A taxpayer who claims an income tax deduction for a charitable contribution of tangible personal property over $500,000 is required to attach to the tax return a qualified appraisal for such property. What happens if, despite the taxpayer’s best intentions, the appraisal is determined not to satisfy the requirements of a qualified appraisal? The U.S. Tax Court, in WT Art Partnership LP, et al. v. Commissioner, T.C. Memo. 2025-30, recently focused on an exception to the qualified appraisal requirement that typically doesn’t get much attention but which, due to the unique circumstances in this case, was very helpful to the taxpayer.
In 1997, Oscar Liu-Chen Tang (Tang), through the entity WT Art Partnership LP (WT Art), purchased a group of 12 early Chinese paintings. In connection with the purchase, WT Art executed a promised gift agreement with the Metropolitan Museum of Art (the Met) for the same group of paintings.
In 2005, WT Art donated four of the paintings to the Met, and, at the Met’s recommendation, Tang obtained an appraisal from an art gallery in Tokyo to attach to the tax return. The Internal Revenue Service selected the return for examination and, again at the Met’s recommendation, Tang obtained a back-up appraisal from the second-largest auction house in China, China Guardian Auction Co. Ltd (China Guardian). China Guardian didn’t regularly prepare appraisals or hold itself out as an appraiser, although it often provided to potential auction consignors non-binding estimates of the prices at which their artworks might sell at auction.
China Guardian’s appraisal for the four paintings consisted of a cover letter addressing the technical requirements of a qualified appraisal and three pages of analysis, including a detailed description of each painting and one or two comparable sales for each painting. The appraisal didn’t address why or how the selected comparables compared to WT Art’s paintings. The IRS slightly adjusted the appraisal values but didn’t question whether China Guardian’s appraisal was a qualified appraisal or whether it was prepared by a qualified appraiser.
When WT Art donated additional works to the Met in 2006, 2007 and 2008, Tang engaged China Guardian and the Tokyo gallery to prepare similar appraisals; none of these tax returns were audited by the IRS.
Over the course of 2010, 2011 and 2012, WT Art donated the remainder of the paintings to the Met, and China Guardian prepared the appraisals, following the same process as before. According to the case, at times, Tang questioned China Guardian’s appraisal values (which seemed high) and analysis of comparables (which seemed lacking). The IRS audited all three tax returns and disallowed the deductions in full on the basis that China Guardian wasn’t a qualified appraiser and, therefore, the appraisals weren’t qualified appraisals. The dispute was brought to the U.S. Tax Court.
The Court agreed with the IRS that the individuals at China Guardian who prepared the appraisals weren’t qualified appraisers and, therefore, the appraisals weren’t qualified appraisals. However, citing Internal Revenue Code Section 170(f)(11)(A)(ii)(II), which provides that a deduction shall not be disallowed “if it is shown that the failure to meet [the qualified appraisal] requirements is due to reasonable cause and not to willful neglect,” the Court concluded that the income tax charitable deductions were nonetheless allowable.
Considering all of the facts and circumstances from Tang’s viewpoint, the Court determined that “Mr. Tang entertained a good-faith belief that China Guardian was a reputable firm whose appraisals were acceptable to the IRS.” The Court found that Tang reasonably relied upon (i) the Met’s recommendation of China Guardian as a suitable company to prepare an appraisal and (ii) the Met’s provision of sufficient information to China Guardian for the preparation of the appraisal. The Court also placed substantial weight on the fact that the IRS had several prior opportunities to flag the appraisals as unqualified for purposes of an income tax deduction and had failed to do so. Although the Court held that the deductions were allowable, upon a further review of the appraised value for the painting donated in 2010, the Court determined that China Guardian’s comparability analysis for the painting donated in 2010 was “flawed” and significantly adjusted the appraisal value accordingly.
Taxpayers should remember the availability of this “reasonable cause” defense if a difficult case arises where an appraisal is determined not to be a qualified appraisal. If the exception is granted, the appraised values will be considered on their merits instead of the entire appraisal being disqualified. However, this case also serves as a reminder that appraisals that don’t adequately substantiate values may be challenged, and so all appraisals should be comprehensively reviewed prior to submission.
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