IRS Guidance: Donation Appraisals for Artwork Exceeding $20K FMV

Taxpayers and appraisers often refer to IRS Pub 561 Determining the Value of Donated Property in order to ascertain what constitutes a qualified appraisal, i.e., what IRS-required elements of information must be contained in appraisals of property being donated for which a deduction in excess of $5,000 is being claimed by the taxpayer.

But in addition to Pub 561, the IRS Office of Art Appraisal Services (AAS) has issued additional amplifying guidance regarding the appraisal of donated works of art which are valued at over $20,000.

Photographs of the Artwork

The first guidance regards photographs and, as noted, expands upon the requirements of Pub 561.

Pub 561 requires that for returns in which the taxpayer is claiming over $20,000 for donations of art, the taxpayer must attach a qualified appraisal to the return. In addition, Pub 561 requires that for individual items valued at over $20,000, the taxpayer must also supply upon IRS request "a photograph of a size and quality showing the object, preferably an 8 x 10 inch color photograph or a color transparency no smaller than 4 x 5 inches."

Noting that cases submitted without photographs to the Art Advisory Panel for review cannot be processed in a timely manner, the AAS is now requesting that taxpayers always provide (not only "upon request") color images of each property having a claimed value in excess of $20,000. "Each object should be shown in its entirety with separate images depicting important details, such as the artist’s signature, date, labels or other distinguishing features (including damage and repairs). Multiple views are helpful for 3-dimensional works of art." Photo format options include transparencies, print photographs and high resolution color digital images.

read the guidance regarding photographs

Identification of the Artwork

Having to do with the artwork's description, the second guidance regards identifying the artwork's value relevant characteristics and is entitled "Preferred Object Identification Format for Art Valued Over $20,000" with "art" being defined as "paintings, sculptures, watercolors, prints, drawings, ceramics, antiques, decorative arts, textiles, carpets, silver, rare manuscripts, historical memorabilia, and other similar objects."

The operative word in the title of this guidance is "Preferred," which would seem to indicate that the appraiser can choose to make use of some other format if he or she would rather do so. Having said that, I am unsure as to why an appraiser would want to make use of a format that differs substantially from one "recommended" by the IRS.

If need be, the appraiser should not hesitate to supplement the IRS's recommended format with whatever additional descriptive information the appraiser feels is necessary to ensure that the appraisal report is complete, understandable and not misleading. For instance, while not mentioned in the guidance, if a painting is framed, the appraiser would want to include information regarding the frame as well the painting.

This guidance addresses more than just identifying the donated property. It also:

Calls for the appraisal report to include the taxpayer's acquisition cost of the donated item as well as the source and date of acquisition,
Suggests a format for reporting comparable sales (including photos of the comparable sales and/or auction pages) on which the value opinion is based,
Encourages a reasoned approach to developing an opinion of value based on the comparable sales including a comparative analysis of how the value relevant characteristics of the comparable properties relate to those of the subject property.

read the guidance regarding identification format