November 2006

The Internal Revenue Service (IRS) released Notice 2006-96, which provides guidance regarding the meaning of “qualified appraiser” and “qualified appraisal” contained in Internal Revenue Code (IRC) Section 170(f)(11).  This portion of the IRC requires that a taxpayer substantiate the value of non-cash charitable contributions by obtaining an appraisal of the donated property.

Appraisals are commonly used to substantiate a wide range of other tax positions, but the newly-enacted requirement is the first time that the IRC starts to more precisely specify how, and by whom, such appraisals are to be performed.

Key items include:

  1. An appraisal performed in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP) is deemed “qualified”.  This is the only standard given this recognition
  2. The appraiser needs professional designations and/or education and experience relating to the specific type of property being appraised.
  3. Compliance with new IRC Section 6695A regarding penalties for appraisers that result in substantial or gross valuation misstatements.  The appraiser will need to file a statement that he understands a substantial or gross valuation misstatement may subject the appraiser to a civil penalty if the appraiser knows or reasonably should have known of the misstatement.

Even though not required to do so previously, the IRS’s valuation professionals generally view appraisals that follow USPAP over those that do not.  Ironically, the IRS does not require its own appraisers in tax disputes to follow these same USPAP standards.

The new guidance is required because of Section 1219 of the recently enacted Pension Protection Act of 2006.  (See Charitable Contributions of Property Become More Restricted.”)  While the Pension Protection Act generally focuses on improving defined benefit plans, the law contains a wide variety of other provisions, including new requirements to stem the abuse of non-cash charitable deductions.

Fulcrum Inquiry performs appraisals for a wide variety of tax and non-tax purposes.  All of our appraisals meet these requirements (even before they were required to do so).