Citations and Declarations for the Donation Appraisal

Citations and Declarations for the Donation Appraisal

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 IRS regulations, rules, publications and forms, it is often in the donation appraisal that we find the appraiser struggling to demonstratedemonstrating the greatest of originality in the design of sometimes rather elaborate citations and declarations.(I like just plain demonstrate better. The appraiser is not struggling. As a matter of fact, the appraiser is easily copying what others are doing <g>.)

Understanding which IRS regulations, forms, pubs, notices, or revenue procedures are required to be cited in a donation appraisal report, and which declarations are mandated can be a challenge, particularly at this point in time during which we are awaiting final approval of IRS Proposed Treasury Regulations. We must wait to see which that will incorporate changes will be generated by the passing of the American Jobs Creation Act of 2004 and the Pension Protection Act of 2006. ???Regulations that will incorporate changes generated by the passing of the American Jobs Creation Act of 2004 and the Pension Protection Act of 2006. (If I make this change I have to draw in the Proposed Regs since we really do not have to “wait” to see the changes, they are already posted in Proposed regs. I know you think this para should be broken up, but, I think its length will be OK.)

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. (Summarizing what I wrote is a very important part of this part of the article. Most people who read this will not have read the article, so a summary is important. Also, without this sentence, this part becomes choppy and lacks proper content flow.) Forappraisals prepared with respect to returns filed after August 17, 2006, Section 170(f)(11)(E) of the IRC was amended and expanded. These changes include, among other things,new statutory definitions of the terms “qualified appraisal” and “qualified appraiser.” The next 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. The Proposed Treasury Regulations add the following sections that are of interest to the personal property appraiserto 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.

To help bridge the gap between the passing of Jobs Creation Act of 2004 and the Pension Protection Act of 2006, the two laws and the eventual approval of the Final Treasury Regulations, in 2006 the IRS issued Internal Revenue Bulletin 2006-96Guidance 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.

Citations

There are no donation appraisal IRS-related citations mandated 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, and it is a citation that must appear in all appraisal reports, not just donation appraisals. 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..."

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 other IRS regulations, forms, pubs, notices, or revenue procedures such as:

• IRS Pub 526 Charitable Contributions
• IRS Pub 561 Determining the Value of Donated Property
• 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 prior to August 17, 2006)
• Revenue Procedures 65-49 (largely superseded for appraisals done for donation purposes)
• Revenue Procedure 66-19 (most applicable to estate appraisals)

What is the reason for including information in an appraisal report 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, pubs, 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.

If, however, you insist on including a statement citing sources with which you should be complying during when doing donation appraisals during this transitional period, I suggest you use the following which was recently prepared with the kind assistance of an IRS attorney:

I am in compliance with:

• Internal Revenue Code Section 170(f)(11), as added by section 883 of the American Jobs Creation Act of 2004, and
• Treasury Regulation§1.170A-13(c) to the extent those regulations are not superseded by the American Jobs Creation Act of 2004 or the Pension Protection Act of 2006, and
• Internal Revenue Bulletin 2006-96 Guidance Regarding Appraisal Requirements for Noncash Charitable Contributions, and
• IRS Form 8283 and its Instructions

Though comprehensive, to some (including myself) the above might appear excessive. Regardless, if you are familiar with the above IRS sources and feel that referencing them makes your donation appraisal report understandable, not misleading and credible, cite them. Otherwise, leave them out.

Declarations

Requirements for declarations that are to be 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

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 value. 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) continues to define the term “qualified appraisal.” In doing so, 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 currently defines 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 2006-96Guidance Regarding Appraisal Requirements for Noncash Charitable Contributions, however, modifies that Declaration by the requirement for the inclusion of this additional statement:

“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 is 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.

Conclusion

In my opinion, we need to step back from time to time in order and justify some of the content of our appraisal reports. It is not enough to merely do what has been done in the past, 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 content that is neither required or useful, and at times is even difficult to understand.