WHEN TAX TIME rolls around, artists and their families often feel they get the short end of the stick from the Internal Revenue Service.
An artist who donates a work to a museum, for example, may deduct from income tax only the cost of materials--brushes, canvases and the like--rather than the fair market value of the creation.
At the artist's death, however, the family must pay estate or gift taxes based on an appraisal of market worth.
"It seems to the artist that the IRS almost always gets it both ways," says Ira Lowe, a Washington lawyer and noted authority on art taxation. "The result is that artists have become increasingly hesitant to donate their works to museums," adds Lowe, "while their families still face tough problems with the estate."
A case now before the U.S. Tax Court involving the estate of Alexander Calder adds a new twist to the problem and has provoked a fresh barrage of criticism against the IRS.
When Calder died in 1976, he left 1,292 paintings in gouache, appraised for estate purposes at $949,750. The IRS accepted that wholesale figure, allowing a 65 percent discount from estimated retail value.
Six weeks after the artist's death, his widow, Louisa J. Calder of Roxbury, Conn., received 1,226 of the paintings and divided them among four trusts for her children and grandchildren. She valued the works for gift tax, based on the estate tax appraisal, at $897,230.
But the IRS recently changed its position, insisting that at the time of the gift, the paintings' value was $2.3 million. The government now wants $459,230 in additional gift tax.
Louisa Calder is contesting the new assessment in court, arguing that her art couldn't have become so much more valuable in six weeks.
The dispute has confounded experts on art taxation.
"There is a tremendous inconsistency on the government's part," says Leon Nad, a tax specialist with the New York accounting firm Price Waterhouse. The IRS is contending "that there was this huge change in value in six weeks," adds Nad. "How can that be?"
Nad, who has no connection to the case, says it's unclear whether the government's action will set a new precedent for IRS policy in art estate valuation disputes.
IRS officials refuse to discuss the situation before a court decision, expected within the next six months.
Calder's New York attorney, Harold Daitch, will say only that "the government accepted one value for estate tax and insists on a different value for gift tax . . . The IRS is wrong."
Ira Lowe compares the Calder dispute to a 1969 controversy in which he represented the estate of sculptor David Smith.
In that case, the IRS waited almost three years before sharply increasing its appraisal of the estate of 425 works and demanding additional taxes of $2.4 million.
Lowe argued in the Smith case that the simultaneous offering for sale of a large number of one artist's works would reduce the return on the hypothetical retail value.
The court decided on a valuation midway between that of the estate's executors and the IRS, which relies on estimates submitted by a special panel of outside experts.
Allowed a variety of administrative deductions during the legal proceedings, the Smith estate paid only $69,944 in additional taxes.
"Except for the difference in the time lapse, the analogy between the Smith and Calder cases is very close," says Lowe. "The precedent set by Smith should benefit the Calder estate on the consideration of a huge bulk of an artist's work."
The IRS, adds Lowe, "doesn't explain the why's and wherefore's in these cases--never has."