Tax Court Allows $41.5 Charitable Deduction Despite Lack of Qualified Appraisal

(Parker Tax Publishing April 2025)

The Tax Court held that a taxpayer who donated paintings to the Metropolitan Museum of Art failed to obtain "qualified appraisals" because none of the individuals involved in preparing the appraisals was a qualified appraiser." However, the court found that the taxpayer's deductions for the donations were nevertheless allowable because the taxpayer reasonably believed that the auction house that prepared the appraisals was a reputable firm whose appraisals were acceptable to the IRS. WT Art Partnership LP v. Comm'r, T.C. Memo. 2025-30.

Background

Oscar Liu-Chen Tang is a prominent Chinese-born American businessman, investor, and philanthropist. For many decades he has been a generous supporter of the Metropolitan Museum of Art in New York City (Met). During the 1990s the Met was eager to enhance its collection of early Chinese paintings. Tang, who joined the Met's board of trustees in 1994, pledged to assist with this effort.

Curators at the Met expressed admiration for a group of early Chinese paintings owned by C.C. Wang, a New York art collector and dealer. In 1997 Tang paid $5 million to acquire 12 of these paintings through WT Art Partnership LP (WT Art). In April 1997 Tang and his family executed in favor of the Met a deed of promised gift covering 11 of the paintings. Tang's plan was to retain ownership of the paintings in WT Art for a period of time, expecting that they would appreciate. Meanwhile, most or all of the paintings were exhibited at the Met on temporary or permanent loan from WT Art.

During 2010 - 2012 WT Art donated five of these paintings to the Met, reporting aggregate charitable contribution deductions in excess of $73 million. WT Art attached to its tax return for each year appraisals to substantiate the reported values of the paintings. All five appraisals were prepared by China Guardian Auction Co. Ltd. (China Guardian), which at the time was the second largest art auction house in China. Upon examination of WT Art's 2010-2012 returns, the IRS disallowed the charitable contribution deductions in their entirety. It determined that China Guardian was not a "qualified appraiser" and that WT Art had failed to attach to its return a qualified appraisal, as required by Code Sec. 170(f)(11)(D), to substantiate gifts of property valued in excess of $500,000. In the alternative, the IRS determined that WT Art had overvalued the paintings. Tang took his case to the Tax Court.

Code Sec. 170(a)(1) allows as a deduction any charitable contribution made within the tax year. If the taxpayer donates property other than money, Reg. Sec. 1.170A-1(c)(1) provides that the amount of the contribution is generally equal to the fair market value (FMV) of the property at the time of the gift. Where (as in this case) the taxpayer has donated property (other than publicly traded securities) valued in excess of $500,000, Code Sec. 170(f)(11)(D) requires that the taxpayer obtain and attach to its return a qualified appraisal of such property. Under Code Sec. 170(f)(11)(E), an appraisal is "qualified" if it is "conducted by a qualified appraiser in accordance with generally accepted appraisal standards." The statute provides that the term "qualified appraiser" means an individual who has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in the regulations. Under Code Sec. 170(f)(11)(E)(ii)(II) and (III), the individual must regularly perform appraisals for which the individual receives compensation.

Tang and the IRS reached agreement as to the FMV of four of the five paintings. However, the parties disagreed with respect to one painting, Palace Banquet. Tang's appraiser valued Palace Banquet at $21 million as of the contribution date based on comparable sales. The IRS's expert, on the other hand, determined a value of $10 million, based in part on what it said was a "deaccession restriction" that reduced its value in the hands of the Met. As evidence of this restriction, the IRS pointed to the minutes of a January 2011 meeting of the Met's trustees, an excerpt of which stated that Palace Banquet was offered "subject to the restriction that it is not to be deaccessioned," i.e., removed from the collection and considered for disposal by sale, exchange, or other means.

Analysis

The Tax Court found that the appraisals prepared by China Guardian were not qualified appraisals because none of the individuals involved in preparing those documents was a qualified appraiser. The court noted that under Code Sec. 170(f)(11)(E)(ii), China Guardian as an entity clearly could not be a qualified appraiser since the statute explicitly states that the term qualified appraiser "means an individual" who meets certain requirements. The court reasoned that China Guardian is an auction house that provides, as a service to its clients, estimates of the price at which artwork might sell if offered at auction (often called a "reserve estimate" or "presale estimate"). The court said there was no evidence that China Guardian or any of its staff regularly performed appraisal services or held themselves out to the public as appraisers. In fact, the court noted that the appraisals China Guardian performed for WT Art were the only appraisals it performed for compensation during 2010-2012.

However, the Tax Court further held that that Tang's deductions were nevertheless allowable because the failure to secure qualified appraisals was due to reasonable cause and not willful neglect. The court found that Tang entertained a good-faith belief that China Guardian was a reputable firm whose appraisals were acceptable to the IRS. In 2005, WT Art donated four paintings to the Met and secured an appraisal from London Gallery to support the values claimed. Tang also supplied backup appraisals prepared by China Guardian. The IRS audited this return and disputed the valuations placed on the four paintings. Tang and the IRS eventually settled the case and the Tax Court entered a stipulated decision that allowed a deduction of $2.448 million, corresponding to 90 percent of the value WT Art had reported for the four paintings. The court found that Tang believed China Guardian's backup appraisals to be helpful in negotiating a favorable settlement and that his takeaway from the 2005 examination was that the IRS regarded China Guardian as a reputable company that produced reliable appraisals using Chinese auction house transactions as comparable sales.

The court also noted that Tang had no expertise in tax law and had no knowledge of the technical regulatory requirements regarding who could be a qualified appraiser. However, he did know that China Guardian was recommended to him by Wen Fong, an expert in Chinese art, and that crucial information about the paintings was supplied to China Guardian by Dr. Maxwell Hearn, the curator of Chinese paintings at the Met. Further, the court observed that at no point during the 2005 examination did the examining agents suggest that either China Guardian or London Gallery failed to meet the requirements for a qualified appraiser. Tang's takeaway from the ultimate resolution of the 2005 examination was, in the court's view, that the IRS regarded China Guardian as a reputable company that produced reliable appraisals using Chinese auction house transactions as comparable sales.

The court concluded that the FMV of Palace Banquet was $12 million, slightly above the value determined by the IRS, and that no deaccession restriction encumbered this gift because the documents by which the painting was transferred contained no reference to a deaccession restriction. Finally, because the value claimed on WT Art's return exceeded the Palace Banquet's correct value by more than 200 percent, the court held that WT Art was liable for a 40 percent valuation misstatement penalty under Code Sec. 6662(a) and (h).

For a discussion of the rules for appraisals for charitable contributions, see Parker Tax ¶84,198.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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