The last two issues reviewed a round up of issues affecting art and collectibles. This final part of the series will provide a brief overview of additional planning considerations.
Estate Tax Art Audit
The IRS Art Advisory Panel of the IRS reviews the fair market value of all works of art reported on gift and estate tax returns, or for charitable contribution deductions when the combined value of the items or art exceeds $20,000. The Valuation division of the IRS also reviews artworks. Once reviewed a report is issued by either the Art Advisory Panel or the Valuation division. by taking advantage of the procedure set forth in IRC section 2204. It merely requires that the executor ask the IRS to set the estate tax. The IRS has nine months to do so. As soon as the executor pays the tax he's free of any further liability. If your executor cannot reach an agreement on fair market value of art, your executor can request the matter to be reviewed by the IRS Appeals Division. If the value cannot be resolved at Appeals, your executor will have to petition the Tax Court.
■ For claimed contributions of more than $5,000, in addition to a contemporaneous written acknowledgment, a qualified appraisal generally is required. A qualified appraisal is defined in IRC Sec. 170(f)(11)(E)(i). Either Section A or Section B of Form 8283 (depending on the type of property contributed) must be completed and filed with the tax return on which you claim the deduction.
■ Is the art or collectible you donate used for the charity's exempt purpose? ■ Example: You donate furniture to a shelter for abused women. You paid $10,000 for the antique furniture, but it is now worth $15,000. Since the furniture is used for the charity's exempt purpose, your deduction is the full $15,000. ■ Example: You donated a statue to the shelter that is valued at $16,000, that has a tax basis of $8,000. The charity sold the statue and used the proceeds for the charity's exempt purpose. Since the statue was not used for the charity's exempt purpose, your charitable deduction is limited to $8,000. You must still attach a qualified appraisal to your tax return. ■ Example: Assume the same facts as the preceding example, except your tax basis in the statute was only $4,800. Your deduction is limited to $4,800, but since this amount is less then $5,000, you don't require a qualified appraisal to substantiate your deduction.
■ The appraisal must be completed not more than 60 days before your contribution of the art, and no later than the extended due date for the tax return on which you claim the deduction. If the deduction is claimed on an amended return, the appraisal must be received by the day the return is filed. Reg. 1.170A-13(c)(3)(iv)(B).
Determine what coverage is available. Obtain a replacement value appraisal for insurance purposes. Replacement value could be substantially more than "fair market value" used for gift and estate tax purposes. The definitions of value are quite different. If you inherit art, don't assume that the value on the estate tax return suffices for insurance purposes.
■ Restoration and conservation: How much discretion will you be giving an auction house? What parameters can you set? Should your consent be required before any work occurs? Can the auction house remove matting, framing, etc. without your consent as consignor? Your desire for control should be tempered by the auction house's judgment to take steps (e.g., re-framing) that could increase auction price to your benefit and theirs.
■ Promotion: What will the auction house do to market your art? Who should decide which items in the collection to show? Can the auction house divide your collection into lots? What if errors occur in catalogue descriptions? While the auction house might wish to avoid any liability, is that acceptable? Who can decide when, and in which auctions to show your art? Do you want to specify, for example, that your contemporary art should be auctioned with other contemporary art? Should you establish some parameters as to the time and locations within which the auction house can exercise its discretion to sell?
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