IRS Guidance Regarding Appraisal Requirements for Noncash Charitable Contributions

SECTION1. PURPOSE
This notice provides transitional guidance relating to the newdefinitions of “qualified appraisal” and “qualified appraiser” in § 170(f)(11)of the Internal Revenue Code, and new § 6695A of the Code regarding substantialor gross valuation misstatements, as added by § 1219 of the Pension ProtectionAct of 2006, Pub. L. No. 109-280, 120 Stat. 780 (2006) (the “PPA”).

The Service and the Treasury Department expect to issueregulations under § 170(f)(11). Until those regulations are effective,taxpayers may rely on this notice to comply with the new provisions added by §1219 of the PPA.
 
SECTION2. BACKGROUND
A deduction for charitable contributions is generally permittedunder § 170(a), subject to certain limitations depending on the type oftaxpayer, the nature of the property contributed, and the type of doneeorganization. Section 170(f)(11), as added by § 883 of the American JobsCreation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418 (2004), containsreporting and substantiation requirements relating to the allowance ofdeductions for noncash charitable contributions. In particular, under §170(f)(11)(C),taxpayers are required to obtain a qualified appraisal for donated property forwhich a deduction of more than $5,000 is claimed. Under § 170(f)(11)(D), incertain cases the qualified appraisal must be attached to the tax return. For appraisals prepared with respect to returns filed on or before August 17, 2006, existing TreasuryRegulations provide a definition of the terms “qualified appraisal” and“qualified appraiser” for purposes of § 170(f)(11).

Section 1219 of the PPA amends § 170(f)(11)(E) and providesstatutory definitions of a qualified appraisal and qualified appraiser forappraisals prepared with respect to returns filed after August 17, 2006.
Section 170(f)(11)(E)(i) provides that the term “qualifiedappraisal” means an appraisal that is (1) treated as a qualified appraisal underregulations or other guidance prescribed by the Secretary, and (2) conducted bya qualified appraiser in accordance with generally accepted appraisal standardsand any regulations or other guidance prescribed by the Secretary.

Section 170(f)(11)(E)(ii) provides that the term “qualifiedappraiser” means an individual who (1) has earned an appraisal designation froma recognized professional appraiser organization or has otherwise met minimumeducation and experience requirements set forth in regulations prescribed bythe Secretary, (2) regularly performs appraisals for which the individualreceives compensation, and (3) meets such other requirements as may beprescribed by the Secretary in regulations or other guidance. Section170(f)(11)(E)(iii) further provides that an individual will not be treated as aqualified appraiser unless that individual (1) demonstrates verifiableeducation and experience in valuing the type of property subject to theappraisal, and (2) has not been prohibited from practicing before the InternalRevenue Service by the Secretary under §330(c) of Title 31 of the United StatesCode at any time during the 3-year period ending on the date of the appraisal.

Section 1219 of the PPA also adds a new penalty provision. If theclaimed value of property based on an appraisal results in a substantial orgross valuation misstatement under § 6662, a penalty is imposed by new § 6695Aon any person who prepared the appraisal and who knew, or reasonably shouldhave known, the appraisal would be used in connection with a return or claimfor refund.
 
SECTION3. TRANSITIONAL GUIDANCE
.01In general
The Service and the Treasury Department expect to issueregulations under §170(f)(11), as amended by the PPA. The terms in section 3 ofthis notice apply to contributions of property (other than readily valuedproperty within the meaning of § 170(f)(11)(A)(ii)(I)) by individuals,partnerships, or corporations for which a deduction of more than $5,000 isclaimed on returns filed after August 17, 2006, and before the effective dateof the regulations that the Service and the Treasury Department expect to issue.Until regulations are effective under § 170(f)(11), as amended by the PPA, an appraisalthat meets the requirements of this notice shall be treated as a qualified appraisalfor purposes of § 170(f)(11). The determination of whether an appraiser is qualifiedunder section 3.03 of this notice must be based on the appraiser’s qualificationsas of the date the appraisal is made.

.02Transitional terms-qualifiedappraisal
(1) Qualified appraisal. An appraisal will be treated as a qualified appraisal within themeaning of § 170(f)(11)(E) if the appraisal complies with all of therequirements of § 1.170A-13(c) of the existing regulations (except to theextent the regulations are inconsistent with § 170(f)(11)), and is conducted bya qualified appraiser in accordance with generally accepted appraisalstandards. See sections 3.02(2) and 3.03 of this notice.

(2) Generally accepted appraisal standards. An appraisal will be treated ashaving been conducted in accordance with generally accepted appraisal standardswithin the meaning of § 170(f)(11)(E)(i)(II) if, for example, the appraisal isconsistent with the substance and principles of the Uniform Standards ofProfessional Appraisal Practice (“USPAP”), as developed by the AppraisalStandards Board of the Appraisal Foundation.
Additionalinformation is available at http://www.appraisalfoundation.org

.03Transitional terms – qualified appraiser
(1) Appraisal designation. An appraiser will be treated as having earned an appraisaldesignation from a recognized professional appraiser organization within themeaning of § 170(f)(11)(E)(ii)(I) if the appraisal designation is awarded onthe basis of demonstrated competency in valuing the type of property for whichthe appraisal is performed.

(2) Education and experience in valuing the type of property. An appraiser will be treated ashaving demonstrated verifiable education and experience in valuing the type ofproperty subject to the appraisal within the meaning of § 170(f)(11)(E)(iii)(I)if the appraiser makes a declaration in the appraisal that, because of theappraiser’s background, experience, education, and membership in professionalassociations, the appraiser is qualified to make appraisals of the type ofproperty being valued. See also § 1.170A-13(c)(5).

(3) Minimum education and experience. An appraiser will be treated ashaving met minimum education and experience requirements within the meaning of§ 170(f)(11)(E)(ii)(I) if –
(a) For real property
(i)For returns filed on or before October 19, 2006, the appraiser is qualified asa “qualified appraiser” within the meaning of § 1.170A-13(c)(5) to makeappraisals of the type of property being valued.
(ii)For returns filed after October 19, 2006, the appraiser is licensed orcertified for the type of property being appraised in the state in which theappraised real property is located.
(b) For property other than real property
(i)For returns filed on or before February 16, 2007, the appraiser is qualified asa “qualified appraiser” within the meaning of § 1.170A-13(c)(5) to makeappraisals of the type of property being valued.
(ii)For returns filed after February 16, 2007, the appraiser has (A) successfully completedcollege or professional-level coursework that is relevant to the property beingvalued, (B) obtained at least two years of experience in the trade or businessof buying, selling, or valuing the type of property being valued, and (C) fullydescribed in the appraisal the appraiser’s education and experience that qualifythe appraiser to value the type of property being valued.

.04Applicability of reporting andsubstantiation regulations
(1) In general
The requirements of § 1.170A-13(c) of the existing regulationsconcerning qualified appraisals and qualified appraisers continue to apply toall taxpayers, including those to whom the transitional guidance in thissection may apply, except to the extent the regulations are inconsistent withthe provisions of § 170(f)(11). In particular, all taxpayers are required tocomply with §§ 1.170A-13(c)(3), (c)(5), (c)(6) and (c)(7).

(2) Revision to appraiser declaration
For returns filed after February 16, 2007, the declarationrequired under § 1.170A-13(c)(5)(i) must include an additional statement thatthe appraiser understands that a substantial or gross valuation misstatementresulting from an appraisal of the value of property that the appraiser knows,or reasonably should have known, would be used in connection with a return orclaim for refund, may subject the appraiser to a civil penalty under § 6695A.See also § 1.170A-13(c)(3)(iii).
 
SECTION4. REQUEST FOR COMMENTS
The Service and the Treasury Department invite comments containingsuggestions for future guidance under § 170(f)(11), including regulations. In particular,comments are requested concerning the definition of the following terms: (1)"generally accepted appraisal standards” in § 170(f)(11)(E)(i)(II); (2) "appraisaldesignation from a recognized professional appraisal organization” in §170(f)(11)(E)(ii)(I); (3) "minimum education and experience requirements”in § 170(f)(11)(E)(ii)(I); and (4) “verifiable education and experience invaluing the type of property subject to the appraisal” in §170(f)(11)(E)(iii)(I). Comments also are requested on the potential impact anyguidance under § 170(f)(11) may have on small businesses. Comments should referto Notice 2006-96 and be submitted by January 17, 2007, to:
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
Attn: CC:PA:LPD:PR
Room5203
Alternatively,comments may be submitted electronically via e-mail to the following address:Notice.Comments@irscounsel.treas.gov. All comments will be available for publicinspection and copying.
 
SECTION5. PAPERWORK REDUCTION ACT
The collections of information in this notice have been reviewedand approved by the Office of Management and Budget (OMB) in accordance withthe Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1953.
An agency may not conduct or sponsor, and a person is not requiredto respond to, a collection of information unless the collection of informationdisplays a valid OMB control number.
The collections of information in this notice are in section 3 ofthis notice. The collections of information are required from donors to satisfythe substantiation requirements of § 170(f)(11). The collections of informationare required from donors to obtain a benefit. The likely respondents areindividuals, partnerships, and corporations.
The estimated total annual reporting burden is 161,571 hours.
The estimated annual burden per respondent varies from 5 minutesto 5 hours, with an estimated average of approximately 3.5 hours. The estimatednumber of respondents is 46,285.
The estimated annual frequency of responses (used for reportingrequirements only) is once per year.
Books or records relating to a collection of information must beretained as long as their contents may become material in the administration ofany internal revenue law.  Generally, taxreturns and return information are confidential, as required by § 6103.
 
SECTION6. DRAFTING INFORMATION
The principal author of this notice is Susan J. Kassell of theOffice of Associate Chief Counsel (Income Tax & Accounting). For furtherinformation regarding this notice contact Susan J. Kassell at (202) 622-5020(not a toll-free call).