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By – Ronald D. Spencer

“This essay is about the difficult process of valuing art for tax purposes. The most important factor for intrinsic value is the authenticity of the art. Yet appraisers are not, and do not claim to be, experts on authentication. This essay describes the resulting problems.

RONALD D. SPENCER is counsel to the New York law firm of Carter Ledyard & Milburn LLP, where he specializes in art law as Chairman of the Art Law Practice. He is expert in the legal aspects of art authentication issues and has written and edited, The Expert Versus the Object: Judging Fakes and False Attributions in the Visual Arts, (New York, Oxford University Press, 2004).

A federal income tax deduction for your contribution of art valued at more than $20,000 must be supported by a written appraisal of value by a qualified art appraiser. IRS Publication 561 (April 2007) states:

The authenticity of the donated art must be determined by the appraiser.

But, it’s not as easy to determine as it should be. Blame the IRS, the courts and experts’ fear of liability. The authenticity of a work of art is a critical factor in determining its value for tax purposes. But each of the players in this determination, the Internal Revenue Service, the art historian, the art appraiser and the courts, have their own impediments to arriving at a decision on authenticity.

The IRS is saddled with two revenue procedures that appear to give little specific thought to the determination of authenticity and what the IRS expects to see by way of support for the taxpayer’s assertion of authenticity. The art historian, often a connoisseur of the works of the artist in question, is concerned that he will be sued for his opinion on the authenticity of the work in question. (Ever since the famous art dealer, Sir Joseph Duveen, was sued in 1929 by the owner of a painting Duveen publicly declared was a copy — and had to pay $60,000, 1929 dollars in settlement — art experts have considered that opinions are dangerous things to give.) The art appraiser is not usually an art historian and almost never an expert on the artist in question, and hence must look to the reluctant art historian. And the judge, when called upon to make the final determination of value, does not have the visual training to see what the art historian is describing. Their exchange is often as fruitless as if the historian were a radiologist trying to show a patient the subtle readings of the patient’s x-ray.

This tragicomedy with four players is enacted against a background of some public skepticism and no small amount of public misunderstanding concerning the process of authentication in the visual arts. The public (and judges, when not deciding the case, are themselves part of this public) is looking for “objective,” scientific evidence, and regards connoisseurship as “subjective,” meaning (only or primarily) personal taste and (perhaps) unsubstantiated opinion. This public skepticism and experts’ concern about legal liability for expressing their opinions have combined to inhibit freedom of scholarly opinion and thereby produce fertile ground in which fakes and false or mistaken (negligent or not) attributions flourish — making supportable valuations for tax purposes difficult to obtain.

Muddled IRS Rules
The visual arts become professionally important to tax advisers and estate planners chiefly as an issue of valuation for income, gift and estate tax purposes. Art appraisals will, of course, take into account public sales of comparable works of art by the same artist — comparable in terms of size, medium, subject matter, condition, time period of creation in the artist’s career (later van Goghs, for example, are generally more valuable than earlier works). However, missing from this enumeration of factors to be considered in an appraisal of value is one that has the greatest impact on value: whether the art was in fact made by the artist named as its creator. And, indeed, appraisal and authentication of art are two very distinct processes, resulting, on the one hand, in an opinion on monetary value, and on the other, in an opinion on authorship or historical accuracy.

While the applicable IRS revenue procedures do not confuse authentication and appraisal, there is a glaring lack of clarity as to the nature and relative importance of the factors important to proving authenticity. Rev. Proc. 66-49, “[a] procedure to be used as a guideline by all persons making appraisals of donated property for Federal income tax purposes” states that an appraisal report should contain, inter alia, a

complete description of the object, indicating the size, the subject matter, the medium, the name of the artist, approximate date created. . . . A history of the item including proof of authenticity such as a certificate of authentication if such exists.

In 1996, the IRS modified this revenue procedure by issuing a new procedure (Rev. Proc. 96-15) for works valued at $50,000 or more, for requesting a statement of value from the IRS that could be used to substantiate the value of art for estate, gift or income tax purposes, and could “be relied upon in completing the federal estate, gift or income tax return that reports the transfers of art.” The request for a statement of value from the IRS must include an appraisal which itself must include, inter alia,

. . .the history (provenance) of the item, including proof of authenticity if that information is available. . . [and] a record of any exhibitions at which the item was displayed. . . and the physical condition of the item.

First, it should be noted, that a “history of the item,” more usually called “provenance,” is a documented chain of title and possession from the artist’s hand to the present owner. Provenance is important to (but not the same as) proving the authenticity of a work. A public exhibition record is, itself, part of the provenance of a work. Second, certificates of authenticity are only as relevant as the qualifications of the author of the certificate and the art historical research supporting the certificate. Further, as a practical matter, certificates of authenticity are looked upon with suspicion by art market professionals, in part because of their abuse during the 1920s and 1930s in Europe when financially pressed scholars would issue certificates privately for a substantial fee but avoid publicly publishing their opinion contained in the certificate. Indeed, it was often said that the more certificates a piece had, the more likely it was to be fake.

Under current IRS procedure, any taxpayer’s appraisal of a single work with a claimed value of $20,000 more must be referred by the local IRS office for review by the Commissioner’s Art Advisory Panel and Art Appraisal Services. The Art Advisory Panel consists of approximately 19 volunteers who are nationally prominent art museum directors, curators, scholars, art dealers, auction house representatives, and appraisers who aid the Service in the review of IRS-selected cases involving taxpayer valuations of art objects. The Panel members, after reviewing photographs or color transparencies, along with relevant documentation provided by the taxpayer and research by IRS staff appraisers, make recommendations on the acceptability of the taxpayer-claimed values. If unacceptable, the panelists may make alternate value recommendations. Such Panel recommendations are advisory only, but, after review and acceptance by the Office of Art Appraisal Services, these Panel recommendations become the IRS’s position.

Rev. Proc. 96-15 left unmodified the burden of proof set out by the 1966 revenue procedure, to wit:

While the Service is responsible for reviewing appraisals, it is not responsible for making appraisals; the burden of supporting the fair market value listed on a return is the taxpayer’s.

Because the taxpayer has this burden, it is important to examine the process — and the inherent difficulties — of authentication of art and antiquities.

Authentication – the Process
The authenticity of a work of art is always a critical issue. Is it “real” or “original” is a perennial question in the art world reflecting an underlying intellectual respect for what is true and real and a rejection of what is not. Authentication is the process by which experts — art historians, museum curators, archaeologists, art conservators, and others — attribute a work of art to a particular artist or specific culture, era or origin.

Three lines of inquiry are basic to determining authenticity: (1) a connoisseur’s opinion, (2) historical documentation or provenance and (3) technical or scientific testing of the physical components of the work. A connoisseur is an expert who evaluates the “rightness” of a work based on having looked hard and carefully at many works of the artist, combined with knowing the artist’s usual manner of working and materials utilized during a particular time period of the artist’s career. Thus, “connoisseurship,” is the sensitivity of visual perception, historical training, technical awareness and empirical experience needed by the expert to attribute the object. To determine an object’s provenance, a researcher traces the physical object from the artist, culture or geographic location (or all three) through a chain of ownership or possession (not necessarily the same thing) to the current owner or possessor. That’s a simple enough concept, assuming the documentation is not faked or inaccurate. Its goal is to assure that the object under study is the same one that left the artist’s hand.

Technical or scientific testing for age, structure, material and method of manufacture is often longer on promise than result. Dating paint or wood samples, for example, can show that the painting was made in Rembrandt’s lifetime, but cannot prove that it is by Rembrandt’s hand. And, at a more technical level, testing of ancient pottery to determine the date of kiln firing assumes that the sample or samples tested are representative of the entire object.

Fakes distort our understanding of an artist’s work as well as our understanding of an era or a culture, and thereby the historical record itself. One important distortion is that many fakes (as well as malicious, fraudulent, negligent or simply mistaken attributions) very often contain current era-specific characteristics. Notwithstanding the common use of the word “forgery,” a fake — a work created with intent to deceive — is but one facet of authenticity issues. The larger, more important and more frequent problem is the work of unknown or wrongly attributed authorship or origin.

Obviously, the object being attributed must be physically available for examination to the connoisseur or other expert. Not necessarily so, one might say with respect to provenance research or the historical chain of title, possession, ownership and exhibition. But the most careful analysis of this provenance documentation is not helpful in attributing an object unless the expert can be reasonably sure that the documentation being examined is for the specific object in hand. So here again we are led back to the object itself. This point is illustrated by a 1993 litigation involving an Alexander Calder mobile in which the judge did not fully comprehend the attribution process or the experts’ role. An object, sold as a Calder mobile, had a well documented ownership trail over 20 years from the artist to the current owner/seller. But, because the mobile could not be made to hang as Calder intended, the buyer became convinced (probably correctly) that a fake had been substituted for the real mobile sometime during those 20 years. The judge of the federal district court, in deciding that the piece was authentic, placed unreasonable weight on the apparently faultless provenance of the piece and heavily discounted the testimony of the leading expert on Calder, Klaus Perls, that the piece was a fake.

Art Scholars
And what of these connoisseurs and other experts? Many are constrained in rendering scholarly opinions by worry over their legal liability to owners, sellers and buyers. As a result, there are no false attribution sections in most catalogues raisonnés of artists’ work. Similarly, many U.S. museums have policies prohibiting or discouraging their curators from expressing opinions on objects not already owned by the museum. Also, an art scholar authenticating a work may not ethically charge a fee related to the value of the art. So why would an expert, for a fee of, say $500, risk a million-dollar lawsuit for product disparagement or professional negligence?

The Professional Appraiser
The third player in our tragicomedy is the professional appraiser of the value of art who is not often an art historian. Even more rarely does the appraiser have expert qualifications with respect to the artist whose work is being valued. This has led to the appraiser’s practice of expressly assuming the authenticity of work and expressly disclaiming any opinion on authenticity, while attempting to find someone who is an expert on the artist to render an opinion on authenticity. Small wonder that this process leads us directly to court decisions where the IRS challenges the appraisal based on a lack of authenticity, and the Tax Court is left with the difficult and perplexing task, aided only by competing experts for the IRS and the taxpayer, of deciding whether doubts about authenticity of the work depress its value, and, if so, by how much.

Courts Reluctant to Decide Authenticity
Courts treat authenticity as a critical factor in the valuation of a work of art. While the U.S. Tax Court usually avoids deciding questions of authenticity, it uniformly holds that serious doubts or disputes about authenticity reduce the value of a work.

However, the Tax Court will venture into this territory and expressly decide authenticity where it is a matter, not of subjective quality or style, but of restoration or overpainting. In the 1981 case of Monaghan v Comm’r, for example, the Tax Court designated a painting inauthentic because restoration had made it so that “only 40% of the paint of the original artist remains on the canvas.” Indeed, the Tax Court noted in the 1989 case of Ferrari v. Comm’r,

[A]t some point, excessive restoration takes a piece of this art out of the category of an original and turns it into a reproduction. For example, it would certainly be misleading to sell as pre-Columbian art an object which consists of less than 25 percent original material. That dividing line may in fact be too low without full disclosure to the customer.

However, one British court expressed the opposite view in a 1993 case where an unknown restorer of an Egon Schiele painting had overpainted the original surface to the extent of 94 percent of the surface area. No amount of overpainting could make the painting a forgery if the overpainter simply followed the design of the original artist and reproduced as best he could the original colors used by the artist, said the High Court of Justice, Queens Bench Division, in De Balkany v. Christie’s.

But Courts Do Decide that Serious Doubts about Authenticity Affect Value
Two points should be noted about these court decisions and others like them. First, while the U.S. Tax Court states that it is not deciding authenticity, the decision process articulated by the Tax Court reads as though the court is doing just that. Thus, the Tax Court uses such facts as — a painting is not listed in the standard reference work, a theme was very common and frequently copied, a work is of insufficient quality, or a subject matter not characteristic of the artist — to determine that doubt exists as to the work’s authenticity and its value is thereby reduced.

And Substitute Their Opinion for Expert Opinion
Second, it’s clear that, while the Tax Court carefully considers expert opinion offered in court, it feels free to ignore the experts. — as the Tax Court did in Ferrari, (and as the Calder Court did)repeatedly emphasizing:

We are not bound by the opinion of any expert witness when that opinion is contrary to our own judgment. . . . We may embrace or reject expert testimony, whichever, in our best judgment, is appropriate. . . . We are not restricted to choose one valuation over the other, but may extract relevant findings from each in drawing our conclusions.

New York, New York
December 2010

Ronald D. Spencer