Definitions of “Qualified Appraiser” and “Qualified Appraisal” Continue to Evolve
(by David Maloney Sept. 30, 2011) A taxpayer is generally permitted a deduction for noncash charitable contributions subject to certain limitations depending on the type of taxpayer, the nature of the property contributed, and the type of donee organization. When the deduction is permitted, taxpayers are required to obtain a qualified appraisal from a qualified appraiser for donated property for which a deduction of more than $5,000 is claimed.
Since tax deductions reduce the amount of tax collected by the federal government, Congress has tightened the rules governing appraisals in recent years in quest of discouraging valuation abuse, i.e., overstating the value of the contributed property. To accomplish this, relevant statutes were introduced embedded within the American Jobs Creation Act of 2004 (Jobs Act) and the Pension Protection Act of 2006 (PPA).
Jobs Creation Act of 2004
The American Jobs Creation Act of 2004 introduced new standards among which was the requirement that the appraiser must either regularly perform appraisals or hold himself out to the general public as an appraiser. This requirement reduced considerably those able to perform an appraisal. The Jobs Act also added the requirement that the appraiser include his credentials in the appraisal. Despite these 2004 changes, valuation abuses continued. As a result, additional requirements were added just two years later by way of the Public Law 109-280 Pension Protection Act of 2006.
Pension Protection Act of 2006
The PPA included new statutes which amended the IRS definitions for the terms “qualified appraiser” and “qualified appraisal” (as codified in Treasury Regulation §1.170A-13 of 1988) as those terms apply to noncash charitable contribution appraisals in which a deduction of more than $5,000 is claimed on returns prepared after August 17, 2006. (Appraisals prepared on or before August 17, 2006 would continue to be governed by the earlier §1.170A-13.)
In addition, the Act introduced a new provision requiring that the qualified appraiser make use of “generally accepted appraisal standards” (GAAS) when preparing the qualified appraisal. While GAAS was left undefined, the IRS did give a nod to USPAP by identifying it as an example of generally accepted appraisal standards.
The PPA also included the first-ever penalties imposed solely upon appraisers who substantially misstate the value of appraised property, and the PPA increased existing penalties imposed upon taxpayers for valuation misstatements.
2006 PPA Guidance by the IRS
The appraisal-related statutory requirements of the PPA require interpretation and codification by means Treasury Regulations which can take years to draft, so on November 13, 2006, the IRS issued Internal Revenue Bulletin 2006-96 Guidance Regarding Appraisal Requirements for Noncash Charitable Contributions which provided transitional guidance to explain in greater detail the appraisal-related changes intended by the PPA. While generally helpful, the guidance left several issues lingering. For the next year the IRS solicited input regarding the PPA from interested parties as it attempted to formulate new Treasury regulations necessary to enact the requirements of the PPA.
2008 Proposed Regulations Issued by the IRS
Many of those lingering issues which remained despite the 2006 IRS PPA Guidance were resolved on October 6, 2008 when the IRS issued its “Proposed Treasury Regulations” in Internal Revenue Bulletin 2008-40 entitled Notice of Proposed Rulemaking Substantiation and Reporting Requirements for Cash and Noncash Charitable Contribution Deductions.
(Note that these are Proposed Regulations are not the Final Regulations. As such they are not binding and the rules found in them are not yet technically effective. Regulations do not become “final” until such time as they are published in the Federal Register. Additional input is currently being sought by the IRS as it continues the process of drafting final Treasury Regulations that will satisfy the new statutory requirements introduced by the PPA pertaining to appraisals and individuals performing appraisals. Bulletin 2008-40 states, “These proposed regulations are proposed to apply to contributions occurring after the date these regulations are published as final regulations in the Federal Register [which, as of this writing has yet to occur – Author]. Taxpayers should continue to comply with the recordkeeping and return requirements in §1.170A-13 of the existing regulations to the extent those provisions are not superseded by the Jobs Act or the PPA.”) Until such time as the Proposed Regulations become finalized, comply with transitional guidance as provided in Internal Revenue Bulletin 2006-96.
Of interest to the personal property appraiser, the Proposed Regulations add the following sections to the Treasury Regulations regarding donation appraisals performed after August 17, 2006:
- §1.170A-16 Establishes record keeping requirements for noncash charitable contributions
- §1.170A-17 Establishes definition for “qualified appraisal” in §1.170A-17(a) and “qualified appraiser” in §1.170A-17(b)
- §1.170A-18 Defines “household items” and prohibits a deduction for clothing and household items in less than good condition with the exception of items in less than good condition but greater than $500 in fair market value in which case said items must be appraised by a qualified appraiser.
For the balance of this discussion, we will focus only on the requirements of Proposed Treasury Regulation §1.170A-17 which addresses the two definitions of interest: qualified appraiser and qualified appraisal.
Qualified Appraisal as defined in §1.170A-17(a)
The definition of qualified appraisal in the new Proposed Regulation §1.170A-17(a) as stated in Bulletin 2008-40 is similar to the transitional guidance of Bulletin 2006-96, except that the new Proposed Regulation requires the use of GAAS which it defines as the “substance and principles” of USPAP whereas the transitional guidance merely referred to the “substance and principles of USPAP” as an example of GAAS. The Proposed Regulations stops short of requiring compliance with any particular standard; however, it is clear that whichever standard is used by the appraiser it must be in compliance with the “substance and principles” of USPAP.
While other disciplines such as the American Institute of Certified Public Accountants (AICPA) has its own standards (Valuation of a Business, Business Ownership Interest, Security or Intangible Asset), there is no GAAS for the personal property appraiser other than USPAP. Therefore, it would appear that for the discipline of personal property appraising, this new Proposed Regulation §1.170A-17(a), in effect, mandates compliance with USPAP when performing appraisals of donated property for which a deduction of more than $5,000 is claimed.
Qualified Appraiser as defined in §1.170A-17(b)
As a result of the new proposed Treasury Regulation §1.170A-17(b), a qualified appraiser now means an individual who has verifiable education and experience in valuing the relevant type of property for which the appraisal is performed. (The relevant type of property means the category of property customary in the appraisal field for an appraiser to value.)
An individual is treated as having education and experience in valuing the relevant type of property if the individual has satisfied at least one of the following two requirements:
- Successfully completed (for example, received a passing grade on a final examination) professional or college-level coursework in valuing the relevant type of property, and has two or more years of experience in valuing the relevant type of property,
The above-mentioned coursework must be obtained from:
- a professional or college-level educational organization described in IRC Section 170(b)(1)(A)(ii) (see below), or
- A generally recognized professional appraisal organization that regularly offers educational programs in the principles of valuation, or
- An employer as part of an employee apprenticeship or educational program.
- Earned a recognized appraisal designation for the relevant type of property. (Because significant education and experience are required to obtain a designation from a recognized professional appraiser organization, under the new Proposed Regulations appraisers with these designations are deemed to have demonstrated sufficient verifiable education and experience.) A recognized appraisal designation is defined as a designation awarded by a recognized professional appraiser organization on the basis of demonstrated competency. (According to IRS Letter dated Jan. 1, 2008, “The Service does not consider any particular organization’s recognized appraisal designations to be superior to, or preferred over, those of any other organization.”)
The Proposed Regulations attempt to provide clarification on the subject of education and experience by means of three examples:
Example (1). Coursework in valuing relevant type of property. There are very few professional-level courses offered in widget appraising, and it is customary in the appraisal field for personal property appraisers to appraise widgets. Appraiser A has successfully completed professional-level coursework in valuing personal property generally but has completed no coursework in valuing widgets. The coursework completed by Appraiser A is for the relevant type of property [under this section.]
Example (2). Experience in valuing relevant type of property. It is customary for professional antique appraisers to appraise antique widgets. Appraiser A has 2 years of experience in valuing antiques generally and is asked to appraise an antique widget. Appraiser A has obtained experience in valuing the relevant type of property [under this section.]
Example (3). No experience in valuing relevant type of property. It is not customary for professional antique appraisers to appraise new widgets. Appraiser A has experience in appraising antiques generally but no experience in appraising new widgets. Appraiser A is asked to appraise a new widget. Appraiser A does not have experience in valuing the relevant type of property [under this section.]
The Proposed Regulations also note that education and experience in valuing the relevant type of property are considered verifiable if 1) the appraiser specifies in the appraisal the appraiser’s education and experience in valuing the relevant type of property, and 2) the appraiser makes a declaration in the appraisal that, because of the appraiser’s education and experience, the appraiser is qualified to make appraisals of the relevant type of property being valued. The appraiser declaration referred to must include the following statement:
“I understand that my appraisal will be used in connection with a return or claim for refund. I also understand that, if a substantial or gross valuation misstatement of the value of the property claimed on the return or claim for refund results from my appraisal, I may be subject to a penalty under section 6695A of the Internal Revenue Code, as well as other applicable penalties. I affirm that I have not been barred from presenting evidence or testimony before the Department of the Treasury or the Internal Revenue Service pursuant to 31 U.S.C. section 330(c).”
Proposed Regulations May be Troubling for Specialist Appraisers
The Proposed Regulations may prove troubling for the specialist appraiser in as much as the two paths to qualified appraiser status may be nonexistent. For instance, recognized professional appraisal organizations do not offer specific designations in most specialty areas such as books, stamps or coins.
In the absence of obtaining a designation via a recognized professional appraisal organization, the only remaining option to become a qualified appraiser is by “successfully completing” professional or college-level coursework in valuing the category of property that is customary in the appraisal field for an appraiser to value. Yet, the definition of what constitutes “successfully completing” remains unclear. The Proposed Regulation gives the single example “received a passing on a final examination,” but is there no other way for satisfying this requirement? Might mere attendance at a professional level program fulfill this requirement?
While the Proposed Regulations are unclear regarding what constitutes successfully completing coursework, the Regulations are clear regarding the nature of the professional or college-level educational organization. The Proposed Regulations require such organizations to fall within IRC Section 170(b)(1)(A)(ii), i.e., “an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.” Optionally, coursework can be obtained from a generally recognized professional appraisal organization that regularly offers educational programs in the principles of valuation. Remaining in doubt, however, is the acceptability of organizations that normally deliver instruction via the Internet—a method of instruction becoming more and more popular in today’s online and cost-conscious society.
While the Proposed Treasury Regulations of October 6, 2008 swept away some of the lingering uncertainty regarding issues relating to the definition of “qualified appraiser” and “qualified appraisal” and have put compliance with the “substance and principles of USPAP” squarely in the forefront, important issues remain to be clarified.
Should the Final Regulations remain unchanged from the Proposed Regulations, specialist appraisers may discover that they are not qualified and may be unable to provide qualified donation appraisals for items exceeding $5000 in fair market value either because there is no formal education available in their specialty area or because recognized professional appraisal organizations do not offer designations in their chosen areas of expertise.
© David J. Maloney, Jr. 2011