Market for Art is Subject to Unparalleled Sources of Ambiguity
By Brent Randall
Last month, sculptures once thought to have been created by Michelangelo failed to sell at auction. The pieces, originally appraised at $31 million, were found by experts to actually have been the work of Johan Gregor van der Schardt, and therefore “only” worth $200,000 to $300,000. In itself, this would be rather unremarkable, as forgeries, fakes, and mistakes in general are bound to impact art valuation. What makes this situation significantly more interesting is that these sculptures were donated to the Museum of Vancouver based upon the $31 million valuation, and therefore the source of $31 million in tax receipts.
The Canadian Cultural Property Export Review Board is responsible for the cultural property certification process, which encourages private holders to keep significant cultural works like art, within Canada, and transfer them to the public domain such as to a Canadian museum. The Review Board determines what the fair market value of the cultural property is, and the donor receives a tax credit based on that amount. One attractive element of being certified as cultural property is the donor does not have to pay any capital gains tax on the difference between the valuation and the original purchase price. Should new information present itself, the Review Board has the ability to re-determine fair market value, and the Canada Revenue Agency can reassess the taxpayer as well.
The story of the Michelangelo models raises interesting questions about the nature of fair market valuation, since the market for art is subject to unparalleled sources of ambiguity. Artworks that are deemed to be fakes, or looted property during war time, or subject to other unique legal restrictions, as in the case of Robert Rauschenberg’s “Canyon”, can suddenly go from priceless to worthless. Of course, the value attached to the art in these situations retains a degree of subjectivity. Rauschenberg’s “Canyon” has been appraised for millions of dollars by the IRS, and yet it cannot be sold as this would violate American law. When the Michelangelo models were valued at approximately $31 million in 1998, at the time of their donation to the Museum of Vancouver, making an offer to purchase them at $300,000 would have been unreasonable. Today, that would be seen as more than fair. Situations such as these underscore the fact that the value of art is fraught with unique dangers.
Based on the Tax Court case of Henderson v. Minister of National Revenue,  C.T.C. 636, Canadian Heritage states that the following factors must be considered when determining the fair market value of an item:
Highest price [to be reasonably expected] means the highest price that is consistently achieved.
The transaction occurs in the market where such properties are most commonly and consistently sold to the public.
The public is the customary purchaser or ultimate consumer.
An ultimate consumer is a person, institution or corporation who does not hold the item for subsequent resale.
The appropriate or relevant market for a determination of fair market value is the most active market for the particular asset and is determined by the frequency and aggregate number of sales.
The buyer and seller are typically motivated, where neither is under compulsion to buy or sell.
Each party is knowledgeable, informed of all of the relevant facts and acting in their own best interests.
An unrestricted and open market is one that is available to the public.
The property has been exposed to an unrestricted and open market for an adequate amount of time.
The transaction is not influenced by time restrictions that would have a significant effect on the price; for example, fair market value cannot be determined by a forced sale.
Payment is made in terms of Canadian dollars. To convert currency to Canadian dollars, appraisers should consult the rates published by the Bank of Canada, and take the higher of the noon and closing nominal rates.
Of most relevance to art appraisal is likely factor 7. Appraisers, donors and donees could be knowledgeable and acting in the best interests of all parties involved, but they may not be aware of all the relevant facts which could have drastic impact on the valuation. To be certain, many goods outside of the arts could have their market values significantly changed by the emergence of new information. The difference for art is that such information and “facts” are harder to attain and verify.
The now-mistaken issuance of the $31 million in tax receipts for the donation of the models to the Museum of Vancouver also serves as a reminder for all charities receiving gifts in kind instead of money that they must be diligent in their valuations. The amount must be justifiable and fair. Furthermore, even with a competent and qualified third-party appraiser, some gifts are simply harder to value than others and so charities should be aware of this possibility and their rights should the situation arise.