A recent US Tax Court case (WT Art P'ship LP v. Commissioner, T.C. Memo. 2025-30) illustrates how failing to comply with the technical requirements for substantiating the value of charitable contributions can jeopardize a taxpayer's charitable deduction.
In 1997, WT Art Partnership LP (WT Art) acquired an early Chinese painting known as "Palace Banquet." Several years later, WT Art donated Palace Banquet to the Metropolitan Museum of Art and reported a corresponding charitable deduction of $26 million. Under Section 170(f)(E) of the Internal Revenue Code, charitable deductions of more than $500,000 must be substantiated by a "qualified appraisal," which must be conducted by a "qualified appraiser." Section 170(f)(E)(ii) defines a "qualified appraiser" as someone who has earned an appraisal designation from a recognized professional appraiser organization, or has otherwise met minimum education and experience requirements set forth in Treasury regulations, regularly performs appraisals for which the individual receives compensation and meets other requirements set forth in Treasury regulations.
To support its claimed deduction, WT Art attached an appraisal performed by China Guardian Auction Co. Ltd., China's second largest art auction house. The three-page appraisal, signed by China Guardian's president, included a description of the painting, a list of publication references and one or two comparable sales (without explanation of how they were similar to or different than Palace Banquet). The Tax Court held that the appraisal was not a qualified appraisal because neither China Guardian nor its president were "qualified appraisers." A "qualified appraiser" must be an individual, and in this case, the appraiser was an executive of China Guardian without the requisite educational experience. In addition, China Guardian typically provided estimates of value for auction purposes, not appraisals.
Generally, failure to procure a qualified appraisal results in a disallowance of a charitable deduction. In this case, because WT Art had reasonable cause for relying on this appraisal, the deduction was not disallowed. However, because the Tax Court determined the value of the painting to be $12 million (not $26 million), a 40% gross misstatement penalty was applicable.
This case provides a reminder to taxpayers of the importance of following the technical substantiation requirements when donating valuable property to charity. Similar principles apply in the U.S. federal gift tax concept, where the valuation of a gift can be supported by a qualified appraisal. It is important that taxpayers comply with the technical requirements of the Internal Revenue Code and Treasury regulations in these areas to adequately support the valuation of the property involved in such transactions in order to best protect themselves and defend their tax positions.
A link to this case can be found at WT Art P'ship LP v. Commissioner, T.C. Memo. 2025-30, No. 28440-15, 2025 BL 120384, 2025 Tax CT Memo Lexis 32, Court Opinion.
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