range of penalties for the appraiser, including 10 percent of any tax underpayment due to the misstatement, $1,000, or 125 percent of the income received for the appraisal, whichever is greater.

In addition, the appraiser may be subject to a civil penalty for aiding and abetting an understatement of tax liability and be prohibited from submitting appraisals for tax purposes for a period of five years. Taxpayers are assessed 30 percent of the tax underpayment if the appraised value of the object is found by the IRS to be off by 150 percent or more. This is in addition to the payment of the adjusted tax and interest on that amount.

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