Noting the burden of proof is on the taxpayer to determine the value of the art, Kaufman said, “Art valuation, to a great degree, is subjective… A taxpayer's valuation is complicated by many factors, including effects stemming from the period during which a piece was created and the prominence of the artist.” Kaufman added that it is not uncommon for someone to purchase a piece of art for the purpose of donating it to a museum. In these situations where the gift is fairly straightforward, Kaufman said, “There's no appreciation there, so there's no major upside for [the taxpayer] to do that.” Kaufman noted the situation becomes more complicated when an individual purchases a piece of art, holds it for some time, then donates it to a museum, saying, “You will have a very hard time convincing the art advisory board of the IRS why the piece you bought last year is now worth twice as much.
To help determine the value of artwork, courts rely strongly on expert witnesses. According to Johnson, “If you don't provide a rational basis for your value, then no matter how renowned you are, your appraisal will be discredited.” Johnson added an additional concern arises for taxpayers who use auction houses for art valuations purposes noting the appraiser must be independent. “If they're the party that sold the artwork to the donor, then they're not considered to be independent under the definition of qualified appraiser under the regs…Auction houses tend to employ the top appraisers, and if they assisted in the sale of a piece of art, it not only taints them, it also makes them unqualified for purposes of offering an unbiased appraisal,” said Johnson.