C.3. Appraisal Requirements to Substantiate Deductions for Noncash Gifts Spring 1992 Development Policy and Administration Manual Chapter IV. Gift Administration Procedures Section C. General Information About Noncash Gifts ************************************************************* APPRAISAL REQUIREMENTS TO SUBSTANTIATE DEDUCTIONS FOR NONCASH GIFTS To substantiate a charitable deduction in excess of $5,000 for a noncash gift or collection of gifts ($10,000 in the case of nonpublicly traded securities), it is necessary that donors obtain a qualified appraisal. A summary of that appraisal is to be reported using Form 8283 (see Section IV: C.2). The following summarizes the requirements that must be met for an appraisal to qualify. Who Can Appraise? A qualified appraiser must make a declaration on Form 8283 that: (1) The individual holds himself or herself out to the public as an appraiser or performs appraisals on a regular basis. (2) Because of the appraiser's qualifications as described in the appraisal, the appraiser is qualified to make appraisals of the type of property being valued. (3) The appraiser is not someone who would be excluded by the regulations from being a qualified appraiser, i.e., the donor, a party to the transaction in which the donor acquired the property (e.g., an art dealer from whom a painting was purchased), the recipient institution, or any person related to or regularly employed by any of the foregoing; or anyone married to any person in the above categories. (Note: an appraiser who is regularly retained by the donor, a party to the transaction, or the University could be considered as an employee of that party unless the appraiser performs a majority of appraisals for other parties during the taxable year.) Under these regulations, the value of a life insurance policy supplied by the insurance carrier is not considered an independent appraisal, since the carrier is a party to the transaction; however, another insurance agent can appraise the value of the policy. (4) The appraiser understands that a false or fraudulent overstatement of the value of the property may subject the appraiser to a civil penalty undersection 6701 for aiding and abetting an understatement of tax liability, and consequently the appraiser may have appraisals disregarded pursuant to 31 U.S.C. 330(C). Even if the individual makes this declaration, he or she is not a qualified appraiser if the donor had knowledge that would cause a reasonable person to expect the appraiser to falsely overstate the value of the property. What Must the Appraisal Include? A qualified appraisal must include the following: (1) A description of the property in sufficient detail for a person unfamiliar with the type of property to determine that the property appraised was the property donated (in the case of a group of similar items whose aggregate value exceeds $5,000, this will normally mean an itemized listing of the value of the individual items; but note that the appraiser may give a group description of any items whose aggregate value is appraised at $100 or less); (2) For tangible property, the physical condition of the property; (3) The date or expected date of donation; (4) The terms of any prior or anticipated agreement of understanding by or on behalf of the donor regarding the use, sale, or other disposition of the property; (5) The name, address, and taxpayer identification number of the appraiser and, if the appraiser is a partner in a partnership, an employee, or an independent contractor engaged by someone other than the donor, the name, address, and taxpayer identification number of the partnership or employer; (6) The qualifications of the appraiser who signs the appraisal, including 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 valued; (9) The fair market value of the property on the date (or expected date) of donation; (10) 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; (11) The specific basis for the valuation, if any, such as any specific comparable sales transactions; and (12) A declaration from the appraiser that the fee arrangement between the donor and appraiser is not one that would disqualify the appraisal (see below). The appraisal must be made not earlier than sixty days before the date of contribution of the property and must be received by the donor before the due date (including any extension) of the tax return on which the donation is first claimed as a deduction. Paying for the Appraisal If the appraiser's fee is based on a percentage of the appraised value, the appraisal will generally be disqualified. However, appraisal fees based entirely or in part on a sliding scale do qualify when the portion of the fee based on a sliding scale is paid to a generally recognized association that regulates apprai- sers (and when no parties to the transaction have a beneficial interest in the association). If the donor is not willing or able to incur the cost of an appraisal, it would be appropriate for the University to reimburse the donor for the cost. However, direct involvement of the University in securing appraisals could result in their accuracy and objectivity being challenged by the Internal Revenue Service. Thus, it is in the donor's best interest that the University neither provide directly nor become involved in securing an appraisal. In addition, correspondence with the donor shall not indicate the value of a nonmonetary gift in any way that could be construed as endorsement of its value for tax purposes. The cost of appraising a nonmonetary gift is not deductible as a charitable contribution; however, it is included in the so-called "Second Tier" class of miscellaneous itemized deductions, which are deductible to the extent that in the aggregate they exceed 2% of adjusted gross income. Donors are advised to refer to IRS Publication 529 or consult their tax advisors. Penalties If the claimed value is 200% or more of what the IRS allows and, as a result, the donor underpaid tax by more than $5,000, then the penalty for the donor is 20% of the resulting tax under- payment. If the claimed value is 400% or more of what the IRS allows and, as a result, the donor underpaid tax by more than $5,000, then the penalty for the donor is 40% of the resulting tax underpayment. The penalty applies regardless of how long the donor has owned the property. The IRS's ability to waive penalties is more limited than under previous IRS regulations.