Legal Briefs

Appraisal Update

New requirements for charitable deductions put appraisers at risk.

By Mark L. Levine, CCIM, CIPS, MAI |

Are appraisers more exposed undertaking charitable contribution appraisals when the taxpayer-donor seeks a federal tax deduction?

This concern arises with the passage of the Pension Protection Act of 2006, signed by President George Bush last August. The PPA increases the requirements imposed for appraisals and appraisers to meet Internal Revenue Code Section 170, which covers charitable contribution requirements. Appraisers should recognize that if the qualified appraiser requirements are not met or if the appraisal undertaken does not comply with the new regulations, they could have additional legal exposure. This risk goes beyond what normally might be the case for appraisers under the Uniform Standards of Professional Appraisal Practice and other standards.

Appraisers must be aware of PPA changes, given that the appraisal and appraiser need to conform to PPA requirements in order for the taxpayer-donor to gain a deduction for federal income tax purposes.

The New Requirements

Under the PPA, charitable contributions greater than $5,000 now require an appraisal by a qualified appraiser attached to the taxpayer-donor's tax return. If the taxpayer-donor does not support the charitable contribution deduction with an appraisal - and additional support material if an audit occurs - the taxpayer may lose the charitable deduction.

If the taxpayer fails to gain the charitable deduction, the appraiser may be at risk for a civil action, if the reason for the deduction denial is traced to negligence by the appraiser in failing to comply with PPA-imposed regulations.

Further, the PPA creates additional sanctions against charitable contributors when an overstatement of valuation occurs supported by an incorrect appraisal. Code Section 6695A, "Substantial and Gross Valuation Misstatements Attributable to Incorrect Appraisals," states that a penalty applies if a person prepares a defective property appraisal knowing that the appraisal would be used in connection with a tax matter. If such claim or tax return is based on an appraisal that results in a misstatement of the gross valuation, then a substantial penalty can be involved. The penalty is the greater of two amounts: if greater than $1,000, it is 10 percent of the amount of tax underpayment or 125 percent of gross income received by the taxpayer-donor from the appraisal. No penalty is imposed if the appraiser establishes to the U.S. Treasury secretary's satisfaction that the appraised value is the proper value.

Further help in determining the nature and meaning of the new provisions is found by reviewing the comments in the PPA's "Technical Explanation," prepared by the Joint Committee on Taxation at www.house.gov/jct/x-38-06.pdf.

Who Is Qualified?

The PPA added new definitions for a "qualified appraisal" and a "qualified appraiser." An appraisal meets "qualified" standards if the appraiser acts in accordance with generally accepted appraisal standards and any regulations or guidance as determined under the provisions.

A qualified appraiser under the new provisions means an individual who has earned an appraisal designation from a recognized professional appraisal organization and regularly performs appraisals for compensation. The new law states that an individual will not be treated as a qualified appraiser unless he or she demonstrates verifiable education and experience in valuing the property type that is the subject of the appraisal.

An individual would not meet qualified appraiser standards if he or she has been prohibited from practicing before the Internal Revenue Service. This new provision gives more teeth to the new regulations, making it more difficult for appraisers to qualify. An appraiser also may have civil exposure from a taxpayer-donor who might claim that the appraiser was not a qualified appraiser.

All appraisers should review the PPA provisions to comply with the requirements for appraisals made for charitable contributions. A summary of the changes prepared by the Appraisal Institute is available at www.appraisalinstitute.org/govtaffairs/downloads/HR4AppraisalSummary.pdf.