Just what is the purpose of an appraisal and what do you look for in a qualified appraisal?
Essentially anyone can write an appraisal. Personal property appraising is a non-regulated, or rather, self-regulated profession. Personal property appraisers are not subject to governmental regulations as is found in real estate matters. There is no governmental licensing or certifying authority. As this is the case, the credentials carried by the appraiser are earned through study, apprenticeship and, after careful scrutiny, being granted certification and membership in a professional association.
In the current economic maelstrom the value of art and art objects can be of enormous significance when valuing the personal assets in an estate. The purpose for an appraisal is;
- In estate planning, determining both content and estate tax liability;
- Establishing the value of a donation for tax credit;
- Resolving the amount of tax deduction due to damage or complete loss;
- Setting a valuation in anticipation of disposition or distribution;
- Arbitrating equitable distribution, as in divorce.
The valuation methods used will differ according to the specific situation pertinent to the client. The different valuation models are:
- Fair market value for IRS purposes (favored by the IRS)
- Marketable cash value for equitable distribution, and (used in divorce)
- Liquidation value for bankruptcy (lowest value)
- Replacement value for insurance purposes (highest value)
Fair Market Value: is defined by the service as: “the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.” (IRS Publication 526, pg.10). This value is not the value that might be offered for sale in a shop or gallery since there is no certainty that the item would actually sell at that price. A recorded sale or sales must be present to substantiate this valuation. This is the only definition of value accepted by the IRS for tax purposes. FMV is the gross valuation, including fees and sales commissions.
Fair market value is judged by the use of one or a combination of the three following forms of analysis: The Income, The Cost and The Comparative Market Data approaches.
- The Income Approach is used when the object is either being, or reasonably can be, leased or rented by an institution or individual who is in the business of leasing or renting art. (Getty Films leases or sells rights to their library of film clips for inclusion in movies or advertising at rates exceeding $1000 per second)
- (exception: an exception must be made when an image of a work of art is being used to create a tax depreciable value –i.e. tax shelters.)
- The Cost Approach is the method used to determine value based on the cost of manufacturing or recreating an identical item, this method is rarely applied to fine arts.
- The Comparative Market Data Approach is normal to personal property appraisals and is used to determine the price for a work of equal value by the same artist or one whose reputation is accepted as being on the same level.
- It should be noted that an object subjected to the three different approaches can be catalogued with three very different values: i.e., an etching which might be valued at $200 using the Cost Approach, may be valued at $50,000 using the Comparative Market Data Approach, and, $200,000 when the Income Approach is employed.
Marketable Cash Value: is the valuation method most used in divorce settlements, again, between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Here it is implied that the sale take place within an agreed upon time period, with a specific form of payment and in the best available market with sufficient time being made available to advertise the property. This method is net of any expenses which would include premiums and fees due or paid to galleries, seller’s commissions, cataloguing expenses; photography; transportation costs; advertising and promotion costs; insurance premiums, etc. This method is most often applied when tangible property is to be exchanged for cash or other financial instruments.
Replacement Value: is the amount it would cost to replace an item of similar type and quality being purchased in the most appropriate marketplace within a specified period of time. This method is most prevalent in insurance matters.
Liquidation Value or Actual Cash Value: defined as the replacement cost less depreciation, is more appropriate for machinery and industrial components with limited time value, is not normally applicable to art.
Important matters of substance found in appraisals
Appraisers are not authenticators but are responsible for verification of the authenticity of the objects of the appraisal. In opining as to authenticity the appraiser relies upon the judgmentsa of third parties including, scholars, museum curators, dealers, auction houses, families of artists and committees or Catalogue Raisonnes. The appraiser is required to make all reasonable efforts to gather all available information relative to the appraised object. When there is a conflicting set of opinions as to authenticity, the appraisal must report the dispute as the effect such difference of opinion may have an effect on the value to be reported.
- In George O. Doherty and Emelia A. Doherty v. Commissione, 16 F.3d 338 73 A.F.T.R.2d 94-1126, 94-1 USTC P 50,112, two of the foremost authorities on the paintings of Charles M. Russell could not resolve the question of authenticity of a donated painting. In 1969, the Dohertys bought “Attacking Stagecoach,” which may or may not have been painted by Charles M. Russell, for $10,000. They donated an undivided 40% interest in the painting to the Charles M. Russell Museum in Great Falls, Montana in tax year 1982 and the remaining 60% in tax year 1983. In those years, they claimed charitable contribution tax deductions in the amounts of $140,000 and $210,000 The IRS, backed by its expert, maintained that the painting was a forgery and only worth $100. The court noted that the credentials of the two experts were beyond question, yet they had reached different conclusions. The court felt that it could not rule on the issue of authentication and concluded that the painting had a value of $30,000 giving recognition to the fact that the dispute had affected painting’s the fair market value.
Provenance and Title
There are different types of theft. Burglary is rather uncomplicated but claims of cultural patrimony suggesting illegal importation of works and items that have been illegally imported from a foreign country, plunder from archaeological sites, items seized illegally or immorally by governments such as confiscated works by the Nazi regime during the Holocaust, all must be noted in the appraisal. Although it is not the responsibility of the appraiser to pass judgment as to the validity of the dispute they must be reported considering the impact such claims may have on the value. It is appropriate to check with the International Foundation for Art Research (IFAR) (www.ifar.org) and The Art Loss Register if there is a questionable provenance or break in the chain of title (www.artloss.com).
While the “masters” have continued to have a gradual and orderly increase in value a significant portion of the contemporary market for prints, paintings and installations has fallen to less than half their value.
over that of the previous year. With the art market having a 40+% loss in volume which can be converted to a loss in value (more pieces are being left unsold at the auction block) requiring the appraiser to be aware for the client as well as themselves considering the more egregious penalties they are facing (XXXXXXXXXX)
The question of ownership, or clear title, may prove central in establishing the value of a work of art. A contested title will definitely compromise the value of an object as prospective buyers might be understandably reluctant to buy a work where there is a cloud on the title or, in the more serious sense, all or part of the ownership is claimed by another. The rights of intellectual property, including copyrights, have their own complications in the international arena in that works produced before 1979 are subject to different regulations under the Geneva Convention than those works produced at a later date. As below, Koon’s Puppies would have commanded a severely reduced value if it had been appraised before or during the period of litigation.
- In Roger v. Koons, 751 F. Supp 474 S.D.N.Y. 1990), aff’d, Docket Nos. 91-7396,91-7442, 91-7540 (2nd Cir Apr 2, 1992), Jeff Koons sculpted a polychrome and wooden statue, Puppies, that was a three dimensional version of a copyrighted photograph by Art Rogers. Rogers sued for copyright infringement which concluded with the court ruling in his favor.
The concept of blockage discount in art is borrowed from the area of business valuation. It describes the lessening of value when a group of similar items are presented for sale at the same time as in securities. The contemporaneous sale of a large block of shares would cause the price to recede as the market has a finite number of buyer who would be unable to absorb all of the shares at the full price. In art, the concept was first applied to the estate of David Smith who left an assets of 400 sculptures. Due to the number of piece available the appraisers convinced the tax court that, as a group, the statues should be devalued as there would not be enough ready buyers willing to pay full price if the items were offered for sale at the same time. The agreed upon discount was 37%. Since that decision in 1975 the Service has been willing to accept the principal of blockage discount in cases involving gift tax, Calder v. Commissioner, 85 T.C. 713 (1985), and in cases of charitable donations, Skripak v. Commissioner, 84 T.C.M. (CCH) 2699 (1992)
In an interesting note, in the Estate of Georgia T. O’Keefe v. Commissioner, 63 T.C.M. (CCH) 2699 (1992)the executors sought a 75% discount. The Service agreed with the estate’s valuation at $72,759,000 but applied a much lower discount based on a three tiered formula developed by the Art Advisory Panel of the IRS: allowing no discount for works valued at more than $500,000, a 20% discount for works valued between $500,000 and $200,000 and a 50% discount on all other works in the estate. The eventual valuation was $36,400,000 or 50% from the agreed upon total value.
Appraisers charge in various ways. Most professional set their fees on an hourly or per diem basis. In most cases the appraiser is able to give the client, in broad terms, an idea as to the time that will be needed to complete the job. Professional appraisers may choose other methods of billing such as a per object basis but, all professional associations prohibit their members from billing based on a percentage of the eventual appraised value of the piece or collection. Percentage billing is also prohibited by the IRS (XXXXXXXXXX) and billing in this manner will automatically disqualify the use of that appraisal for IRS consideration.
All of the professional appraisal associations strongly endorse or require their members to use the Uniform Standards of Professional Appraisal Practice (USPAP). These standards, developed by the Appraisal Foundation, an organization in Washington, D.C. which oversees all appraisal disciplines including real property, personal property and business valuation was founded in 1987 and was named by Congress in 1989 as the source for appraisal standards and appraiser qualifications in the aftermath of the savings and loan crisis. USPAP certification requires a 15 hour course of study and required examinations with recertification every five years.
Although the appraiser may understand and be sensitive to the tax issues of the day, a professional appraiser’s focus is on the job at hand. The appraiser is charged with the responsibility of producing a thoroughly explicate and complete analysis of the object or objects of study in order to construct an immediate picture of value and to minimize the potential of a legal challenge from any quarter. The volatility of the current market and the apparent unpredictable price and value corrections over the last few years has set a challenge to both the appraiser and the auditor.