Consider Obtaining an IRS “Statement of Value” Before You Commit to Donating Your Treasured Work of Art
Suppose you’ve made a lot of money this year, and are expecting to have a big tax obligation when April 15 rolls around. Assume further that you have a painting that you treasure, and you’re convinced that its value is $60,000. You’re in the highest income tax bracket (currently 39.6%), so you decide to donate your masterpiece to your alma matter, expecting to save $23,760 from your income tax obligation. However, after you’ve made the donation, the IRS audits your return and challenges the valuation, asserting that your donation had a fair market value of only $20,000. For the relatively small tax deduction (i.e., $7,920), you would never have given up that painting that gave you so much pleasure, but you’ve already given your painting away, and you can’t get it back. Worse still, not only do you have to pay back the amount of over deduction (i.e., the difference between $23,760 and $7,920 [$15,840]), but you’ll also be hit with a 40% penalty on that $15,840 under payment of tax (i.e., $6,336). After all is said and done, and not even considering the hassle of defending an IRS audit, the economic benefit of your donation of your beloved painting is only $1,584, i.e., the difference between the value of your deduction ($7,920) and the penalty ($6,336).
Instead of concluding that nice guys always finish last and vowing never again to donate another one of your valuable paintings, consider obtaining from the IRS a Statement of Value before you commit yourself to your donation.
What is a “Statement of Value”? If you intend to donate an object of art having a fair market value of $50,000 or more, you may obtain a ruling from the IRS that it will accept your appraiser’s valuation, or give you a lower or higher fair market value appraised value. For this service, the IRS charges a $2,500 application fee, for which it will give Statements of Value for up to three items, as long as you claim at least one of the three items to have a fair market value of over $50,000. (The IRS charges an extra $250 for every item after the first three.) In addition, the IRS requires that you submit a qualified appraisal for each object to be evaluated. The IRS is bound by the fair market value figure set forth in its Statement of Value. With that information in hand, you’re in a much better position to evaluate whether or not to part with your beloved artwork and donate it. Also, you’ll sleep better at night, knowing you won’t be audited as a result of that donation and won’t have to worry about paying onerous penalties for over-estimating the value of your charitable contribution.
At this point, you’re probably saying to yourself: “If I ask for a Statement of Value for my donation, the IRS’s default position will be to “lowball” me and value my prospective donation to be worth less than what I claim.” Not so.
The IRS directs all requests for Statements of Value to an independent group of volunteers who are preeminent art dealers, curators, scholars, gallery owners and auctioneers called the “Art Advisory Panel” who review your appraisal, debate and finally concur on a fair market value for your prospective donation. Importantly, it must be noted that when the IRS gives an assignment to the Art Advisory Panel, it does not tell the panel members whether it is in the taxpayer’s economic interest to have a high or low Statement of Value. (Obviously, art donors want high Statements of Value, whereas federal estates taxpayers want low ones.) For the year 2015, the Art Advisory Panel increased the appraised value of the evaluated art in 44% of cases, decreased it in 21% and accepted the taxpayers’ appraised value in the remaining 35%.
For those who want this peace of mind, we at Arcadia Appraisers are happy to prepare and submit a highly sophisticated, well analyzed and documented appraisal to anyone interested in obtaining a Statement of Value for their prospective donation.