At one end of the giant hall in the Baltimore Convention Center was the booth of New York art dealer Howard Rehs, a specialist in the more traditional strains of 19th- and 20th-century painting. He explained why the golden-framed work behind him depicting a young woman polishing an urn on a table outdoors was worth $210,000. It had to do with the artist, Daniel Ridgway Knight, an American expat academic painter; the subject matter; sale prices for comparable works; and when it was completed. Rehs said he could place a painting within a year or two of when it was made "because I've seen so much."
The study it takes to acquire such knowledge may sound tedious, but that discerning eye is worth more than a cameo on "Antiques Roadshow." Each year, bequests and donations of art generate tens of millions of dollars in potential tax revenue. But to be accurately taxed, an artwork needs to be accurately valued, and the owner who has to pay the tax can't be expected to provide the last word. When an artwork is sold outright, the Internal Revenue Service needs no help in determining how much to tax; it has the purchase price and the sale price and it knows how to subtract. (The maximum federal tax rate on profits from the sale of art and collectibles is 28 percent, higher than the 15 to 20 percent for stocks.) Things get trickier, however, when an artwork passes to an heir or is given to a museum. The agency still needs to know, as of the date of death or donation, how much the art is worth, but without a current sale price that figure can be debatable.
So the IRS turns to a secretive, little-known body called the Art Advisory Panel — on which Rehs serves without pay — to figure out the value of works of art. The group, consisting of up to 25 members, includes curators from such well-known institutions as the Los Angeles County Museum of Art and the J. Paul Getty Museum. They "volunteer their valuable time and expertise to help our tax system function fairly for all," says Donna Hansberry, chief of IRS appeals, which handles disputes with taxpayers.
Some art experts welcome sitting on the panel as a patriotic service despite a heavy workload and nonexistent compensation. "I think it's my obligation, I truly do, as a citizen to give back. It's a kind of community service on the federal level," says works-on-paper specialist David Tunick, the longest-serving member of the panel, now going into his 27th year. But it can also be a chore to serve. Douglas Baxter, president of the international powerhouse Pace Gallery and a panel member from 1998 to 2014, says he enjoyed its "nice collegial feeling" and the opportunity to speak with people he might not otherwise run into, but he wished they'd had more time to prepare for the meetings. "Some people might think it's prestigious," he says. "And other people might think, 'Suckaaa!' "
An IRS official called Rehs out of the blue in 2008 and asked him about serving on the panel. He said he was happy to do it. After a bevy of background checks (obviously, tax delinquents can't be panelists) and a mountain of paperwork, he was ready to start attending the twice yearly meetings — one in New York and one in Washington — that last a day or two.
Cases that go before Rehs and his colleagues reach them one of two ways. Sometimes the owners of an artwork want an estimate of what they owe Uncle Sam before they file their tax returns. Other times, the owners have already filed and are either challenging their tax bill or have been audited by the IRS. These cases are routed first to the IRS's Art Appraisal Services division. That office then decides which ones require the expert eyes of the Art Advisory Panel. The panel generally considers works of art worth at least $50,000.
The panel can accept a taxpayer's assessment of a work's value or adjust it up or down. As might be expected, recipients of estates, who have to pay taxes, tend to undervalue artworks, while donors, who are looking for a tax deduction, tend to overvalue them. In fiscal year 2016, the panel reviewed more than 500 works. Their total value, according to taxpayers, exceeded half a billion dollars. The panel recommended a net adjustment upward of about $100 million.
To figure out how much artwork is worth, members get piles and piles of appraisals in a carton or two before each meeting, Tunick explains. Some may enlist their gallery assistants to highlight works most relevant to the members' expertise and to conduct preliminary research into the sales of comparable works.
The panel's meeting room is something of a black box; deliberations are a closely held secret, for the simple reason that tax returns are private. Panelists and IRS employees are forbidden from disclosing the particulars of individual cases. And to keep panelists honest, the documents they receive are carefully redacted. "We're not told who the taxpayer is, we're not told who the appraiser is, we're not told if it's donation or for an estate," says Tunick. "It's really a well-done methodology that they follow."
Works are considered in alphabetical order by artist, which ensures that multiple works from a single taxpayer are still considered on an individual basis. The panelists with the most expertise in the relevant area take the lead, soon bringing the room into consensus. According to Joseph Bothwell, who from 1978 to 2011 rose through the ranks of Art Appraisal Services,the proceedings move with the speed of an auction. The panel "could get through about 600 items in a day," he says.
They rely mostly on reproductions provided by the taxpayer. On rare and especially contentious occasions, a field trip to a residence or warehouse is necessary. Art tax attorney Ralph E. Lerner told me he once invited the panel to see an oil painting whose condition issues didn't show up well in photographs. After seeing the painting up close, the panel reduced its appraisal. Sometimes an in-person viewing can uncover potential fraud. Former Art Appraisal Services head Karen Carolan recalls a case where the taxpayer was seeking a tax deduction, but the panel "thought there was something funny" about the painting. "And when they went to see it, it was actually in two or three pieces, and [the taxpayer] had just pushed it together to take the photograph," Lerner says. The panel "disallowed the charitable donation."
Another responsibility of the panel is to suggest new members. The ideal panelist is close enough to the action to know the field, but not so close as to present obvious conflicts of interest. This isn't always easy in a profession where the price of expertise can be measured in air kisses. Depending on the work under consideration, it can be tricky to ensure anonymity. Despite the IRS's best efforts to conceal the identity of the owners, panelists may still recognize them based on what is being appraised. And they may have their own history with those owners, be they collectors, artists or heirs.
"You try to be fair," Baxter notes, though he's willing to consider the theoretical bases for bias. "Do you like or dislike the work of Jeff Koons? Is he known to be a nice guy or is he known to be a ..." He cuts himself off. "Are you a dealer who once showed Jeff Koons and he left you for another dealer?" In the last case, recusal would clearly be in order. But if you happen to be aware of an artist's temperament? The contemporary art world is altogether too cozy a place to avoid such knowledge.
The splashiest case to come before the panel in recent years involved the estate of blue-chip art dealer Ileana Sonnabend, whose résumé included shows by such cornerstone figures as pop prince Andy Warhol, minimalist mage Donald Judd, performance pioneer Vito Acconci and globally diversified corporate entity Koons. When Sonnabend died in October 2007, there were estate taxes to pay on her personal collection, which included a piece called "Canyon." The work — one of Robert Rauschenberg's "combines" — featured a stuffed bald eagle projecting out from the canvas. At the time, the piece was on long-term loan to the Metropolitan Museum of Art.
The panel initially appraised "Canyon" at $15 million. The heirs argued to the IRS it was worth nothing because they could not legally sell it due to the presence of the eagle, which is no longer on the endangered species list but still has the benefit of heavy federal protections. At least two federal laws forbade the sale of the stuffed bird; museums longed to have the work, but auction houses wouldn't touch it. The heirs had three appraisals that supported their estimated value of zero, and they went back to the IRS, which kicked it back to the panel. The panel then actually raised the value to $65 million. In the media, Lerner, the Sonnabend heirs' lawyer, said the panel's appraisal was based on a far-fetched scenario in which the work was smuggled into the arms of some unknown Dr. No. "The IRS Invents a Chinese Billionaire" read the headline in Forbes. (When I asked about Lerner's view of the situation, Bothwell turned cryptic. "I think it's best that I not talk about anything further on that," he said.)
The Sonnabend estate was hardly hurting for cash or unwilling to pay what it owed. Already, it had liquidated enough art to pay $471 million in federal and state taxes. But to an observer untrained in the niceties of tax law, it verged on the Kafkaesque for the IRS to assess $40.9 million in taxes and penalties for "Canyon" when it was illegal to sell it to settle the bill. In 2012, as part of a deal with the IRS, the Sonnabend family agreed to donate the work to the Museum of Modern Art. No estate taxes would be levied, and no deduction would be claimed for the gift. The eagle had landed.
Baxter shrugs off the issues surrounding the case as "arcane," saying, "The Rauschenberg was completely unique. I don't know of another work where a bald eagle or ... endangered species" was involved. For his part, Rehs wryly dismisses the work's precarious legal perch. "I don't know. If I owned the piece, what would I do? Take the bird off!" he says. "I'll donate it to you after. I'll give you the bird after, right?"
Despite the occasional dust-up with the panel, Lerner hails its role in administering a part of the tax code that provides an incentive for collectors to share art with the public. If Congress were to repeal the estate tax, "Canyon" would not be at a museum, he says, but "passed down to grandchildren or great-grandchildren."
The "Canyon" case may be exotic, but it sheds light on countless other negotiations that never become public. And so, the next time you're in a museum, gazing at a masterpiece, consider that the IRS's secretive art panel may have helped to put it there.
Glenn Dixon is a writer in Silver Spring, Md. To comment on this story, email firstname.lastname@example.org.
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