Service issues transition guidance on appraisal requirements for noncash charitable contributions.

In Notice 2006-96, the Service issued transition guidance on the new definitions of "qualified appraisal" and "qualified appraiser" in Sec. 170(f)(11) and new Sec. 6695A on substantial and gross valuation misstatements attributable to incorrect appraisals, as added by the Pension Protection Act of 2006 (PPA '06).

Background

Sec. 170(f)(11)(C) requires taxpayers to obtain a qualified appraisal for donated property for which a deduction exceeding $5,000 is claimed. Sec. 170(f)(11)(D) provides that, in certain cases, the qualified appraisal must be attached to the return. For appraisals prepared for returns filed before Aug. 18, 2006, existing regulations provide definitions for the terms "qualified appraisal" and "qualified appraiser" for Sec. 170(f)(11) purposes. PPA '06 Section 1219 amended Sec. 170(f)(11)(E) and provided statutory definitions of "qualified appraisal" and "qualified appraiser" for appraisals prepared for returns filed after Aug. 17, 2006.

Qualified appraisal, Sec. 170(f)(11) (E)(i) provides that a "qualified appraisal" means an appraisal (1) treated as a qualified appraisal under regulations or other IRS guidance; and (2) conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any IRS regulations or other guidance.

Qualified appraiser: Under Sec. 170(f)(11)(E)(ii), "qualified appraiser" means an individual who (1) has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in regulations; (2) regularly performs appraisals for which the individual receives compensation; and (3) meets such other requirements as may be prescribed in IRS regulations or other guidance. Sec. 170(f)(11)(E)(iii) further provides that an individual will not be treated as a qualified appraiser unless he or she (1) demonstrates verifiable education and experience in valuing the type of property subject to the appraisal and (2) has not been prohibited from practicing before the Service by the Secretary under 31 USC Section 330(c) at any time during the three-year period ending on the appraisal date.

PPA '06 Section 1219 also added a penalty provision. Under new Sec. 6695A, if the claimed value of property based on an appraisal results in a substantial or gross valuation misstatement under Sec. 6662, a penalty will be imposed on any person who prepared the appraisal and who knew (or reasonably should have known) it would be used in connection with a return or retired claim.

Transition Guidance

The IRS expects to issue regulations under Sec. 170(f)(11); until they are effective, taxpayers may rely on the notice to comply with the new provisions. Under Notice 2006-96, an appraisal will be qualified under Sec. 170(f)(11)(E) if it complies with all of the requirements of Regs. Sec. 1.170A-13(c) (except to the extent the regulations are inconsistent with Sec. 170(f)(11)), and is conducted by a qualified appraiser in accordance with generally accepted appraisal standards (e.g., the appraisal is consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice, as developed by the Appraisal Standards Board of the Appraisal Foundation).

Notice 2006-96 provides that an appraiser will be treated as having earned an appraisal designation from a recognized professional appraiser organization under Sec. 170(f)(11)(E)(ii)(I) if the designation is awarded on the basis of demonstrated competency in valuing the type of property for which the appraisal is performed. To be treated as having demonstrated verifiable education and experience, the appraiser must make a declaration in the appraisal that, because of his or her background, experience, education and membership in professional associations, he or she is qualified to make appraisals of the type of property being valued.

Real property: For real property, an appraiser will be treated as having met the minimum education and experience requirements under Sec. 170(f) (11)(E)(ii)(I) if, for returns filed (1) before Oct. 20, 2006, the appraiser is a "qualified appraiser" within the meaning of Regs. Sec. 1.170A-13(c)(5) to make appraisals of the type of property being valued; or (2) after Oct. 19, 2006, the appraiser is licensed or certified for the type of property being appraised in the state in which the appraised real property is located.

Other property: For property other than real property, an appraiser Hill be treated as having met the minimum education and experience requirements under Sec. 170(f)(11)(E)(ii)(I) if, for returns filed (1) before Feb. 17, 2007, he or she is qualified within the meaning of Regs. Sec. 1.170A-13(c)(5) to make appraisals of the type of property being valued; or (2) after Feb. 16, 2007, the appraiser has (i) successfully completed college or professional-level coursework relevant to the property being valued, (ii) obtained at least two years' experience in the trade or business of buying, selling or valuing the type of property involved and (iii) fully described in the appraisal his or her education and experience that qualify the appraiser to appraise the type of property being valued.

Regs. Sec. 1.170A-13(c)'s requirements continue to apply to all taxpayers, including those to whom the transition guidance may apply, except to the extent they are inconsistent with Sec. 170(f)(11). Specifically, all taxpayers must comply with Regs. Sec. 1.170A-13(c)(3), (5), (6) and (7).

For returns filed after Feb. 16, 2007, Notice 2006-96 requires that the declaration made under Regs. Sec. 1.170A-13(c)(5)(i) include an additional statement that the appraiser understands that a substantial or gross valuation misstatement resulting 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 or refund claim, may subject him or her to a civil penalty under Sec. 6695A.

Implications

Notice 2006-96 was issued to address the PPA '06's requirements for qualified appraisers and appraisals of donated property. The IRS and Treasury may be considering transition rules for other PPA '06 provisions affecting non-profit organizations. However, at this point, there are no guarantees that any such additional transition relief will be forthcoming.

FROM PHILLIP ROYALTY, J.D., CPA, WASHINGTON, DC