ARTful Planning STEP May 28, Moderated by

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1 ARTful Planning STEP May 28, 2014 Elizabeth von Habsburg Tash Perrin Frank Lord Winston Art Group Christie s Herrick, Feinstein LLP Moderated by David Stutzman Seward & Kissel LLP

2 Elizabeth von Habsburg Managing Director Winston Art Group ARTful Planning May 28, 2014 Copyright Winston Art Group 2014

3 Art Market Overview "When bankers get together for dinner, they discuss art. When artists get together for dinner, they discuss money. Oscar Wilde Francis Bacon $142 Million in November 2013 Mark Rothko $86.9 million in 2012 Sotheby s & Christie s NY May Contemporary Auctions 2008: $880 M 2009:$64 M 2010:$394 M 2012: $880 M 2013: $900 M $1bn of art sold at Christie s & Sotheby s in November 2013 Contemporary evening sales, breaking all records $1.1bn sold in November 2014 Contemporary evening sales, with record breaking $745M sale at Christie s 2012 Global art market estimated in the range of $65 billion per annum* *TEFAF Report 2013 The art market is the largest LEGAL economy to be largely unregulated, Wall Street Journal Copyright Winston Art Group 2014

4 Trends Increasing and Broadening Markets Highest Grossing Artists at Auction in Zhang Daqian, US$506.7 M 2. Qi Bashi, US$445.1 M 3. Andy Warhol, US$324.8 M 4. Pablo Picasso, US$311.6 M 5. Xu Beihong, US$212.9 M* *HuffPost 1/13/2012 Diamond Market Prices Auction Records Copyright Winston Art Group 2014

5 Trends - Other Strong Markets Patek Philippe Sold $2,200,000 Screaming Eagle 1992 Sold $500,000 The Pink Star Sold $83,200,000 Ferrari Testa Rossa $39,000,000 Liberty Head nickel $3,737,500 Yuan Dynasty $1,342, Inverted Jenny $977,000 Carlo Mollino Sold $3,800,000

6 Current Issue: New Guidelines for Appraisers The Appraisal Foundation and USPAP The Appraisal Foundation is dedicated to promoting professionalism and ensuring public trust in the valuation profession. This is accomplished through: the promulgation of standards, appraiser qualifications, guidance regarding valuation methods and techniques The Foundation is authorized by Congress and made up of over 80 organizations, corporations and government agencies servicing millions of individuals Copyright Winston Art Group 2014

7 FAIR MARKET VALUE Using Correct Value RETAIL REPLACEMENT VALUE Retail from Tiffany & Co. $12,400 Retail from Ralph Lauren $7, sold at auction for $3, sold at auction for $600 Copyright Winston Art Group 2014

8 Exceptions Rare Works of Art Volatile Markets Christie's New York, November 2013 Francis Bacon, Three Studies of Lucian Freud, 1969 Sold for $142,400,000 Celebrity Auctions Qianlong Imperial Porcelain Vase Sold at auction 2010, $83,000,000 Sold privately 2013, $40,000,000 Andy Warhol, Liz Normal retail price: $60,000-95,000 Sold, ET sale, $662,000

9 Correctly Prepared Appraisal Elements of a Correctly Prepared Appraisal Independent and Impartial Qualified Appraisers Adheres to IRS & USPAP standards Photographic record incorporated Comparable market data approach Condition, Provenance, Exhibitions, Literature citations Copyright Winston Art Group 2014

10 Objective Expertise WILLIAM T. RICHARDS Breaking Waves $240,000 vs. WILLIAM T. RICHARDS Crashing Waves $42,500 Copyright Winston Art Group 2014

11 Provenance 'Sancai'-glazed Pottery Caparisoned Horse, Tang Dynasty Sold 2011: $158,500 Provenance: New England Estate Sotheby s New York, June 1993 Ralph M. Chait Galleries, New York, 1994 'Sancai'-glazed Pottery Caparisoned Horse, Tang Dynasty Provenance: None Copyright Winston Art Group 2014

12 Authenticity Andy Warhol, Self Portrait Red $2,000,000 or unsalable? Owned by Joe Simon-Whelan paid under $200,000 in early 1990s. $7 million in legal fees Artists no longer being authenticated: Warhol, de Kooning, Modigliani, Basquiat and more Dan Flavin No Certificate NCV Copyright Winston Art Group 2014

13 Title Modigliani, Man with Cane Owned by Oscar Stettiner Acquired by Nazis in 1944 Sold at Christie s in 1996 for $3,200,000 Offered at Sotheby s in 2008 for $18,000,000-25,000,000. Withdrawn. Restitution claim Hans Wendland; Hans Fankhauser; Fischer Auctioneers, Lucerne; Bruno Lohse; Semmel; Muller Auction House, Amsterdam ARIS Title Insurance Tax Fraud No title transfer Copyright Winston Art Group 2014

14 Condition Issues DAMIEN HIRST The Physical Impossibility of Death in the Mind of Someone Living DAN FLAVIN Fluorescent tubes no longer widely available in the diameters or colors used by Flavin without this NCV Restoration Hidden Damage Environment New Media Unstable Media Pests Copyright Winston Art Group 2014

15 Fakes and Forgeries Van Meegheren not caught for fakes, but for selling art to Himmler Elmyr de Hory Fernand le Gros sold fakes to Alger Meadows for his museum in Dallas Knoedler Gallery Multi-million dollar scam Copyright Winston Art Group 2014

16 Copyright Winston Art Group 2014

17 A Discussion of Appraisal Options & How They Can be Helpful Tash Perrin, SVP, Senior Director Trusts, Estates & Wealth Management Services CHRISTIE S

18 Appraisal Options : How They Can be Useful I. Types of Appraisals II. Estate Planning: Fair Market Value & dealing with the IRS III. Life Events: Appraisals as a Tool for Change

19 Types of Appraisals Insurance Estate Tax Gift Tax / Charitable Donation Financial Planning Loan Collateral To Establish Cost Basis Divorce Rental Planning

20 Estate Planning & The IRS Estate Tax Gift Tax Charitable Donation to Establish Cost Basis For all of the above IRS-bound appraisals, best practice is for a specialist or a generalist to see the property in person. 20

21 The IRS Art Panel The Office of Art Appraisal Services (AAS) and the Commissioner s Art Advisory Panel review and evaluate fair market value appraisals. Federal Income, Estate, Gift Tax & Charitable Donation 25 Art Experts $50K+ Threshold Requirements 21

22 The IRS Art Panel Full Year 2012: 444 items appraised Acceptance Rate: 51% Net Adjustment recommendation: $67 million 52% reduction for Charitable Contribution 47% increase on Estate and Gift Tax 22

23 Appraisals as a Tool for Change Fair Market Value: The price at which property would exchange hands between a willing buyer and a willing seller, neither under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts. Fair Market Value assumes the property would change hands in the relevant and appropriate marketplace. Appraisal Methodology: Market Data Approach (comparables)

24 Appraisals as a Tool for Change Life events trigger change in the course of collecting. Appraisals can help facilitate that change: Gift Tax / Charitable Donation Financial Planning Divorce Loan Collateral Rental Planning

25 Appraisals for Fair Rental Value Involves both a qualitative and quantitative analysis Christie s London already advises on rental agreements. 5 year history, annual Rental cost based on length of term Rates are sensitive but not tied to the AFR 25

26 Secured Art Lending Loan Amount: Term: Collateral: Loan Structure: Rates: Target Segments: $1 million minimum Up to 15 years Remains with client, generally Up to 50% loan amount to value Diversity of loan structures possible Diversity of debt service options Competitive bank lending rates Art Rich Liquidity Challenged Estate Planning Investor / Collector 26

27 Secured Art Lending: Examples Art Rich Liquidity Challenged Swiss collector with extensive inherited collection Business interests in South America $100mm+ collection of Old Master Paintings and Sculpture Estate Planning 88 Year Old American Collector Desire to live with his collection, sell from his estate $23mm collection of Impressionist and Modern art Investment Collector US-based Hedge fund manager Needed funds to invest in new business venture $6mm collection of Contemporary Paintings 27

28 Appraisal Reminders Appraisals are not inventory control Appraisals are not authentications Attributions can change Appraisals do not confirm title Schedule updates Examine in person Appraisals are different from Auction Estimates 28

29 1031 EXCHANGES OF ARTWORKS Frank K. Lord IV (212)

30 NONRECOGNITION OF CAPITAL GAINS IRC 1031(a) permits the exchange of property without requiring the taxpayer to recognize a capital gain Exchanges are often used in real estate transactions but can also be in transactions involving works of art.

31 CAPITAL GAINS ON ARTWORKS ARE TAXED AT A HIGHER RATE Basic capital gains tax rate: 20% Capital gains tax on artworks: 28% Net Investment Income Tax: 3.8% Total capital gains tax on artworks: 31.8%

32 PRICES OF ARTWORKS HAVE SURGED Francis Bacon Three Studies for a Portrait of John Edwards Purchased in 2004 for $15,000,000 Sold in 2014 for $80,800,000

33 PRICES OF ARTWORKS HAVE SURGED Cindy Sherman Untitled #93 Purchased in 1998 for $96,000 Sold in 2014 for $3,900,0000

34 IRC 1031(a)(1) No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.

35 KEY CONSIDERATIONS: 1) The relinquished and the exchange property must be held for productive use in a trade or business or for investment. 2) The property must be exchanged solely for property of like kind. 3) The mechanics of the exchange 4) The timing of the exchange

36 HELD FOR PRODUCTIVE USE IN A TRADE OR BUSINESS OR FOR INVESTMENT Holders of artworks fall into three basic categories: Collector Investor Broker or Dealer

37 HELD FOR PRODUCTIVE USE IN A TRADE OR BUSINESS OR FOR INVESTMENT There are corresponding categories of uses: For personal use and enjoyment As an investment held for appreciation As inventory for sale Only property held as an investment for appreciation is eligible for a 1031 Exchange.

38 EXCHANGED SOLELY FOR PROPERTY OF LIKE KIND There is little guidance on what constitutes property of like kind for artworks in the context of a 1031 Exchange. Priv. Ltr. Rul

39 MECHANICS OF THE EXCHANGE The Qualified Intermediary The Qualified Intermediary acts on behalf of the taxpayer in the sale of the relinquished property and the acquisition of the exchange property. The Qualified Intermediary is someone other than the taxpayer who is not a disqualified person.

40 TIMING OF THE EXCHANGE After transferring the relinquished property, the taxpayer must: Identify the exchange property to be acquired within 45 days. Complete the acquisition of the exchange property within the earlier of 180 days after the transfer or the due date for the taxpayer s income tax return for the taxable year in which the relinquished property is transferred.

41 HOLZER V. STEPHAN STOYANOV GALLERY

42 1031 EXCHANGES OF ARTWORKS Frank K. Lord IV (212)

43 Copyright 2013 by Herrick, Feinstein LLP. All Rights Reserved. This publication is intended as a general guide only. It does not contain a general legal analysis or constitute an opinion of Herrick, Feinstein LLP or any member of the firm on legal issues described. It is recommended that readers not rely on this general guide in structuring individual transactions but that professional advice be sought in connection with individual transactions. References herein to Herrick, Herrick, Feinstein, Herrick, Feinstein LLP, the firm and terms of similar import refer to Herrick, Feinstein LLP operating in various jurisdictions. IRS Circular 230 Disclosure: To ensure compliance with Treasury Department regulations, we inform you that any U.S. federal tax advice contained in this document (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the U.S. Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.