Most business appraisers have performed business appraisals for gift tax planning or for estate tax purposes. These appraisals are signed in the ordinary course of business. They will have actual or potential impact to reduce future taxes (gifts) or to determine present taxes (taxable estates). We think we are generally familiar with the “rules” of the gift and estate tax planning game, at least from an appraiser’s perspective.
Less frequently, at least in my experience, appraisers are called upon to provide appraisals for charitable gifting purposes. A different set of “rules” applies for such appraisals, and appraisers and attorneys should be familiar with them. I chanced upon a reference to a relatively new change to the regulation regarding the Substantiation and Reporting Requirements for Cash and Noncash Charitable Contribution Deductions (26 CFR Parts 1 and 602 [TD 9836] RIN 1646-BH62, and published in the Federal Register on July 30, 2018). Since I had not seen it, I will write about it on the chance that some readers of this blog may have missed it as well.
I was a bit surprised when I read the new regulations. This post shares what I learned regarding what constitutes a qualified appraisal and, importantly, who would be considered to be a qualified appraiser under these regulations.
There is a definition of a qualified appraisal in §1.170A-17(a) of the updated regulations:
For purposes of [noted sections], the term qualified appraisal means an appraisal document that is prepared by a qualified appraiser (as defined in paragraph (b)(1) of this section) in accordance with generally accepted appraisal standards (as defined in paragraph (a)(2) of this section) and otherwise complies with the requirements of this paragraph (a). (emphasis in original, emphasis added)
We don’t typically use a term like generally accepted appraisal standards, so what are those?
Generally accepted appraisal standards generally means the “substance and principles” of the Uniform Standards of Professional Appraisal Practice, as developed by the Appraisal Standards Board of The Appraisal Foundation. There was discussion leading to the adoption of of the updated regulations and it was decided not to require strict compliance with USPAP. However, the term generally accepted appraisal standards now means conformity with appraisal standards that are consistent (rather than strict compliance) with the substance and principles of USPAP.
Frankly, I don’t know how an appraiser can render a report that is “consistent with the substance and principles of USPAP” without complying with USPAP. It makes no difference to appraisers who are members of organizations that require USPAP compliance (like the American Society of Appraisers), who are required to comply with USPAP as well as the ASA Business Valuation Standards. However, some organizations do not require compliance with USPAP compliance. It would seem that if an appraisal supporting the value of a charitable contribution of closely held stock is prepared by an appraiser for whom USPAP compliance is not mandatory is rendered, the appraiser should either:
- Voluntarily comply with USPAP and so state in the report, or,
- State that the report is rendered “consistent with the substance and principles of USPAP”
What else is there to learn about what constitutes a qualified appraisal? Parsing the regulation for applicability to business appraisals, a qualified appraisal must include a number of things, including:
- An adequate description of the property (i.e., the interest) being valued.
- The valuation effective date
- The fair market value of the interest on the valuation effective date
- The terms of any agreements of understandings between the donor and the donee relating to the use, sale, or other distribution of the property (and there is more detail regarding this item in the regulation)
- The date or the expected date of the contribution to the donee
Regarding the appraiser, the new regulation requires:
- The name, address and taxpayer identification number of the appraiser (or, alternatively, if the appraiser works for a company, the same information for the company)
- The signature of the appraiser and the date signed by the appraiser (the appraisal report date)
- The following declaration:
“I understand that my appraisal will be used in connection with a return or claim for refund. I also understand that, if there is a substantial or gross valuation misstatement of the value of the property claimed on the return or claim for refund that is based on my appraisal, I may be subject to a penalty under section 6695A of the Internal REvenue Code, as well as other applicable penalties. I affirm that I have not been at any time in the three-year period ending on the date of the appraisal barred from presenting evidence or testimony before the Department of the Treasury or the Internal Revenue Service pursuant to 31 U.S.C. 330(c).”
This declaration is duplicated in part on the Form 8283 that an appraiser must sign to substantiate the value of closely-held stock that is a charitable contribution.
- A statement that the appraisal was prepared for income tax purposes. A charitable contribution provides an income tax deduction that can be used to reduce taxes in the current period. Gift and estate tax appraisals do not have the same immediacy of impact on tax collections.
- The methods used and bases for the valuation in the determination of fair market value (this would be part of normal appraisal procedures for most appraisers)
- Timely appraisal report. A charitable gift appraisal must be dated no earlier than 60 days prior to the date of the gift. Timely appraisals are required. Further, if the appraisal is rendered after the date of a charitable gift, the valuation date must be the date of the gift.
- Appraisal fees that are contingent on the appraised value of property are prohibited.
My takeaway from this review of the new charitable contribution regulation is that there are a number of boxes that business appraisers should check if they are rendering appraisals to support the value of noncash charitable contributions of closely held business interests.
The regulation defines a qualified appraiser as follows:
“For purposes of [code sections], the term qualified appraiser means an individual with verifiable education and experience in valuing the type of property for which the appraisal is performed, as described in paragraphs (b)(2) through (4) of this section.”
- Education and experience in valuing the type of property is required and can be verified in one of two ways:
1) By successfully completing a college-level or professional course re valuing the type of property at issue and passing its final examination. This coursework must be obtained from an educational organization, a generally recognized professional trade or appraiser organization, or employer educational program. There are very few college-level courses in valuation, so the most likely source of verifiable education would be the professional organizations that offer training and credentialing. Or,
2) Earning a recognized appraiser designation for the type of property. A recognized appraiser designation is one awarded by a generally recognized appraiser organization on the basis of demonstrated competency. The “generally recognized appraiser organizations” offering designations in the United States are the American Society of Appraisers (offering the ASA and AM designations), the AICPA (offering the CPA/ABV or ABV designations), the NACVA (offering the CVA and ABAR designations), and Royal Institution of Chartered Surveyors North America (MRICS designation). Interestingly, a CPA member of the AICPA who does not hold the ABV credential or another appraisal credential would not appear to meet this qualification.
- The appraiser must make a declaration that, because of his or her education and experience, he or she is qualified to make appraisals of the type of property being valued. The qualifications must be described in the qualified appraisal. It is not clear if the declaration must be in the appraisal, or if the declaration signed by appraisers signing a Form 8283 would suffice.
- The appraiser must be independent of the donor. The declaration on the Form 8283 reads as follows:
“I declare that I am not the donor, the donee, a party to the transaction in which the donor acquired the property, employed by, or related to any of the foregoing persons, or married to any person who is related to any of the foregoing persons. And, if regularly used by the donor, donee, or party to the transaction, I performed the majority of my appraisals during my tax year for other persons.”
- Individuals who have been prohibited from practicing before the Department of the Treasury or the Internal Revenue Service during the three year period ending the date of the appraisal are not qualified appraisers.
Taxpayers making noncash charitable contributions of closely held stock must file a Form 8283 with their income tax returns. Appraisers providing the fair market value of closely-held ownership interests must sign a “Declaration of Appraiser” in Part III of the form. Appraisers who perform appraisals for charitable gifting purposes should be familiar with this form, which requires that fair market value determinations listed must be qualified appraisals from qualified appraisers.
Download a copy of Form 8283 here. It would be a good idea to download the form and look it over, even if you are familiar with the form. The instructions for filling out Form 8283 can be downloaded here.
First, as a matter of practice, any appraiser signing a Form 8283 for a client/donor should verify that the fair market value per share or per unit or interest stated on the form matches the fair market value conclusion in his or her report and that the extension of per share or per unit prices to the gifted interest is correct.
We reviewed the declaration from Form 8283 for an appraiser to assert his independence above. There is a second declaration that must be signed by appraisers. It reads as follows:
“Also, I declare that I perform appraisals on a regular basis, and that because of my qualifications as described in the appraisal, I am qualified to make appraisals of the type of property being valued. I certify that the appraisal fees were not based on a percentage of the appraised property value. Furthermore, I understand that a false or fraudulent overstatement of the property value as described in the qualified appraisal or this Form 8283 may subject me to the penalty under section 6701(a) (aiding and abetting the understatement of tax liability). I understand that my appraisal will be used in connection with a return or claim for refund. I also understand that, if there is a substantial or gross valuation misstatement of the value of the property claimed on the return or claim for refund that is based on my appraisal, I may be subject to a penalty under section 6695A of the Internal Revenue Code, as well as other applicable penalties. I affirm that I have not been at any time in the three-year period ending on the date of the appraisal barred from presenting evidence or testimony before the Department of the Treasury or the Internal Revenue Service pursuant to 31 U.S.C. 330(c).”
That declaration will cause most of us to stop and think!
If you even occasionally sign a Form 8283 for a donor/client who has made a gift of closely held business interests, it is probably a good idea to know what you are signing. This post provides an overview of the “rules” of the charitable gifting game from an appraiser’s perspective. If you’ve read this far, I’m guessing that you, like me, are a bit surprised at how the valuation rules are a bit different for charitable giving purposes than for the more usual gift and estate tax appraisal world.
Until next time, be well!