Wednesday April 1, 2020
Article of the Month
IRS Appraiser Qualifications
The Internal Revenue Service requires donors who claim charitable income tax deductions to substantiate the value of their charitable contributions. Charitable gifts of noncash assets valued in excess of $5,000 require a qualified appraisal for substantiation purposes. The current rules regarding qualified appraisals are the result of changes to the Internal Revenue Code from the American Jobs Creation Act of 2004 and the Pension Protection Act of 2006. Following those statutory changes, the Service developed proposed regulations in 2008. Nearly a decade later, the IRS published final regulations in T.D. 9836 (27 July 2018).
The Service's substantiation rules are strict. 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.
Gifts valued above a certain threshold require the donor to obtain a qualified appraisal of the asset. This article will cover the general qualified appraiser requirements and explore the professional designations and education available for appraisers of various types of property.
General Appraiser Qualifications
In order to be considered a qualified appraisal, the valuation must be conducted by a qualified appraiser. Under Sec. 170(f)(11)(E), in order to be a qualified appraiser, an individual must earn “an appraisal designation from a recognized professional appraiser organization” or meet education and experience requirements set by the regulations. The individual must also regularly perform appraisals of this type and meet any other requirements in the regulations. The individual must also “not be prohibited from practicing before the Internal Revenue Service . . . at any time during the 3-year period ending on the date of the appraisal.” Sec. 170(f)(11)(E).
A “qualified appraiser” is defined in Reg. 1.170A-17(b)(1) as an individual with “verifiable education and experience in valuing the type of property for which the appraisal is performed.” The education and experience requirements may be met one of two ways. First, the appraiser may satisfy the requirement by successfully completing college-level or professional-level coursework in valuing the type of property being appraised and having two or more years of experience valuing that type of property. Reg. 1.170A-17(b)(2)(i)(A). Under Reg. 1.170A-17(b)(2)(ii), the coursework must be obtained from one of three sources: a professional or college-level educational organization, a generally recognized trade or appraiser organization or an employee apprenticeship or educational program similar to the educational options above.
Alternatively, the appraiser may satisfy the education and experience requirement by earning a “recognized appraiser designation” for the type of property to be 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).
The regulations define “type of property” as “the category of property customary in the appraisal field for an appraiser to value.” Reg. 1.170A-17(b)(3). Therefore, it is important to not only meet the education and experience requirements, but those requirements must be met specifically for the type of asset that is being valued. In other words, a qualified appraiser of real estate is not necessarily qualified to appraise life insurance. The appraiser must meet the requirements for each type of property in order to be recognized as a qualified appraiser of that type of asset.
The term “qualified appraisal” is defined as an appraisal “prepared by a qualified appraiser in accordance with generally accepted appraisal standards.” Reg. 1.170A-17(a)(1). The Treasury Regulations define generally accepted appraisal standards as “the substance and principles of the Uniform Standards of Professional Appraisal Practice, as developed by the Appraisal Standards Board of the Appraisal Foundation.” Reg. 1.170A-17(a)(2).
The Appraisal Foundation was created in 1987 to guide the promulgation of the Uniform Standards of Professional Appraisal Practice (USPAP). Congress adopted the USPAP in 1989. The Appraisal Foundation has an independent board, known as the Appraiser Qualifications Board (AQB), which establishes requirements and criteria for appraisals of real and personal property. The AQB’s Real Property Appraiser Qualification Criteria governs licensing for three different real estate appraiser qualifications: Licensed Residential, Certified Residential and Certified General.
Examples of Recognized Appraiser Designations
According to the AQB’s Real Property Appraiser Qualification Criteria, there are three classifications of real estate appraisers: Licensed Residential Real Property Appraisers, Certified Residential Appraisers and Certified General Appraisers.
Prior to obtaining one of these three classifications, an appraiser is classified as a Trainee Appraiser. The Trainee Appraiser must have 75 hours of qualifying education in the last 5 years and must work with a Supervisory Appraiser. No prior experience is required for Trainee Appraisers.
Licensed Residential Real Property Appraisers are qualified to appraise “non-complex one-to-four residential units having a transaction value less than $1,000,000, and complex one-to-four residential units having a transaction value less than $250,000,” per The Real Property Appraiser Qualification Criteria and Interpretations of the Criteria, effective May 1, 2018 (RPAQC). According to the AQB, a “complex one-to-four unit residential property appraisal” is “one in which the property to be appraised, the form of ownership, or the market conditions are atypical.” In order to qualify as a Licensed Residential Appraiser, an individual must attain 150 credit hours of qualified education, 1,000 hours of experience in no less than 6 months and pass an examination.
A Certified Residential Real Property Appraiser is qualified “to appraise one-to-four residential units without regard to value or complexity,” per the RPAQC. Individuals must complete 200 credit hours of qualified education, obtain 1,500 hours of experience in no less than 12 months and pass an examination in order to achieve this certification.
Finally, a Certified General Real Property Appraiser is qualified “to appraise all types of real property,” per the RPAQC . This certification requires the appraiser to complete 300 credit hours of qualified education, obtain 3,000 hours of experience and pass an examination.
Additionally, the Appraisal Institute, a real estate appraisal association, offers an MAI designation. Short for “Member Appraisal Institute,” this designation is open to Certified General Real Property Appraisers who meet various requirements, including being of good moral character, holding a bachelor’s degree or higher and passing a comprehensive examination.
Real estate appraisers must also meet certain continuing education requirements. The USPAP offers two courses for continuing education: the 15-Hour National USPAP Course and the 7-Hour National USPAP Update Course. The 15-hour course is intended as an introductory course to the field, while the 7-hour course is a required update course, taken every two years.
Various organizations offer professional designations for valuations of business interests. These include the American Society of Appraisers, the American Institute of CPAs (AICPA) and the National Association of Certified Valuators and Analysts (NACVA). Each organization maintains its own standards for education and experience required to receive that organization’s certification.
The American Society of Appraisers offers two levels of credentials, the Accredited Member (AM) and the Accredited Senior Appraiser (ASA). Candidates for the ASA credential may apply to receive a designation in Business Valuation (BV). The BV designation requires a four-year college degree (or its equivalent) and either two years of full-time experience toward the AM designation or five years of full-time experience toward the ASA designation.
The AICPA offers an Accredited in Business Valuation (ABV) credential. This credential is offered to AICPA members who hold either a CPA license or a bachelor’s degree or its equivalent plus completion of AICPA’s course on professional conduct and standards. Candidates are required to achieve a passing score on the ABV examination. Individuals who have passed certain other examinations, including the ASA examination are not required to take the ABV examination prior to applying for the ABV credential.
Individuals who pass the ABV examination must then obtain the requisite experience. For CPAs seeking the ABV credential, 1,500 hours of experience in valuations in the preceding 5 years is required. Non-CPA candidates are required to reach 4,500 hours of experience within the preceding 5 years.
NACVA offers the Certified Valuation Analyst (CVA) credential. The CVA certification requires an active, valid CPA license or either a business degree or masters of business administration (MBA) plus “substantial experience in business valuation.” NACVA defines “substantial experience” as having two or more years of full-time business valuation experience, having performed 10 or more business valuations, or “being able to demonstrate substantial knowledge of business valuation theory, methodologies, and practices.” Applicants must attend a training program, submit references and pass an examination.
NACVA also recertifies the Certified Business Appraiser (CBA) and Master Certified Business Appraiser (MCBA) credentials for current certification-holders. These designations were originally offered by the Institute of Business Appraisers (IBA). The IBA was acquired by NACVA in 2008. In 2016, NACVA suspended the issuance of new CBA and MCBA credentials. Holders of the CBA and MCBA credentials are able to recertify by complying with NACVA’s other credential recertification requirements.
In addition to real property criteria, the AQB also publishes The Personal Property Appraiser Qualification Criteria. These criteria require applicants to have completed either 30 college-level credit hours or to have attained an associate’s degree or higher. Additionally, applicants must complete 120 classroom hours, including the 15-Hour Personal Property USPAP Course (including the final examination), a 45-hour course including a final examination and 60 credit hours related to the field of appraisal, with an emphasis on personal property.
Additionally, the AQB requires applicants to have 700 hours of experience appraising personal property. The individual must also have either “[a] minimum of 1,800 hours of market-related personal property appraisal experience . . . of which at least 900 additional hours are in the area(s) of specialization” or “[a] minimum of 4,500 hours of market-related personal property non-appraisal experience . . . in area(s) of specialization” or “[an] equivalent combination of market-related personal property appraisal experience and market-related non-appraisal experience in area(s) of the appraiser’s specialization based upon a minimum ratio of 1 year to 2.5 years,” per The Personal Property Appraiser Qualification Criteria.
The AQB also requires applicants to obtain 70 hours of continuing education every 5 years, including 20 hours of valuation theory coursework and either the 15-Hour Personal Property USPAP Course or the 7-Hour Personal Property USPAP Update Course every two years.
The American Society of Appraisers offers Personal Property (PP), Gems and Jewelry (GJ) and Machinery and Technical Specialties (MTS) designations to appraisers. Each of these designations requires specialized coursework and experience in valuation of various types of assets. For instance, the PP designation covers a number of types of personal property, including various types of art, antiques, clocks, dolls and toys, firearms, furniture, sports collectibles and memorabilia, stamps and textiles.
Applicants for a PP designation must meet a number of prerequisites, including passing a 4-hour specialty examination, meeting PP-specific education requirements, having a college degree or its equivalent and having 2 years full-time experience toward the AM designation or 5 years toward the ASA.
Difficulty with Strict Compliance
As discussed above, the personal property appraiser designation includes appraisers of artwork. However, changes in the law in the mid-2000s caused difficulty for many appraisers who had the requisite experience, but did not have the formal education or appraiser designations required. In 2006, Sotheby’s submitted comments in response to the IRS’ transitional guidance regarding the appraisal requirements published in Notice 2006-96. In its letter, Sotheby’s requested that the IRS reconsider the then-newly-created rule requiring qualified appraisers to either hold an appraisal designation or meet both the education and experience requirements. Sotheby’s contended that “[b]ecause Sotheby’s specialists are already employees of one of the leading appraisers of art and antiques in the world, they generally do not also seek recognition from a separate appraisal organization.” It also noted that “[v]ery little coursework—at any level—exists that is relevant to valuing rare art or collectibles. For many of the specialists’ areas of expertise, there is no coursework at all.” Therefore, Sotheby’s contended, the rules could cause many experienced appraisers to fail to be considered “qualified appraisers.” Despite Sotheby’s contentions, the IRS maintained the requirement of an appraisal designation or both education and experience in its final rules.
Cryptocurrency is an encrypted form of digital virtual currency. This is a relatively new type of asset that has rapidly gained popularity in recent years with the rise of Bitcoin. Given the fairly recent creation of cryptocurrency as a category of property, IRS regulations and industry standards have not yet produced appraisal standards that are common to other well-established categories of property.
While for other types of property, obtaining a professional designation satisfies the appraiser qualifications, there is no such designation yet available for appraisers of cryptocurrency. Likewise, it appears that there are very few, if any, college-level courses regarding valuation of cryptocurrency. Therefore, individuals who hold themselves out as appraisers of cryptocurrency and the donors who seek their services must exercise caution. If the IRS finds fault with the appraiser’s qualifications, the entire charitable income tax deduction from the gift of cryptocurrency may be denied.
Individuals who offer qualified appraisals of cryptocurrency should be up front about their qualifications. Appraisers of other intangible personal property type assets, such as life insurance, may be able to claim the requisite experience to be considered a qualified appraiser of cryptocurrency.
In May 2018, the AICPA submitted comments to the IRS regarding Notice 2014-21, in which the IRS provided guidance on virtual currency. The AICPA suggested that the IRS should treat valuation of cryptocurrency donations in the same manner as donations of publicly traded stock. “The rationale is that the prices for these publicly traded stocks are available on established exchanges, thus not requiring a qualified appraisal,” stated the AICPA. “The same is true for most, if not all types of virtual currencies. That is, various exchanges publish the value of the currency on any given day.” The AICPA suggested that the IRS implement a rule that allows the taxpayer to “document, and calculate the average of, the fair market value on at least two exchanges (at the date and time of the contribution) and the basis of the virtual currency contributed.” Despite the AICPA’s efforts, the IRS has not implemented such a rule.
Valuation of life insurance for charitable deduction purposes can be complex. The deduction for such a gift is generally the lesser of the donor’s cost basis (usually the premiums paid) or the value of the policy. Most often, the cost basis does not exceed the value of the policy. Nevertheless, as a noncash asset, a gift of life insurance in excess of $5,000 is required to have a qualified appraisal by a qualified appraiser. The valuation of the policy will be determined by the qualified appraiser. In many cases the value may be based either on the policy’s replacement value if it is paid in full or the policy’s interpolated terminal reserve value (ITRV) if the policy is not paid in full. While the major appraisal associations do not offer specific credentials in valuation of insurance policies, many offer certification in intangible assets, either as a specialization within another field or as a standalone credential. For example, the American Society of Appraisers offers an “Intangible Assets” specialty within the Business Valuation field.
Alternatively, some senior donors may receive a quote for life settlement of the policy. Several firms specialize in life settlement valuations. The life settlement value may exceed the cash value of the policy. In that case, the value of the policy will consist of the donor’s cost basis (premiums paid), an ordinary income element (the difference between the policy’s basis and cash value) and capital gain (the difference between the policy’s cash value and the life settlement value). Under Rev. Rul. 2009-13, the IRS ruled that charges for the cost of insurance would reduce the donor’s basis. However, that rule was abolished with the passage of the Tax Cuts and Jobs Act of 2017. Therefore, with a life settlement policy and a qualified appraisal, the donor is now able to deduct both the policy’s cost basis and capital gain.
When evaluating the qualifications of an individual who holds himself or herself out as a qualified appraiser of life insurance, consider whether the individual already holds an appraiser designation from a well-respected appraisal organization as well as substantial education and experience valuing life insurance. This may include advanced degrees in the study of insurance or years of experience in the field of insurance.
A Cautionary Tale
In Reg. 1.170A-13(c)(5)(iv), there are a number of circumstances listed in which individuals who might otherwise be qualified are excluded from being considered a “qualified appraiser.” These include when the appraiser is the donor, a “party to the transaction in which the donor acquired the property being appraised,” the donee, anyone employed by or related to one of the aforementioned parties or “an appraiser who is regularly used by” the donor, donee or a party to the transaction in which the donor acquired the property “who does not perform a majority of his or her appraisals made during his or her taxable year for other persons.”
In James Tarpey v. United States, No. 2:17-cv-00094 (2019), the U.S. District Court for the District of Montana held that an appraiser was not qualified under Reg. 1.170A-13(c)(5)(iv). James Tarpey formed a nonprofit, known as Donate for Cause (“DFC”), to facilitate the donation of timeshares. While Tarpey hired two appraisers, Ron Broyles and Curt Thor, to conduct appraisals, Tarpey and his sister, Suzanne Tarpey, also conducted appraisals for DFC.
The court noted that Tarpey relied on advice from his CPA, George Schramm, that Tarpey was qualified to be an appraiser of non-real property. However, the court also stated that “[t]he record fails to establish, however, that Schramm, or any other professional, ever advised Tarpey that he met all of the criteria to serve as a qualified appraiser for his scheme within the meaning of the Treasury Regulations.” In its ruling, the court held that “all of the appraisers lacked sufficient independence from DFC to be considered ‘qualified appraisers’ under the Treasury Regulations.”
While this is somewhat of an extreme case, it highlights the need for donors to educate themselves and seek the advice of knowledgeable and trustworthy advisors regarding the Service’s requirements for appraisals and appraisers. If a client proposes an individual as a potential qualified appraiser for a specific gift, the advisor’s inquiry should focus both on whether the appraiser meets the education and experience requirements and whether the appraiser is related to the parties involved in the transaction.
It is essential for donors seeking charitable deductions for gifts of noncash assets to understand their need to properly substantiate their gift. In many circumstances, substantiation for the charitable gift of noncash assets will require the services of a qualified appraiser. With the Service’s rigid approach to appraiser qualifications, a misstep could lead to a lost charitable income tax deduction. Given the stakes involved, it is important for the donor’s advisor to be able to assist the donor in determining where to turn when looking for an appraiser. Therefore, it is highly recommended that advisors help their clients find appraisers credentialed in the type of property transferred whenever possible. When there is no direct credential available for the type of property donated, the donor and advisor must be diligent in selecting an individual who is both highly educated and experienced in the field and sufficiently independent from the parties involved in the transaction.