Panels Get Millions for IRS by Deflating Donated Art

The 1,900-year-old ceramic jar from China’s Han Dynasty once belonged to Mme. Chiang Kai-shek, its owner said. He claimed a $50,000 tax deduction in 1976 when he donated the artifact to KQED, San Francisco’s public television station.

The Internal Revenue Service disputed that value. It said the jar was cracked on one side and that a hole had been drilled in the bottom so it could be used as a lamp base. Further, it said, the jar had brought only $360 at the station’s annual fund-raising auction and actually was worth only $150.

To support its position, the IRS brought in Clarence Shangraw, a senior curator of the Avery Brundage Collection at the Asian Art Museum of San Francisco. Testifying as an expert witness in 1982, Shangraw declared:

‘I look upon it as an unfortunate relic . . . that has been mutilated and altered and, aesthetically, I sort of feel cool disdain toward it.”

Another expert called the Han jar a “mere specimen” that lacked museum quality.

The U.S. Tax Court in San Francisco ultimately ruled that the jar was worth $800 and the $50,000 claimed deduction went the way of a growing number of similar charitable write-offs for art contributions that have been drastically reduced by the IRS with the help of experts from the art world.

Such episodes have become familiar since 1968 when the federal tax agency decided it might pay to take a closer look at art deductions. It named 15 experts to an IRS Art Advisory Panel to examine paintings, ceramics, sculptures and other objects whose value might be in dispute on tax returns.

Today there are 25 experts on four different panels: Far Eastern and Asian Art, African and Pre-Columbian, Old Masters and Modern Art. Together, they save the government about $20 million each year in potentially lost tax revenues.

Twice a year, the art experts come to IRS headquarters in Washington. Cloistered inside a small conference room, they appraise works like old Dutch masterpieces, pre-Columbian fertility goddesses, 20th-Century sculpture, antique guns and airplanes and Colonial furniture and artifacts. They sift through ownership records, sale histories and color photographs of artworks with an average claimed value of $168,000.

Last year, the panels reviewed 1,538 items worth a claimed $70 million and recommended adjustments on 74% of them.

The IRS is especially intrigued by works that are donated to museums, which the experts say often are overvalued. Objects handed down as part of taxable estates also are likely to pique tax collector curiosity. And they tend to be undervalued.

“The abuses we find are unbelievable,” said one panelist, Pratapaditya Pal, a senior curator of Indian and Southeast Asian art at the Los Angeles County Museum of Art.

Pal, who was in Washington for a day recently to evaluate art works, said it is not unusual to find on audited returns that taxpayers have overvalued Oriental works by as much as 3,000%. Taxpayers often donate insignificant or counterfeit objects to obscure museums in faraway places, he said.

‘Doesn’t Take an Expert’

“A lot of people pick up junk in Hong Kong . . . give it to institutions and take outrageous deductions,” he said. “Most of the time the tourist stuff is so bad that it doesn’t take an expert to tell.”

In 1982, IRS agents uncovered a scheme in which a prominent Los Angeles art dealer inflated art values up to 15 times so clients could claim large donations.

IRS agents posing as collectors paid dealer Michael Ripinsky $25,000 for old Egyptian masks and other items. Ripinsky then appraised the objects at $90,000, backdated the purchases to 1979 and 1980 and had them donated to the Los Angeles County Museum of Art and the museum of UC Santa Barbara, according to IRS affidavits filed in federal court. Ripinsky eventually pleaded guilty to fraud charges and was sentenced to a six-month prison term and five years of probation.

In another case, Ralph and Virginia G. Neely, then of Reno, Nev., claimed a value of $1.5 million on 442 pieces of African art donated to three museums between 1976 and 1980. The IRS appraised the collection at $170,000. In 1985, a federal tax court upheld the IRS claim and the Neelys were assessed additional taxes of $40,652.

Inflating Was Widespread

When the IRS panels were formed, inflated appraisals were so widespread that museum curators and art dealers feared Congress might eliminate all deductions for donated work, according to Karen E. Carolan, an art history specialist who heads the IRS art evaluation group in Washington and works with the panels.

Because cultural institutions rely heavily on donations to enlarge their collections, that prospect prompted meetings between the Art Dealers Assn. of America, the American Assn. of Museums and the IRS to come up with ways to curb art fraud. Their solution: the independent panels of expert appraisers.

“It was absolutely needed,” said Gilbert S. Edelson, vice president of the Art Dealers Assn. “The IRS are not experts, nor should they try to appraise works.”

Panelists are nominated to two-year terms. They are reimbursed for air fare and expenses but otherwise are not paid. The panels work with Carolan and other IRS art historians, each of whom has expertise in a particular area.

Some panelists accept the nominations out of a sense of civic duty. Others say that they find the work intellectually challenging.

Taxpayer Identity Withheld

Meetings are confidential and panelists are not told the identity of the taxpayer whose return is involved or whether the item being examined is part of an estate or a donation. Each item they appraise has a claimed value of $20,000 or more. Art of lesser amounts is handled at IRS district offices.

Lawrence Rubin, president of New York’s Knoedler Gallery and a panelist for three years, said of the sessions:

“You learn to home in much better on pricing, find out what your colleagues think and what certain things are worth intrinsically. “It opens up a lot of ideas.”

Some say that appraising gets tedious despite the allure of big-name artists. “It’s a terrific chore, to tell you the truth,” said panelist James D. Burke, director of the St. Louis Art Museum. “You have to deal with the fact that there’s a great deal of greed and avarice.”

‘People Think Twice’

Nevertheless, Burke is enthusiastic about the panel’s work. “It has stopped very effectively some of the outrageous behavior that took place 10 to 15 years ago,” he said. “I used to hear appraisers say, ‘We’ll put it in real high. I’ll take a shot at the government.’ Now people think twice.”

In 1977 the IRS started a separate panel to combat the flagrant abuse of art prints as tax shelters. It was so successful that the tax shelter market collapsed by the early 1980s and the print panel was disbanded, Carolan said.

Margo Leavin, who owns a West Hollywood gallery, sat on the art print panel for two years. “It was kind of shocking,” she said. “People were creating markets for artists who had none.”

But some wonder whether the panels see only the tip of the iceberg.

William M. Speiller, a former IRS lawyer and professor at the Rutgers University School of Law, says that the penalties are too lenient to deter would-be rip-off artists and that the IRS panels are understaffed. He thinks the IRS should stiffen penalties and hire 50 full-time appraisers.

Fair Market Value

Under the law, taxpayers who have owned art work for six months or more can claim deductions equal to the fair market value of the art at the time of its donation. When a deduction is challenged, the taxpayer is asked to provide a qualified appraisal, the acquisition cost, the ownership history and color transparencies of the object.

If the IRS decides that a claim is 150% or more of the item’s actual worth, the taxpayer must pay a 30% penalty based on the object’s actual value along with the extra tax, according to IRS spokesman Steven J. Pyrek. Appraisers whose value is off by 150% or more can be assessed fines of $1,000 per return.

Speiller thinks the new tax law will help curb abuses because the value of a deduction will drop because of the lower tax rates. Some fear that the new tax system will inhibit donations to museums for the same reason.

Panelists are not always price-slashers. If they think a piece is undervalued or accurately valued, they point that out too.

The Far Eastern panel once upheld a $1-million deduction on a jade-studded Ming Dynasty screen that had been donated to the Smithsonian Institution. “We agonized over it but had to justify it in the end,” Pal said.

Windfalls Occur

And occasionally, an encounter with the IRS yields a windfall.

In 1984, the IRS needed an appraisal for a large oil painting it had seized from Eugene Allen, a hospital-supply businessman who owed back taxes. Allen told the IRS that he had bought the work from his sister and that it was probably worth several hundred dollars, recalled Charles Credaroli, an appraiser from the West Coast auction house Butterfield & Butterfield hired to appraise the work.

Credaroli drove to a Los Angeles warehouse to see the painting, which depicted a reclining female nude attended by Mercury, Jupiter and some plump cherubs. He discovered “Danae,” a long-lost major work by 17th-Century Dutch master Henrik Goltzius that had last been sold at a 1935 Stockholm auction for $57,000.

In November, 1984, “Danae” sold at Butterfield’s for $675,000--and Allen collected the after-tax profits.