There’s a common misunderstanding that an appraised value is singularly remarkable, that is, that the fair market value (FMV) of an item is substantially the same for all purposes. Nothing could be further from the truth. Estate-planning professionals often don’t understand the assortment of appraisal designs, each of which will create vastly differing values for the same book, document, film, collectible or piece of art. I’ll concentrate on the specific objectives of each type of appraisal and explain what estate-planning professionals can expect from an appraiser.
I’ve had attorneys cry “foul” when their clients, now parties to an equitable distribution, can’t immediately sell the items for the FMV that was originally confirmed specifically for the purpose of an estate tax return. To avoid this and other similar dilemmas, and to understand the distinctions in valuation, it’s necessary to understand the many purposes for an appraisal. For instance, on Jan. 22, 2014, the Detroit Free Press reported that U.S. Bankruptcy Judge Steven Rhodes rejected the request of the Detroit Institute of Arts’ (DIA) creditors to establish an independent committee to evaluate the value of all of the DIA’s assets.1 The creditors claimed that the Christie’s valuation was insufficient and inappropriately low. The basic conceptual mistake seems to be that Christie’s made an assessment based on the FMV, while it should have been based on the liquidation value.
Estate tax and donation. In this context, I use FMV, defined as the gross price that property would sell for on the open market with a “willing buyer and willing seller.” This valuation includes all fees, costs and sales commissions. It’s important to recognize that this is a gross figure, usually 25 percent to 30 percent higher than the actual funds that the owner/seller will receive at auction and requires an “orderly event,” defined as a sale that allows for proper announcement and time for preparation and organization.
Practice Note: Often, this FMV appraisal is requested in anticipation of either modest values, in the case of estate tax, or higher valuations for the purpose of donation. I’ve encountered situations in which the trustee hired two appraisers with the idea of using the appraisal that most met his needs. This process dramatically compounded the costs and ended with values in the same range, which reduced any savings that might have been gleaned for the estate.
Equitable distribution to heirs or to set prices for an estate sale or divorce settlement. Here, instead of FMV, I use marketable cash value, which is an FMV net of all expenses, such as all fees, costs and sales commissions. This value represents the actual proceeds that the heirs will receive if they choose to sell, assuming, as above, an orderly sales event. The result is usually 25 percent to 30 percent less than sale or auction hammer price. It’s also here where the appraiser addresses the marketability of possibly illegal items (for example, certain firearms, Native American artifacts or ivory). While an item may have an FMV for estate tax purposes,2 illegal items carry restrictions on their salability and must be excluded from the inventory for the purpose of fair and equitable distribution (and donation).
All appraisals written by a qualified appraiser conforming to Universal Standards of Professional Appraisal Practice (USPAP) contain the language:
This appraisal consists of __ pages and must be presented in its entirety to be valid. This appraisal is prepared solely for (charitable contribution/estate tax/etc.) purposes using the (appropriate) market approach to arrive at the (fair) market value as of (date). It is to be used solely by (Owners) and their agents (accountants, attorneys, trustees, curators) for (income tax/equitable distribution/etc.) purposes. This report can be relied on by the Internal Revenue Service (and, where appropriate, the non-profit recipient). Each appraisal is unique and distinct in its purpose and is not to be copied or used for any other purpose.
Practice Note. In one case I handled, the trustees, after the filing of the estate tax return, used the estate tax appraisal as the document for calculating the distribution to heirs and then as the gauge for an immediate estate asset sale. As would be expected, the quick sale was settled for considerably less than the FMV. Included in the estate assets was a cache of illegal ivory, which, although valued for estate tax purposes, was an asset that couldn’t be sold. In this case, the estate tax appraisal was improperly used, the distributions were skewed and the heirs were misled and angry.
Casualty insurance policy scheduling or claims. I use replacement value, which is the amount it would cost to replace an item with one of similar and like quality, age and provenance, purchased in the most similar and appropriate marketplace to the original and available within a rather limited amount of time suggesting the retail dealer market. For this reason, replacement value is generally the highest valuation assigned to personal property and is always used in cases of loss or theft.
For example, a Tiffany diamond of particular quality sells for considerably more than a similar quality Kay Jeweler’s diamond. Where the owner shops, his most appropriate marketplace, sets the venue for the insurance value for that item.
Practice Note. I’m often asked, “I have homeowners insurance covering a significant total loss, this should be more than enough to cover any possible loss in my collection. Why do I need an appraisal?”
Unless collectibles are appraised and then listed and valued separately, there’s a limit on unscheduled personal items that will, with most important items, not come near to the replacement value.
I use actual cash value when items have limited life spans, such as when appraising machinery. This value is called the “replacement cost less
Liquidation or immediate monetization. After distribution, due to bankruptcy or, in many cases, after equitable distribution with an immediate attempt to monetize, the appraiser determines the liquidation value. Liquidation value is the sales revenue that will be realized within an immediate and specified period of time and is the lowest valuation assigned.
Estate planning. Here, the appraiser must be made aware of the proposed disposition of the assets. Consider: Are the items to be kept by the heirs? Will collections be maintained in a whole state or broken up and sold piecemeal (consider blockage discounts)? Are the items going to be immediately monetized? Is the appraisal sought for eventual distribution that’s to be chronicled in advance, and, if so, are the values for the purpose of an individual’s equity or other estate needs?
Determining value for transfer or donation of a life insurance policy, assets between trusts, collateral for a loan or to establish a traditional FMV for an item with commercial linkage. FMV is defined using different data in all of these cases but still relies on the basics of comparability. The valuing of a life insurance policy may simply be the lesser of the interpolated terminal reserve and the net cost, or it may have to consider the very real potential secondary market pressures. A convertible term life policy on a 70-year-old with health problems can be appraised and donated at its secondary market value, rather than being discarded for no value.
The FMVs of non-cash assets being transferred between trusts or for donative purposes, whether remainder or income interests, require an enlightened understanding of the process. Valuation in support of loan collateralization, although of a different technical variety, still requires adherence to the basic principles established by USPAP.
The appraiser is always left to choose the most appropriate market approach.
Assume that an iconic photograph that’s created by an established living artist is being valued based on a variety of uses. Here are four different valuations for the same image, using different approaches:
1. Market comparison 1: The image may be donated by a collector/owner that’s available in a market with comparables that are valued at $25,000.
2. Market comparison 2: The image may be reproduced in a series of 50, each currently selling at $3,500.
3. Cost: The image may be commissioned by an advertising agency for an introduction to a company documentary requiring the photographer’s research and travel and time for Beta testing. The photographer has negotiated a price based on the time, cost and equipment needed to create that singular image (market value) of $75,000.
4. Income: The image may be leased for an expressed purpose and period of time to a popular manufacturer for an exclusive clothing line (scarves, shoes, accessories, etc.). Through an appropriate business plan, and by referencing known market dynamics, the appraiser views the sales forecasts and creates a market value using a yield function based on anticipated income. The initial value was set at $400,000.
Estate-planning professionals aren’t necessarily expected to spot fakes or stolen works, especially in the area of art and collectibles, so, in questionable areas, they should conscientiously check to see that the appraiser has consulted scholars, museum curators, dealers, auction houses, families of artists and catalogues raisonnés (a comprehensive list of works by an artist). Recently, the prestigious Knoedler Gallery was closed for dealing in forged paintings and is involved in numerous lawsuits. (For more information, see “Navigating the Art World,” by Claire Brown, in this Special Report, p. A30.)
When researching the provenance (that is, history of ownership), if there’s any question that the painting, rare book or document was stolen or is a forgery, the appraiser is required to contact the Art Loss Register or The National Stolen Arts File of the Federal Bureau of Investigation. The appraiser must be sensitive to the possibility of a stolen or forged item and be willing to recommend the use of scientific analysis to determine an item’s authenticity. Counterfeit wines are estimated to account for as much as 5 percent of the secondary market.3 For centuries, most wineries made little effort to make sure their wines couldn’t be counterfeited. Unfortunately, even the most advanced radio frequency identification technologies can’t absolutely ensure that the product inside the bottle is genuine. As with a dedicated collector, by the time Russell Frye learned he’d been a victim of wine counterfeiters, it was too late. In
May 2006, the Massachusetts wine collector and businessman decided to sell his 8,500 bottle collection after 10 years of meticulously selecting top Bordeaux, Burgundy and other premium wines.4
The appraiser is required to make every reasonable effort to gather all available information relative to the appraised object. But in some cases, even experts have been unable to come to agreement as to whether a work is authentic. In George O. Doherty and Emelia A. Doherty v. Commissioner,5 two of the foremost authorities on the paintings of Charles M. Russell couldn’t resolve the question of authenticity of a donated painting. In 1969, the Dohertys bought “Attacking Stagecoach,” which Russell may or may not have painted, for $10,000. They donated an undivided 40 percent interest in the painting to the Charles M. Russell Museum in Great Falls, Mont. in 1982 and the remaining 60 percent in 1983. In those years, they claimed charitable contribution tax deductions of $140,000 and $210,000, respectively. The Internal Revenue Service, backed by its expert, maintained that the painting was a forgery and worth only $100. The court noted that the credentials of the two sides’ experts were beyond question, yet they had reached different conclusions. The court said that it couldn’t rule on authentication and concluded that the painting had a value of $30,000, recognizing the fact that even if the painting were authentic, the dispute had affected its FMV.
In Estate of Elkins v. Comm’r, Judge Halpern noted:
In deciding valuation cases, courts often look to the opinions of expert witnesses. Nonetheless, we are not bound by the opinion of any expert witness, and we may accept or reject expert testimony in the exercise of our sound judgment. Although we may largely accept the opinion of one party’s expert over that of the other party’s expert, we may be selective in determining what portions of each expert’s opinion, if any, to accept. Finally, because valuation necessarily involves an approximation, the figure at which we arrive need not be directly traceable to specific testimony if it is within the range of values that may be properly derived from consideration of all the evidence.6
Confirming the accuracy of an appraisal is as important as choosing the right type of appraisal, especially when taxes are concerned. “Review of Appraisals,” this page, shows the results of the Annual Summary Report for Fiscal Year 2012 of The Art Advisory Panel (the Panel), which provides advice and makes recommendations to the Art Appraisal Services (AAS) unit in the Office of Appeals for the IRS. The Panel helps the IRS review and evaluate the acceptability of tangible personal property appraisals of FMV claimed on works of art involved in income, estate and gift tax returns.
The AAS appraisers review appraisals by researching publicly available information; the Panel provides additional knowledge of private sales, based on their personal experience as dealers, scholars and museum curators, as well as from information obtained from other members of their relatively small industry. The panelists’ knowledge is particularly beneficial when questions exist about the authenticity of works of art.
The Panel meets once or twice a year in each specialty area. During 2012, the Panel completed its review of 444 items with a combined taxpayer valuation of $281,859,200 on 43 cases under audit. The average claimed value of a charitable contribution item was $634,818; the average claimed value for an estate and gift item was $626,890.
The Panel recommended accepting 51 percent and adjustments to 49 percent of the appraisals it reviewed, while 2 percent of the appraisals reviewed required additional staff research before the Panel could make a value recommendation. The Panel recommended total net adjustments of $66,066,800. On the adjusted items, the Panel recommended a net 52 percent reduction on the charitable contribution appraisals and a net 47 percent increase on items in estate and gift appraisals.
An appraisal report may be used in a wide variety of contexts depending on its purpose: an insurance schedule; the settlement of a damage/loss claim; a determination of tax liability for the IRS in an estate situation; a determination of tax relief for the IRS in a non-cash charitable contribution; the basis for an equitable distribution; the basis for disposition decisions; or the basis for a collateral loan decision. No matter the reason for the appraisal, it’s clear that the document must not only be accurate, but also be qualified and adhere to the IRS’ formal requirements.
Mohamed v. Comm’r
In Mohamed v. Comm’r,7 Joseph and Shirley Mohamed donated real estate to charity in 2003 and 2004, but didn’t follow the Commissioner’s directions about how to document their
donations. The Tax Court denied the contribution of real estate worth $19 million when the donor, a real estate appraiser, performed the appraisal himself, which isn’t allowed under the regulations. The court held that Joseph failed to substantially comply with the regulations, because a qualified appraisal is an “essential requirement” of the regulations. This was the case even though at trial, both parties stipulated that the property was likely worth in excess of $19 million.
The appraiser is an adjunct to the financial professional: the attorney, accountant or financial planner. His information guides some of the team’s important planning decisions. The object of appraising is to remain at arm’s length and discover, through market analysis, all that’s pertinent to the value of the object. For the owner/seller to set a value for his planned purposes, the appraiser must, with an unbiased mentality, study the provenance and what comparable and like items have brought in the comparable market place. With art, rare documents, wine and other collectibles, research includes where and when sales have occurred and how the piece or pieces being appraised compare to items that have already sold. Through training and experience, the appraiser is sensitive to the materials and techniques of the individual’s works that are being considered, as well as that of comparable artists and authors and the particular period of the artist’s or author’s development within their productive lifetime. And, although an appraiser isn’t an authenticator, he understands the need for committed research into materials and techniques, including paper analysis, exact measurements, inscriptions and markings, as well as the many subtleties of artists’ and authors’ signatures.
The volatility of the changing market makes the appraiser an important resource to the estate-planning professional. The appraiser presents the values to the professional for his application to the assignment. The appraiser isn’t qualified to give legal or accounting advice.
In valuing art, rare books and documents, wine and collectibles, an appraisal is a subjective valuation for a specific moment in time. This concept must be understood in light of the idea that “all fine art is considered to be appreciable” and as such, has the potential for increasing in value over time. Of course, with less established artists or with timing, the market and reputation may lead to an eventual diminution in value as well. If seeking to monetize the item, once the appraiser has completed the critical survey, appropriate pricing and timing can be crucial. The right auction, the right geographic selling market (for example, most southern art doesn’t sell well in the northeast) and a timely and aggressive promotion could lead to excellent pricing.
1. “Rhodes rejects creditors’ request for independent valuation of DIA art,” Detroit Free Press (Jan. 22, 2014),
2. “MoMA Gains Treasure That Met Also Coveted,” New York Times (Nov. 28, 2012), http://www.nytimes.com/2012/11/28/arts/design/moma-gains-treasure-that-metropolitan-museum-of-art-also-coveted.html.
3. Augustus Weed, “Fighting Faux Wine,” Wine Spectator (Nov. 12, 2008), http://static.winespectator.com/ebfeature/show/id/Fighting-Faux-Wine_4454.
5. George O. Doherty and Emelia A. Doherty v. Commissioner, 16 F.3d 338 (9th Cir. 1994).
6. Elkins v. Comm’r, 140 T.C. 5, at p. 38.
7. Mohamed v. Comm’r, T.C. Memo. 2012-152.