By Theodore Peyser, Esq.
Roberts & Holland, LLP, Washington, DC and New York, NY
The Commissioner's Art Advisory Panel was first authorized in 1968, and on February 23, 2010, the Commissioner announced its renewal for an additional two years. The Panel reviews and evaluates appraisals submitted by taxpayers in support of the value claimed for works of art for purposes of the deduction for charitable contributions, the federal estate tax, and the federal gift tax. The Panel consists of museum directors, curators, art dealers, and auction representatives, who serve without compensation.1 Generally, the Panel meets twice a year to consider paintings and sculpture and one or two times a year to consider decorative arts and antiques.2 The IRS Office of Art Appraisal Services under the Chief of Appeals reviews fair market value claims on works of art and cultural property in cases under examination and manages the Art Advisory Panel.3
For 2008, the Panel had 22 members. Also attending the 2008 meetings were nine IRS officials: the Chief of Appeals and her Deputy, the Chief of Art Appraisal Services (who chaired the Panel), 5 staff appraisers, and one staff assistant.4
All taxpayer appraisals of a single work of art with a claimed value of $20,000 or more must be referred to Headquarters for review by the Panel and Art Appraisal Services.5
Panel meetings are held in Washington, D.C. At each meeting, the Panel reviews the taxpayer's valuation of some 240 to 300 items. Prior to each meeting, Art Appraisal Services sends each panelist materials regarding the works of art to be reviewed. Seeking objectivity, the Panel is not told the tax consequences of the valuations, whether the taxpayer is claiming a §170 charitable deduction or reporting an amount to be included in the gross estate (§2031(a)) or taxable gifts (§2503(a)).6
According to the Panel, at the meetings, which are closed to the public, each item is discussed and a consensus is reached on each item. The Panel's conclusions are reviewed by Art Appraisal Services and recommendations as to value are sent to the requesting IRS office. A report detailing the Panel's determination, together with a list of the participating Panelists, is prepared and a copy is given to the taxpayer. The Panel's determination becomes the position of the IRS.7
If the IRS and the taxpayer do not reach agreement on the valuation at the Examination level, the Panel will provide assistance to Appeals and Area Counsel by participating in taxpayer conferences, preparing expert reports and securing expert witnesses, including members of the Panel and other outside experts. A taxpayer may request reconsideration by the Panel where it provides additional evidence such as comparable sales data or other relevant facts to support their fair market value opinion. The taxpayer's request must respond specifically to the report detailing the Panel's determination.8
The three most recent years for which statistics are available are 2006 through 2008.9 In these years, the Panel accepted the taxpayer's valuations in a significant number of cases. Specifically, the percentages of taxpayer valuations accepted were 38 for 2006, 36 for 2007, and 42 for 2008. For estate and gift tax cases, the Panel recommended aggregate increases in value of $117 million for 2006, $79 million for 2007, and $38 million for 2008. As for charitable contribution deductions, the Panel recommended aggregate net decreases of $120 million for 2006 and $6.9 million for 2007 and an aggregate net increase of $257,500 for 2008.
Where the valuation issue considered by the Panel becomes the subject of a law suit, the Panel's report would be admissible evidence for the IRS only where the Panel authors of the report testify and are available for cross-examination.10 Otherwise, the Panel report would be inadmissible hearsay.11
In litigation following the Panel's consideration of a piece of art, courts have, at the request of the taxpayer, ordered production and disclosure of a limited amount of records of the Panel. In Bernardo v. Comr.,12 involving the value of a 21-foot granite sculpture, the Tax Court held that the Panel's notes regarding the Panel's valuation of the sculpture were not protected by executive privilege and had to be provided to the taxpayer-petitioners. The Tax Court rejected as overly broad their request for other Panel documents including Panel appraisals of other sculptures by the same artist, Panel appraisals of other granite sculptures, and curricula vitae of the Panel members who participated in the appraisal of the sculpture in question.13 In Proctor & Gamble Co. v. U.S.,14 involving the value of 80 artwork paintings donated by the taxpayer, a magistrate judge ordered production of unspecified Panel documents. The government's assertion of the deliberative process privilege was rejected on the basis of Bernardo. The magistrate did, however, issue a protective order limiting release of the Panel documents to the participants in the lawsuit.15
After the Panel issues a report on the value of an art item, rarely is the valuation the subject of a court trial. Searching reported decisions for the last 20 years, the author could find only one decision that explicitly reviews a Panel valuation, Stone v. U.S.16 This apparent scarcity of litigation suggests that the Panel is making an important contribution to the administration of the tax laws. After the Panel issues its report, in most cases the taxpayer accepts the Panel valuation17 or is able to reach a compromise settlement with the IRS or the Tax Division of the Department of Justice.
For more information, in the Tax Management Portfolios, see La Puma and Pai, 625 T.M., Obtaining Information from the Government — Disclosure Statutes, Schmehl and Fox, 633 T.M., Compelled Production of Documents and Testimony in Tax Examinations, Crawford and Sare, 815 T.M., Planning for Authors and Artists, and in Tax Practice Series, see ¶3850, Examination: Audits, Assessments, Appeals.
5 IRM 126.96.36.199 (02-20-01). Under Rev. Proc. 96-15, a taxpayer may obtain from the IRS a statement of value as to a work of art worth $50,000 or more in advance of filing the appropriate return. It appears that these requests are also referred to the Panel.
16 99 AFTR 2d 2922 (N.D. Cal. 2007). A supplemental decision on the appropriate discount for taxpayer's fractional interest in the paintings is reported at 100 AFTR 2d 5512 (N.D. Cal. 2007). In Doherty v. Comr., T.C. Memo 1992-98, aff'd, 16 F.3d 338 (9th Cir. 1994), the Tax Court determined the value of a painting contributed to a museum. The opinion makes no reference to a determination of value by the Panel. Perhaps, because the taxpayers failed to file with their income tax returns the required appraisal, there was nothing to refer to the Panel.
17 For instance, the estate of art gallery owner Sidney Janis reported on its federal estate tax return a value of $12.4 million for 464 works of art. For this collection, the Panel arrived at a value of $14.5 million. The estate agreed to the adjustments resulting from the Panel valuation. Janis v. Comr., T.C. Memo 2004-117.
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