Vagaries of Valuation for Collections of Artwork

By Elizabeth Summers

For better or for worse, the world cares how much collectors pay for art. A record price realized at auction or in a “private” sale can create headlines in both art world publications and the national press. The final value of a collection, however, is determined only upon the collector’s death, when the personal representative of the estate assigns a value to the art for purposes of the federal estate tax. Issues surrounding the valuation of art have generated extensive and energetic litigation in the U.S. Tax Court and, by extension, considerable interest among estate planning attorneys.

General Rules of Estate Tax Valuation

The value of a decedent’s gross estate is determined by calculating the value of all property the decedent owned at the time of his or her death, wherever such property is situated. (IRC Section 2031) Under IRS regulations regarding valuation for estate tax purposes, the value of every item of property includible in a decedent’s gross estate is its fair market value at the time of the decedent’s death. (T.R. Section 20.2031-1(b)) The IRS defines “fair market value” as the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts. With unique objects like individual works of art, the determination of a “fair market value” may be difficult. Fortunately, the IRS has provided additional guidance. Special rules apply to tangible personal property “having marked artistic or intrinsic value” of a value in excess of $3,000. Items that fall into this category must be formally appraised, and the appraiser must be competent in the specific subject matter of the appraisal. The appraisal of a painting of “artistic value” must include a description of the size and subject of the painting and the name of the artist. The appraisal must be filed with the estate tax return, along with a written statement by the executor containing a declaration that, under penalty of perjury, the appraisal is complete and accurate, and the appraiser both qualified and disinterested.