In an Internal Legal Memorandum dated Nov. 4, 2016, but released on March 17, 2017, the Internal Revenue Service’s Chief Counsel Advice Appeals Team Case Leader responded to a question posed in a “request for assistance” by the Senior Technical Reviewer for Procedure and Administration regarding a sizable number of pieces of art donated to a charity. The question pertained to “whether the Service may calculate the values of multiple articles of property through reliance on a random sample of some of the properties determining the taxpayer’s liability for the gross valuation or substantial valuation misstatement penalty under section 6662.”
In answering the question, the Office of Chief Counsel turned to Internal Revenue Code Section 6662-5(f), which states:
“(f) Multiple valuation misstatements on a return. — (1) Determination of whether valuation misstatements are substantial or gross. — The determination of whether there is a substantial or gross valuation misstatement on a return is made on a property-by-property basis. Assume, for example, that property A has a value of 60 but a taxpayer claims a value of 110, and that property B has a value of 40, but the taxpayer claims a value of 100. Because the claimed and correct values are compared on a property-by-property basis, there is a substantial valuation misstatement with respect to property B, but not with respect to property A, even though the claimed values (210) are 200 percent or more of the correct values (100) when compared on an aggregate basis.1 Accordingly, the Office of Chief Counsel requires that, for purposes of determining the fair market value of property donated for charitable deduction purposes, the property in question is to be valued, property-by-property for each of the items donated.”
Multiple Properties–One Appraisal Report
One issue raised, but not asked of, or answered by, the Office of Chief Counsel was whether a single report listing the appraised values of each of the items donated was sufficient or should there be a “separate appraisal report for each [item] donated by the taxpayer…”? Apparently, while it was a concern of the IRS, the concern didn’t rise to the level such that the appraised values should be automatically rejected.
Notwithstanding the fact the appraisal of each of the multiple pieces of art was documented in a single report, with individual values for each piece, there should be no reason for the IRS to reject such an appraisal, provided the appraiser conformed with the Uniform Standards of Appraisal Practice. The Pension Protection Act of 2006 specifically defines a “qualified appraisal” as an appraisal “conducted by a qualified appraiser in accordance with generally accepted appraisal standards…” Conformance with the Uniform Standards of Appraisal Practice meets the requirement to follow “generally accepted appraisal standards.”
One risk of having the appraisal of multiple properties performed in a single report is whether, for statute of limitations purposes, enough information is provided to meet the Dec. 3, 1999 “adequate disclosure” requirements.2
Qualified Appraiser under Section 170
Without consulting with the Office of Chief Counsel, the IRS determined that the appraiser wasn’t a qualified appraiser under the meaning of IRC Section 170. Under Section 170(f)(11)(E)(ii) a qualified appraiser must comply with the following:
- “(I) has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements…
- “(II) regularly performs appraisals for which the individual receives compensation, and
- “(III) meets such other requirements as may be prescribed by the Secretary in regulations or other guidance.”
- “Demonstrates verifiable education and experience in valuing the type of property subject to the appraisal, and
- “Has not been prohibited from practicing before the Internal Revenue Service…”
- The “verifiable experience” requirement will be satisfied “if the appraiser makes a declaration in the appraisal that, because of the appraiser’s background, experience, education, and membership in professional associations, the appraiser is qualified to make appraisals of the type of property being valued.” (Internal Revenue Bulletin 2006-46).
In determining that the appraiser wasn’t a qualified appraiser, the IRS focused on requirement II, which requires that the appraiser “regularly performs appraisals for which the individual receives compensation.” In assessing whether the appraiser met this requirement, the IRS examined the ratio of appraisal reports performed for the taxpayer “in comparison to the number prepared for all other individuals and entities” during the time period in question. In addition, the IRS considered: (1) the time devoted to performing appraisals for the taxpayer in comparison with appraisals performed by others, and (2) the income received from the taxpayer in comparison with income received from other appraisal clients. Based on the above analysis, the IRS determined that the appraiser failed the qualified appraisal requirement.
It should be noted that the Pension Protection Act of 2006 requires a qualified appraisal from a qualified appraiser for only charitable gifts. While much discussion has taken place over the last decade to mandate that the qualified appraisal and qualified appraiser standards also pertain to all estate or non-charitable gift tax appraisals, currently, there’s no such statutory requirement. Nonetheless, it’s the common practice of experienced estate and gift tax valuation professionals to perform appraisals for estate and non-charitable gift purposes such that they do conform with the qualified appraisal and qualified appraiser requirements.
1. The Pension Protection Act of 2006, “lowered the thresholds for substantial and gross valuation misstatements to 150 percent and 200 percent, respectively, for tax returns filed after August 17, 2006” from 200 percent and 400 percent, respectively.
2. See Treasury Regulations Section 301.6501(c)-1(f)(2).