Choosing the Most Appropriate Market for Valuation
Appraisers frequently decide how much an object is worth by comparing it to similar and like objects that have recently been sold. This is the comparative market data approach to valuation, which was discussed in our last column.
Choosing the market from which these comparables should be selected, however, is one of the most difficult and challenging tasks for any appraiser. For example, one may ask is it best to chose comparables from auction sales or from the retail market of private gallery sales?
To complicate matters even further, the courts, the IRS and appraisers have identified other “markets” which may not be obvious to anyone except the most knowledgeable professional. These include the wholesale market, for bulk purchases; the middleman’s market, for purchases among dealers; the glamour market, where the notoriety of a sale may contribute to inflate prices; the collectors market, where knowledgeable collectors may be given discounts routinely by dealers; and even the discreet retail market, which is a euphemism used recently by the IRS to describe the market for stolen goods or illegal narcotics which have a certain street value.
There are three major factors which determine the market from which the appraiser should choose comparables: the market in which the collector normally would purchase a work of art; the market in which a work of art is normally sold; and the market which must be chosen because of the circumstances of the appraisal.
In the case of Chou v. Commissioner Mr. Chou, a prominent collector, had made a donation of opals to a museum, and his appraiser had used comparables drawn from gallery sales of similar opals. However, the value for Chou’s donation was lowered significantly when the court supported the IRS contention that since Mr. Chou was a prominent collector, known to all dealers, the opals that he donated could only be valued using comparables chosen from “the collector’s market” where a dealer’s sale price to a collector/client would be significantly discounted.
On the other hand, in the case of pre-Columbian art, taxpayers have successfully challenged the IRS using the second determining factor of valuation by arguing that comparables should be chosen from the market in which specific objects are normally sold. The plaintiffs in both the Ferrari Case and the Biagiotti Case convinced the court that the IRS was wrong in relying on comparables selected from auction sales for donated pre-Columbian art rather than selecting comparables from gallery sales. They successfully argued that pre-Columbian art is normally purchased by the consumer from galleries which will offer firm guarantees of authenticity and uncontested title and, therefore, this was the most appropriate market.
By looking at estate valuations for tax purposes, we can see the best illustration of the concept that the circumstances of an appraisal may dictate the market from which comparables should be chosen. Estate taxes must be paid on a timely basis and executors are frequently hard pressed to produce capital to meet the estate’s financial obligations. Auction sales for estates are, consequently, the most appropriate venue of sale, because they offer the strong possibility of relatively quick sales while removing any suggestion of conflict of interest or collusion from the executor, since all sales are open to any member of the public who wishes to participate.
As one may imagine from our brief overview, selecting the most appropriate market for valuation is one of the most challenging aspects of an appraiser’s job and one which leaves both the appraiser and the client most vulnerable to legal challenge – especially when the IRS is involved. For this reason all clients should be well advised to select the most qualified appraiser who is knowledgeable of all the nuances of appraisal methodology and art law.
The choice of the most appropriate market for valuation is just one of the many elements of a correctly prepared appraisal. For a complete list of the Elements of a Correctly Prepared Appraisal, please contact the Appraisers Association of America, Inc.
This article appeared in the Antiques and The Arts Weekly, July 21, 1995, page 35 and was written by Victor Wiener.