Most of us are aware that IRS will disallow a claimed deduction for a noncash contribution in excess of $5k, other than marketable securities, unless it is supported by a "qualified appraisal."
But what exactly does that mean? When is an appraisal not "qualified"? Who is or is not a “qualified” appraiser? If the gift is of an interest in a passthrough entity, are we appraising that interest itself… or a fractional share of the assets held by the entity? How far in advance or how long after the date of the gift can the appraisal be made?
If the recipient org sells the contributed property almost immediately in an arm's length transaction, can’t we just use the sale price and skip the appraisal? What if the appraised value is significantly higher or lower than the sale price?
What does "substantial compliance" with the reporting requirements of Form 8283 look like? Which fields are mandatory? What happens if we do not have all the requested information at hand? Does the filing method matter? What if a donor contributes multiple donations of $1,000 over 10 separate days – does that require an appraisal?
And what is the responsibility of the recipient donee in all of this? What are we signing off on when we sign the Form 8283? Under what circumstances are we required to follow up with a Form 8282? What happens if we don't?
With the enactment of section 170(f)(11) as part of the Tax Reform Act of 1984, the Congress told IRS to get serious about policing the overvaluation of noncash gifts. No longer would taxpayers be allowed to "play the audit lottery." Instead, they would be required to flag these items on any return claiming these deductions, and to clearly indicate that yes, an independent appraiser who was also willing to sign the return had rendered a written opinion as to fair market value.
The 1984 legislation also gave the Treasury very broad authority to implement these requirements through detailed regulations. In 2006, further legislation nudged the Treasury to set more specific requirements for certifying the qualifications of an appraiser. Proposed appraisal regulations issued in 2009 to implement that legislation were not finalized until 2018, after much public comment and informal interim guidance through a series of published Notices. And as several observers have commented, that regulatory project may have opened as many questions as it has resolved.
The penalties for overvaluing a noncash gift can be very substantial, and even a qualified appraisal will not protect the taxpayer from these penalties unless she herself has made a "good faith investigation" of the value of the contributed property.
In recent years, with these tools in hand, IRS has become more aggressive in challenging the claimed valuation of noncash gifts. When these cases reach the courts, rather than rely entirely on the testimony of valuation "experts," the agency will typically raise issues as to technical compliance with reporting and substantiation requirements.
Taxpayers have lost quite a number of these cases because of some footfault or other, often involving the appraisal report. In our May webinar, we will look at several of these by way of highlighting the key takeaways from our discussion of qualified appraisals.
Want to Learn More?
Join Bryan Clontz, Ph.D., CFP, CAP, Ryan Raffin, JD and Russ Willis, JD, LLM for a free, information webinar that will take a very deep dive into qualified appraisals as well as key court cases highlighting where things can go wrong.
Past Webinar Recordings (https://charitablesolutionsllc.com/webinars/)
April – It’s a Brave New World: Charitable Gifts of SPACs, PIPEs and NFTs
March – CGA Reinsurance: What it is, What it isn’t, When it works and When it doesn’t
February – Avoiding the Grey Line: Closer Recent Scrutiny of Charitable Pre-Arranged Sales
January – Trends and Five Creative Case Studies from 2020
Nov/Dec – Cryptocurrency Donations Explode: Are you Missing Out?
October – Don’t Be Spooked By Mortgaged Real Estate: Three Creative Charitable Solutions
September – Almost Last Minute Charitable Opportunities Under CARES Act and TCJA
August – Creative Charitable Options for Sub-Chapter S Corporations in 2020 (and Beyond)
July – Testamentary Gift Annuities as a Solution to the Stretch IRA Conundrum