In the recent case (February 22, 2017) of the Estate of Kollsman v. Commissioner, the U.S. Tax Court ruled that the estate had significantly underreported the value of artworks to the IRS for estate tax purposes. The court found that the values were unpersuasive because the auction house specialist who had prepared the appraisal was found to have exaggerated the poor condition and risk of cleaning the Old Master paintings under consideration. More importantly, the auction specialist who produced the appraisal report was, at the same time, soliciting the works for consignment, which could result in significant commissions from the sale. Not surprisingly, the court found that the auction specialist had a significant conflict of interest in preparing the appraisal report stating: “he had a direct financial incentive to curry favor with [the executor]” by providing “‘lowball’ estimates that would lessen the Federal estate tax burden borne by the estate.”
Collectors, estate administrators and fiduciaries should be aware that to reduce the risk that an appraisal prepared for Estate Tax calculation or Charitable Contribution will later be deemed unreliable, independent appraisers who have no financial interest in the property should be retained. When hiring an appraiser look for an appraiser who prepares appraisal reports in compliance with the Uniform Standards of Professional Appraisal Practice USPAP, the generally recognized performance standards for the appraisal profession in the U.S.. All reports conforming to USPAP include a certification that the opinions expressed in those reports are the appraiser’s unbiased professional opinions, and that the appraiser has no present or prospective interest in the property being appraised or personal interest with respect to the parties involved (or if such interests exist, they must be disclosed).