Paintings Undervalued By $1.77 Million In Estate Tax Case

By Lynn Magnusson, ASA with Becky Lipnick

At the AuctionIf the IRS determines that you gave them a misleading appraisal report, expect to pay.  In Estate of Kollsman v. Commissioner, the Tax Court found that the evaluation used for the Estate’s taxes was off by $1.77 Million. What went wrong?  The Estate expected a Sotheby’s auction house specialist would satisfy the IRS’s appraisal requirements. However, it was found that the expert’s valuations were “lowballed” in order to secure the future sale of the works.

Two Old Master Paintings

The Estate of Kollsman possessed two 17th Century Old Master paintings, one created by Pieter Brueghel the Younger and the other by either Jan Brueghel the Elder, Jan Brueghel the Younger, or a Brueghel studio.  A Sotheby’s specialist examined the two paintings, evaluated them for $500,000 and $100,000 respectively, and offered to have Sotheby’s sell the works at auction. The Executor then submitted the specialist’s appraisal with their estate tax reports.

The Tax Courts found that the Sotheby’s specialist “had a significant conflict of interest.”

The fact that Sotheby’s is an auction house significantly hurt the Estate’s case. Because the specialist would receive commission rewards for procuring the consignment and Sotheby’s Auction House would benefit from the sale of the paintings, the Tax Court found “a significant conflict of interest.” Additionally, the Court determined that the specialist “had a direct financial incentive to curry favor with [the executor] by providing ‘lowball’ estimates that would lessen the Federal estate tax burden borne by the estate.”

The IRS first issued a notice of deficiency asserting values of $1.75 million and $300,000.  After the Estate’s filed its petition, the IRS revised the values to $2.1 million and $500,000.  Sotheby’s sold the Elder’s painting for over $2.4 million.  Nonetheless, the specialist did not adjust his valuation opinion.

Dance around the Maypole by Pieter Brueghel the Younger
Dance around the Maypole by Pieter Brueghel the Younger, courtesy of Sotheby’s
Exaggerated Condition Issues

The appraisal noted the works were dirty and there were risks involved in cleaning them. The specialist lowered the fair market value of the works because of their “dirtiness.” However, the Court noted that the paintings were cleaned with relative ease. Sotheby’s also did not raise these concerns with the Estate when they were pitching to gain the consignment. According to the Commissioner’s case, Sotheby’s valuation report did not seem to match reality.

The IRS has its own experts

The IRS relies upon the expertise of its own, unbiased team of appraisers, the Art Panel, to review suspicious appraisals. With the help of these appraisers, the Tax Court determined that the Estate of Kollsman were off in their estate tax valuation by 1.77 Million, nearly four times the amounts they reported.

Auction house estimates are not appraisal reports

Clients are often confused when the Fair Market Value in my appraisal differs from an auction house estimate. I explain to them that an auction house establishes auction sales estimates, typically a range of values, to procure consignments and encourage bidding.  My duty as an independent appraiser is to give them an objective Fair Market Valuation, reinforced by comparable, recent sales data. Sometimes they are not the same.

An appraisal report prepared in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP), the generally recognized performance standards for the appraisal profession in the U.S., includes a certification that the opinions expressed in those reports are the appraiser’s unbiased professional opinions, and that the appraiser has no present or prospective interest in the property being appraised or personal interest with respect to the parties involved (or if such interests exist, they must be disclosed). These certifications serve to clarify the parties’ relationship and create a paper trail that can help estates avoid problems down the road.

This blog reprinted by permission of the author. It was originally published as Paintings Undervalued By $1.77 Million In Estate Tax Case.

How Does The IRS Define A “Qualified Appraiser?”

By Lynn Magnusson, ASA with Becky Lipnick

IRS Qualified AppraiserMany households donate personal property like clothing, furniture, artwork, or collections to a non-profit organization in order to take an income tax deduction. If you need to consult an appraiser for your personal property donation, shouldn’t that appraiser meet IRS standards?

IRS Publication 561 defines a “Qualified Appraiser” for the purpose of evaluating charitable donations.

The IRS Definition Includes These Requirements
  • Accredited by a recognized professional appraiser organization.
  • USPAP-Compliant: Follows the Uniform Standards of Professional Appraisal Practice, which Congress authorized the Appraisal Foundation to define.
  • Professional: Regularly prepares appraisals for a fee.
  • Competence: Is an expert examiner of the type of item in the appraisal.
  • Preferred Providers: Insurance companies have preferred providers for appraisals (i.e., The Magnusson Group is a Preferred Provider for Chubb and AIG).
  • High-Quality References from your peers and previous clients. Because personal property appraisers are not licensed, like real estate appraisers, by a state agency, you should ask a trustworthy colleague or professional for a recommendation.
What Does It Mean To Be Accredited?

You can trust an appraiser who is accredited by one of the top three national and international associations offering accreditation. They are the ASA (American Society of Appraisers), AAA (Appraisers Association of America), and the ISA (International Society of Appraisers).

To achieve accreditation from these organizations, an appraiser must pass a series of tests in core subject areas:

  • Appraisal methodology
  • Connoisseurship in a specialization area
  • Report writing
  • Professional standards, i.e., USPAP
  • IRS guidelines

All Certified or Accredited Members of the top professional organizations are required to take a prescribed minimum number of hours of Continuing Education to retain membership in good standing.  For the ASA, 100 hours are required every five years!

Some appraisers (myself included) obtain additional credentials in particular sub-specialties. And Gems & Jewelry appraisers who are designated Master Gemologist® Appraisers also must take precious stone and jewelry exams on a regular basis to remain current.

 WHAT IS USPAP COMPLIANCE?

USPAP: Uniform Standards of Professional Appraisal Practice.  A set of standards for valuing anything.

  • The Appraisal Foundation and Congress established mandatory industry standards — USPAP — in response to the 1980’s Savings and Loan Crisis.
  • USPAP governs appraisals of businesses, real estate, machinery & equipment, in addition to personal property.
  • USPAP is revised every 2 years. Therefore, an appraiser must re-qualify every 2 years by completing USPAP update course and passing an exam on the current standards.

In general terms, USPAP covers the following aspects of appraisal practice:

  • Ethics
  • Scope of work
  • Records retention
  • Purpose & use
  • Defining and analyzing market data

This blog reprinted by permission of the author. It was originally published as How Does The IRS Define A “Qualified Appraiser?”