9062 / What appraisal requirements may be required in connection with substantiating a charitable deduction that exceeds certain valuation thresholds?

In addition to satisfying the requirements described in Q 9061, a qualified appraisal is required in connection with the charitable donation of certain highly valued property. The qualified appraisal requirement for contributions of property for which a deduction of more than $5,000 is claimed is met if the individual, partnership, or corporation:

(1)   Obtains a qualified appraisal of the property; and

(2)   Attaches to the tax return information regarding the property and the appraisal (as the Secretary may require).¹

Donors who claim a deduction for a charitable gift of property (except publicly traded securities) valued in excess of $5,000 ($10,000 for nonpublicly traded stock) are required to obtain a qualified appraisal report, attach an appraisal summary (containing the information specified in regulations) to their return for the year in which the deduction is claimed, and maintain records of certain information related to the contribution.²

If a taxpayer fails to obtain the required appraisal for a gift of nonpublicly traded stock, the IRS may deny the deduction even if it does not dispute the value of the gift.³ The Tax Court distinguished its holding in Hewitt from a 1993 decision in which it had permitted a deduction to a taxpayer who substantially, though not fully, complied with the appraisal requirement. In the earlier ruling, the taxpayer had obtained an appraisal from a qualified appraiser, completed and attached Form 8283, but had failed to include all the information required of an appraisal summary.⁴ The Fourth Circuit agreed with the Tax Court’s analysis, stating that “Bond does not suggest that a taxpayer who completely fails to observe the appraisal regulations has substantially complied with them.” The Fourth Circuit further found that a deduction may still be permitted in situations where the taxpayers make a good faith effort to comply with the appraisal requirements, but that the deduction will be denied for taxpayers who ignore the requirement entirely. (For more information about the appraisal and summary requirements, see the instructions for Schedule A, Form 1040, and IRS Publication 526, Charitable Contributions.)

A qualified appraiser must not be the taxpayer, a party to the transaction in which the taxpayer acquired the property, the donee, an employee of any of the above, any other person who might appear not to be totally independent, or one who is regularly used by the taxpayer, a party to the transaction or the charity, and does not perform a majority of appraisals for other persons.⁵ See, for example, Davis v. Commissioner,^[6] where appraisals were upheld where the appraiser was determined to be financially independent of the donor, and no conspiracy or collusive relationship was established.

In Wortmann v. Commissioner,⁷ the Tax Court substantially reduced the taxpayers’ charitable deduction (from $475,000 to $76,200) after it concluded that the property appraisal was dubious and not well supported by valuation methodology.

An appraisal will not be upheld if the appraiser bases his fee on a percentage of the appraisal value, unless the fee is based on a sliding scale that is paid to a generally recognized association regulating appraisers.⁸

If the donor gives similar items of property (such as books, stamps, paintings, etc.) to the same donee during the taxable year, only one appraisal and summary is required. If similar items of property are given during the same taxable year to several donees, and the aggregate value of the donations exceeds $5,000, a separate appraisal and summary must be made for each donation.⁹ The appraisal summary must be signed and dated by the donee as an acknowledgement of the donation.¹⁰

Taxpayers making contributions of art appraised at $50,000 or more may wish to request a “Statement of Value” from the IRS (which is the equivalent of a letter ruling as to the value of a particular transfer that is made at death, by inter vivos gift, or as a charitable contribution).¹¹ The request must include specified information, including a description of the artwork, the cost, manner and date of acquisition, and a copy of an appraisal (which meets requirements set forth in Section 8 of the revenue procedure). The IRS charges a fee of $2,500 for obtaining a Statement of Value that can cover up to three items of art.¹²

The regulations state that taxpayers are not required to obtain a qualified appraisal of securities whose claimed value exceeds $5,000 if the donated property meets the definition of “publicly traded securities.” Publicly traded securities are (1) listed on a stock exchange in which quotations are published on a daily basis or (2) regularly traded in a national or regional over-the-counter market for which published quotations are available.¹³

Securities that do not meet the above requirements may still be considered publicly traded securities if they meet the following five requirements:

(1)   The issue is regularly traded during the computational period in a market that is reflected by the existence of an interdealer quotation system for the issue;

(2)   The issuer or its agent computes the issue’s average trading price for the computational period;

(3)   The average price and total volume of the issue during the computational period are published in a newspaper of general circulation throughout the U.S. not later than the last day of the month following the end of the calendar quarter in which the computational period ends;

(4)   The issuer or its agent keeps books and records that list for each transaction during the computational period involving each issue covered by this procedure the date of the settlement of the transaction, the name and address of the broker or dealer making the market in which the transaction occurred, and the trading price and volume; and

(5)   The issuer or agent permits the IRS to review the books and records.¹⁴

The “computational period” is weekly during October through December and monthly during January through September. Taxpayers who are exempted from obtaining a qualified appraisal because the securities meet these five requirements must attach a partially completed appraisal summary (section B of Form 8283) to the appropriate returns. The summary must contain the information required by parts I and II of the Form.¹⁵

For property contributions for which a deduction of more than $500,000 is claimed, the individual, partnership, or corporation must attach the qualified appraisal of the property to the tax return for the taxable year.¹⁶