1) The Picasso must have been listed on Schedule F under line 1 of art items at date of death exceeded 3,000. On this schedule, identify
the property for which you are claiming the loss by indicating the schedule and item number where the property is included in the gross estate.
2) Whether you claim such a loss and/or how to report on Schedule L needs further thinking. The Form 706 reduction reduces the estate tax.
3) You may want to consider to report the loss on the estate income tax return or to report it here. It is a choice between the income tax and estate tax. Depending on the tax benefit, you may want to report the item on the estate tax return and take the loss on the income tax return.
3) For a large and significant item of casualty and loss as such, a police report will not cut it. You need to have reported to the insurance company. The process and documents need to be on file. It has to have professional appraisal. As you might have known, an appraiser may and should be able to give an appraised value even after the effect. For anyone who needs to file estate tax form 706, the CPA cannot just come with a value on him/herself. That is out of our specialty. Form 706 is scrutinized by the IRS. The loss of a major art collection is a key issue in the return. It has significance beyond just estate tax to the IRS. Many beneficiaries of the estate in court would use the tax return as a document for their arguments, and the dispute can go on for years. An official appraisal is a have-to in this case.
5) One simple requirement of the appraisal by the appraiser is published in Publication 17. More links are stated below.
Appraisal. An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterward should be made by a competent appraiser. The appraiser must recognize the effects of any general market decline that may occur along with the casualty. This information is needed to limit any deduction to the actual loss resulting from damage to the property.
Several factors are important in evaluating the accuracy of an appraisal, including the following.
The appraiser's familiarity with your property before and after the casualty or theft.
The appraiser's knowledge of sales of comparable property in the area.
The appraiser's knowledge of conditions in the area of the casualty.
The appraiser's method of appraisal.
6) These are further references on the reporting on theft and casualty losses.
Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP