NEW YORK—Under new laws passed last August as part of the United States Pension Protection Act (PPA), art patrons and appraisers are now faced with stricter standards for valuations of donated property. Donors, heirs and their appraisers also confront stiffer penalties for artworks found to have been grossly over- or undervalued for tax purposes.
The new rules affect tax returns filed after Aug. 17, 2006. They call for penalties to be paid separately by the taxpayer, not only for the deficient tax but for interest on that amount plus a fine. Appraisers also are liable, with penalties ranging from $1,000, or 10 percent of the amount of tax attributable to a substantial or gross valuation misstatement, to a maximum of 125 percent of the fee received for preparing the appraisal.
Writes Paul Roy, a partner with Withers Bergman, LLP, New Haven, Conn., in the spring issue of the firm’s quarterly newsletter Keeping Up with Art and Cultural Assets: The PPA “lowers the threshold for imposing accuracy-related penalties on donors for ‘substantial’ and ‘gross’ valuation misstatements.”
A penalty is triggered, for instance, if a donor values a gift to charity at $150,000 when the correct value is $100,000. Previously the penalty would have been triggered at the $200,000 mark. The bar for “determining whether a penalty is imposed on donors . . . is lowered to 150 percent (from 200 percent) of the correct value as determined by the IRS [Internal Revenue Service],” Roy writes.
In passing the PPA, Congress sought to clamp down on misstated appraisals, along with other loopholes for potential abuse in the donation of personal property such as real estate and artworks. The PPA also tightens rules related to “fractional” gifts, a form of donation in which a collector can take tax deductions for several years before completely transferring possession of the artwork to an institution (ANL, 1/17/06, pp. 1-2).
For example, the PPA now limits the period of the gift-giving to 10 years, instead of permitting the owner to stagger tax benefits over a period of years for maximum benefit, and establishes its value at the time of the initial gifting. The appraisal value cannot be altered, even if the fair market value of the work climbs higher in ensuing years.
The new law is the first to define the meaning of “qualified appraiser,” Peter Barash, a government affairs lobbyist for the 5,100-member American Society of Appraisers, Washington, D.C., told ARTnewsletter. “Previously, he explains, “a qualified appraiser just meant someone who held himself out to the public as being qualified to do it. There were no objective criteria.”
The PPA states that a “qualified appraiser” is one who is certified by a recognized professional appraisal organization, regularly performs appraisals, has experience and educational training in the type of property involved, and “has not been prohibited from” submitting appraisals to the IRS during the previous three years as a result of a valuation misstatement.
“We’re very pleased with the law,” says Aleya Lehmann, executive director of the 700-member Appraisers Association of America, New York. “It supports our efforts to raise the standards of appraisals.” She notes that the association primarily represents independent appraisers, rather than dealers or auction house staff.
The U.S. Treasury Department and the IRS plan to issue more stringent guidelines for the qualification of appraisers who do not belong to the American Society of Appraisers, the Appraisers Association of America or the International Society of Appraisers, Renton, Wash.—the three main membership organizations in the U.S.
Some Things Haven’t Changed
The basic standards for valuing property for income, gift and estate-tax purposes are basically the same: identifying the client and reason for the appraisal, the date of the appraisal and an indication of how it was performed. Appraisers must explain their methodology—for instance, by examining prices of comparable items and other factors that might affect value.
These guidelines conform with the Uniform Standards of Professional Appraisal Practice, published by the Appraisal Standards Board of the Appraisal Foundation. The Foundation also has an Appraiser Qualifications Board in place to ensure adherence to a high level of professional practice.
Appraisals of artworks worth more than $20,000 each—those that either have been donated to charitable institutions or are part of an estate— may be subject to review by the Art Advisory Panel of the IRS, established in 1969, which lists 20 art-world members (divided equally between museum curators and art dealers), who meet twice a year.
In 2006, reports chairwoman Karen Carolan, the Panel reviewed 1,638 items that had been included on 124 tax returns valued by the taxpayers at $219.2 million. The Panel accepted 38% of the appraisals and recommended adjustments of $126.5 million on others. Objects in estates were revalued at higher amounts—the Panel recommended a 95% increase in overall estate and gift appraisals—while charitable donations were lowered in their estimates by 57%.
In 2005, before passage of the PPA, the Panel accepted 75% of the appraisals, adjusting estate and gift values up by 56% and charitable donations down by 86%. In 2004 the Panel accepted 37%, raising estate and gift appraisals by 56% and lowering charitable donations by 69%.
Appraisers frequently have attempted to justify the setting of different fair market values for the same object, whether from an estate or donated.
Their claim is that selling pieces from an estate to raise money toward inheritance tax has a “fire sale” quality that brings lower prices, while a donation should be appraised with a view to the amount an institution might have to pay were it to seek out the same piece at auction or in a gallery.