In the Eye of the Beholder: Appraisals of Art for Estate Tax Liability

by Emily Lanza*

Form 706 Estate Tax

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In February 2017, the U.S. Tax Court ruled that the estate of a deceased New York woman, Eva Franzen Kollsman, undervalued $2.4 million worth of art on the estate tax return. The assets at issue before the Tax Court were two Old Master paintings by Pieter and Jan Brueghel held by the decedent at her death. The IRS claimed before the Tax Court that the Kollsman estate underreported the values of the two Old Master paintings resulting in a $781,488 federal estate tax deficiency.

In reaching this decision, the Tax Court not only rejected but also criticized the appraisals made for the estate of the two Old Masters by George Wachter, Vice President of Sotheby’s North America and South America. The Tax Court dismissed Estate’s declaration and the valuations made by Wachter, finding that his valuations were “unreliable and unpersuasive” due to his direct conflict of interest and misconstrued analysis of the Old Master paintings. 

The opinion of the Tax Court in the Estate of Eva Franzen Kollsman v. Commissioner of Internal Revenue demonstrates the importance of having a justifiable and objective appraisal when determining the tax liability of an estate. The valuation of art is not an exact science and may change depending on the “eye of the beholder.” However, in order to determine the precise tax liability of an estate, appraisers and estate executors must adhere to Internal Revenue Service (IRS) guidelines, professional codes of ethics, and the legal requirements within the Tax Code to ensure some level of objectivity and consistency. What were the shortcomings of the appraisal conducted for the Kollsman estate and what are the lessons to be learned from this case?

Estate Tax

The federal estate tax is a tax levied against the estate of a decedent, which must be paid by the estate upon the transfer of the property. The top tax rate is statutorily set at 40%. A series of adjustments and modifications of a tax base known as the “gross estate” determines federal estate tax liability. The gross estate includes the value of all property, including real or personal property such as artwork, that the decedent owned on the date of his or her death. The value of the property included in the decedent’s gross estate is the “fair market  value” on the date of the decedent’s death. According to estate tax regulations, the “fair market value” of the property is the price at which the estate property would hypothetically change hands between a willing buyer and willing seller. In such a sale, the buyer and seller would not be compelled to buy or sell the property as such a compulsion would disproportionately raise or lower the price. Additionally, both parties would be expected to have reasonable knowledge of the relevant facts, such as the condition or history of the relevant property. The impact of subsequent events after the death of death on the fair market value depends on the particular facts of the case and whether the parties would be expected to have knowledge of the relevant facts surrounding the subsequent event. The fair market value tends to reflect the hypothetical sale price in a market in which the item is most commonly sold to the public, such as the auction market for art assets.

Next, certain allowable deductions reduce the gross estate to the taxable estate. These allowable deductions include estate administration expenses, certain debts and losses, charitable bequests, and state death taxes. Then, the tax rates are applied to the taxable estate after the total of all lifetime taxable gifts made by the decedent is added to the taxable estate. Any available credits, such as the “unified credit,” are subsequently taken to obtain the actual estate tax liability, the amount of tax paid by the estate. For estates belonging to decedents who died in 2017, they must pay tax on estates valued greater than $5.49 million, the basic exclusion amount under the unified credit for 2017 (the unified credit in 2016 was $5.45 million). The IRS adjusts the unified credit amount every year to account for inflation. The Trump administration has recently proposed to eliminate the estate tax.

Estate of Eva Franzen Kollsman v. Commissioner of Internal Revenue

As explained above, the fair market value of property held by the estate is an important factor in determining the tax liability of the estate. This was the primary issue before the Tax Court in this case. Upon her death in 2005, the decedent, Eva Franzen Kollsman, owned two 17th-century Old Master paintings at issue in this case: Village Kermesse, Dance Around the Maypole (“Maypole”) by Pieter Brueghel the Younger and Orpheus Charming the Animals (“Orpheus”) by Jan Brueghel the Elder or the Younger. Pieter Brueghel’s work was later sold by Sotheby’s for the hammer price of $2,100,000.

In September 2005, a month following the decedent’s death, the estate’s expert, George Wachter, Vice President of Sotheby’s North America and South America, valued the paintings at $500,000 for the Maypole and $100,000 for Orpheus. In reaching these values, Wachter considered the composition and subject matter of the paintings but focused much of his analysis, according to his testimony before the Tax Court, on the extreme yellow discoloration and the dirt and grime on the paintings that accumulated during years of the decedent’s smoking. Wachter’s valuation was included in the estate’s 2005 tax return. After the valuation, the paintings were cleaned by a fine art services firm, Julius Lowry Frame and Restoring Company, at the request of the estate.

 

In 2009, Maypole sold at Sotheby’s for the hammer price of $2,100,000. The executor of the estate, Jeffrey Hyland, retained Orpheus. While the estate tax return listed the fair market value of Maypole and Orpheus at $500,000 and $100,000 respectively, the IRS asserted in a notice of deficiency that the estate had underreported the value of the two paintings and the actual fair market value of Maypole was $2,100,00 and of Orpheus was $500,000, resulting in a $781,488 tax deficiency. The estate petitioned the Tax Court for a redetermination of the paintings’ fair market values.

Before the Tax Court about ten years after the initial evaluation, the estate and the IRS presented the testimony of their respective experts and their valuations of the two paintings at issue. Paul Cardile, Ph.D., an art historian with twenty-five years of experience as a fine art appraiser, served as the expert for the IRS before the Tax Court. After analyzing the testimonies of the two experts, the court rejected Wachter’s valuation, and found the value of the Maypole at $1,995,000 and of Orpheus at $375,000. The estate was found liable for the resulting tax deficiency, the amount of which to be determined later by the IRS.  

Analysis of the Estate’s Appraisal

While the Tax Court routinely weighs in on the valuation of paintings for the purpose of determining estate tax liability, the court in the case of Estate of Eva Franzen Kollsman v. Commissioner of Internal Revenue not only agreed with the analysis of the IRS’s expert but strongly objected to and criticized Wachter’s testimony referring to his valuations as unreliable and unpersuasive. Why did the estate’s appraiser incur such criticism by the Tax Court?

1. Lack of Objectivity

First, the Tax Court found that Wachter held a significant conflict of interest “that could cause a reasonable person to question his objectivity” by adjusting the valuation for his own benefit. Determining the appropriate estate tax liability greatly depends on the objectivity of an appraiser, especially in the context of assessing the fair market value of art. Such calculations demand “insider-knowledge” of the art market, and objectivity must accompany this skill and expertise in order to maintain the integrity of the estate tax framework.

IRS Revenue Procedure 96-15 outlines various conflicts of interest that an appraiser must avoid when crafting his appraisal for tax liability purposes. These prohibitions include the appraiser not inheriting property from the estate as a beneficiary or not being any part of the estate. The appraiser also cannot have been employed by the decedent, because such a relationship may color the motivations of either party. The IRS also requires the appraiser to “hold himself or herself out to the public as an appraiser,” as potentially demonstrated through membership in professional appraisal organizations. These organizations, such as the American Society of Appraisers (ASA) and the Appraisers Association of America (AAA), require their members to follow a code of ethics in order to avoid such conflicts of interest as identified by the IRS. For example, the AAA requires that its members must appraise property objectively, “independent of outside influences and without any other motive or purpose than stated in said appraisal.” The AAA offers a list of certified appraisers, who possess an extensive level of expertise, education, and experience.

In addition to the IRS procedures and ethical “carrots,” appraisers may face potential “sticks” to ensure objective and accurate work. Implemented by the Pension Protection Act of 2006, section 6695A of the Tax Code imposes a penalty on the appraiser who prepared an appraisal used for an estate tax return and the appraisal results in a substantial valuation understatement. An understatement has occurred if the reported value of the property is 65% or less of the amount determined to be the correct value. The penalty imposed is the lesser of 10% of the underpayment (or $1,000 if greater than the 10%) or 125% of the gross income received from the preparation of the appraisal. For example, if an appraisal resulted in an underpayment of $50,000 and the appraiser received $2,000 for the appraisal, the penalty imposed under section 6695A would be $2,500 as the lesser value of 10% of the $50,000 underpayment ($5,000) and 125% of the gross income of $2,000 ($2,500) for the appraisal.

The court held that Wachter’s relationship and correspondence with the estate’s executor, Hyland, during the valuation process impaired his objectivity and, correspondingly, his credibility. While Wachter was determining the fair market value estimates for the estate paintings, Wachter and Hyland apparently corresponded about the fate of the paintings. During this correspondence, Wachter, as a Vice President of Sotheby’s, solicited Hyland for the exclusive rights for Sotheby’s to auction the Maypole and Orpheus, if Hyland ever chose to sell the paintings. The Tax Court did not reveal whether or how much Wachter received for this appraisal or whether he differentiated between his two roles as an appraiser or potential seller of the paintings in this correspondence.  Under Sotheby’s terms of service according to the Tax Court, an auction sale would entitle Sotheby’s to a 20% commission on the first $200,000 of the hammer price. Presumably, the employee who would bring in property would also collect a certain fraction of the hammer price as an incentive for bringing business. It appears, according to the Tax Court, that Wachter “had a direct financial incentive to curry favor with Mr. Hyland by providing fair market value statements that benefited his interests as the estate’s residual beneficiary” and that Wachter thus “lowballed” the estimates of the paintings to reduce the estate’s tax liability. The Tax Court further found that the simultaneous timing of the valuations and Wachter’s pitch for exclusive auction rights seemed to imply that the latter influenced the former, demonstrating Wachter’s lack of objectivity.

Wachter’s actions suggest if not directly implicate the various conflicts of interest outlined in the IRS policy about appraisal procedures. While Wachter was not a direct beneficiary inheriting the paintings from the estate, his employer certainly benefited from the sale of the Maypole and the explicit or inexplicit arrangement between Wachter and Hyland. Thus, Wachter violated professional ethics requirements for objectivity with this “quid pro quo” arrangement. However, according to the Tax Court opinion and Wachter’s biography on the Sotheby’s website, he is not a member of any professional organizations that demand some sort of accountability. If Wachter’s valuation had occurred after 2006 (and not the year before), Wachter would likely have been penalized under section 6695A for the gross understatement of the painting’s value. Given the hammer price that was more than four times the value he ascribed to Maypole, Wachter valued that work well under the threshold set in the Tax Code at a quarter of the value determined by the Tax Court. While Wachter seemed to avoid any legal repercussions for his lack of objectivity, at least according to the Tax Court ruling, the estate was settled with the consequences and the adjusted estate tax liability. In order to avoid such scenarios, estates should investigate the objectivity of their appraisers and ensure some type of oversight or accountability when hiring them for this important task.

2. Exaggerating the Poor Condition of the Paintings

Second, the Tax Court objected to Wachter’s emphasis on the poor condition of the paintings when forming his valuations. In his report, Wachter described the condition of both paintings as covered in dirt and grime with extreme yellow discoloration, due to the decedent being a heavy smoker. According to Wachter, one could not be certain of the inherent value of the paintings in this condition, and he concluded that the value of the paintings should reflect the high level of risk involved in cleaning. However, the Tax Court found that such a risk was exaggerated, highlighting testimony of the conservator that the risks involved with cleaning were low. Moreover, the Tax Court pointed out that the cleaning process only took two to three hours, indicating that such a procedure was “comparatively easy and problem free.” Contrary to Wachter’s report, Cardile, the IRS expert, did not adjust for the dirty condition of the paintings as “surface dirt do[es] not affect the intrinsic value of an Old Master painting.”

Upon first consideration, accounting for the state of the painting, as Wachter did when calculating the value, appears to be a logical step in a fair market value analysis. According to IRS policies, an appraisal must include a description of the art item that states the physical condition of the work in addition to the subject, medium, size, visible marks, and provenance. In the past, the Tax Court has acknowledged the physical condition of the work and has adjusted the value accordingly. For example, in the Estate of James J. Mitchell v. Commissioner of Internal Revenue, the Tax Court placed less weight on the testimony of the IRS experts because they did not adjust their valuation of an early twentieth-century watercolor by American artist Charles Marion Russell to account for “its inferior status and for its poor paper quality and back boarding.”

While an appraiser may and should consider the physical condition of a work, Wachter’s assessment of Maypole and Orpheus was inappropriate due to the emphasis on the level of dirt – a condition that could be and was easily remedied. The cleaning and framing of Maypole and Orpheus, which occurred after Wachter’s valuations, cost the estate $4,500 and $4,350 respectively. Unlike the Russell watercolor which was painted with inherently volatile and poor materials, the dirt covering the Maypole and Orpheus was not intrinsic to the painting itself. Wachter’s emphasis on the dirt of the paintings ignores the guiding principle when determining fair market value that the hypothetical buyer and seller have “reasonable knowledge of relevant facts” affecting the potential sale. “Reasonable knowledge” includes facts acquired during the background investigation and negotiations for the sale, and in this particular case would likely involve consulting a conservator about the risks of cleaning a dirty painting. Wachter’s deep deduction in the value of the paintings to account for their dirtiness was misplaced and too substantial, for information about the actual cleaning process, which only took a few hours, was “readily discoverable.” The Tax Court did acknowledge that cleaning carries some risk but calculated only a 5% discount for the Maypole and a 25% discount for Orpheus to account for bowing, a more critical aspect of its condition. But Wachter’s inappropriate consideration of surface dirt demonstrates the importance of taking a holistic approach towards the analysis of a painting and fully accounting for all the facts that a likely buyer or seller would recognize when approaching a sale.

3. Need to Use Comparable Sales

Perhaps the most significant criticism of Wachter’s valuation by the Tax Court is the absence of comparable sales to support his analysis. “Comparables”  (or “comps”) are the recent selling prices of similar pieces of art that are used to help determine the fair market value of a piece of art, with the assumption that it will sell at a similar price of other similar works. The Tax Court referred to this omission as “remarkable” and with the absence of any comparables, “Wachter’s report lacks any objective support for his valuation figures.” According to the Tax Court, comparables of paintings by Pieter Brueghel sold between $1,040,000 and $3,331,000, and paintings by Jan Brueghel sold between $400,000 and $700,000.

The use of comparable sales provides the basic foundation for the valuation of art by offering an objective analysis of the likely market value. Cardile, the expert for the IRS, identified several comparable paintings for both the Maypole and Orpheus. Comparing the subject matter, medium, size, and the provenance (record of ownership) of similar paintings that sold prior to the date of the Kollsman estate was being appraised, Cardile could calculate the likely market price of the Maypole and Orpheus more accurately and confidently. Generally, courts, in their analysis of appraiser testimony, are likely to weigh more favorably comps that were sold closer in time to the date of valuation and are more similar in subject matter to the estate’s property than comparables that are too dissimilar to the painting at issue to provide an objective benchmark. For example, the court in Estate of Murphy v. United States found the testimony of the IRS expert to be particularly problematic and thus gave his testimony less weight than the testimony of other experts. The valuation of the IRS expert was based upon sales too remote in time, from six to nineteen years before the valuation date, while the testimony of the other experts relied upon sales only a few months before the valuation date.

When evaluating suitable comparables, courts focus on the details, such as the date of the sale and similarity in composition to the painting at issue. When an expert such as Wachter completely ignores such evidence, the court has very little information to rely upon when assessing the credibility and accuracy of a valuation and corresponding testimony. There is no reason to believe that Wachter did not know who painted Maypole and Orpheus and even those less familiar with leading artists are likely to recognize the surname Brueghel to find suitable comparables. The practice of using comparable sales in this context is so essential and commonplace that it is unclear why Wachter’s valuation was missing such a critical component. The lesson from this omission is that the strength and credibility of future appraisals depends upon finding pertinent and appropriate comps so that a court may properly analyze the proposed valuation.

Conclusion

The evasive “fair market value” is the cornerstone of determining estate tax liability. Calculating the value of a unique piece of property based upon the price of a hypothetical market transaction is an inherently difficult task. Appraisers rely upon past sales of comparable art pieces in order to predict the future activity of this market. They consider the whole piece of art, including the subject matter, condition, and provenance, from the point of view of a hypothetical buyer and seller for the fair market value analysis. Because such precise analysis requires great skill, knowledge, and years of specialized experience that members of the courts generally do not possess, the courts and accompanying legal system depend upon the objectivity of the appraisers. If such professionalism is absent, the courts and the IRS cannot administer the tax law fairly. Unfortunately for the estate of Eva Franzen Kollsman, its appraiser did not follow these principles, and the estate had to pay penalties for the omissions of its appraiser.

Selected Sources:

  1. Estate of Eva Franzen Kollsman v. Comm’r of Internal Revenue, 2017 T.C.M. (RIA) 2017-040 (2017).
  2. 26 U.S.C. § 2001.
  3. 26 U.S.C. § 2031.
  4. Treas. Reg. § 20.2031-1(b).
  5. 26 U.S.C. §§ 2053, 2054, 2056.
  6. Rev. Proc. 96-15, 1996-3 I.R.B. 41, § 8.04.
  7. Appraisers Association of America, Code of Ethics, https://www.appraisersassociation.org/index.cfm;jsessionid=15426E3A1A9207384153A96906B788A6.cfusion?fuseaction=document.viewDocument&documentid=720&documentFormatId=1353&CFID=3969729&CFTOKEN=a08c8da32b839881-B1374B0E-1C23-C8EB-805AFDB50E7E6B2D.
  8. 26 U.S.C. § 6695A.
  9. 26 U.S.C. § 6662(g).
  10. Sotheby’s, Bio of George Wachter, ttp://www.sothebys.com/en/specialists/george-wachter/bio.html.
  11. Estate of James J. Mitchell v. Comm’r of Internal Revenue, 101 T.C.M. 1435, at *14 (2011).
  12. U.S. v. Simmons, 346 F.2d 213, 217-18 (5th Cir. 1965)(finding that facts revealed during a background investigation of the decedent’s records constituted “reasonable knowledge” for purposes of determining the fair market value of property).
  13. Mary Anderson et al., Art Advisory Panel Helps Courts Sculpt Estate Valuations, 42 Est. Plan. 20, 11 (2015).
  14. Estate of Charles H. Murphy, Jr. v. U.S., No. 07-CV-1013, 2009 WL 3366099, at *18 (W.D. Ark. Oct. 2, 2009).

*About the Author: Emily Lanza is currently Counsel for Policy and International Affairs at the U.S. Copyright Office and had worked previously as a legislative attorney for the Congressional Research Service, advising Congress on intellectual property and estate tax issues. She received her J.D. in 2013 from the Georgetown University Law Center. Before her law career, she studied archaeology and worked for museums in various capacities. She can be reached at emilyla8@gmail.com.

Disclaimer: The opinions expressed here are solely of the author and do not express the views and opinions of the U.S. Copyright Office.

Art Price Indices: Op Ed

Note from the editors: The subject of art investment and art as an alternative asset is of great interest to the regulators creators and collectors. Center for Art Law has published writing on related subjects before and we are delighted to be bringing an opinion on the subject of art indices from a seasoned art dealer and educator, Carole Pinto.

For additional readings on the subject of art markets, visit http://www.hec.edu/Knowledge/Strategy-Management/Micro-economics/The-Art-Market-Understanding-Changes-in-Prices

* * * 

By Carole Pinto*

The boom in prices of artwork sold at auction since the financial meltdown of 2008 has led to the proliferation of articles written by people who attempt to apply the tools used to interpret the financial markets to the art market.  Much of the data provided by art dealers, advisers, consultants and fund managers, among others, is often used as a means to promote their inventory, while more objective data, such as the Mei Moses Indices and the Art Market Research, do not comprise a broad enough base to reflect significant and data driven movements (meaning in the art market).

A multitude of private equity art funds, including Philip Hoffman Fine Art Fund, The Collectors Fund and the Art Fund Association and a myriad of art advisory firms as well as advisors in the personal banking departments of financial institutions such as Bank of America, Citibank, Deutsche Bank, HSBC, JP Morgan Chase and Goldman Sachs regularly consult with high net worth clients on the advantages of including artwork in the long-term portion of their portfolio, underlining the positive aspects, but often disregarding risk of erosion of asset value over time.  The pleasure of admiring a work of great beauty combined with a potential appreciation in value over a fairly lengthy period of time has to be weighed against the illiquidity of the art market, the possibility of not recuperating the purchase price due to the high cost of getting in and out of the market (commissions of auction houses, for buyers and sellers, on average 25%), the impact that fashion and trends have on the value of a work of art, currency fluctuations and factors such as the geopolitical climate and world economic conditions.

What is the purpose of art market indices? The benefits? What analytical financial data is currently available to the public? One must keep in mind that less than 50% of all artwork sold worldwide is done so publicly, so any market data that is available is drastically skewed because it is based on publicly shared data.  To begin with, it is important to realize that the art market is not one big market, but a series of smaller markets representing over $66 billion in recorded sales annually, according to the most recent Bloomberg Business Report.  It is the largest unregulated market in the world. Contrary to the heavy regulation and transparency of the financial markets, the art market has almost no regulatory oversight. Art assets acquired by funds are not subject to the same level of investor protection measures as securities and other financial instruments. Aside from anti-fraud provisions, auction regulations, cultural property laws, and general consumer protection and contract law, there is little regulation and the art market can be used for money laundering and tax avoidance purposes.

The difficulty of regulating the market lies not only in the resistance of dealers to imposed rules, but also in the fact that works of art are not fungible, and that their value is impossible to calculate against any independent measure at any given point in time.  Two works by the same artist, executed in the same year, with the same subject matter, with comparable dimensions, in the same condition can command vastly different prices due to the quality of the work which unfortunately is not quantifiable.  

There are also major differences between collecting and investing in art one is a passion and the other profit.  Typically, investors in the stock market are advised to diversify their portfolio in order to mitigate risk, since some stocks prices rise while others tend to underperform.  Even though many art collectors have eclectic tastes, their approach is not to buy a basket of artwork a few Impressionist paintings, some old Masters, Chinese porcelain, etc.–but to concentrate on a few artists or types of art that appeal to them.  

The increase in sheer wealth of the top .01% of the worlds population in India, China, Russia, and North and South America has created a bifurcation in the market, resulting in a widening spread between blue chipartwork by well-known artists and the rest of the market. Many of these active players investin art in the same way they invest in other hard assets such as precious stones and metals, as well as real estate, reducing their exposure to currency and political or economic risk. Exponential growth in the market means a lot more players in the field, with a greater risk for mistakes where provenance, ownership and authenticity are concerned. In addition, there are more middlemen in the market today, leading to a diffusion of responsibility when it comes to authentication of a work of art.

In light of the aforementioned caveats, there are a number of specific factors that have to be taken into careful consideration when contemplating art as an investment vehicle:

Artwork traditionally has to be held for a minimum of 10 to 15 years before realizing potential profits. The notion of flipping art for a quick profit is highly risky and is reserved for a select group of savvy dealers. Additional costs associated with buying art include storage, transportation and insurance, appraisal for tax purposes, and buyer and seller premiums.

The lack of liquidity in the art market makes it difficult to unload a work of art for quick cash. One must keep in mind the high cost of entry and exit from the auction market, with a commission of 25% for both buyer and seller, means a work of art has to increase by at least 50% before profits can be realized. Fashion and trends cause tremendous fluctuations in the valuation of works of art. What was considered hotten years ago might have fallen out of fashion, and collectors have to sometimes wait years before the item they want to sell becomes popular once again. It is difficult to assess the value of a work of art at any point in time given the impossibility of obtaining sales data from an important segment of the market, private dealers. This lack of data (price information is available for less than half of all artwork sold) combined with a lack of transparency of the market impacts the validity of any market data analysis.  

There are a few tools that have been made available to the public that try to analyze trends in the art market. Art indices provide a limited tool, and as such it is important to understand what data they include and what they leave out. Art indices are informal records of prices for a select group of works sold at auction, and are not subject to any kind of external scrutiny or regulation.  As an exercise demonstrating this, one only has to subscribe to any number of companies that compile data obtained from the public market, and carefully read the information pertaining to what the numbers actually reflect.  

Art indices also fail to include works that do not sell at auction, which reflects a number of art works that could exceed 50% of those presented at auction. Indices tend to track only the most successful art sales, and do not take into account artwork that is not considered valuable enoughto be resold.

Screen Shot 2015-11-16 at 11.14.59 AMThe Mei Moses Family of Fine Arts Indices, named after two New York University professors, Jianping Mei and Michael Moses, has high name recognition, a long history and a broad base that covers over 30,000 repeat sales. They publish a World All Art Index as well as seven indices representing different categories of collecting. The information is updated annually, though Mei Moses recently indicated that a semi-annual update for the World Wide Art Index will soon be made available according to online information. Quarterly tracking estimates for these indices based on this year’s results are also available. It is noteworthy that the Mei Moses indices do not take into account transaction costs (shipping, insurance, sales tax, buyer/seller premiums), and they only reflect the prices of artwork that has turned around twice in the marketplace.  The source of information is data from Sothebys and Christies, but does not include online sales.  Furthermore, access to the Mei Moses indices is subscription based, costing anywhere from $100 to $250 year.

Another source, Art Market Research, which has existed since 1985, publishes 500 indices covering a variety of categories including vintage wine, Old Masters, jewelry, etc. Some of the data is published in the Wall Street Journal, the Financial Times, BusinessWeek and the Economist, but a complete listing is available to online subscribers. Here too, sale prices that result from online purchases are not made available, meaning the data are less representative of the broader market than prior to online transactions. The existence of online sites limits the information available to collectors in their quest for asset valuations, and combined with a growing number of private sales (both by dealers and auction houses playing the role of dealers) means price comparison is becoming more difficult and less meaningful for understanding market trends.

Artnet indices, again only available to subscribers, cover Contemporary, Impressionist and Modern art. Subscribers can also access artist-specific indices or indices devoted to a subset of an artists work. Citadel Art Price Index includes the results from seven auction houses, but given the multitude of smaller auction houses around the world, the results appear to reflect a very limited dataset.

Sites such as Art Price and Art Net rarely indicate whether a work of art was offered privately before coming to auction and therefore is not fresh to the market, which puts downward pressure on the price. They do not indicate whether or not a dealer is cornering the market, therefore pushing prices up. It is imperative to know key players in the market in order to understand why certain prices are obtained for specific artworks. Price guarantees made by auction houses to sellers are also not indicated, nor are factors such as the geopolitical climate or world economic conditions, all of which have an impact on the art market.

Historically auction houses and other private entities have maintained indices for internal use, which are not available to the public at large. For example, in the mid 1970s, Sothebys auction house attempted to create such an internal index, which was used as a marketing tool to entice clients to purchase art sold there. Then as now, data available was limited to public sales and sales conducted by Sothebys in private transactions.

An integral part of data missing from the indices is how important the aesthetic quality, the intrinsic beauty of a work, is to its valuation. Financial and statistical tools overlook art history–the period in the artists life during which a work was created, the social, political and artistic movements that influenced its creation, or factors impacting the artists personal life–all of which contribute to the artistic creation and works reception in the marketplace. Those choosing a brand name artist without reference to the quality of the work and advice from dealers and experts in the field are exposing themselves to additional risks.   

In the opinion of this author, art should be purchased for the purpose of pleasing the eye, as food for the soul. The great art collector Paul Mellon once described collecting art as an investment in pleasure, a treasure for the eye.” Those who believe that price charts and tabulated data alone can serve as a fireproof guideline for investors could benefit from considering art for both its financial and cultural capital.

About the Author: Carole Pinto is a private dealer and art advisor who teaches a course on the Art Market at Hunter College. She is a regular contributor to the Fine Art Connoisseur magazine. Her work experience includes curatorial work at the Metropolitan Museum of Art and Brooklyn Museums, art investment at Sothebys, Corporate Finance at Salomon Brothers and consulting at the New York State Council on the Arts.

Alternative Alternatives: ALT2 Conference Review

By Jessica M. Curley

On 29 September 2014, Bonhams auction house, together with BigelowSands LLC, hosted the fourth ALT2 Conference at its Madison Avenue location in New York City, where about 100 attendees from a multitude of industries including banking, marketing, commodity trading, and law gathered to hear world leading experts in these fields discuss investments in “alternative alternative assets.” The three panels were dedicated to rare gems and diamonds, healthcare and entertainment royalty rights, and vintage cars. Some of the speakers included Susan Abeles, Director of US Jewelry, Roger Miller, CEO of Alchemy Copyrights and CIO the Bicycle Music Company, and Bruce Wennerstrom, Founder, Chairman and CEO of the Greenwich Concours d’Elegance. The half-day conference was followed by a wine tasting event lead by Jennifer Williams-Bulkeley, Managing Partner of AOC Investment Advisors.

An “alternative asset” is a newer type of asset that traditionally had not been included in a standard investment portfolio. Some “alternative assets” include hedge funds, venture capital, real property, and commodities. A distinguished class of alternative assets, so-called “alternative alternative assets,” has begun to increase in popularity and includes diamonds, fine art, stringed instruments, vintage cars, healthcare and entertainment royalty rights, wine and vintage watches.

At ALT2 event experts discussed how these alternative alternative assets have gained in popularity and are becoming increasingly accepted as a way to further diversify investment portfolios. For example, panelist Alan Landau, CEO and co-founding Partner of Novel Asset Management, attorney by training and graduate of Benjamin N. Cardozo School of Law, advised that the diamond industry is not highly regulated in general, and that because diamonds are not classified as a financial product, they are not regulated by securities laws despite their being utilized for investment purposes. Mahyar Makzani, Co-Founder & Joint Managing Director of Sciens Colour Diamonds Fund, who moderated the panel on diamonds, noted that his fund voluntarily provides clients with “comfort points” to fill the gap created by the lack of regulatory oversight of this specific asset class.

Experts on the music, healthcare and film royalty rights panel advised that these less institutionalized assets are governed by traditional US intellectual property law. Dempsey Gable, Managing Director & Founding Fund Manager of the Opportunity Fund within Alternative Investments of APG Asset Management, explained that under US copyright law, films and television shows can be licensed to provide low yield low risk investment opportunities for investors. Panelist Tadd Wessel, Managing Director of OrbiMed, advised on the complexities of the healthcare system, and spoke to ways in which US patent law affects investment decisions regarding healthcare royalties.

The final panel, dedicated to vintage cars, discussed the steadily increasing valuation of classic cars, and the asset class’ low volatility and low correlation to other alternative alternative asset classes. Panelist Eric Minoff, a Specialist in the Motoring Department at Bonhams, advised the audience on the rapid growth of motorcar sales at auction, noting the increasing investor interest in this type of asset. Bonhams recently auctioned a 1962 Ferrari 250 GTO Berlinetta, which went for $38 million, making it the most valuable car to ever be sold at auction.

The panels seemed to strike a chord with attendees whose questions largely pertained to the regulation of certain asset classes, liquidity issues, and yield to risk ratios. The panel dedicated to royalty rights was most informative on the issue of regulation, and was of significant interest to attorneys, as this asset class is strictly governed and regulated by US intellectual property law. Regulation of diamonds and vintage cars is much less extensive, but both respective panels noted that increased investor interest could create a demand for heightened oversight. Liquidity potential also varied greatly among the various alternative alternative assets, as discussed by each panel. For example, whereas the ability to easily sell diamonds on the market make them highly liquid, copyright licenses, however, involve complex ownership and usage issues that prevent the asset from being easily alienable, and therefore have low liquidity. Yield to risk ratios also varied across the asset classes with film and TV shows providing a low risk low yield investment opportunity, while other tangible assets had a higher risk due the potential for physical damage or loss.

The ALT2 Conferences are by invitation only.

About the Author: Jessica M. Curley is a post-graduate fellow from the Benjamin N. Cardozo School of Law. She is pursuing her interest in art law and financial regulation in New York, and may be reached at jessicamcurleyATgmailDOTcom.

Restrictions on Ivory in the United States, U.S. Fish and Wildlife Service Director’s Order No. 210

By Chris Michaels, Esq.

Piano Keys, by Texasgurl

Piano Keys, by Texasgurl

The U.S. Fish and Wildlife Service recently enacted an order seeking to restrict the market for ivory in the United States; an action that may have unintended consequences. For example, in 2012, The New York Times ran an article noting that the market for upright pianos has plummeted in recent years. Formerly considered a “middle-class must-have” the cost of upkeep, coupled with the low cost of new electronic keyboards and foreign-manufactured uprights, caused many owners to discard their older upright pianos. Some of these relics of the past were outfitted with ivory – a material traditionally used to construct the keys. The resale of such ivory may now be subject to the newly enacted order.

While restrictions against the use and trade of ivory have been in place for years, there is an increased demand for ivory in emerging markets like China. In response to this trend, on 25 February 2014 the U.S. Fish and Wildlife Service (the “Service”), through Director Daniel M. Ashe, enacted Director’s Order No 210: Administrative Actions to Strengthen U.S. Trade Controls for Elephant Ivory, Rhinoceros Horn, and Parts and Products of Other Species Listed Under the Endangered Species Act. The Order was enacted to protect endangered species, namely African elephants, by regulating the ivory market in the United States. Specifically, it calls for strict enforcement of existing restrictions on the import, export, and interstate sale of ivory.

At first blush, the Service’s goal of protecting endangered animals through strict regulation of the market seems relatively straightforward. What is less straightforward, however, is the effect the enforcement of the restrictions will have on the sale of ubiquitous objects such as old musical instruments, chess sets, handguns, and other items that contain ivory. Until the new Order was enacted, these types of items could be sold within the United States with little concern for intervention by authorities. With the new Order in place it will become much more difficult to sell these items.

Pursuant to the Order, the interstate sale of ivory is strictly prohibited unless accompanied by an Endangered Species Act (“ESA”) permit. Transport is nonetheless allowed if the item can be qualified as “antique.” To comply with the “antique” exception, the importer, exporter, or seller must show that the object meets the following qualifications. The item:

  • Must be 100 years or older;
  • Must be composed in whole or in part of an ESA-listed species (of which there are approximately 2,140 endangered or threatened species under the ESA);
  • Must not have been repaired or modified with any such species after December 27, 1973 (the ESA was signed in to law by President Nixon on December 28, 1973); and
  • Is being or was imported through an endangered species “antique port.”

The specific “antique ports” include the following thirteen locations: Boston (MA); New York (NY) Baltimore (MD); Philadelphia (PA); Miami, (FL); San Juan, (PR); New Orleans, (LA); Houston, (TX); Los Angeles, (CA); San Francisco, (CA); Anchorage, (AK); Honolulu, (HI); and Chicago, (IL).

The ability to prove the above-mentioned criteria prior to a sale are extremely slim since the majority of antique ivory items lack provenance records.

In addition to restricting sales, the Order restricts the sale of musical instruments using ivory and also makes them difficult to import into the United States. The Order sets forth the following criteria that must be established in order to legally import the item:

  • It must have been legally acquired before February 26, 1976;
  • It must not have been subsequently transferred from one person to another person in the pursuit of financial gain or profit since February 26, 1976;
  • The importer must qualify for a Convention on International Trade in Endangered Species of Wild Fauna and Flora (“CITES”) musical instrument certificate; and
  • The musical instrument containing elephant ivory must be accompanied by a valid CITES musical instrument certificate or an equivalent CITES document that meets the requirements of CITES Resolution Conf. 16.8.

Similar restrictions are now in place for objects containing ivory imported for traveling exhibition purposes. In other words, museums and foundations seeking to exhibit collections with ivory will likely find themselves struggling to meet the requirements set out in the Order. In fact, they are more likely to opt out of exhibiting objects containing or made of ivory to avoid incurring additional costs and risks associated with the exhibition.

The sentiment behind the Order is certainly praiseworthy, but it remains to be seen whether the overall chilling effect on the market for ivory in the United States will actually curb the poaching of African elephants. It surely will not have a chilling effect on continued demolition of antique pianos; however, art loans are another matter altogether.

Sources:

About the Author: Chris Michaels is a litigation attorney in the Philadelphia office of the Atlanta, GA-based law firm, Cruser & Mitchell, LLP, where he actively pursues his interest in the field of art law. He may be reached at 518-421-7238, chriswmichaels@gmail.com, or on Twitter @CMichaels88.

Disclaimer: This article is intended as general information, not legal advice, and is no substitute for seeking representation.

Order of Business At Auction, Red Flag or Paddle?

Steven Brooks, a collector of Old Masters, says that a painting he bought from Sotheby’s for £57,600 in 2004 (about $90,000 today) is worthless because it was once owned by the war criminal Hermann Goering, and might have been looted by the Nazis.  The painting, Allegorical Portrait of a Lady as Diana Wounded by Cupid, is by the 18th-century French artist, Louis-Michel van Loo. The Goering connection came to light in 2010, when Brooks sought to sell the painting at Christie’s. When Christie’s specialists discovered that Goering had bought the work in 1939, Christie’s refused to accept it for auction, citing concerns about being able to convey good title.

In a complaint filed against Sotheby’s in California on March 21, Brooks alleges that Sotheby’s should have researched the provenance and informed potential buyers that the work had been owned by Goering; that the Goering connection creates “a cloud on title” that renders the painting unsalable and without value; and that Sotheby’s refuses either to put it up for auction or refund his money.

The case is unusual in many respects.  First, it is standard practice for auction catalogues to contain Conditions of Sale, Terms of Guarantee, and Glossaries of Terms.  A typical* Sotheby’s catalogue from 2001 states, under Conditions of Sale:
The following Conditions of Sale and Terms of Guarantee are Sotheby’s, Inc. and the Consignor’s entire agreement with the purchaser relative to the property listed in this catalogue…

By participating in any sale, you acknowledge that you are bound by these terms and conditions.
      1.     [A]ll property is sold “AS IS” without any representations or warranties by us or the Consignor as to merchantability, fitness for a particular purpose, the correctness of the catalogue or other description of the…provenance…of any property…and no statement anywhere, whether oral or written,…shall be deemed such a warranty, representation or assumption of liability.

Five Art Market Lessons from Recent Case Law

By Daniel S. Kokhba, Esq.

A growing number of investors have turned their attention to the art market. There, they are greeted by advisors, appraisers, brokers, experts and insurers. Art collectors and art investors hop from gallery to auction house to website, and their motives are as varied as the prices and mediums of the art and the structures of the transactions. In the midst of this exhilarating and ever changing marketplace, a review of recent case law identifies five fundamental lessons to keep in mind in navigating the art world.

I.  ACA Galleries, Inc. v. Kinney Lesson: Investigate before you buy 

A real estate buyer is unlikely to close on a sale without proper investigation. Such investigation may include careful and repeated visits, professional inspections, review of board minutes and title reports, and securing title and homeowner’s insurance. By contrast, an art buyer may skip critical investigatory steps at great risk of loss. Such risk can be hedged by performing adequate due diligence, including but not limited to, independent professional inspection, review of the provenance, attorney review of the contract and securing adequate insurance. ACA Galleries, Inc. v. Kinney, 2013 WL 638835 (S.D.N.Y. 2013), ACA Galleries, Inc. (“ACA”) sued an art seller for selling a forged Milton Avery painting. The District Court granted defendant’s motion for summary judgment and dismissed the fraud claims, holding that “Kinney’s motion for summary judgment on ACA’s fraud claims must be granted because, as a matter of New York law, ACA’s reliance on any representations made by Kinney was unreasonable and thus ACA’s fraud claims fail.” Id. at *3. ACA cannot establish justifiable reliance because it had the opportunity to fully investigate the authenticity of the painting but failed to do so.” Id. at *3.

Here, the Court recognized that ACA “failed to avail itself of the opportunity to have the painting inspected by the Avery Foundation or another expert prior to purchase…  ACA is in the business of buying and selling art. Such a business must be cognizant of forgery of the works of well known artists like Avery.” Id. at *4. The Court’s reasoning would be wisely followed by all buyers in an effort to avoid both purchasing a forged work of art and finding themselves without legal recourse in such an event.

II. Craig Robins v. Zwirner. Lesson: Get it in writing

In Craig Robins v. Zwirner, 713 F.Supp.2d 367 (S.D.N.Y. 2010), plaintiff sued an art dealer claiming the dealer reneged on a promise to sell certain paintings by the artist Marlene Dumas. The Court noted “plaintiff has not come forward with any writing signed by Zwirner promising to sell paintings to Robins. Absent a writing signed by Zwirner, enforcement of the oral Gallery Agreement is barred.” Id. at 376. The lesson here is clear: if you feel strongly about that artist or her artwork, get the promise to sell in writing.

“Under New York law a contract for the sale of goods for the price of $500 or more is not enforceable without a contemporaneous writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought.” Craig Robins v. Zwirner, 713 F.Supp.2d 367, 375 (S.D.N.Y. 2010); N.Y.U.C.C §2-201(1); Hoffman v. Boone, 708 F.Supp 78, 80 (S.D.N.Y. 1989). “However, where a service component of a contract ‘predominates’ over the incidental sale of personal property, an oral agreement is barred by the Statute of Frauds only if it is incapable of being performed within one year.” Id.; N.Y. Gen. Oblig L. § 5-701. Practically, not having the transaction memorialized in a detailed and signed writing invites litigation.

III. Flaum v. Great Northern Insurance Company. Lesson: Review the policy for adequate coverage

While insurance can protect the insured against certain losses, it is imperative to review the applicable policy and ascertain if a specific risk is actually covered by it. As illustrated by the case below, one cannot equate insurance with universal protection against all losses.

In Flaum v. Great Northern Insurance Company, 28 Misc.3d 1042 (Sup. Ct., Westchester, 2010), Flaum, as an insured, brought an action against an insurer alleging breach of an insurance policy based on the Company’s failure to provide coverage for a painting that Flaum claimed was a forgery. The Court noted that “the language of the Valuable Article’s Coverage clearly and unambiguously state that ‘all risk of physical loss’ is covered under the terms of the policy. Here, however, plaintiffs did not sustain a physical loss. There is no dispute that the painting originally attributed to the famous French painter Pierre-Auguste Renoir still hangs in [plaintiff’s] primary residence in substantially the same condition as when it was purchased.  In addition there is no claim that [this painting] has been lost, damaged or destroyed”. Id. at 1045.  It just happens to be a fake.

This case clearly demonstrates that an insured should carefully review the terms of an insurance policy obtained to protect his investments, in case something believed authentic turns out to be a fake.

IV. Schoeps v. Andrew Lloyd Webber Art Foundation, Inc. Lesson: If a lawsuit is initiated, make sure the proper party brings the case

Notwithstanding, litigation may be needed due to, inter alia, tortious conduct and/or breach of contract. Before considering taking legal action, it is important to determine who is the proper party to proceed with the claim.

In Schoeps v. Andrew Lloyd Webber Art Foundation, Inc., 66 A.D.3d 137 (1st Dept. 2009) the Court affirmed an order dismissing the complaint. The court held that a beneficiary of an estate may not act on behalf of the estate, instead any such moving party has to be appointed a representative first.

While a claimant may have a beneficial interest in the claim, standing may rest with a particular person or require that this person obtains authority to proceed from the Court. Failure to consider this procedural step can lead to delay and even dismissal of valid claims.

V. Grosz v. Museum of Modern Art. Lesson: Remember about the statute of limitations – even when discussing settlement

It is imperative that if a lawsuit is inevitable, that it is filed timely. If a claim is filed outside of the applicable statute of limitations it may be dismissed with prejudice. A common misconception is that settlement discussions alone toll the statute of limitations. In fact, they do not.

To protect a valid claim from expiring, one may file a summons and complaint to preserve rights to sue which could also apply additional leverage in settlement negotiations. If the negotiations are fruitful, the litigation can be discontinued upon securing a written and signed settlement agreement.  If they are not, claimant’s rights are preserved with timely filing.

The mere existence of settlement negotiations is insufficient to equitably toll the statute of limitations. Grosz v. Museum of Modern Art, 403 Fed. Appx 575 (2nd Cir. 2010).  According to Grosz, as soon as a claim arises it may be prudent to assess what claims are viable and what statute of limitations period applies. Should a lawsuit be required, it should be timely filed to avoid dismissal on that ground.

* * *

In conclusion, this survey of recent case law confirms that good practices of navigating the art market are far from universally learned, and these lessons warrant attention. Doing so may help art collectors both before and after art law issues arise.

About the Author

Daniel S. Kokhba, Esq. is a Partner at Kantor Davidoff, Wolfe, Mandelker, Twomey & Gallanty, P.C. and focuses his practice on commercial law, employment law and art law.  He may be reached at Kokhba@kantordavidoff.com or 212-682-8383

Disclaimer

This article is intended as general information, not legal advice, and is no substitute for seeking representation.

The Contentious World of Art Appraisal: Michelangelo, Van der Schardt and the Canadian Cultural Property Export Review Board*

The Canadian government offers a tax incentive to encourage the donation of art from private collections to public institutions, a practice that is similarly followed in the United Kingdom and the United States. On one hand, the public receives access to artwork that they might otherwise never see, and on the other hand the individuals or corporations receive a tax break for donating the works. The Canadian Cultural Property Export Review Board, in its role as an independent administrative tribunal among other functions, upholds a mandate to certify the cultural property for income tax purposes. The Board determines the fair market value of art to be donated by either the sales comparison approach or the cost approach, both of which are outlined on the Board’s website.

The purpose of the tax certification process is to “encourage[ ] the transfer of cultural property from private hands to the public domain.” In order to qualify for the tax certification, the Board must determine whether the work is of  “outstanding significance, due to its close association with Canadian history, its close association with national life, its aesthetic qualities, its value in the study of the arts, or its value in the study of the sciences; and the object is of such national importance that its loss to Canada would significantly diminish the national heritage.”

The incentivesgranted to successful applicants include “exemption from capital gains tax on the certified cultural property; and non-refundable tax credits for the full fair market values of the certified cultural property.”

How is cultural property actually appraised? The story below raises issues of provenance, the qualification of experts and the contentious nature of the appraisal of art.

* * *

On January 26, 2013, David Baines of the Vancouver Sunreported that eighteen sculptures (the “Collection”) donated to the Museum of Vancouver – terracotta studies of body parts – which had previously been attributed to Michelangelo (1475-1564) and Benvenuto Cellini (1500-1571) by art historians, were in actuality made by Dutch sculptor Johann Gregor Van der Schardt (1530-1591) in the late sixteenth or seventeenth century. The sculptures had been put up for auction by the Museum of Vancouver at Sotheby’s in January, Lot 354, and were featured as a part of Old Masters Week.

Measuring between 7.7 and 21 centimeters, Sotheby’s catalogue described the sculptures as “studies after anatomical elements seen in famous monuments sculpted by Michelangelo Buonarotti. The practice of making copies … was central to the education and stylistic development of artists of the Renaissance; these artists also learned by copying their immediate predecessors and contemporaries, particularly the works of great masters.”

Sotheby’s website reveals that they were most likely acquired by Paul von Praun (an important art collector) in the late 1500s directly from the estate of Van der Schardt. After changing several hands they were then sold to J. Wolff from Montreal by Christie’s London in 1938. Wolff’s twin sons, Paul and Peter LeBrooy, inherited the terracotta sculptures in the 1950s, nine pieces each.
As CBC News reports, while in possession of the LeBrooy brothers, the sculptures remained virtually unstudied for years, until some art historians began suggesting that they might be the works of Michelangelo himself. Sometime after, the brothers contacted experts in hopes of having the sculptures attributed to Michelangelo. Later and for years, the works were promoted and toured internationally as Michelangelo’s studies. Paul LeBrooy even authored a book on the topic titled Michelangelo Models: Formerly in the Paul von Praun Collection (1972).

The ensuing controversy making headlines in Canada is centered on the appraised value of the collection. That is, the donation of the sculptures by Corporate House (a financial group) to the Museum of Vancouver, once valued at about $31 million, had also resulted in the issuance of $31 million in tax receipts for the company by the Review Board. It was clearly a shock when Sotheby’s appraised the works at a fraction of that amount, valuing nine sculptures from the Collection at $200,000-300,000. 

Apparently, as revealed in a radio interview with CBC reporter Jason Proctor, the sculptures had endured a riveting history. The pieces had been put up for sale numerous times since the 1960s, receiving offers ranging from several to about $40 million; they were never sold. As per Proctor, the brothers became estranged over the sculptures and divided the collection into two. Corporate House then offered $18 million for Paul’s nine sculptures on the condition that they were attributable to Michelangelo and that they could be appraised for that value in 1996. However, the attribution to Michelangelo could not be made conclusively, and consequently Corporate House acquired Paul’s set of sculptures in 1998 for an undisclosed amount, on the basis that the sculptures were important, unattributed works of the Renaissance era. Shortly following Peter’s death in 2003, Corporate House purchased the remainder of the nine sculptures, whereupon in 2006 they donated the entire collection to the Museum of Vancouver in return for a tax break.

According to Proctor, when Corporate House approached the Review Board regarding the donation to the Museum of Vancouver, they had contacted every expert eligible to verify the attribution to Michelangelo, but learned that it was not “tenable.” Interestingly, Proctor managed to track down two scholars who had been hired by Corporate House, neither of whom had attributed the works to Michelangelo. One of the scholars even concluded that the sculptures were most likely the works of Van der Shardt but he was specifically asked to forgo writing a report about it.

Proctor reveals that the Review Board rejected the initial valuation made by Corporate House for $55 million and later accepted a second valuation based on independent appraisals, in the total fair market value (as defined by the Board) of $31 million for all eighteen figures. Although the appraisals are not made public, the Vancouver Sun reports that Nancy Noble (CEO, Museum of Vancouver) suspects that the sculptures may have been attributed to Michelangelo given the “enormous valuations.”

Several years after the transfer, in 2012, when the Museum of Vancouver decided that the statues were not a part of their collection mandate and decided to flip them on the market, they approached Sotheby’s. The auction house issued a valuation of $200,000-$300,000 for a portion of the collection, and attributed the studies to Van der Shardt.

The question now is: what happens when tax certificates are issued by the Review Board based on appraisals that are disproportionate to subsequent ‘corrected’ valuations when new information is brought to light? Luckily for Canadians, and less so for Corporate House, based on paragraph 32(5)(b) of the Cultural Property Export and Import Act, the Review Board has the power to “redetermine” the fair market value “at any time,” which would then prompt the Canadian Revenue Agency to re-evaluate tax returns from Corporate House, clearly anticipating situations like this one. 

The tax certification application process is an intensiveone. However, as Proctor mused in his interview, if he was able to track down the experts that Corporate House used – one of whom had attributed the works to Van der Schardt earlier on – then should the Review Board have done the same? Currently, the Review Board’s policy on monetary appraisal is that “[r]ecipient institutions/public authorities are responsible for selecting reliable evaluators for donations and should be prepared to stand by the work of the appraisers they have engaged,” further, the onus for providing certificates of authenticity also rests with the applicant. 

Sotheby’s Lot 354 from the January sale in New York remains unsold.

*Sources: Department of Canadian Heritage; “Important Old Master Painting and Sculptures: Lot 354” Sotheby’s; “Blockbuster Donation of ‘Michelangelo’ Sculptures Turns into a Multi-Million-Dollar Bust” The Vancouver Sun, January 26, 2013; “‘Michelangelo Models’ Cost Canada Millions in Tax Credits” CBC News, February 20, 2013; “Why Did ‘Michelangelo Models’ Cost Canadians Millions of Dollars in Tax Credits?” CBC News The Current, February 19, 2013; Michelangelo www.michelangelo.com; The J. Paul Getty Museum www.getty.edu/museum; The Museum of Vancouver www.museumofvancouver.ca; Amazon www.amazon.ca.

**The author wishes to thank Jason Proctor and the Department of Canadian Heritage for their assistance in providing additional information, and Dr. Laura Petican for her assistance in editing and feedback on the article.

The NYC Art World Surveys Damage And Makes Predictions Following the Devastation Caused By Hurricane Sandy

In the wake of the unprecedented destruction caused by Hurricane Sandy earlier this week, the art dealers, gallerists, and museum professionals of New York City survey the damage done. From Chelsea to Greenpoint, and DUMBO to the Lower East Side, the art world is grappling with destroyed artworks and wrecked office and exhibition spaces.

Art Info reported that many spaces, including R 20th Century in SoHo, Rachel Uffner Gallery on the LES, the New Museum on the Bowery, Postmasters Gallery in Chelsea, and Storm King Art Center in Mountainville are without power. Others, including art spaces in Chelsea and Bushwick, were hit especially hard. Among the most affected was gallerist Zach Feuer, whose gallery is on West 22nd Street between 10th and 11th Avenues. At the peak of the storm, waters reached five feet inside his gallery and almost all of the work in his current exhibition, “Kate Levant: Closure of the Jaw,” has been destroyed. As of yesterday, Feuer and his staff were planning to return to the gallery to break open the warped-shut door to the back room where much of his inventory is kept. Some of the storage racks are built higher than five feet, so he’s hoping they provided minimal protection. Although he had not been able to fully assess the damage, he estimated that 2 percent of the artworks “escaped damage.” Additionally, the wall between his gallery and its neighbor, CRG Gallery, was torn apart during the storm. Meanwhile, in Greenpoint, Brooklyn, 99 Commercial Street, an old factory that was converted into studios for dozens of artists for many years, was flooded by the waters from the Newtown Creek, destroying years of work.

Besides the damage done to the artworks themselves, the exhibit spaces, offices, and storage spaces were affected. Tony Coll, who manages the building that includes Feuer’s gallery, as well as the Franklin Parrasch Gallery and the CRG Gallery, said that the storm caused damage to the building that would have to be dealt with before many of the galleries could open for business. Coll stated that in addition to still being without power, there may be damage to the electrical systems. Repairs will also have to be done to the interior walls and doors. Coll estimated that the costs for his building would be around $200,000.

Once the immediate devastation of the hurricane has been dealt with, a major question to be tackled is how artists, dealers, and institutions will sort out the cost of damage done to art works and how insurance will be affected. Art dealer Lisa Schroeder noted over Twitter that her gallery has insurance for $500,000, but many galleries do not insure art, though most have liability and short-term travel insurance. She predicts that “premiums are going to go through the roof.”

The unprecedented damage done to one of the world’s centers of art creation and business will undoubtedly force insurance companies, business owners, and artists alike to reassess how legal and insurance risks will be managed in the art world.

To read up on coverage of how the art world has been affected around the city:

New York Times

Huffington Post

NY Gallerist

Art Info