NEW YORK—As the financial crisis continues to weigh on the art market, significant fluctuations in prices for work from certain schools of art or by particular artists are making it increasingly difficult for collectors to make decisions about sales and donations. Dealers, appraisers and other advisers are therefore forced to consider very carefully what they tell their clients right now.
“I am aggressive in advising clients not to sell right now, because this is a falling market” for certain artists and kinds of artwork, says Charles Rosoff, president of Appraisal Services Associates, an art and antiques appraisal company in New York City. “But I am aggressive in advising them to donate right now,” he adds. “The risks associated with valuation can be far less for donations than for sales.”
Rosoff’s opinion was seconded by others in the museum and appraisal fields, who try to determine the value of an artwork on the basis of what similar works, commonly known as “comparables,” have sold for. Experts say the works that have appreciated the fastest in recent years are subject to the biggest declines in prices right now. At the recent fall auctions, for instance, many works by such artists as Damien Hirst, Takashi Murakami and Andy Warhol went unsold.
‘Sooner Rather Than Later’
Katherine Getchell, deputy director of the Museum of Fine Arts, Boston, told ARTnewsletter that donors of artwork “want to give sooner rather than later, while values are still good.” Jane Jacob, a fine-art appraiser in Chicago, said that “the savvy collector should give now, because comparables may be much less in a year.”
A comparable from an auction last spring, when the art market was still performing well, may no longer be applicable in the wake of the dramatic downturn in the credit, securities and housing markets that intensified in late summer and throughout the fall. The benefit of making a donation in the early stages of what is expected to be a lengthy recession lies in capturing what value remains in an artwork, given the likelihood that things are going to get worse, including in the art market.
In theory, every donation has an effective date on which ownership of the object transfers from an individual to an institution. The appraised value of a painting donated to a museum in July would not be adversely affected by a drop in prices for works by that artist or in the art market as a whole two months later, according to Internal Revenue Service spokesperson Bruce Friedland. When establishing appropriate valuations for art in estates, he noted, heirs are permitted an extension of six months to set values of the deceased person’s artworks if “a dramatic swing in values” is expected.
A volatile art market, combined with increased IRS scrutiny of the appraisals of personal property submitted with taxpayer filings as a result of the Pension Protection Act of 2006 (ANL, 5/1/07), has raised the stakes for both collectors and appraisers. Taxpayers whose appraisals are determined to be off the mark are assessed penalties for the deficient tax payment, interest on that amount and a fine. The appraiser may face fines ranging from $1,000 to a maximum of 125 percent of the fee for preparing the appraisal, and can also be barred for three years from submitting another appraisal to the IRS for tax purposes. Jacob says that appraisers always include “market statements” with their appraisals, which place the object in the appropriate context and describe the market for similar pieces. “What I think you’re seeing now is many more statements and caveats to cover ourselves with each appraisal, and an acknowledgement that we really can’t guarantee the values,” she says.
Certain collectors who have donated artworks to museums in years past may also feel the effects of the downturn in the art market—specifically, those who gave artworks as “fractional gifts,” which allow the museum to acquire an increasing ownership stake in the donated work over a period of years. These donors are permitted to take a continuing deduction for their gift based on the object’s market worth. However, notes art law expert Ralph Lerner, of law firm Withers Bergman, the amount of the annual deduction can decline along with the diminishing value of a donated work.
Valuation concerns have had less of an impact on art insurance policies, because most collectors insure their collections as a whole, rather than insuring each artwork for its individual value. “When the market was increasing exponentially, we were always trying to get people to properly insure their collections,” Joe Dunn, president and chief financial officer of Huntington T. Block insurance, told ARTnewsletter. “Less than 10 percent of our clients have full-value insurance; most carry between 35 and 50 percent loss-limit coverage.” He noted that most collectors bet that if there is a fire in their home, it will only damage or destroy a room or two, rather than every room and everything in them.