A couple of times a year, a big, official-looking box from the Internal Revenue Service arrives on the doorsteps of Ian Kennedy, a curator at the Nelson-Atkins Museum of Art, in Kansas City; David Tunick, an Old Masters print dealer in New York; Brock Jobe, the deputy director of the Winterthur Museum, in Delaware; Gillian Wilson, a retired curator at the J. Paul Getty Museum, in Los Angeles; and 17 other art experts. The recipients aren't facing tax trouble. They're all members of the IRS's Art Advisory Panel, and the packages overflow with files containing pictures of artworks and related documentation.
If you're a collector donating your holdings to a charity or planning to give them to your heirs, either as gifts or bequests, you or your executors may well run into this posse of calculator-punching connoisseurs—that is, if you or your estate are unlucky enough to be audited. The panel helps the IRS assess any audited return that involves an artwork, antique or piece of cultural property with a claimed value of at least $20,000.
In 2007—which was a pretty typical year—these experts reviewed 131 cases involving a total of 1,002 items. Taxpayers had valued them at just over $278.9 million, according to IRS records. The panelists—who see their work as a public service, like some kind of überselective, albeit voluntary, jury duty—agreed with only 36 percent of the appraisals. They sent the other two-thirds of the returns back to the filers and their accountants with new valuations, new tax assessments and orders to pay up.
Perhaps not surprisingly, the panelists reduced the charitable deductions by 47 percent. They raised the estate valuations by 58 percent. In addition, they tabled 3 percent of the claims because they wanted more information—most, if not all, of which they no doubt eventually got. All told, between the increased estate valuations and the lowered charitable deductions, the panel changed tax claims by nearly $95 million. Now that's power.
It's also lots of work, but panelists aren't paid. They do receive a modest per diem of up to $265 for hotels and meals in Washington, D.C., where the entire group meets behind closed doors each spring and fall and a subcommittee convenes in winter for decorative-arts items.
Deliberations are confidential, and most never become public. But a few years ago, a dispute broke into the open when Gerald Peters, the owner of art galleries in Santa Fe, New York and Dallas, sued the IRS for $692,000 in taxes he had to pay after what he called an erroneous appraisal was made by the panel and the agency.
Peters and his wife, Kathleen, had donated five Georgia O'Keeffe pictures—one oil, Mount Fuji, to the Georgia O'Keeffe Museum, in Santa Fe, and four watercolors to the Kemper Museum of Contemporary Art and Design, in Kansas City—for which they claimed a $1.13 million deduction. The IRS appraisers disagreed: They valued the oil at $100,000 and put no value on the watercolors, because they had not been authenticated. Peters was forced to pay a hugely increased tax assessment; he took the service to court, but in 2006 a federal judge dismissed the case.
That wasn't the end, however. Peters began negotiating with IRS agents, showing them records of more than 200 of his own O'Keeffe sales. "We compromised, and I got a good settlement, a significantly higher value [than the experts had determined] for the donated works," he says now. "Unfortunately, there have been some abuses by taxpayers, but this time [the IRS] was wrong, and I proved it." The IRS declined to comment on the case.
The Art Advisory Panel was established in 1968, when Congress started looking into deductions for charitable contributions and discovered that the IRS had no mechanism for evaluating claims involving art. Sheldon Cohen, the IRS commissioner at the time, met with representatives of the Art Dealers Association of America and the Association of Art Museum Directors, and together they set up the panel. Ever since, members—deemed "special government employees" who are subject to disclosure rules and FBI background checks—have advised the IRS's six-member staff of appraisers and art historians, according to Karen E. Carolan, an art historian who began working with the panel in 1974 and is now its chief.
The panelists are dealers, scholars and curators with expertise in all the categories likely to be reviewed; not represented are appraisers, whose work, after all, is being evaluated. Over time, members come and go and requirements evolve. "When a need arises, we establish a panel in that area," says Carolan—prints, for example.
Terms of service are not fixed, but despite not getting paid, panelists tend to remain for years. When people do leave, Carolan may ask them to suggest replacements. They often name friends, which makes the group seem "clubby" to some outsiders. "I think the panel needs to be broadened, period, and to include appraisers," says Helaine Fendelman, a past president of the Appraisers Association of America.
Members say they simply enjoy the work. "I find it to be challenging and invigorating," says Michael Findlay, a director of Acquavella Galleries, a former head of Impressionist and modern art at Sotheby's and a current panelist. Susan Menconi, an American art dealer at Menconi & Schoelkopf, in New York, who was asked to join the panel in 2003, agrees: "You get to work with people out of your field, and you see things out of your field." Jay E. Cantor, an independent American art scholar and former Christie's specialist who joined the panel in 1990, adds, "If it weren't fun, I wouldn't be doing it all these years," especially since the per diem rarely covers expenses, so "I eat the costs."
It does taxpayers no good to know the members. "If anyone has any personal involvement with an item, we recuse ourselves," says Menconi.
And filers' identities are carefully cloaked. The panel's assessment process can resemble a game-show competition. The information received about each item is blind, lacking not only the taxpayer's name and identifying data but also whether the value claimed was for a donation, in which case it might be inflated, or for an estate, in which case it might be understated. "We know the object, a [dollar] number and a date," Findlay says, "and we ask, 'Is that the right number for that object on that date?' "
Of course, it's not an on-the-spot decision, and that's where those big boxes come in. They contain an image of each object to be reviewed, plus a worksheet of sales data for and photos of comparable items, drawn from public auction records or provided by the taxpayer or the irs appraisers (panelists don't know which of the three was the source).
In the weeks before each meeting, says Menconi, "we go through [the files] and do our own research, and bring more comparables from what we know about sales in the private arena. So by the time we arrive in Washington, we bring notes" about each object. Those notes may
suggest rejecting the comparables provided by the taxpayers—if, say, landscapes are used as a price guide for a still life or the date of a sale suggested as an indicator is inappropriate—and may offer different ones.
At the meetings, which normally take place over two days for fine art and one day for decorative art and antiques, panelists review items grouped alphabetically by artist, not by return filer—again to keep taxpayer information secret. "We discuss them while looking at a photograph of the work," says Carolan, adding a tip for anyone facing an audit: "It's up to the taxpayer to provide a really good photograph."
Panelists say that for those who are audited, the key to avoiding problems, which can involve civil penalties for false appraisals, is to hire qualified, experienced appraisers (listings can be found at www.appraisers.org or www.isa-appraisers.org) and make sure they dig deep enough; referring to auction catalogues and surfing the Internet aren't enough. "They should not only research auction records but also call dealers," says Menconi. "Many artists are stronger in the private market." Then, Findlay advises, "don't argue with them. Don't try to influence the appraiser in a way that will benefit you, because I guarantee you it will come out in the wash. And it will take more time than it's worth."
When panelists consider an object, everyone may participate, but the two or three experts in the artistic category represented tend to weigh in most strongly. "We have to try to recollect the temperature of the market for the kind of artwork at the time of the tax incident," Cantor says, slipping into IRS jargon for the time of the transfer of the property. (The IRS has three years to audit a tax return unless it's fraudulent.)
And how do deliberations proceed? "It may be three people saying, 'I agree,' and that's the end," says Cantor. Other times, there is lively debate about the comparables, the condition of the works and the dynamics of the marketplace at the time. "There are no hostilities, but there are differences of opinion," says Findlay. "Everything has to be backed up with a comparison."
Panelists work through conflicts by referring to data. "Appraising is not a science; it's an art," says Cantor. "But it is based on logic and reasoning. Sometimes, when it gets heated, it's someone saying, 'I think I could have got X at X time,' without any documentation. But there's an old saying: One price is a record, two is a trend, and three equals a market. We try to look at the market."
Still, he adds, "We don't climb on chairs and tables and start shouting at each other. The process is orderly and, I believe, quite fair."
What if there are no direct comparisons—if works by an artist are scarce, say, or if something is of unique importance? That's another occasion for lively debate. "You have to look at artists of the same movement, the same quality, the same day," Cantor says. "There is evidence somewhere."
Panelists are reluctant to mention specific cases, but Menconi offers a recent example of dissension: The panel was assessing an important work by a 19th-century American artist. "I felt the value would be strong," she says, "whereas other panelists felt he wasn't a top-tier artist. In the end, I came off a little, and the rest of the panel came up. It was all very friendly."
"We have no axes to grind," Menconi continues. In fact, she and others say that the panel sometimes raises the value of a donated work and lowers the value of an estate asset.
And it is the IRS, which receives the panel's opinions, that makes the final judgment. Taxpayers can appeal if they disagree, but only if they have more evidence. Then, there could be a rehearing—which means even fatter files in those boxes when they show up on doorsteps again.