"Qualified appraisal" and "qualified appraiser" defined for charitable contribution deduction and penalty

By Jeff Faust, AVA

On October 19, 2006, the IRS issued Notice 2006-96 defining “qualified appraisal” and “qualified appraiser” for purposes of substantiating property for which a charitable contribution deduction in excess of $5,000 is claimed and for penalties for appraisals that result in substantial or gross valuation misstatements under Code Sec. 6695A.

Background – Taxpayers must obtain a qualified appraisal for donated property for which a deduction of more than $5,000 is claimed (Code Sec. 170(f)(11)(C)). No charitable deduction is allowed for contributions of property by an individual, partnership, or corporation for which a deduction of more than $500,000 is claimed unless the individual, partnership, or corporation attaches to its return for the tax year a qualified appraisal of the property (Code Sec. 170(f)(11)(D)).

Under the 2006 Pension Act, for returns filed after Aug. 17, 2006, a qualified appraisal is an appraisal that is: (1) treated as a qualified appraisal under regs or other guidance issued by IRS, and (2) conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regs or other guidance issued by IRS. (Code Sec. 170(f)(11)(E)(i))

Qualified appraisal defined – Notice 2006-96 provides that an appraisal will be treated as a qualified appraisal if it complies with all of the requirements of Reg. § 1.170A-13(c) —the preexisting regs—(except to the extent the regs are inconsistent with Code Sec. 170(f) (11)), and is conducted by a qualified appraiser in accordance with generally accepted appraisal standards. For example, the appraisal is consistent 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.

Qualified appraiser defined – A qualified appraiser is an individual who has earned an appraisal designation from a recognized professional organization or has otherwise met minimum education and experience requirements under IRS regs; regularly performs appraisals for compensation; and meets any other such requirements prescribed by IRS (Code Sec. 170(f)(11)(E)(ii)). An individual won't be considered a qualified appraiser for any specific appraisal unless he demonstrates verifiable education and experience in valuing the type of property subject to the appraisal, and hasn't been prohibited from practicing before IRS at any time during the three-year period ending on date of the appraisal (Code Sec. 170(f)(11)(E) (iii)).

Penalty on appraiser – The Pension Act also added a new penalty provision. If the claimed value of property based on an appraisal results in a substantial or gross valuation misstatement under Code Sec. 6662 , a penalty is imposed under new Code Sec. 6695A on any person who prepared the appraisal and who knew, or reasonably should have known, the appraisal would be used in connection with a return or claim for refund.

Transitional guidance – Until regs are effective, an appraisal that meets the requirements of Notice 2006-96 will be treated as a qualified appraisal. Thus, Notice 2006-96 applies to contributions of property (other than readily valued property) by individuals, partnerships, or corporations for which a deduction of more than $5,000 is claimed on returns filed after Aug. 17, 2006, and before the effective date of regs to be issued. Whether an appraiser is qualified under Notice 2006-96 is based on the appraiser's qualifications as of the date the appraisal is made.

The actual notice can be seen at http://www.irs.gov/pub/irs-drop/n-06-96.pdf

For questions or comments, please feel free to contact Jeff Faust at (510) 797-8661 x249 or jfaust@groco.com