I saw a notice that “the IRS Art Advisory Panel plans to hold a closed meeting September 14 in Washington to review and evaluate the fair market value appraisals of works of art involved in federal income, estate, and gift tax returns.” While my low income clients have not in nine years raised any issues that cause me to have any concern about the Art Advisory Panel, I did have cases in which the panel was involved when I work for Chief Counsel. The panel is a rather unique part of the IRS. I thought I would write a post on it for those who have never had a case in which the panel is involved and may not know what it does.
Art is also just a fun topic to discuss. Les alerted me to a tax case involving art. The tax problem in that case is mostly a sales tax case related to state sales taxes and not valuation of art, but I think that art and taxes creates a combination that makes people sit up and listen a little closer. In the tax case in which I encountered the art advisory panel, there were a number of shenanigans going on related to the piece of art but not by the taxpayer. Art is so portable, so difficult to value, and so closely related to rich and famous that it creates its own interest.
The panel consists of up to 25 experts from America’s art world who serve on the panel for no compensation. Based on my observation, the IRS is very fortunate to attract to this panel some of the top experts from the art world. A list of the current panelist is at the back of the current annual report from the Art Advisory Panel. I do not know exactly how the IRS goes about recruiting the experts and convincing them to provide service by participating in this panel and I do not know who came up with the original idea of creating the panel. The goal of the panel is to provide assistance to the IRS in valuing works of art without requiring the IRS to hire experts for all of the cases it works where valuing art becomes important.
The report contains a good description of the way the panel operates and provides figures on the amount of art work the panel appraised last year and the differences between the values it determined and the values provided by taxpayers. While the panel found higher values, the percentage of cases with higher values and the amount of the higher values was lower than I expected. The existence of the panel may discourage taxpayers from low-balling and keep art values submitted to the IRS generally in line with market value. The report did not discuss the types of cases in which the panel provided an opinion. My guess is that estate tax, and perhaps the gift tax, returns brought in most of the work of the panel.
The art advisory panel, or rather its members, does not generally serve as an expert witness for the IRS if it goes to trial but rather it serves as an expert for revenue agents and Estate Tax Attorneys who encounter the artwork during the examination process. The last case I tried when I worked for the Office of Chief Counsel, IRS involved the valuation of a painting. There were many interesting aspects to the discovery of the painting and what happened to the painting after discovery, but the trial essentially involved just the valuation of the painting on the date of death in an estate tax case. During the examination, the art advisory panel had been asked to opine on the value of the painting. The opinions of the experts at trial diverged wildly; however, the value placed on the painting by the Art Advisory Panel seemed quite logical and supportable to me. I was impressed with their work and I felt the panel served as somewhat of a neutral arbiter of value. The panel has no charge but to provide its best opinion of the value of a painting. The report does not provide data on how influential the panel’s valuations are in causing a resolution of the valuation issue. I suspect the panel’s opinions play a large role in reaching resolution in valuation cases involving art.
The values it provides may not always hit the mark but that is true of most experts. I am sure that sometimes artwork does not fit within the scope of expertise of any panel members and then the value provided by the panel loses some of its authority. Generally, a panel member exists in many fields of art in order to provide coverage for all of the types of art it may appraise. The Internal Revenue Manual at 4.48.2 and 22.214.171.124 requires that all cases selected for examination that include an art item with a claimed value of $50,000 or more must be referred to IRS office of Art Appraisal Services for possible review by the panel.
Rev. Proc. 96-15 provides a process for taxpayers to request a review of art valuations. Taxpayers can obtain a Statement of Value from the IRS for an advance review of art valuation claims before filing the return, which may then be used to complete the taxpayer’s return. The taxpayer can request this when the value of the art is $50,000 or more. Art is defined in Section 4.01 of the Rev. Proc. as:
.01 The term “art” includes paintings, sculpture, watercolors, prints, drawings, ceramics, antique furniture, decorative arts, textiles, carpets, silver, rare manuscripts, historical memorabilia, and other similar objects.
The Rev. Proc. details the method for making a request for an art appraisal prior to filing a return. The cost is $2,500. If you get such an appraisal, you must attach a copy of the appraisal to the return even if you, the taxpayer, disagree with the appraisal. I do not know how many people use this service. As a litigator, I do not remember ever having a case in which someone used this service. I do not know whether that is because almost no one uses it, those who use it do not have problems with valuation or a combination of both.
Bill Branch was the Chief of the Estate and Gift Branch when I was the District Counsel in Richmond. Bill is now retired and he works for McGuire Woods, a law firm in Richmond. I spoke with Bill about this post because I felt that Bill would have had a lot more experience than me dealing with the panel. He forwarded to me a fax and document he recently received from an E&G attorney listing out the items Bill needed to provide for the art advisory panel. Bill also forwarded to me a short bio of Karen Carolan. Karen headed up the panel for the IRS for many years and was the person who assisted me in the case I had with the panel. Like many people I know from the IRS, she is also retired, but she would be the expert to contact if you had questions about the panel.
PBS must get decent viewer ratings for its antique roadshow program since it has lasted a long time. If they could produce a show based on the meetings of the art advisory panel, I suspect the ratings would be equally as good or better. The panel sees a lot of interesting stuff, it has top experts and mostly it operates under the radar.