EVERYONE Needs Charitable Contributions—ensuring clients hire the best appraiser

EVERYONE Needs Charitable Contributions—ensuring clients hire the best appraiser

Jessica I. Marschall, President & CEO, The Green Mission Inc.

September 9th, 2020

Nonprofits, charities, churches, and governmental entities need charitable contributions to support their missions and operations. Whether educating children, helping families move into homes, providing drug treatment programs, delivering computers to young learners, and the many other worthy endeavors too lengthy to enumerate.

Donors of property need tax deductions to incentivize donations.

The environment needs property to remain in circulation through reusing and repurposing and to stay out of the landfill.

The IRS needs to know that these donations are accurately valued without inflations of quality or quantity.

The Green Mission Inc. ensures each one of these purposes is achieved by producing IRS qualified appraisals by IRS qualified appraisers.

When does a donor need an appraisal?

The IRS requires appraisal to be obtained when a donation exceeds $5,000 in value or when a grouping of separate donations of similar property exceeds $5,000. For example, if you donate jewelry in January worth $2,000 and in May worth $3,000 an appraisal is required. The IRS requires the appraisal to be a Qualified Appraisal by a Qualified Appraiser. More on that later.

How are these donations valued?

The IRS provides a strict definition of value, Fair Market Value (FMV), for estate tax, gift tax, and charitable contribution valuations. The appraised value should be the same for property whether it is being donated to charity or valued for inclusion in an estate appraisal.

FMV is based upon the following assumptions:

1.    Open market

2.    Willing buyer and willing seller

3.    No compulsion to act by either buyer or seller

4.    Knowledgeable buyer and seller

Personal Property Appraisal Organizations

There are three personal property appraisal organizations who sponsor The Appraisal Foundation. An IRS qualified appraiser should be an accredited member of one or more to ensure sound comprehension and application of valuation methodology:

Appraisers Association of America (AAA) AAA website

American Society of Appraisers (ASA)ASA website

International Society of Appraisers (ISA)ISA website

The organizations provide education and set forth guidelines and procedures for appraising personal property. Members of each organization must follow USPAP.

What is USPAP?

The Uniform Standards of Professional Appraisal Practice are “the generally recognized ethical and performance standards for the appraisal profession in the United States…adopted by Congress in 1989, and contains standards for all types of appraisal services, including real estate, personal property, business and mass appraisal.”[1]

These standards outline the proper appraisal engagement research and reporting requirements to ensure the public can trust appraisals and appraisers.

The Appraisal Foundation website

Proper Valuation Methodology

There are three valuation methods to be applied when appraising. Each must be considered in an appraisal with the appraiser determining if one or more applies to the given assignment. These include:

Sales Comparison Approach (Market-based Approach)

Cost Approach

Income Approach

The Sales Comparison Approach is used for the overwhelming majority of all personal property appraisals prepared to substantiate an income tax deduction for a charitable contribution. This method includes the research and documentation of consummated sales and offers of sale for comparable property in a relevant time frame and in the relevant market.

The Cost Approach estimates the replacement cost of property and is used primarily for insurance appraisals.

The Income Approach calculates the present value of future cash flow from income producing property and is used for financial planning and valuation purposes.

The Sales Comparison Approach is used for the vast majority of appraisals for charitable contributions as taught by the three organizations. Arguing against this would run parallel to a CPA arguing that the definition of accrual accounting does not mean that income must be recognized when earned or expenses when incurred. It defies the logic set forth by the appraisal organization’s education dating back decades.

The International Society of Appraisers introductory textbook provides the following table:

[2]

From the American Society of Appraisers, they state that the Sales Comparison Approach is used in most assignments:

Sales Comparison Approach is used when

• The property is a non-income-producing property
• When a new or reproduced item would not have the same value or utility
• When the type of value and intended use of the appraisal dictate that the property be valued in its current (used) condition. [3]

From the Appraisers Association of America:

The “comparative market data” (“sales comparison,” “market data,” or “market comparison”) approach is the most common method appraisers use when ascertaining values. The market comparison allows appraisers to analyze recent sales or offerings of comparable articles in appropriate markets where the article in question would normally be traded. Adjustments are made for each article based on age, condition, rarity, artistic merit, technical workmanship, current trends, and availability of the article as compared to those recent sales.[4]

Longevity in the Market Does not a Qualified Appraiser Make

Clients must do their homework on their appraiser. Just because an appraiser claims decades of experience, they might not be qualified to accurately value a charitable donation. Consistently producing potentially unqualified appraisals for decades is not a feather in an appraiser’s cap. Appraisal experience should come with the following education, credentials, and applied valuation methodology. Clients—caveat emptor:

• Requisite college and graduate education in a relevant field of study
• Accreditation in one of the three personal property appraisal organizations
• Use of the correct valuation method
• Fully developed documentation of research and reasoning within the actual appraisal

Licensure

Just to make the client’s job dicier in vetting their appraiser, there are no state licensure standards for personal property appraisers like there are for real property. However, drilling down on the above-listed four criteria can help the client ensure their donation appraisal is properly substantiated to the IRS.

Check Case Law for Disallowance

Two recent cases have highlighted the importance of hiring a competent and qualified appraiser. Mann v. US, January 2019 and Loube v. Commissioner, January 2020 are cases of public record where the client lost their charitable contribution. In Mann, the appraiser first appraised the personal property as real property, not recognizing the detachment principle that requires the valuation to be for personal property. Real property improvement values tend to be much higher than when the property is detached and donated in separate pieces. The appraiser then remitted a personal property appraisal but it lacked proper documentation, photographs, and consistency and was also disallowed. In Loube, the IRS did not even need to evaluate the valuation because the appraiser and the nonprofit forgot to sign tax form 8283 and the client did not completely fill out form 8283. In both appraisals, the appraiser used the Cost Approach to Value. Mann v. US case text from Justia Loube v Commissioner from US Tax Court

Bottom Line: Is the appraisal presented like a persuasive research assignment leaving the client and the IRS convinced of your value conclusion?

In attending appraisal organization courses with IRS counsel as presenters, appraisers have been challenged to make a compelling case for the claimed valuation. The appraisal report should read like a research paper. Clients should ask their appraiser for a sample redacted appraisal report and look for the following:

1.    Correct valuation methodology (as discussed above, in 99% of cases this should be the Sales Comparison Approach)

2.    Complete and accurate description of the property using correct terminology with the appraiser presenting a word picture to go along with high resolution photographs of the property included within the appraisal.

3.    Adequate comparable sales data to make the case for a valuation. The Green Mission Inc. includes at least three comparable sales data points for each piece of donated property above a de minimis value of less than $100. For those lower value items, we often rely on a single data point. Sometimes an appraisal may necessitate 20+ comparable sales data points. It all depends on what patterns can be deciphered from the data. We also run statistical analysis to ensure the comparable property sales and offers for sale chosen aggregate around a central tendency and we remove outliers.

4.    A reconciliation of value—the appraiser must provide detailed reasoning as to how the appraised property compares to the market data presented. They must substantiate if adjustments should be made from the comparable property value upwards or downwards to arrive at the appraised value and document each step in this process.

5.    If #3 is completed correctly, ensure the appraiser includes the comparable sales data within the appraisal. Why hide it in the work-file?

The Green Mission Inc ensures our clients receive Qualified Appraisers by Qualified Appraisers. Call or email our office today to secure a no-obligation quoted value range on your charitable contribution donation.

[email protected]

(540) 322-3884

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[1] https://www.appraisalfoundation.org/imis/TAF/Standards/Appraisal_Standards/Uniform_Standards_of_Professional_Appraisal_Practice/TAF/USPAP.aspx

[2] ISA Core Course Lesson 1: Appraisal Theory, Part 1—Introduction

[3] ASA Monograph 7 Analysis of Research: Approaches to Value Market Models

[4] Gayle M. Skluzacek, AAA, Basic Methodology, Appraising Art—The Definitive Guide to Appraising the Fine and Decorative Arts