Don’t Blame Russia!

In a recent tax case, a tax judge and court said that you can’t blame the Russians for this. In the facts a wealthy decedent died leaving a valuable estate. Due to the value of the estate everything was appraised. The estate included real and personal property. Some personal property included two art works.

Based on current sales in 2005, the estate reported the paintings worth around $500,000 and the other about $70,000. At auction, the first painting just so happened to have sold for over $2,000,000, four times the appraised value. Because the estate did not settle with the IRS over disputes, the IRS became interested in this sale all of a sudden. The IRS has also identified artwork in the estate and gift world as a big tax abuse. What estates are doing is under appraising artwork and conversely donors are getting inflated appraisals. Two areas of abuse, contends the IRS.

The expert testified that the 2005 appraisal was accurate at the time, which perplexed the court. Obviously, very few items go up four hundred percent in just 7 years. His explanation was simply that since 2005, there has been a huge influx of Russian buyers for artwork driving the market upward and that the painting had been cleaned. The Court disagreed with the Blame It on Russia defense.

Editor’s Comment: This has been an interesting case to watch. The estate in this matter still owes the IRS money and now they owe more money. As business appraisers we face the same obstacles, but have to steer clear of them. First, when a business must be appraised for estate purposes there is some temptation to appraise on the low end. When a donation is made, we face the temptation to go on the high end. Because the temptation is there, we recommend that in any instance when you are donating or appraising for an estate, it never hurts to get a secondary valuation.