Here's an interesting scenario for you - let's say you have a painting that you'd like to give away for some reason. Since appraising art is such an unpredictable task, you have no idea of how much the painting in question is actually worth.
So, with the value to still be determined, would you want it to be worth a lot or a little?
This is sort of a trick question, as it depends on who you wish to give the painting to. If you'd like to grant it to a museum, it would be in your interest that the appraisal of the artwork concludes it's worth an awful lot so you can get a tax deduction.
However, if you are planning to give the piece to, let's say, your nephew or a grandchild, you might want to tilt your hopes in the opposite direction, due to the possible taxation that might befall upon the receiver.
Since owners can obviously not be trusted to appraise their own artworks, the art world created a system in which a specialized Art Advisory Panel is assembled with goals of helping the IRS (Internal Revenue Service) in evaluating property appraisals submitted by taxpayers in support of the fair market, a topic Washington Post analyzed in detail.
The Art Advisory Panel, constructed of up to 25 renowned museum directors, curators, art dealers and auction representatives, serve these roles without compensation and are in charge of telling the IRS how much art is worth so that this often-dreaded wing of government would know how much money to ask in taxes.
Each year, bequests and donations of art generate tens of millions of dollars in potential tax revenue. The problem lies in the fact that, in order for it to be accurately taxed, an artwork needs to be accurately valued.
When an artwork is sold outright, the Internal Revenue Service does not really require any sort of help in determining how much to tax the owner as the piece has a clear-cut price tag.
The issue occurs when an artwork passes to an heir or is given to a museum, and IRS remains oblivious to how much it should tax as there was no money exchanged. Since, at that point, the value of an artwork becomes debatable, this is when the Advisory Panel steps into play and determines how much the work is worth and, by extent, how much the IRS should tax.
The secretive and little-known body called the Art Advisory Panel has one job and one job alone - to figure out the value of works of art. Consisting of up to 25 members, the panelists are there to volunteer their time and expertise to help the tax system function fairly for all.
David Tunick, the longest-serving member of the panel that's now going into his 27th year, explains what keeps him motivated despite a heavy workload and nonexistent compensation:
I think it’s my obligation, I truly do, as a citizen to give back. It’s a kind of community service on the federal level.
Since the Panel members only get together twice a year for a day or two, the committee is quite selective on what artworks they spend their time on. A general rule is that the Panel only considers works of art worth at least $50,000.
In the year of 2016, members reviewed more than 500 works whose total value, according to taxpayers, exceeded half a billion dollars.
When appraising an artwork, the members have three outcomes - accepting the taxpayer’s assessment of a work’s value or adjust it either up or down.
As you may expect, recipients of estates, the ones who will have to pay the taxes, tend to undervalue artworks, while donors looking for a tax deduction often overvalue them.
Deciding on who becomes a member of the Advisory Panel is a long and tedious process with a bevy of background checks - obviously, there's zero tolerance of tax delinquencies. Traditionally, all members are important figures coming from the functional level of the art world.
After finding a valid candidate, mountains of paperwork need to be processed before a new member is ready to start attending the two yearly meetings, one held in New York City and one in Washington.
To figure out how much an artwork is worth, the members need to fight their way through piles and piles of appraisals. They usually do so before the start of the meeting so they can conduct preliminary research and so that, when they begin, the proceedings can move with the speed of an auction.
Usually, each member is in charge of works most relevant to their expertise, so they can effectively "break the tie" if the committee meets a dead end on a matter connected to their field.
To keep panelists honest, the documents they receive are carefully redacted in a way they censor who the taxpayer in question is. Members also do not know who the appraiser is and they’re not told if they are working on a donation or on an official estate.
Artworks are usually considered in an alphabetical order by artist, a method which ensures that multiple pieces from a single taxpayer are still considered on an individual basis.
The Panel’s meeting room is something of a black box - due to the fact tax returns have to stay a private matter, deliberations are a closely held secret. To make things even more secretive, the panelists and IRS employees are forbidden from disclosing the particulars of individual cases after their finalization.
One of the biggest dilemmas the members of the panel faces is whether they should appraise value based on a reproduction or see the work in person. The latter usually happens on especially contentious occasions when a field trip to a residence or warehouse is necessary.
The most common reason for such a method is when a photograph of an artwork is simply not detailed enough for the Panel to make a ruling.
Furthermore, sometimes an in-person viewing can uncover potential fraud, but the committee usually conducts business by looking at reproductions.
Despite the IRS Advisory Panel's best efforts to conceal the identity of the artwork owners, panelists often find out to whom the appraising artwork belongs. No matter how much they try to be secretive, there's no escaping the fact that members may have their own history with the owners, be they collectors, artists or heirs.
This presents a serious problem because, if it can be proven that the panelist knew who the taxpayer is, there can be made a case for bias. To make things even worse, there's not a real solution to this issue as IRS needs people from the tightly-knit art world, meaning that mutual acquaintances are an unavoidable necessity.
By far the "splashiest" case to come before the Panel in recent years was dealing with the estate of blue-chip art dealer Ileana Sonnabend. When Sonnabend died in October 2007, there were estate taxes to be payed on her personal collection which included a piece called Canyon.
Canyon was created by Robert Rauschenberg and it features a stuffed bald eagle as its projecting out from the canvas. At the time the case ended up on the Panel's table, the piece was on a long-term loan to the Metropolitan Museum of Art.
Members initially appraised Canyon at $15 million. However, the heirs quickly argued that it was worth nothing because they could not legally sell it due to the presence of the eagle - although no longer on the endangered species list, the bald eagle was still the subject of heavy federal protections at the time.
The heirs presented the case to the IRS, explaining that there were at least two federal laws that forbade them from selling the piece with the stuffed bird. To make things even more interesting, museums longed to have the work, but auction houses wouldn’t come near Canyon.
After much debate, the IRS forced the Panel to re-estimate the piece. To the heirs' utter shock, Canyon was re-valued at $65 million. The panelists explained that the valuation was based on a far-fetched scenario in which "the work was smuggled into the arms of some unknown Dr. No".
In 2012, as part of a deal made with the IRS, the Sonnabend family agreed to donate the work to the Museum of Modern Art. No estate taxes would be levied, and no deduction would be claimed for the gift.
The ultimate question is whether the rulings of the Panel are fair or not, as there certainly are cases where one can debate the members' decisions.
Due to the emphasis placed on anonymity and the overall secretive nature of the business, a skeptic might see a lot of "wiggle room" for corruption. Although that may be true, we should also keep in mind that, when it comes to taxes, someone always complains, meaning that in this particular case, "where's smoke there's fire" logic does not automatically need to be true.
Ultimately, the truth of the matter is that the Art Advisory Panel is necessary. Without it, situations like the one surrounding Canyon would financially cripple the art market from within.
Currently, there is no better format of this panel, so until a more sensible option becomes available, the IRS Art Advisory Panel is probably the right way to go despite the often questioning of their decisions.
Featured image: An Art Committee Illustration, via pursuant.com. All images used for illustrative purposes only.