How New IRS Rules Make it Harder to Navigate the World of Appraisals and Tax Deductions

In 2015, Stefan Edlis and Gael Neeson donated their contemporary art collection valued at $400 million to the Art Institute of Chicago. The collection, containing over 40 pieces, was the largest-ever gift of art to the museum. Gifts of art and other non-cash charitable contributions play pivotal roles in the building of collections for museums, archives and libraries. For many institutions, it’s the primary way of building a collection.

Rebecca Meyers, permanent collection curator at the National Museum of Mexican Art, says, “Our permanent collection is mostly built on the generosity of our donors, and artists who have donated their work to the collection.” Staff at the Smart Museum of Art at the University of Chicago and the Newberry library say the same thing: These institutions rely on gifts of art, papers and books to build their collections.

While donors may give for a variety of reasons, such as securing a permanent home for their collections or helping to deepen an institution’s holdings, the potential tax benefit is definitely an important consideration. However, many donors may not realize that receiving that tax benefit is not a simple matter. The IRS requires an appraisal for items valued over $5,000 (with some exceptions). Finding an appropriate appraiser can be a challenge, according to IRS rules, which have become even more complex and ambiguous this year.

“In the past, the IRS said you have to be a qualified appraiser and present ‘a qualified appraisal.’ The qualified appraiser had the appropriate knowledge and training,” explains Sheryl Jaeger, an appraiser specializing in ephemera and paper dolls. The qualified appraisal needs to have certain basic elements, such as a description, an amount, evidence to justify the value of the item, and more.

Recently, the IRS changed the regulation about the meaning of a qualified appraiser. Jaeger explains, “You have to be from a recognized professional appraisal association, or have otherwise met minimal experience/education requirements.” However, the meaning of “minimal experience and education” is ambiguous.

What Do the New Rules Mean?

The Antiquarian Booksellers’ Association of America (ABAA) has attempted to get the IRS to clarify these minimal requirements. Jaeger says that the organization is setting up a program for booksellers who want to do appraisals that includes certification in the Uniform Standards of Professional Appraisal Practice (USPAP) and a secondary course from the ABAA, which will hopefully meet the new IRS requirements. Jaeger points out that part of the challenge is the experience requirement where “you have demonstrated at least two years in the subject matter.”

As with any regulatory change, it will take time for changes in practice to catch up. Meanwhile, the ambiguity around the new rules may have serious ramifications for donors considering non-cash charitable contributions to organizations. When asked about how the law change will impact appraisals, Jaeger says, “The primary impact is that people understand that an appraiser needs to be a qualified appraiser.” She recommends going to a professional appraisal association, like the Appraisers Association of America or a trade association, like the ABAA, but notes that some lists have not been updated from last year. Ultimately, a donor should be cautious when choosing an appraiser.

Ramifications for Donors

If the IRS decides that an appraiser is not qualified, the ramifications can be large for the donor. Jaeger points out that the donor may face penalties, possibly up to two to three years, and interest that accrues during the interim before an audit. Appraisers may lose clients, pay fines, and more.

Institutions accepting non-cash charitable contributions have a strong interest in helping the donors navigate the appraisal process. But such institutions are not permitted to make appraisals themselves since that could be seen as a conflict of interest. Best practice is for interested donors to find their own third-party appraiser and pay for their own appraisal. This may be confusing for donors new to the world of non-cash giving, who may be surprised that they have to pay for the appraisal on top of giving the gift.

The most important factor for institutions considering a non-cash gift is not its value, but whether the donation fulfills the collecting mission of the institution and whether it will be used. “We want to make sure [that the gift is] a good fit and that we have the resources to store and to make them accessible,” says Alice Schreyer, vice president of collections and library services at the Newberry. The Smart Museum also thinks about how the piece may fill the teaching needs of the faculty.

Pros and Cons of Appraisals

While an appraisal is not required by a institutions that receive non-cash gifts, there are certainly benefits, starting with the fact that the donor is complying with IRS rules and can use the deduction on their taxes. Moreover, institutions may be able to use the value from the appraisal to fulfill campaign goals. Stephanie Oberhausen, assistant vice president for development, humanities and the arts at the University of Chicago, noted that “an appraisal counted toward fundraising progress,” which can be wonderful during a campaign.

However, there can be drawbacks to appraisals. Notably, if the market is undervalued, that would have an impact on an artwork. Meyers at the National Museum of Mexican Art notes, “Mexican art has been undervalued and under-exhibited. Sometimes, appraisal value isn’t very high.” But that does not necessarily mean people should avoid getting an appraisal; the price may not be as high as expected.

One notable exception to valuations are gifts of papers, artwork and other materials from the creators. Due to a law change in the 1970s, artists and writers can only receive an appraisal at cost, notably the actual cost of the materials, such as the canvas, paints or paper. Creators do not get to benefit from the fair market value of their work.

This situation disincentivizes artists and other creators from donating to institutions. The law change made it harder for institutions to collect important works that can be shown to the public or fuel scholarly research.

But overall, the tax incentives encourage the growth of collections. Schreyer at the Newberry says, “There are definitely incentives in our tax laws. Institutions would be much the poorer if they didn’t exist.”

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