The qualified appraisal (QA) rules were first imposed on U.S. taxpayers in 1985, aimed at eliminating certain valuation abuses and tax shelter schemes involving charitable gifts. Ultimately, they’ve proved inconvenient for even the most honest and charitably motivated donors.
Black Letter Law
The black letter law on the QA rules is found in Internal Revenue Code Section 170(f)(13) and the corresponding regulations. The important glosses on the black letter law regarding the standard of compliance are found in various Tax Court decisions.
Gifts Subject to Rules
The charitable gifts subject to the QA rules are those of assets, other than cash or marketable securities, for which the donor claims a value of more than $5,000 ($10,000 for non-publicly traded stock).1 Examples of such gifts are the relinquishment of the right to receive gift annuity payments, gifts of Securities and Exchange Commission-restricted stock and gifts of oil and gas rights.
The QA rules are counter-intuitive because the value of an asset subject to the rules may be perfectly clear, yet a QA may still be required. Life insurance policies are a prime example of such an asset. A life insurance policy is neither cash nor a publicly traded security, so it may be subject to the QA rules, even though the issuer can determine its value to the penny. It’s worth noting that a federal appeals court has held that, for charitable contribution purposes, the value of a life insurance policy is its cash surrender value.2
In determining whether the $5,000 threshold has been crossed, the values of charitable gifts of similar items during the year to any organization are aggregated. Stamps and philatelic supplies, for example, are considered similar for this purpose.3
Individuals who wish to avoid complying with the QA rules can simply claim no more than $5,000 of value for the item(s) in question. Doing this can make a lot of sense when the arguable value isn’t much more than $5,000 (or $10,000 for non-publicly traded stock).
Not only are individual donors subject to the QA rules, but partnerships and closely held corporations (including S corporations) are as well. When a pass-through entity makes a gift subject to the QA rules, only the entity itself need obtain a QA. The owners of the entity to whom the charitable deduction is passed through and apportioned, however, need to attach to their own tax returns a copy of the entity’s appraisal summary (Form 8283).4
The QA rules apply only for federal income tax purposes. They don’t apply to charitable bequests. It should be noted that some gifts, for federal income tax purposes, aren’t subject to the QA rules because of other specific rules limiting their deductibility. These exceptions include gifts of: (1) copyrights and patents, (2) cars, boats or aircraft to be sold by the donee, and (3) inventory (see the instructions to Form 8283).
Occasionally, individuals give collections of similar items to a charity. In this situation, the donor can obtain one QA for the collection (here the QA needs to provide detailed information on each item valued at more than $100) or can obtain separate QAs for individual items in the collection.5
Consequences of Noncompliance
A straightforward reading of IRC Section 170(f)(13) leads one to believe that if an individual makes a charitable gift subject to the QA rules, but fails to obtain a QA, he obtains no federal income tax charitable deduction for the gift. Yet, in one case, the IRS and the Tax Court allowed a charitable deduction for the donated item’s basis when the taxpayer failed to obtain a QA.6 In another case, involving both failure to obtain a QA and an overvaluation penalty, the IRS and the Tax Court apparently allowed a federal income tax charitable deduction for the correctly determined fair market value (FMV) of a donated yacht, even though an overvaluation penalty applied to the excess value claimed.7 In any event, the consequences of non-compliance with the QA rules may be dire for the donor.
In my experience, the potential problem here is heightened by the fact that many donors, professionals and charities are clueless about the QA rules.
In correspondence concerning the QA rules, I always put the term “qualified appraisal” in quotes to emphasize that it’s a special kind of appraisal. What makes it special is its definition, laid out in Treasury Regulations Section 1.170A-13(c)(3).
The definition has four parts: (1) the time frame for obtaining a QA; (2) the requirement that it be prepared by a “qualified appraiser”; (3) the information required to be included in the appraisal; and (4) the requirement that it not involve a prohibited fee paid to the appraiser.
Time frame. To be a QA, an appraisal must be obtained no sooner than 60 days before the date of the gift and no later than the day before the due date or the filing date (whichever is earlier) of the federal income tax return on which the gift is first reported.8 “Due date” includes extensions of time to file and also the filing date of an amended return on which a charitable gift subject to the QA rules is first reported.9 Donors often erroneously think real estate appraisals that have gone stale suffice for a QA.
Definition of a “qualified appraiser.” A QA, by definition, is prepared by a qualified appraiser. A qualified appraiser is an individual who: (1) has qualifications to perform the appraisal; (2) either holds himself out to the public as an appraiser or regularly performs appraisals; (3) understands the consequences of performing a false or fraudulent appraisal; and (4) isn’t disqualified from becoming a qualified appraiser.10 Among those who are disqualified are the donor, the donee, an employee of either and a party to the transaction in which the donor acquired the donated item (for example, the insurance agent who sold the insurance policy that’s now being donated).11 Also disqualified is an appraiser whom the donor knows or reasonably should know will overstate the FMV of the donated item (see the instructions to Form 8283).
The donor may have more than one appraiser appraise a donated item and may pick and choose among the appraisals to select the one on which the donor will rely.12
Information required to be included in a QA. Only once have I reviewed an appraisal as originally written and found it to meet the definition of a QA. The problem almost always is failure to include one or more of the required items of information in the appraisal report. The required information includes matters that an experienced real estate appraiser, for example, would know to include in any appraisal, such as the date the appraisal was performed, a detailed listing of the appraiser’s qualifications, the valuation method and the specific basis for valuation (such as specific comparable sales).13
But, the required information also includes matters experienced appraisers may not anticipate, such as a statement:
• as to the date or expected date of gift;
• of FMV as of the date or expected date of gift; and
• that the appraisal was prepared for federal income tax purposes.14
It’s unusual for me to find an appraisal that contains any of these three statements. In Henry R. Lord v. Commissioner,15 the Tax Court held an appraisal isn’t a QA if it omits “significant information.” It held further that not including a statement as to date of gift (or expected date of gift) and a statement as to FMV on that date are failures to include significant information. The court threw out a charitable deduction claimed for a gift of a conservation easement.
The appraisal fee. With one, almost negligible, exception, the two-part rule regarding appraisal fees is: (1) A description of the fee arrangement must be included in the appraisal; and (2) the fee can’t in any way be a percentage of appraised value.16 The exception, which I’ve never encountered in my practice, pertains to a fee paid to a non-profit association that regulates appraisers, which may be a percentage of appraised value.17
Forms 8282 and 8283
Form 8282 is charity-generated and pertains to an item as to which the charity has signed a Form 8283 (the appraisal summary form pertaining to a QA). Form 8283 is generated by the donor or his appraiser and is submitted to the charitable donee for signature. It’s attached to the donor’s federal income tax return for the year of the gift. The QA itself isn’t required to be attached to the return unless:
• the gift is of a conservation easement in a historic district (a façade easement);
• the gift is of an item of used clothing or household items; not in good used condition; for which a deduction of more than $500 is claimed (an exception to the usual $5,000 threshold);
• the appraisal pertains to art valued at $20,000 or more; or
• the appraisal pertains to one or more items valued at more than $500,000 (see the instructions to Form 8283).
Form 8283 confuses both donors and charities. It consists of two completely different parts—Section A (the first page) and Section B (the second page). Section A has nothing to with QAs. It’s only used to provide information on non-cash gifts (including gifts of marketable securities) having a claimed valued of more than $500. Donors and their advisors may think the charitable donee has to sign Form 8283 for gifts listed on Section A. This is false. An authorized representative of the donee organization needs to sign the appraisal summary part of Form 8283 only as to gifts listed on Section B.18
A charity that signs a Form 8283 (Section B) is obligated to file Form 8282 (the “tattletale” form) if it sells the item to which Form 8283 pertains within three years of the date of gift.19 Knowing this requirement, some donors want a “firm handshake” understanding or even an explicit written agreement that the donee organization will hold the item for at least three years before selling. One problem with such an understanding or agreement is that it has to be described in the appraisal for the appraisal to be a QA.20 Another problem is that it will have a deleterious effect on the claimed FMV. Charities need to face these problems squarely in their gift acceptance policies for gift officers not to be backed into uncomfortable corners.
Standard of Compliance
In tax law, there’s strict compliance and there’s substantial compliance. “Strict” is synonymous with “literal.” Income tax regulations are said to be either directory or mandatory. Mandatory regulations require strict compliance; directory regulations require only substantial compliance.21
In Bond v. Comm’r,22 Tax Court Judge Perry Shields wrote that the QA regulations under Treas. Regs. Section 1.170A-13(c) are directory, not mandatory. His reasoning was that the reporting requirements of the regulation “do not relate to the substance or essence of whether a charitable contribution was actually made”—they are merely helpful to the IRS in processing and auditing returns; they are, thus, procedural in nature.
In Bond, the donor couple didn’t obtain a QA, but did file an appraisal summary with their tax return that included most of the information required to be included in a QA. Furthermore, their donated items were valued by a person who met the definition of a qualified appraiser. In a summary judgment, the Tax Court found substantial compliance with QA requirements.
The Bond case, however, is somewhat of an outlier. Hewitt v. Comm’r23 involved a donation of non-publicly traded Jackson Hewitt stock that was, in fact, often traded among about 400 shareholders. The donor couple failed to obtain a QA and didn’t attach an appraisal summary form to their tax return, as did the Bonds. The Hewitt couple relied on the Bond doctrine of substantial compliance, in particular arguing that a QA wasn’t necessary, because the FMV of the donated stock could be ascertained readily from sales of other shares in the Jackson Hewitt company around the time of the gift. The Tax Court found the Hewitts fell far short of substantial compliance, stating, “Petitioners herein furnished practically none of the information required by either the statute or the regulations.” A major lesson of Hewitt is that being able to establish FMV readily is no substitute for a QA.
Bond also needs to be read alongside Henry R. Lord, which holds that an appraisal isn’t a QA if it omits “significant information.”
All in all, although the doctrine of substantial compliance allows for some wiggle room, careful advisors will try to make sure their clients comply as closely with the QA rules as possible.
1. Internal Revenue Code Section 170(f)(11)(C).
2. Tuttle v. United States, 436 F.2d 69 (2d Cir. 1970).
3. Private Letter Ruling 8604025 (Oct. 24, 1985).
4. Treasury Regulations Section 1.170A-13(c)(4)(iv)(G).
5. Treas. Regs. Section 1.170A-13(c)(4)(iv)(A).
6. Hewitt v. Commissioner, 109 T.C. 258 (1997).
7. Sargeant v. Comm’r, T.C. Memo. 1998-265 (July 25, 1998).
8. Treas. Regs. Section 1.170A-13(c)(3)(i)(A).
9. Treas. Regs. Section 1.170A-13(c)(4)(iv)(B).
10. Treas. Regs. Section 1.170A-13(c)(5)(i). At a minimum, the appraiser must have earned an appraisal designation from a recognized appraisal organization or have met certain education and experience requirements prescribed by the Internal Revenue Service and must regularly perform appraisals for which he receives compensation. IRC Section 170(f)(11)(E)(ii).
11. The qualified appraiser exclusions are listed in Treas. Regs. Section 1.170A-13(c)(5)(iv). Excluded in addition is any appraiser who performs a majority of his appraisals for the donor or donee and anyone (or the spouse of anyone) in a relationship described in IRC Section 267(b) with the donor or certain other excluded parties.
12. Treas. Regs. Section 1.170A-13(c)(5)(iii).
13. The complete list of information to be included in a qualified appraisal (QA) is set forth in Treas. Regs. Section 1.170A-13(c)(3)(ii). It’s worth noting that any agreement earmarking donated property for a particular use is to be described in a QA.
14. These three requirements, found in Treas. Regs. Section 1.170A-13(c)(3)(ii), never apply to a garden variety appraisal and represent the real trap for the unwary appraiser or other professional advisor who’s going to take responsibility for the donor’s tax position.
15. Henry R. Lord v. Comm’r, T.C. Memo. 2010-196 (Sept. 8, 2010).
16. Treas. Regs. Section 1.170A-13(c)(6)(i).
17. Treas. Regs. Section 1.170A-13(c)(6)(ii).
18. See Form 8283, Section B. The charity officer who signs Form 8283 needs to be the person who signs the charity’s tax returns or his written delegate. Treas. Regs. Section 1.170A-13(c)(4)(iii).
19. See Form 8282.
20. Treas. Regs. Section 1.170A-13(c)(3)(ii)(D).
21. Sperapini v. Comm’r, 42 T.C. 308 331 (1964) (requirements were mandatory); Cary v. Comm’r, 41 T.C. 214 (1963) (requirements were directory).
22. Bond v. Comm’r, 100 T.C. 32 (1993).
23. Supra note 6.