Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

When should an appraisal of a non-cash charitable contribution be performed?

Taxpayers who make charitable contributions of non-cash property could be putting themselves in IRS penalty danger if the contribution is more than $5,000 and the property has not been appraised by a qualified appraiser who has issued a qualified appraisal report. A recent Tax Court case emphasizes the need for an appraisal report to be made.

In Gemperle v. Commissioner, TC Memo 2016-1 on January 4, 2016, the IRS argued and the Court agreed, that a 20% negligence penalty under 6662(a), and a 40% gross valuation misstatement penalty under 6662(h) should be applied when no appraisal was attached on this charitable contribution case. The Internal Revenue Code, the instructions for Form 8263, and the commentary from the Joint Committee on Taxations’s Technical Explanation clearly indicate that an appraisal should have been attached to the return. An appraisal was required, in this instance, as a matter of law. It was not attached, the taxpayer lost the case, and had penalties applied as a result. Clearly, an appraisal was required to substantiate the charitable contribution. (*)

The Internal Revenue Code provides the following guidance with regard to: a) appraisals of non-cash charitable contributions; and, b) definitions of a qualified appraisal and a qualified appraiser:

“A taxpayer’s deduction for charitable contributions is generally permitted under IRS § 170(a), subject to certain limitations depending on the type of taxpayer, the nature of the property contributed, and the type of done organization. In particular under § 170(f) (11) (C), taxpayers are required to obtain a qualified appraisal for donated property for which a deduction of more than $5,000 is claimed. Under § 170 (f) (11) (D), in certain cases the qualified appraisal must be attached to the tax return. Section 1219 of the Pension Protection Act of 2006 amends § 170(f) (11) (E) and provides definitions of a qualified appraisal and qualified appraiser for appraisals prepared with respect to returns filed after August 17, 2006”. (**)

A “qualified appraisal” is an appraisal that is conducted by a “qualified appraiser” in accordance with generally accepted appraisal standards; e.g., consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice (USPAP), as developed by the Appraisal Standards Board of the Appraisal Foundation. (***)

A “qualified appraiser” is an individual who has earned an appraisal designation from a recognized professional appraiser organization, if the designation is awarded on the basis of demonstrated competency in valuing the type of property for which the appraisal is performed, or has otherwise met minimum education and experience requirements set forth by the Secretary. An appraiser will be treated as having demonstrated verifiable education and experience in valuing the type of property subject to the appraisal if the appraiser makes a declaration in the appraisal that, because of the appraiser’s background, experience, education, and membership in professional associations, the appraiser is qualified to make appraisals of the type of property being valued. And, that the individual regularly performs appraisals for which she/he receives compensation.” (****)

Taxpayers who are making non-cash charitable contributions of more than $5,000 should check with their tax accountant to make sure a qualified appraisal is, or is not, required in support of their contribution.

Don R. Bays, CPA, ABV, CVA, CFF

(*) From online QuickRead of the National Association of Certified Valuators and Analysts, When Should an Appraisal be Attached to a Return? January 13, 2016; Michael Gregory.

(**) Internal Revenue Bulletin: 2006-46, November 13, 2006, Notice 2006-96, Guidance Regarding Appraisal Requirements for Noncash Charitable Contributions.

(***) Pension Protection Act of 2006.

(****) Ibid.