Citations and Declarations for the Donation Appraisal
(by Dave Maloney) The requirements for including citations or declarations in any personal property appraisal report normally originate from such sources as USPAP, the IRS, a law or regulation, a societal mandate, or, albeit it rarely, even the client. But given the plethora of applicable IRS regulations, rules, publications and forms, it is often in the donation appraisal report that we find the appraiser demonstrating the greatest of originality in the design of sometimes rather elaborate (and unnecessary?) citations and declarations.
Understanding which IRS regulations, forms, publications, notices, or revenue procedures are required to be cited in a donation appraisal report and which appraiser declarations are mandated for a donation appraisal report can be a challenge—particularly at this point in time during which we are operating under temporary IRS “Guidance” as we await final approval of new Treasury Regulations. The new Regulations will contain changes affecting the appraiser that were generated by the passing of the American Jobs Creation Act of 2004 and the Pension Protection Act of 2006.
In 2009 I wrote an article entitled Definitions of “Qualified Appraiser” and “Qualified Appraisal” Continue to Evolve in order to outline and explain the evolution and status of changes being made to the definition of these two terms (as well as to other reporting requirements) as they pertain to appraisals of donated property for which a deduction of more than $5,000 is being claimed by the taxpayer.
In summary, the American Jobs Creation Act of 2004 and the Pension Protection Act of 2006 generated changes to the Internal Revenue Code (IRC) concerning substantiation and reporting requirements for cash and noncash charitable contributions under IRC Section 170:
- Section 883 of The Jobs Act added IRS Code Section 170(f)(11) for appraisals prepared with respect to returns filed after August 17, 2006.
- As required by Section 1219 of the Pension Protection Act, Section 170(f)(11)(E) of the added Code amends and expands the statutory definitions of the terms “qualified appraisal” and “qualified appraiser” as found in 170A-13(c)(3) which defines “qualified appraisal” and §1.170A-13(c)(5) which currently defines “qualified appraiser,” (but only for for appraisals done on or before August 17, 2006.)
The next (and currently on-going) step in the process is for those new statutes to be interpreted by the IRS in the form of new Treasury Regulations. As of this writing (July 2010), the IRS has issued new Proposed Treasury Regulations which, while technically effective, have yet to be adopted as “Final” Treasury Regulations. Of interest to the personal property appraiser, the Proposed Treasury 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 the 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.
To help bridge the gap between the passing of the American Jobs Creation Act of 2004/Pension Protection Act of 2006 and the eventual approval of the Final Treasury Regulations, in 2006 the IRS issued Internal Revenue Bulletin 2006-96 Guidance Regarding Appraisal Requirements for Noncash Charitable Contributions to aid in the understanding and enforcement of the new Code until such time as the Final Treasury Regulations are adopted.
Hopefully, the above background will make what follows easier to understand.
There are no IRS-related citations mandated to be included within a donation appraisal report by any requirements including those of USPAP, the IRS, law or regulation, or, as far as I can discover, by any appraisal society.
The only citation that is required to be in a donation appraisal report is one required by USPAP relating to reporting, and it is a citation that must appear in all appraisal reports, not just donation appraisals. USPAP’s Standards Rules 8-2(a,b,c)(v) covering Self-Contained, Summary and Restricted Use appraisal reports require that the appraisal report contain the type of value used and must also:
“… cite the source of the its [the value’s] definition”
As this pertains to donation appraisals (which require the use of fair market value), the applicable source to cite is Treasury Regulation §1.170A-1(c)(2) which defines fair market value as “The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts…”
Yet despite this lack of requirements for citations, we often see donation appraisal reports (mine included) attesting to the appraiser’s compliance with various and sundry IRS regulations, forms, publications, notices, or revenue procedures such as:
- IRS Pub 526 Charitable Contributions (guidance intended primarily for the taxpayer)
- IRS Pub 561 Determining the Value of Donated Property (guidance intended primarily for the taxpayer)
- Treasury Regulation §1.170A-13(c)(3) which defines “qualified appraisal” or §1.170A-13(c)(5) which defines “qualified appraiser” (but only for appraisals done on or before August 17, 2006)
- Revenue Procedure 66-49 (largely superseded for appraisals done for donation purposes)
- Revenue Procedure 65-19 (most applicable to estate appraisals)
What is the reason for including in an appraisal report information that is neither required nor useful to understanding the assignment results (especially information such as the above sources which are subject to change or to becoming outdated, superseded or otherwise irrelevant over time)?
In my opinion, unless required by USPAP, the IRS, a law or regulation, an appraiser’s society or the client, IRS regulations, forms, publications, notices or revenue procedures need not be referenced in an appraisal report. Such superfluous citations are neither required by any entity nor do they serve any useful purpose other than, perhaps, to enhance your appearance as a professional to the reader.
If, however, you insist on including a statement citing current IRS sources with which you should be complying when doing donation appraisals (having an effective date after August 17, 2006) during this transitional period, your statement should be comprehensive and accurate. In addition, you should be sure to fully understand any citation to which you profess compliance. Here is a comprehensive statement which I recently prepared with the kind assistance of an IRS attorney:
This donation appraisal has been prepared in compliance with:
- Internal Revenue Code Section 170(f)(11), as added by Section 883 of the American Jobs Creation Act of 2004, and
- Internal Revenue Bulletin 2006-96 Guidance Regarding Appraisal Requirements for Noncash Charitable Contributions, and
- Treasury Regulation §1.170A-13(c)(3) which defines “qualified appraisal” and §1.170A-13(c)(5) which defines “qualified appraiser” to the extent those regulations are not superseded by the American Jobs Creation Act of 2004 or the Pension Protection Act of 2006, i.e., which are currently defined by Proposed Treasury Regulations §1.170A-17(a) and §1.170A-17(b), respectively.
- IRS Form 8283 and its Instructions
Though comprehensive, to some the above might appear excessive and unnecessary. Regardless, if you are familiar with the above IRS sources and feel that referencing them makes your donation appraisal report understandable, not misleading, credible or more professional in appearance, cite them. Otherwise, leave them out.
Requirements for declarations that are to be made in a donation appraisal for which a deduction in excess of $5,000 is being claimed can be found in the Instructions for IRS Form 8283 and in Treasury Regulation §1.170A-13(c)(3).
Instructions for IRS Form 8283 state:
“…A qualified appraiser is an individual who…demonstrates verifiable education and experience in valuing the type of property being appraised. To do this, the appraiser can make a declaration that, because of his or her background, experience, education, and membership in professional associations, he or she is qualified to make appraisals of the type of property being valued. The declaration must be part of the appraisal. [emphasis added] …”
In accordance with the above, the appraiser is required to make a declaration in the appraisal report regarding his or her qualifications.
Treasury Regulation §1.170A-13(c)(3)
In addition, during this transition period Treasury Regulation §1.170A-13(c)(3) (as amended) continues to be the underlying source of the definition for the term “qualified appraisal.” As such, it lists several elements of information that are required to be included in a qualified appraisal. Two of the elements are administrative in nature. They require that in order to be considered qualified, the appraisal must include:
- The qualifications of the qualified appraiser who signs the appraisal, including the appraiser’s background, experience, education, and membership, if any, in professional appraisal associations.
- A statement that the appraisal was prepared for income tax purposes.
So, given the above, what declaration should be added to a donation appraisal report? I might suggest the following which is minimal yet compliant with the above requirements:
My background, education, experience and membership in professional associations qualify me to make appraisals of the type of property that is the subject of this appraisal. A complete list of my qualifications can be found in my Professional Profile which is attached to this report. I understand that my appraisal will be used for income tax purposes.
Treasury Regulation §1.170A-13(c)(5) as Modified Impacts Form 8283 but not Appraisal Report
Note that Treasury Regulation §1.170A-13(c)(5) (which during this transitional period continues to be the underlying source of the definition for the term “qualified appraiser”) states that a qualified appraiser is one who includes on the appraisal summary (i.e., on IRS Form 8283, Section B Part III) a “Declaration of Appraiser” which contains several statements. Internal Revenue Bulletin 2006-96 Guidance Regarding Appraisal Requirements for Noncash Charitable Contributions, however, modifies that Declaration by the requirement for the inclusion of this additional statement within Form 8283’s Declaration of Appraiser:
“that the appraiser understands that a substantial or gross valuation misstatement resulting from an appraisal of the value of property that the appraiser knows, or reasonably should have known, would be used in connection with a return or claim for refund, may subject the appraiser to a civil penalty under § 6695A.”
The resulting Declaration of Appraiser is found on the current version of IRS Form 8283, Section B Part III (Rev. December 2006). This declaration addresses all the requirements of §1.170A-13(c)(5) as modified and must be signed by the appraiser. There is no requirement that this declaration be repeated in the appraisal report. The Form 8283 Declaration of Appraiser states:
I declare that I am not the donor, the donee, a party to the transaction in which the donor acquired the property, employed by, or related to any of the foregoing persons, or married to any person who is related to any of the foregoing persons. And, if regularly used by the donor, donee, or party to the transaction, I performed the majority of my appraisals during my tax year for other persons.
Also, I declare that I hold myself out to the public as an appraiser or perform appraisals on a regular basis; and that because of my qualifications as described in the appraisal, I am qualified to make appraisals of the type of property being valued. I certify that the appraisal fees were not based on a percentage of the appraised property value. Furthermore, I understand that a false or fraudulent overstatement of the property value as described in the qualified appraisal or this Form 8283 may subject me to the penalty under section 6701(a) (aiding and abetting the understatement of tax liability). In addition, I understand that a substantial or gross valuation misstatement resulting from the appraisal of the value of the property that I know, or reasonably should know, would be used in connection with a return or claim for refund, may subject me to the penalty under section 6695A. I affirm that I have not been barred from presenting evidence or testimony by the Office of Professional Responsibility.
In my opinion, we need to step back from time to time in order to justify some of the content of our appraisal reports. It is not enough to merely do what has been done in the past, to mimic other appraisers, or to include boilerplate content about which we may not be completely familiar.
While it is important to ensure that our reports are complaint with laws, regulations, USPAP and societal mandates, it is equally important to ensure that they are not bloated with excessive content or with content that is neither required, useful, nor understood.
© 2010 David J. Maloney, Jr.