IRS PROPOSES PROCEDURES ON VALUATION OF CHARITABLE CONTRIBUTIONS OF ART OBJECTS.

Notice 95-1

This notice provides a proposed revenue procedure that, if finalized, will allow a taxpayer to obtain from the Internal Revenue Service a Statement of Value for certain art contributed to a qualified charitable organization. Under the proposed revenue procedure, a taxpayer's request for a Statement of Value from the Service must be made before the taxpayer files the federal income tax return on which such a contribution is first claimed as a deduction under section 170 of the Internal Revenue Code. The proposed revenue procedure would require the taxpayer requesting a Statement of Value to pay a user fee.

The Service is proposing this revenue procedure as a means of encouraging and enhancing compliance with federal income tax law. The Service welcomes public comments on the proposed revenue procedure. The Service is particularly interested in comments on the possible application of the proposed revenue procedure to estate and gift taxes. Any such comments should be sent by [60 DAYS AFTER PUBLICATION OF THE NOTICE] to the Internal Revenue Service, 901 D Street, SW, Room 224, Washington, DC 20024, Attn: CC:AP:AS:ART.

Rev. Proc. 95-

SECTION 1. PURPOSE

This revenue procedure provides a procedure for taxpayers to obtain from the Internal Revenue Service a Statement of Value for use in taking a deduction under section 170 of the Internal Revenue Code for a charitable contribution of an item of art. A taxpayer that complies with the provisions of this revenue procedure may rely on the Statement of Value obtained from the Service in completing the taxpayer's federal income tax return that first reports the contribution of the item of art.

SECTION 2. BACKGROUND

.01 Section 170(a) allows as a deduction any charitable contribution (as defined in section 170(c)) payment of which is made during the taxable year.

.02 Section 1.170A-1(c)(1) of the Income Tax Regulations provides that if a charitable contribution is made in property other than money, the amount of the contribution is generally the fair market value of the property at the time of the contribution.

.03 Section 1.170A-1(c)(2) provides, in part, that the fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.

.04 Rev. Proc. 66-49, 1966-2 C.B. 1257, provides guidelines for review of appraisals of contributed property for purposes of section 170. Rev. Proc. 66-49 states that the Service will not approve valuations or appraisals prior to the actual filing of the tax return to which the appraisal pertains, and will not issue advance rulings approving or disapproving such appraisals.

SECTION 3. SCOPE

.01 This revenue procedure only applies to an item of art that has already been contributed to a qualified charitable organization at the time a Statement of Value is requested from the Service.

.02 This revenue procedure only applies to an item of art for which the taxpayer has obtained an appraisal of $50,000 or more.

.03 For purposes of this revenue procedure, "art" includes paintings, sculpture, watercolors, prints, drawings, ceramics, antique furniture, decorative arts, textiles, carpets, silver, rare manuscripts, historical memorabilia, and other similar objects.

SECTION 4. PROCEDURE TO OBTAIN A STATEMENT OF VALUE

.01 To obtain from the Service a Statement of Value for an item of art, a taxpayer must submit to the Service a request for a Statement of Value for the item prior to the filing of the taxpayer's federal income tax return that first reports the contribution of the item. The request shall include the following:

(1) a copy of a qualified appraisal of the item of art in the amount of $50,000 or more; and

(2) a user fee in the amount of $3,000.

.02 The qualified appraisal must meet the requirements of section 1.170A-13(c)(3) and sections 4.02 and 4.03 of this revenue procedure. In particular, the qualified appraisal must be made no earlier than 60 days prior to the date of the contribution of the item of art, and must be made prior to the filing of the federal income tax return that first reports the contribution of the item of art. Also, the requirements of section 1.170A-13(c)(3) must be met by C corporations, even if they would otherwise be exempt from the requirements under section 1.170A-13(c)(2)(ii)(B)(3).

.03 All qualified appraisals submitted to the Service by the taxpayer under this revenue procedure must also include the following:

(1) A complete description of the item of art including--

(a) the name of the artist or culture,

(b) the title or subject matter,

(c) the medium, such as oil on canvas, or watercolor on paper,

(d) the date created,

(e) the size,

(f) any marks, signatures, or labels on the work of art, on the back of the work of art, or affixed to the frame,

(g) the history (provenance) of the item, including proof of authenticity, if such information is available,

(h) a record of any exhibitions at which the item was displayed,

(i) any reference source citing the item, and

(j) the physical condition of the item;

(2) a professional quality photograph of a size and quality fully showing the item, preferably an 8 x 10 inch color photograph or a color transparency not smaller than 4 x 5 inches; and

(3) the specific basis for the valuation.

.04 In addition to the information required for a qualified appraisal, a completed appraisal summary (section B of Form 8283, Noncash Charitable Contributions) must be included with the request to obtain a Statement of Value. Taxpayers are encouraged to include in the request any other information that may affect the determination of the fair market value of the item of art.

.05 A taxpayer may obtain a Statement of Value for up to 10 items of art without submitting an additional user fee. However, in a request for a Statement of Value with respect to multiple items of art, each item of art must have an appraised value of $50,000 or more.

.06 (1) A request to obtain a Statement of Value, any factual representations associated with the request, and any amendments to the request must be accompanied by the following declaration: "Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of the request are true, correct, and complete."

(2) A taxpayer who submits additional factual information on several occasions may provide one declaration that refers to all submissions.

(3) The declaration must be signed by the taxpayer, and not the taxpayer's representative. The person signing for an estate must be the executor or administrator of the estate. The person signing for a trust or partnership must be a trustee or general partner who has personal knowledge of the facts. The person signing for a corporate taxpayer must be an officer of the corporate taxpayer who has personal knowledge of the facts. If a corporate taxpayer is a member of an affiliated group filing consolidated returns, a penalties-of- perjury statement must also be signed and submitted by an officer of the common parent of the group.

.07 Requests for a Statement of Value should be sent to the Internal Revenue Service, 901 D Street, SW, Room 224, Washington, DC 20024, Attn: CC:AP:AS:ART.

.08 Completed requests for a Statement of Value received by January 15 will ordinarily result in a Statement of Value being issued by the Service by June 30 of that calendar year. Completed requests for a Statement of Value received by July 15 will ordinarily result in a Statement of Value being issued by the Service by December 31 of that calendar year. It is the responsibility of taxpayers to obtain extensions, as necessary, to file the appropriate tax returns. If the taxpayer files a tax return reporting the contribution of the item of art before a requested Statement of Value is received from the Service, the taxpayer must:

(1) notify the Service (at the address provided in section 4.07) that the tax return has been filed; and

(2) attach a copy of the Statement of Value request to the tax return.

.09 If the Service agrees with the value reported on the taxpayer's qualified appraisal of art, the Service will issue a Statement of Value to the taxpayer approving the appraisal.

.10 If the Service disagrees with the value reported on the taxpayer's qualified appraisal, the Service will issue a Statement of Value indicating the basis of its disagreement and its own determination of value. If the taxpayer agrees to use the Service's Statement of Value on the relevant tax return, the taxpayer must date and execute the agreement copy of the Statement of Value in the appropriate space provided. The Statement of Value must be signed by someone who is authorized to sign the declaration described in section 4.06 of this revenue procedure. The signed Statement of Value must be mailed to the address provided in the Statement of Value and postmarked within 45 days of the date of its issuance.

.11 A copy of the Statement of Value, whether or not the taxpayer agrees with the Statement of Value, must be attached to a completed Form 8283 and filed with the federal income tax return that first reports the taxpayer's contribution of the item of art on which the Statement of Value is based. If the taxpayer files a tax return reporting the contribution of an item of art before a requested Statement of Value is received from the Service, the taxpayer should subsequently file an amended return with the Statement of Value attached to a completed Form 8283.

.12 A taxpayer may withdraw the request to obtain a Statement of Value at any time before such a statement is issued by the Service. However, the user fee will not be returned for a request that is withdrawn.

.13 In cases where a taxpayer does not expressly agree with the Service's determination of value or withdraws its request as described in section 4.12, the District Director will be so notified.

.14 If a request to obtain a Statement of Value lacks essential information, the Service will notify the taxpayer that the request will be closed if the Service does not receive the missing information within 30 calendar days. If the missing information is received after the request is closed, the request will be reopened (if the taxpayer so desires) and treated as a new request as of the date the information is received. However, the taxpayer must pay another user fee before the case can be reopened.

SECTION 5. EFFECT OF STATEMENT OF VALUE

.01 A taxpayer may rely on a Statement of Value received from the Service for an item of art, subject to the conditions and limitations described in sections 5.02 and 5.03 of this revenue procedure.

.02 A taxpayer may not rely on a Statement of Value issued to another taxpayer.

.03 When determining a taxpayer's actual tax liability, the District Director must ascertain whether--

(1) the Statement of Value for the item of art is properly reflected on the taxpayer's income tax return; and

(2) the representations upon which the Statement of Value was based reflect accurate statements of the material facts.

SECTION 6. EFFECT ON OTHER DOCUMENTS

Revenue Procedure 66-49 is modified.

SECTION 7. EFFECTIVE DATE

This revenue procedure applies to a request to obtain a Statement of Value for an item of art if the request is submitted after [INSERT DATE OF PUBLICATION OF FINALIZED REVENUE PROCEDURE IN THE INTERNAL REVENUE BULLETIN].

DRAFTING INFORMATION

The principal author of this revenue procedure is Karen Carolan of the Office of Art Appraisal Services. For further information regarding this notice, contact Ms. Carolan on (202) 401-4128 (not a toll-free call).

X X X

REPORT ON THE DEVELOPMENT OF AN ADVANCE VALUATION PROCEDURE FOR TANGIBLE PERSONAL PROPERTY

INTRODUCTION

This report from the Internal Revenue Service (the "Service") responds to the directive that the Secretary of the Treasury (the "Secretary") submit a report to the Senate Committee on Finance and the House Committee on Ways and Means on the development of a procedure under which taxpayers could elect to enter into an agreement with the Secretary as to the value of tangible personal property prior to the donation of the property to charity (hereinafter referred to as the "pre-contribution valuation procedure"). H.R. Conf. Rep. No. 213, 103d Cong., 1st Sess. 561-62 (1993).

This report (1) describes the current art advisory panel system, (2) analyzes a proposal for a pre-contribution valuation procedure as it would apply to art, (3) analyzes as an alternative a proposal for a post-contribution pre-filing advance valuation procedure for art (hereinafter referred to as the "pre-filing valuation procedure"), and (4) summarizes and attaches a proposed pre-filing valuation revenue procedure.

CURRENT ART ADVISORY PANEL SYSTEM

BACKGROUND

Currently, there is no procedure for advance valuation of tangible personal property. Moreover, Revenue Procedure 66-49, 1966-2 C.B. 1257, specifically states that the Service does not issue advance rulings approving or disapproving appraisals. Further, the Service generally does not give advance rulings on any factual issues. See, e.g., section 2.01 of Rev. Proc. 94-3, 1994-1 C.B. 382.

Under the existing statute and regulations, donors (generally excluding C corporations) are required to obtain a qualified appraisal to substantiate any deduction under section 170 of the Internal Revenue Code (the "Code") with respect to an item of property with a claimed value in excess of $5,000. To constitute a qualified appraisal, the appraisal must be made by a qualified appraiser (as defined in regulations) not earlier than 60 days prior to the date the appraised property is contributed and generally not later than the extended due date of the taxpayer's return. The appraisal must include a number of items emunerated in regulations, including a description of the contributed property, the physical condition of the property in the case of tangible property, the date (or expected date) of the contribution, the date (or dates) on which the property was appraised, the methodology used to appraise the property, etc. A summary of the qualified appraisal must be attached to the donor's income tax return.

ART ADVISORY PANEL

Although the Service has no current procedure for advance valuation of tangible personal property, the Service does have a procedure for review of art valuations on audit of income, estate, and gift tax returns, if the art is valued at $20,000 or more. When returns are selected for audit, taxpayer-supplied art appraisals pertaining to those returns are sent to Art Advisory Services within the Appeals function of the Service for review by the Art Advisory Panel (hereinafter referred to as the "Panel"). The recommendations made by the Panel are used by the Service in the examination, appeals, and litigation functions.

The Panel was created in 1968 to assist the Service in reviewing and evaluating the value of art reported on returns for federal income, estate, and gift taxes. The Panel is divided into three specialty areas: painting and sculpture; Far Eastern and Asian art; and art of Africa, Oceania, and the Americas.

ART PANELISTS

The Panel is composed of 25 art experts chosen for their experience and scholarship in the three specialty areas. The Panelists are distinguished museum directors and curators from some of the most prestigious museums in this country, noted art scholars, prominent art dealers, and representatives from the most renowned international auction houses. They are selected for their reputation and recognition in the art world and represent both buyer and seller perspectives.

The Panelists devote many hours preparing for, traveling to, and attending the Panel meetings. The Panelists also assist the Service throughout the year consulting on items, examining property, developing cases, sometimes even assisting at taxpayer conferences. The Panelists serve on the Panel as unpaid volunteers, providing invaluable counsel to the Service.

The Panelists are special government employees. They are subject to the Service's employee clearance procedures and standards of conduct to prevent conflicts of interest, and are bound by the Code's disclosure restrictions. The Panelists are subject to annual reappointment.

OPERATING PROCEDURES

Each specialty area of the Panel meets in Washington, D.C. once or twice a year. Approximately 250-300 items are reviewed at each one-day meeting. Prior to the meetings, the Service's staff appraisers send photographs and written materials to the Panelists concerning the works of art to be reviewed. The written materials include information from taxpayer-supplied appraisals, as well as the staff's own market research, such as information on public and private sales of relevant art works close to the valuation date. The Panelists also are provided with the valuation date and the value of the art work claimed on the tax return.

Various measures help to ensure the objectivity of the Panel. Because the Panel reviews appraisals of art only if the tax event has already occurred (contribution, gift, or in estate cases, death) and the return has already been filed and chosen for audit, the Panelists deal with past values and not current values. In addition, the Panelists are not informed as to whether their appraisal review is for income, estate, or gift tax purposes. Thus, Panelists do not know whether the taxpayers would prefer a high or low valuation. Also, to minimize the possibility that Panelists might recognize items from a particular taxpayer's collection, the art works are reviewed in alphabetical order by artist or, in the case of non-Western art, by culture.

At the Panel's meetings, the taxpayer's appraisal and any other background documents, along with the research and findings of both the Panelists and staff appraisers, are reviewed. After discussing each item individually, the Panelists reach a consensus. The Panel's conclusions, after review by Art Advisory Services, become the position of the Service as to the value of the art.

In 1993, a total of 2,256 items were reviewed by the Panel. Approximately 200 of these items had claimed values exceeding $50,000. Disagreements with taxpayers as to the value of art are almost always resolved without resort to litigation. On average, less than one case per year is litigated.

ANNUAL OPERATING COSTS

The Service reimburses the Panelists for their travel and lodging expenses for four to six meetings in Washington, D.C. each year. These reimbursements total less than $20,000 annually. The major operating cost of the Panel is for photography -- $90,000 in 1993.

NEED FOR THE PANEL

Since its creation in 1968, the Panel has proven to be an invaluable mechanism for art review for the Service and is the focal point of all Servicewide art valuation activity. Over the past ten years, the Panel has recommended adjustments of $385 million on returned values of $1.6 billion. In the past four years, the Panel has recommended average adjustments of $52 million per year.

Because of the valuable contributions of the Panel, the Service enjoys an excellent reputation in this difficult area. The Panel's recommendations are an integral part of the Service's efforts to oversee and administer art valuation. If the Service were to review art appraisals without the assistance of the Panel, we would expect a significant increase in the number of disputed cases.

There are at present no Service personnel who have the technical expertise or reputation in the art community of the Panelists. It would be very costly, if not impossible, for the Service to hire such experts.

OPTIONS

I. PROPOSAL FOR A PRE-CONTRIBUTION VALUATION PROCEDURE

The possibility of a pre-contribution valuation procedure has been the subject of Service study since 1992. A pre-contribution valuation procedure would permit taxpayers to request the Service's conclusion as to the value of art before contributing it to a charitable organization. Under such a procedure, the taxpayer could be required to obtain an appraisal and attach the appraisal to the request. The Panel would review the appraisal, and the Service would issue its conclusion as to value. The Service's conclusion would be binding on the Service with respect to the value of the art if the art were contributed to a charitable organization within a specified period of time after issuance of the conclusion.

A. ADVANTAGES

A pre-contribution valuation procedure has been viewed as enhancing compliance with the law by providing certainty for taxpayers in the reporting of their charitable contributions. It would also help taxpayers plan their charitable giving. In addition, other possible advantages have been identified: providing faster service to taxpayers, eliminating taxpayer uncertainties as to value (which, under current procedures, can last for two or more years after the contribution is made); resolving and preventing future disputes; reducing taxpayers' time and related expenses in resolving valuation issues; and increasing the number of contribution cases reviewed by the Service.

Some might also argue that a pre-contribution valuation procedure could result in an increase in the number of contributions of art to museums. Others argue that there would be cases in which a pre-contribution valuation procedure could cause some potential donors not to make their contemplated gifts, for example, in cases where the Service's valuation is lower than the taxpayer's.

B. DISADVANTAGES

1. CONFLICTS OF INTEREST

The Service is concerned that a pre-contribution valuation procedure would raise conflict of interest issues. We believe that this would be a significant problem because the Service and the Panelists would be dealing with current cases and contemporaneous values. Conflicts could extend to the Panelists' current business dealings as well as to potential clients.

With a pre-contribution valuation procedure, the property would not be committed to a particular charitable donee, but would be potentially on the market and available to the public. Consequently, Panelists could face a conflict of interest in knowing, prior to others in the art community, that an individual has a particular item to donate or otherwise dispose of. This might make objective review difficult. The art community is quite small. With a pre-contribution valuation procedure, not only private dealers and auction representatives, but also museum directors and curators on the Panel would be in competing positions for the art.

The Service does not want to put the Panelists in a position where they could so readily be questioned or criticized. Based on our discussions with the Panelists, we believe they share our concerns.

2. PREDICTING VALUES

For income tax purposes, the relevant valuation date for an item of art that is contributed to charity is the date of contribution. Art values cannot be accurately predicted because market conditions can fluctuate dramatically within a short time period. External factors such as the death of the artist, the stock market, or the world situation can affect the art market and the value of an object. Under any pre-contribution valuation procedure, there would be some time lag between the Service's valuation date and the date of the contribution. Consequently, the Service's conclusion as to value on the valuation date may well differ from the value on the date of contribution. This would create tension between the needs of taxpayers to be able to rely on the Service's conclusions as to value and the proper application of the law.

Contributions are usually made at the end of the year. A major auction season ends in December, with the results published after the sales. To help ensure the accuracy of their determinations, it is important for the Panelists to have these auction results before determining the value of art contributed at year's end. A pre-contribution valuation procedure would require the Panelists to value year-end contributions before the December auction results are available.

3. EFFECT ON THE ART MARKET

Under the current system, the potential for the Panel to influence the art market is limited. This is because the Panel's review of art appraisals is based on the Panel's determination of the value of the art in a prior year, and this value can be based on actual reported sales of art close to the valuation date. The time lapse between the date of contribution and the date of Panel review protects the Panelists and the Service from affecting the market.

Although the Service's conclusion as to value under a pre- contribution valuation procedure would be issued for tax purposes only, it is foreseeable that some taxpayers would use the Service's conclusion for other purposes, such as for marketing their art and testing values. If the Service's conclusion were to be used for these other purposes, it could influence the market for art.

4. INCREASED ADMINISTRATIVE COST TO THE SERVICE AND INCREASED WORKLOAD FOR THE PANEL

Under a pre-contribution valuation procedure, the Service and the Panelists could spend considerable time and resources on contemplated gifts that are never made. Therefore, certain perceived advantages, such as an increase in the number of contribution cases reviewed by the Service, may be less than anticipated. As indicated above, the Panelists are volunteers who have many other professional obligations. It is desirable to ensure that their public-spirited efforts on behalf of the Service are not wasted.

C. CONCLUSION

Based on meetings and discussions we have had with the Panel on the subject of a pre-contribution valuation procedure, we believe the Panelists share the concerns we have set forth above. We believe the adoption of a pre-contribution valuation procedure would discourage qualified individuals from participating on the Panel and, thus, would endanger the effectiveness of the Panel system. We explored various options to attempt to address the disadvantages of this approach, but none were satisfactory. For example, the procedure could impose a requirement that a taxpayer seeking pre-contribution valuation submit a letter of intent to make a donation to a specified charity and correspondence from the charity documenting its interest in accepting the donation. We are concerned, however, that charitable organizations would be reluctant to accept gifts conditioned on the donor's receipt of an acceptable valuation by the Service.

On balance, therefore, we believe the disadvantages to a pre- contribution valuation procedure outweigh the advantages.

II. PROPOSAL FOR A PRE-FILING VALUATION PROCEDURE

A pre-filing valuation procedure would permit taxpayers to obtain the Service's conclusion as to the value of art AFTER THE ART IS CONTRIBUTED to a charitable organization, but prior to the filing of the income tax return reporting the contribution.

A. ADVANTAGES

As in the case of a pre-contribution valuation procedure, a pre- filing valuation procedure would provide taxpayers with certainty. It would dramatically reduce the delay that currently exists between the time a taxpayer submits an art appraisal to the Service and the time that the taxpayer is assured of the Service's position on the value of the appraised item. Moreover, a pre-filing valuation procedure would allow a taxpayer to rely on the Service's conclusion as to value prior to filing the return that reports the contribution. Thus, the pre-filing valuation procedure retains substantially all the advantages of the pre-contribution valuation procedure.

In addition, we believe a pre-filing valuation procedure would minimize the conflict of interest concerns described above, because the art presumably would no longer be on the market and available to the public. The potential ethical pressures on the Panelists would be reduced, if not eliminated. A pre-filing valuation procedure would enable the Service to know the appropriate valuation date and, thus, increase the precision of the Service's conclusion as to value. In addition, a pre-filing valuation procedure would mitigate the effect of the Service's conclusion on the art market, again because the art would no longer be on the market. A pre-filing valuation procedure would also eliminate the expending of resources on contemplated contributions that are never actually made.

B. DISADVANTAGE

The only disadvantage with a pre-filing valuation procedure, as compared to a pre-contribution valuation procedure, is that a taxpayer will not know the Service's view as to the value of art prior to its contribution and, therefore, a pre-filing valuation procedure would not facilitate tax planning activities.

C. CONCLUSION

We believe that potential advantages of a pre-filing valuation procedure warrant testing of this approach. Attached to this report is a proposed revenue procedure that would implement a pre-filing valuation procedure for income tax purposes. Contemporaneous with the issuance of this report, the Service will publish this proposed revenue procedure as a notice for public comment. The notice solicits comments both as to the terms of the revenue procedure itself and also as to whether the proposed procedure should apply for estate and gift tax purposes.

The pre-filing valuation procedure that the Service has proposed would minimize the problems with a pre-contribution valuation procedure and still provide taxpayers with pre-filing certainty as to the value of property. The procedure proposes a threshold amount for claimed value ($50,000) that the Service believes would balance both the needs of taxpayers and the needs of the Service. In addition, the procedure proposes a user fee ($3,000) to cover the Service's costs (e.g., staff time, Panel travel and photography). The Service does not believe that a pre-filing valuation procedure should be limited to items with significant artistic or cultural value, because such a limitation would be difficult to administer and would tend to preclude the broad availability of the procedure to the public.