Wednesday April 1, 2020
Article of the Month
Substantiation Requirements for Charitable Contributions, Part V
The Internal Revenue Service requires donors who claim charitable income tax deductions to substantiate the value of their charitable contributions. Some donors may not understand the specific substantiation requirements when making charitable donations. The Service's substantiation rules are strict, and if these rules are not closely followed, a donor may lose his or her entire charitable deduction. Advisors should be prepared to explain these requirements, guide their clients through the process of substantiating charitable gifts and work with charities to meet the Service's requirements.
This article series explores the substantiation requirements for charitable contributions. Part V will explore the final regulations for requirements for qualified appraisers. This article will detail the qualifications necessary for an individual to be considered a qualified appraiser. Advisors can provide an additional benefit to their clients by understanding the requirements for qualified appraisers under the final regulations.
Qualified Appraiser Definition
Generally, charitable gifts of noncash assets valued in excess of $5,000 require a qualified appraisal. In order to be considered a qualified appraisal, the valuation must be conducted by a qualified appraiser. For a discussion on when a qualified appraisal is required, see Parts II and III of this series. For a review of the contents and requirements of a qualified appraisal, see Part IV of this series.
The Service defines a qualified appraiser as an individual with "verifiable education and experience in valuing the type of property for which the appraisal is performed." Reg. 1.170A-17(b)(1). The effective date of these regulations was January 1, 2019. Reg. 1.170A-17(c). The delayed effective date permitted a transitional period for appraisers to obtain the requisite education and experience standards.
Education and Experience Requirements
As discussed in Part IV of this series, the qualified appraisal must be signed and dated by a qualified appraiser. The appraiser must have the requisite qualifications, as of the signature date of the appraisal, to be considered a qualified appraiser. Reg. 1.170A-17(b)(2).
An appraiser may satisfy the education and experience requirements in one of two ways. The first route to satisfy the education and experience requirements is by successfully completing course work in valuing the type of property being appraised and having two or more years of experience in valuing that type of property. Reg. 1.170A-17(b)(2)(i)(A). The coursework may be either professional-level or college-level. Successful completion may be demonstrated by receiving a passing score for the course.
The coursework must be obtained from an educational organization, a generally recognized professional trade or appraiser organization or through employer education programs. Reg. 1.170A-17(b)(2)(ii). The Service further defines each of the organizations. In order to be considered an educational organization, an organization must be a professional or college-level educational organization, as defined in Sec. 170(b)(1)(A)(ii). Reg. 1.170A-17(b)(2)(ii)(A). A generally recognized professional trade or appraiser organization must regularly offer educational programs on the topic of the type of property being valued. Reg. 1.170A-17(b)(2)(ii)(B). If an employer provides education, it must be part of an apprenticeship or educational program that is "substantially similar" to the aforementioned programs. Reg. 1.170A-17(b)(2)(ii)(C).
Example 1The alternative route to satisfy the education and experience requirements is by earning a "recognized appraiser designation" for the type of property that is being valued. Reg. 1.170A-17(b)(2)(i)(B). This designation must be obtained from a generally recognized professional appraiser organization and the individual must earn the designation through demonstrated competency. Reg. 1.170A-17(b)(2)(iii).
Rory is an ambitious lifelong student. She is very excited to have completed a rigorous educational course from a generally recognized appraiser organization. The course taught Rory how to value dollhouse furniture. Rory is particularly pleased that she passed the course because she has received her first request to appraise a set of dollhouse furniture that is being donated to charity. Rory is dismayed to find out that because she has only been valuing dollhouse furniture for the past 6 months, she will not be considered a qualified appraiser and cannot complete the qualified appraisal for the charitable contribution.
The Service requires the education and experience to be verifiable. Reg. 1.170A-17(b)(4). In order to meet the threshold of "verifiable," the appraiser must include a description of his or her education and experience in valuing the type of property in the appraisal. The appraiser must also make a declaration in the appraisal stating he or she is qualified to create appraisals in the type of property being valued.
Example 2Type of Property Definition
Dean holds a recognized appraisal designation from a generally recognized professional appraiser organization in commercial real estate. Because Dean holds a recognized appraisal designation in the type of property, he would be considered a qualified appraiser for real property. Dean's appraisal designation is proudly displayed on his office wall. In his qualified appraisals, Dean includes a statement as to his designation, the type of property his designation is for and a declaration stating he is qualified to provide appraisals for the type of property being valued.
Appraisers must have the required education and experience for the type of property being appraised. The type of property is defined as the "category of property customary in the appraisal field" in which the appraiser has education and experience. Reg. 1.170A-17(b)(2)(iii). While the regulations provide a broad definition, the Service provides examples to further illustrate the concept of the type of property.
The final regulations provide the same examples from the 2008 proposed regulations. These examples clarify the types of property an appraiser is qualified to appraise. First, an individual with coursework in a general field may be qualified to appraise items if those items customarily fall within that general field. Second, a person with experience in appraising antiques will usually be qualified to appraise most antique items. In the third example, the Service indicates that an appraiser with expertise in appraising antique items may not be qualified to appraise new items. The factual inquiry may also vary if the property is in a unique or unusual category.
Example 3Excluded Individuals
Emily has a recognized appraisal designation in valuing mid-century glass. A donor requested that Emily appraise hobnail milk glass cake stands created in the mid-1950s. The cake stands were being donated to charity for use at its annual bake sale. Because hobnail milk glass falls within the general category of mid-century glass, Emily may be deemed a qualified appraiser for this type of property.
The Service expressly states that certain categories of individuals are "not qualified appraisers." Reg. 1.170A-17(b)(5). If an individual charges an appraisal fee that is "based to any extent" on the appraised item's value, the individual is not a qualified appraiser. Reg. 1.170A-17(b)(5)(i). The Service does not allow the donor or the donee to act as a qualified appraiser. Reg. 1.170A-17(b)(5)(ii). Reg. 1.170A-17(b)(5)(iv).
Party to the Acquisition
If the appraiser is a party to the donor's acquisition of the item, the item must be contributed within two months of its acquisition and the appraised value must not exceed the acquisition price paid. If the item is not donated to charity within two months or the appraised value exceeds the acquisition cost, the appraiser will not be considered a qualified appraiser. The Service defines a party to the transaction as an individual who sold, exchanged or gifted the item; or any individual who acted "as an agent" for the transferring individual or the donor in the sale, exchange or gift transaction. Reg. 1.170A-17(b)(5)(iii).
An individual who is related to or is an employee of the donor, a party to the transaction or the donee are not considered qualified appraisers. Reg. 1.170A-17(b)(5)(v)(A). If the individual is married to a relative or an employee of the donor, a party to the transaction or the donee, he or she will not be considered a qualified appraiser. Reg. 1.170A-17(b)(5)(v)(B).
The definition of "related to" is found in Sec. 267(b) and includes a long list of potential relationships between the parties. A few of the defined relationships are as follows: siblings, spouse, ancestors, lineal descendants and any individual and corporation owned by such individual that owns more than half the value of the outstanding stock, directly or indirectly. Sec. 267(b)(1), (2).
Majority of Appraisals
If an individual is an independent contractor who is "regularly used" for appraisal purposes by the donor, a party to the transaction or the donee and does not perform a majority of appraisals for individuals other than the donor, he or she will not be considered a qualified appraiser. Reg. 1.170A-17(b)(5)(v)(C). For a cautionary tale, see James Tarpey v. United States; No. 2:17-cv-00094 (2019).
Example 4Prohibited by IRS
Kirk works as an independent contractor and has an appropriate appraisal designation. A very large, philanthropic family at a particular charity consistently retains his services for appraisal valuations. The family refers other relatives to Kirk for his appraisal services. Kirk begins to struggle to keep up with the family's different charitable contribution appraisals. Kirk realizes that if he does not also appraise items for other individuals outside of this philanthropic family, he may not be considered a qualified appraiser. Kirk ensures that through his workload, the majority of his appraisals are for other individuals outside the relation of this family to safeguard his qualified appraisal recognition.
If, at any time during the three-year period ending on the appraisal signature date, an individual was prohibited from practicing before the Service under 31 U.S.C. Sec. 3330(c), he or she will not be considered a qualified appraiser. Reg. 1.170A-17(b)(5)(vi).
It is imperative that professional advisors understand the Service's qualified appraiser requirements. The qualifications of a qualified appraiser are strictly construed and the Service expressly excludes certain individuals. Donors may need assistance finding a qualified appraiser to provide an appraisal that meets the Service's strict standards. In order to safeguard charitable income tax deductions, it is necessary to obtain the proper documentation, which includes a qualified appraisal from a qualified appraiser.