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How much is artwork worth for estate tax purposes?

Valuations on artwork are frequently too low or too high. An IRS review from 2011 to 2015, found that 58 percent of the works of art reviewed had been valued incorrectly.

Taxpayers were prone to underestimate the value when art was gifted or left in a bequest. On the other hand, when artwork is donated the value was often overestimated for charitable contribution write offs. When the Service raises questions it can lead to a protracted court battle.

How to get it right in the first place?

A recent tax court case offers some good pointers. The facts of the case were provided in a New York Times article. a woman who had died in 2005 left two paintings – one a Pieter Bruegel depiction of a village festival and another work by his relative – to the executor or her estate.

A Sotheby’s official appraisal set the value of the 17th-century work at $500,000. In 2009, it actually sold at auction for $2.1 million. The IRS had questions and sought an additional $781,488 in estate taxes based on the auction sale price. The matter ended up in Tax Court.

The Sotheby’s expert explained the difference in value was caused by Russian buyers who had entered the market for old master artwork and driven up prices. The painting had also been cleaned to remove yellow discoloration from years of tobacco smoke exposure.

The Art Advisory Panel of the Commissioner of Internal Revenue works with the Service to provide assistance on valuation issues when a work of art is worth more than $50,000. The IRS sought an analysis by an art historian and former museum director. His estimate was in line with the $2.1 million based on sales of other Bruegel works from 1986 to 2005 from $538,000 to $7.1 million.

Avoid conflicts of interest

The Judge noted a “significant conflict of interest,” because the Sotheby’s expert sought exclusive rights to auction the paintings, if they were to be sold. The Judge discounted the Russian-buyer explanation, instead finding it more plausible that the “lowball” estimates were to “curry favor” with the owner.

The lesson is to seek an impartial appraisal from an expert who will have no financial interest in future action sales.

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