Lessons Learned, From Someone Else's Mistake

Tax Court Memorandum 2014-15, issued on January 27, 2014, is another example of a taxpayers falling far short of the requirements to substantiate a charitable income tax deduction resulting in the deduction for their contribution of a 34 unit apartment building to charity being denied.  The taxpayers, a doctor and his wife, provided false information and submitted appraisals that did not meet the substantive requirements of Code section 170 for submitting a “qualified appraisal,” hiring a qualified appraiser, and the appraisal summary requirements.  The result….well,  the judge absolutely denied their claim for a deduction, and that, readers, is the loss of real money.

When making large donations, failing to meet these requirements (which often occurs by failing to invest the time and money in hiring appropriate appraisers and advisors) can result in the loss of major dollars!  Unless a donation can be readily valued, such as donations of cash and marketable securities, it’s important to know the type of documentation you need.

Under Treasury Regulation 1.170A-13(c)(2), a taxpayer who claims a charitable deduction in excess of $5,000 must (1) obtain a qualified appraisal for the property contributed; (2) attach a fully completed appraisal summary to his tax return; and (3) maintain records containing certain information (as required by paragraph (b)(2)(ii) 13 of this section).

So, what is a qualified appraisal?  Under the regulations, a qualified appraisal must be made not more than 60 days before the gift and no later than the due date of the income tax return, it must be signed by a “qualified appraiser” (more on that later), must not involved a prohibited appraisal fee, and must include the following information:

1. A description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property that was appraised is the property that was (or will be) contributed;

2.  In the case of tangible property, the physical condition of the property;

3. The date (or expected date) of contribution to the charity;

4. The terms of any agreement or understanding entered into that relates to the use, sale, or other disposition of the property contributed;

5. The name, address, and the identifying number of the qualified appraiser;

6. The qualifications of the qualified appraiser who signs the appraisal, including the appraiser's background, experience, education, and membership, if any, in professional appraisal associations;

7.  A statement that the appraisal was prepared for income tax purposes;

8. The date (or dates) on which the property was appraised;

9. The appraised fair market value of the property on the date (or expected date) of contribution;

10. The method of valuation used to determine the fair market value; and

11. The specific basis for the valuation. (See Regulation §1.170A-13(c)(3)(ii))

A “qualified appraiser” is an individual who (1) “has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in regulations….; (2) “regularly performs appraisals for which the individual receives compensation”; and (3) “meets such other requirements as may be prescribed by the [Treasury] Secretary in regulations or other guidance.”  Additionally, the individual must demonstrate verifiable education and experience in valuing the type of property subject to the appraisal and not be prohibited from practicing before the IRS.  (See IRC § 170(f)(11)(E)(ii) & (iii)).

Under the regulations, a qualified appraiser is an individual who includes on the appraisal summary a declaration that: (1) the individual either holds himself out to the public as an appraiser or performs appraisals regularly; (2) the appraiser is qualified to make appraisals of the type of property being valued; (3) the appraiser is not excluded from qualifying as a qualified appraiser under section 1.170A-13(c)(5)(iv), Income Tax Regs.; 21 and (4) the appraiser understands that an intentionally false or fraudulent overstatement of the value of the property described in the qualified appraisal or appraisal summary may subject the appraiser to a civil penalty under section 6701 for aiding and abetting an understatement of tax liability.  (See Regulation  § 1.170A-13(c)(5)(i)).

The rules surrounding charitable contributions and the required receipts and verifications needed for different types of property are complex.  It is important to discuss these issues with your CPA (because I assure you, they are not all covered here!) and ensure you take the steps necessary to protect the deduction you wish to take in April!