A charitable donation of illiquid securities must be accompanied by a Qualified Appraisal that is performed by a Qualified Appraiser for a charitable deduction. If the appraisal is deemed not to be a Qualified Appraisal, the IRS may disallow the deduction. IRS Regs. Sec. 1.170A-17 identifies the necessary contents of a qualified appraisal for taxpayers that are making a charitable contribution and provides the definition of a qualified appraiser.
A Qualified Appraisal is an appraisal that is prepared by a Qualified Appraiser in accordance with the substance and principles of the Uniform Standards of Professional Appraisal Practice (USPAP), as developed by the Appraisal Standards Board of the Appraisal Foundation.
A Qualified Appraisal must also include the following information about the contributed property:
(A) A description in sufficient detail under the circumstances, taking into account the value of the property, for a person who is not generally familiar with the type of property to ascertain that the appraised property is the contributed property;
(B) In the case of real property or tangible personal property, the condition of the property;
(C) The valuation effective date;
(D) The fair market value of the contributed property on the valuation effective date;
(E) The terms of any agreement or understanding by or on behalf of the donor and donee that relates to the use, sale, or other disposition of the contributed property, including, for example, the terms of any agreement or understanding that— (i) Restricts temporarily or permanently a donee’s right to use or dispose of the contributed property; (ii) Reserves to, or confers upon, anyone, other than a donee or an organization participating with a donee in cooperative fundraising, any right to the income from the contributed property or to the possession of the property, including the right to vote contributed securities, to acquire the property by purchase or otherwise, or to designate the person having income, possession, or right to acquire; or (iii) Earmarks of the contributed property for a particular use;
(F) The date, or expected date, of the contribution to the donee;
(G) The following information about the appraiser:
(i) Name, address, and taxpayer identification number.
(ii) Qualifications to value the type of property being valued, including the appraiser’s education and experience.
(iii) If the appraiser is acting in his or her capacity as a partner in a partnership, an employee of any person, whether an individual, corporation, or partnership, or an independent contractor engaged by a person other than the donor, the name, address, and taxpayer identification number of the partnership or the person who employs or engages the qualified appraiser;
(H) The signature of the appraiser and the date signed by the appraiser (appraisal report date);
(I) The following declaration by the appraiser: “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)”;
(J) A statement that the appraisal was prepared for income tax purposes;
(K) The method of valuation used to determine the fair market value, such as the income approach, the market-data approach, or the replacement-cost-less-depreciation approach; and
(L) The specific basis for the valuation, such as specific comparable sales transactions or statistical sampling, including a justification for using sampling and an explanation of the sampling procedure employed.
IRS Regs. Sec. 1.170A-17 also includes the following rules governing the timeliness and effective dates of appraisals that are prepared for a charitable donation:
(A) Timely appraisal report. A qualified appraisal must be signed and dated by the qualified appraiser no earlier than 60 days before the date of the contribution and no later than—
(i) The due date, including extensions, of the return on which the deduction for the contribution is first claimed;
(ii) In the case of a donor that is a partnership or S corporation, the due date, including extensions, of the return on which the deduction for the contribution is first reported; or
(iii) In the case of a deduction first claimed on an amended return, the date on which the amended return is filed.
(B) Valuation effective date—
(i) Definition. The valuation effective date is the date to which the value opinion applies.
(ii) Timely valuation effective date. For an appraisal report dated before the date of the contribution, the valuation effective date must be no earlier than 60 days before the date of the contribution and no later than the date of the contribution. For an appraisal report dated on or after the date of the contribution, the valuation effective date must be the date of the contribution.
A Qualified appraiser is an appraiser who meets the following characteristics:
(A) The term qualified appraiser means an individual with verifiable education and experience in valuing the type of property for which the appraisal is performed
(B) Education and experience in valuing the type of property–An individual is treated as having education and experience in valuing the type of property if, as of the date the individual signs the appraisal, the individual has—
(i) Successfully completed (for example, received a passing grade on a final examination) professional or college-level coursework in valuing the type of property, and has two or more years of experience in valuing the type of property; or
(ii) Earned a recognized appraiser designation for the type of property from a generally recognized professional trade or appraiser organization that regularly offers educational programs in valuing the type of property; or
(iii) An employer as part of an employee apprenticeship or educational program substantially similar to the educational programs described in (i) and (ii) immediately above.
(C) Education and experience in valuing the type of property are verifiable if the appraiser specifies in the appraisal the appraiser’s education and experience in valuing the type of property and the appraiser makes a declaration in the appraisal that, because of the appraiser’s education and experience, the appraiser is qualified to make appraisals of the type of property being valued.
IRS Regs. Sec. 1.170A-17 also provides guidance on who is not considered to be a qualified appraiser.
The following individuals are not qualified appraisers for an appraised asset:
(A) An individual who receives a fee that is based on the appraised value of the property;
(B) The donor of the property.
(C) A party to the transaction in which the donor acquired the property (for example, the individual who sold, exchanged, or gave the property to the donor, or any individual who acted as an agent for the transferor or for the donor for the sale, exchange, or gift), unless the property is contributed within 2 months of the date of acquisition and its appraised value does not exceed its acquisition price.
(D) The donee of the property.
(E) Any individual who is either—
(i) Related, within the meaning of section 267(b), to, or an employee of, an individual described in (B), (C), or (D) immediately above;
(ii) Married to an individual described (B), (C) or (D) immediately above; or
(iii) An independent contractor who is regularly used as an appraiser by any of the individuals described (B), (C) or (D) immediately above, and who does not perform a majority of his or her appraisals for others during the taxable year.
(F) An individual who is prohibited from practicing before the Internal Revenue Service by the Secretary under 31 U.S.C. 330(c) at any time during the three-year period ending on the date the appraisal is signed by the individual.
The effective date of IRS Regs. Sec. 1.170A-17 applies to contributions made on or after January 1, 2019. Taxpayers may rely on the rules of this section for appraisals prepared for returns or submissions filed after August 17, 2006.
Chaffe’s valuation professionals are well versed in performing valuations of businesses and other securities for donations to charities and other parties. To discuss how Chaffe can provide you with a qualified appraisal for your charitable donation, contact one of Chaffe’s professionals:
VANESSA BROWN CLAIBORNE, CPA/ABV, ASA, AEP®, CEPA / email@example.com
MARC KATSANIS, CPA/ABV, CEIV, CFA, CPVA / firstname.lastname@example.org
RILEY BUSENLENER / CPA/ABV, ASA, AEP®, JD / email@example.com
NENE GLENN GIANFALA / CPA/ABV, CEIV, ASA-BV/IA / firstname.lastname@example.org