Art and Collectibles Part III

Summary:

The last two issues reviewed a round up of issues
affecting art and collectibles. This final part of the series will provide a
brief overview of additional planning considerations.

Estate Tax Art Audit

The IRS Art Advisory Panel
of the IRS reviews the fair market value of all works of art reported on gift
and estate tax returns, or for charitable contribution deductions when the combined
value of the items or art exceeds $20,000. The Valuation division of the IRS
also reviews artworks. Once reviewed a report is issued by either the Art
Advisory Panel or the Valuation division. by taking advantage of the procedure
set forth in IRC section 2204. It merely requires that the executor ask the IRS
to set the estate tax. The IRS has nine months to do so. As soon as the
executor pays the tax he’s free of any further liability. If your executor
cannot reach an agreement on fair market value of art, your executor can
request the matter to be reviewed by the IRS Appeals Division. If the value
cannot be resolved at Appeals, your executor will have to petition the Tax
Court.

Charitable Donations

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For
claimed contributions of more than $5,000, in addition to a contemporaneous
written acknowledgment, a qualified appraisal generally is required. A
qualified appraisal is defined in
IRC Sec. 170(f)(11)(E)(i). Either Section A or Section B of Form 8283
(depending on the type of property contributed) must be completed and filed with
the tax return on which you claim the deduction.

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Is the art or collectible you
donate used for the charity’s exempt purpose? ■ Example: You donate furniture to a shelter for
abused women. You paid $10,000 for the antique furniture, but it is now worth
$15,000. Since the furniture is used for the charity’s exempt purpose, your
deduction is the full $15,000. ■ Example: You
donated a statue to the shelter that is valued at $16,000, that has a tax basis
of $8,000. The charity sold the statue and used the proceeds for the charity’s
exempt purpose. Since the statue was not used for the charity’s exempt purpose,
your charitable deduction is limited to $8,000. You must still attach a
qualified appraisal to your tax return. ■ Example: Assume the same facts as the preceding example, except your
tax basis in the statute was only $4,800. Your deduction is limited to $4,800,
but since this amount is less then $5,000, you don’t require a qualified
appraisal to substantiate your deduction.

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The appraisal must be completed
not more than 60 days before your contribution of the art, and no later than
the extended due date for the tax return on which you claim the deduction. If
the deduction is claimed on an amended return, the appraisal must be received
by the day the return is filed. Reg. 1.170A-13(c)(3)(iv)(B).

Insurance

Determine what coverage is
available.  Obtain a replacement
value appraisal for insurance purposes. Replacement value could be
substantially more than “fair market value” used for gift and estate tax
purposes. The definitions of value are quite different. If you inherit art,
don’t assume that the value on the estate tax return suffices for insurance
purposes.

Consignment

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Restoration and conservation: How
much discretion will you be giving an auction house? What parameters can you
set? Should your consent be required before any work occurs? Can the auction
house remove matting, framing, etc. without your consent as consignor? Your
desire for control should be tempered by the auction house’s judgment to take
steps (e.g., re-framing) that could increase auction price to your benefit and
theirs.

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Promotion: What will the auction
house do to market your art? Who should decide which items in the collection to
show?  Can the auction house divide
your collection into lots? What if errors occur in catalogue descriptions?
While the auction house might wish to avoid any liability, is that acceptable?
Who can decide when, and in which auctions to show your art? Do you want to
specify, for example, that your contemporary art should be auctioned with other
contemporary art? Should you establish some parameters as to the time and
locations within which the auction house can exercise its discretion to sell?