At its core, the art market is subjective and unpredictable, underscoring the importance of establishing the value of your artwork at many points during artwork ownership.
Authentication and appraisal are the two critical assessments for establishing the value of artwork.
Authentication is the process of determining whether the artwork really was created by the artist to whom it is attributed. Authenticators are often academics or other experts who are familiar with one particular artist’s body of work or have a specific focus on one period of art history. If an authenticator believes a work of art is a forgery or a copy of an artist’s trademark style, the authenticator will refuse to offer an authentication. Refusal of authentication can render a work of art unsalable.
An appraisal is performed by an expert and is an approximation of the fair market value of a piece of artwork. In many cases, appraisals are necessary for income, gift, and estate tax purposes. An artwork appraisal is necessary when an individual who donated artwork to a charitable organization is seeking a federal income tax charitable deduction in excess of $5,000 or an individual has died owning artwork valued in excess of $3,000.[1] With respect to non-charitable gifts, failure to report and adequately disclose a gift, which includes certain information as to how the artwork was valued, will cause the statute of limitations with respect to the assessment of gift tax to remain open.[2] Submission of an appraisal that meets certain requirements,[3] along with other necessary information, will constitute adequate disclosure.[4]
Authenticating Your Art
Authentication is generally a necessary first step toward a reliable appraisal. A lack of authentication dramatically reduces the appraised value.
Finding an appropriate professional to authenticate your collection, however, may not be as straight forward as it would seem. Authentication has become increasingly fraught as high-profile art fraud gains international attention.[5] Much recent art fraud has been perpetuated by family and friends of the late artist, casting doubt upon the judgment of those who are often considered the ultimate authorities on an artist’s body of work.
Additionally, in response to the increasing risk of litigation, many individuals in this field have decided to stop making authentications.[6] Authentication boards, which are the common source of authentication for contemporary works, are also disbanding due to the litigious environment.[7] While many lawsuits against authenticators eventually fail, they can be extremely expensive to defend. Authentication boards are frequently derived from outgrowths of foundations established to advance the artistic ideals of one particular artist. Collectors with work believed to be by a certain artist can submit the work in question for review by the board. Customarily, as part of the agreement with the board, the collector agrees to be bound by the board’s decision.
Some authenticators may require certain provisions in their contracts to protect themselves from liability. The general belief in the industry is that these clauses do not prevent authenticators from acting in good faith, as the business hinges upon reputation. More broadly, if the whole industry of authenticators decides the risk of lawsuit is too high, it will become difficult to authenticate artworks not already authenticated.
Legislative steps aimed at removing the chill from this market are just beginning to surface. For example, there is pending in the New York Legislature bills to deter frivolous litigation against authenticators.[8]
Establishing Provenance
Buyers and auction houses expect sound provenance and other guarantees to authenticity as soon as discussions of a sale begin. Reports of forgeries have increased in recent years,[9] and prospective buyers are becoming more discerning.[10]
Establishing a record of ownership dating back to the artist is the best way to prove that an artwork is authentic. A bill of sale is the best way to prove that ownership has passed from one to another. Other types of documentation can build a strong provenance as well. Appearance of the artwork in auction catalogs, photos of owners with the artwork, newspaper articles documenting physical location of the artwork, and other formal, written materials can help establish provenance.
Options for When There Is No Provenance
In the absence of an established provenance, art experts seek to authenticate works of art by examining formal elements. Usually those who have published research on a certain artist, have curated a collection of the artist’s work, or have extensively studied and taught the artist’s work will be considered experts with the appropriate level of knowledge. While this high level of expertise in the artist’s style certainly renders an expert’s opinion valuable, authentication based on expertise is ultimately subjective.
Scientific Techniques
Certain techniques are frequently used to disprove an authentication. Scientific means that refute an authenticator’s decision are viewed as all but irrefutable. For example, pigment dating can be the source of a challenge when the artwork’s material postdates the years an artist was active.[11] A thorough analysis may also consider the date of use of the wood in the frame and the fibers of the canvas.[12] Computers can now analyze brush strokes to identify fakes[13] and analyze the presence of crack lines that appear over time in a painting.[14] Science can assist in an authentication in quite unexpected ways: a new Leonardo da Vinci painting was authenticated following a macrophotography that demonstrated a page in a book had been removed from the exact place where the small portrait in question would have been.[15]
Appraisals Can Ease Estate Settlement
Estate settlement can be significantly easier for the executor if while alive the decedent compiled a full inventory and appraisals of their artwork, authenticated suspect works, and compiled a paper trail to establish provenance.
Coordination of an appraisal of artwork must happen relatively quickly after the passing of the owner.[16] Estates with major art collections may experience a liquidity problem when taxes come due if proper planning for an appraisal and sale have not been made.[17] However, having an inventory of artwork and appraisals obtained during the decedent’s lifetime can expedite the process and greatly assist the executor seeking to raise cash from the sale of some or all of a collection.[18] Additionally, certain pieces can be earmarked for sale upon death to raise cash if they are expected to sell quickly and for full value.
An appraisal obtained during an owner’s life can also help a collector know the value of artwork so as to leave artwork of relatively equal value to heirs, if desired. Discord among family members could arise after the collector’s death if heirs receive pieces that, through oversight, differ greatly in value.
Although, having a recent appraisal or inventory is most helpful for someone settling an estate, it is also important for owners to retain all documentation regarding the purchase dates and prices of artwork. At the very least, knowing the location of the receipts or other information surrounding the purchase of artwork will make the subsequent sale easier. A collector should share as much information as possible during his or her lifetime to make subsequent provenance searches easy and help maintain or improve the value of the art.
IRS May Dispute Appraisals
The Internal Revenue Service (IRS) may dispute valuations for estate, gift, or charitable deduction purposes.
For tax purposes, appraisals are mandatory for many transactions involving artworks. The process of determining value is so subjective that the IRS has created an Art Advisory Panel to audit appraisals and provide recommendations to the Art Appraisal Services (AAS) unit of the IRS Office of Appeals. If a single work of art or cultural property is valued at $50,000 or more and the tax return on which such property is reported is selected for audit, the local IRS office must refer the case to AAS for possible referral to the Art Panel.[19] The panel’s recommendations are advisory. In fiscal year 2021, AAS adopted 57% of the panel’s recommendations.[20]
An art collector may need to engage several different professionals, each for different art services.
Given the subjective nature of valuation, art owners should not be surprised that many art valuations are audited. In fiscal year 2021, for those items audited by the Art Panel, a net increase in value of almost 28.7% was suggested.[21]
During the audit, the panel does not know whether the piece has been submitted for a charitable deduction (incentivizing a taxpayer to submit a higher appraisal) or for estate and gift tax purposes (incentivizing a taxpayer to submit a lower appraisal).[22] The panel adjusts items upward and downward in value.[23]
Art collections often include both financial and emotional assets. When planning for the future of your collection, it is important to work with professionals you trust to address both the technical and emotional complexities. This may require coordination of art market advisors, estate planning advisors, and those with expertise on family dynamics. If casualty or title insurance is required, different professionals with those specialties may also be added to the mix.
Each person brings a different skill set to an art team. Understanding each role can help maximize the benefits received and help clarify the art collection owner’s goals and estate planning needs.
