October 15, 2012

How to Help Clients With Donation Appraisals

Here are four techniques that advisors can share with collectors seeking to donate collections and take a tax write-off

At some point your clients who are collectors may decide to donate part or all of their collections to charity.

If that happens you’ll need a solid valuation to avoid or survive a possible challenge from the IRS. Here are some key points to consider when advising clients on donations.

Follow IRS Valuation Procedures

Michael D. Whitty, an attorney with Vedder Price in Chicago, highlights several techniques to avoid problems with IRS procedures.

Michael WhittyFirst, Whitty (left) says, the appraisal should be conducted by an independent, qualified expert. Although there is no single appraisal qualification, several organizations such as the Appraisal Institute have certification programs. Other factors to consider include are the appraisers’ educational background and experience appraising objects similar to those the client is valuing.

A caveat: don’t let your clients provide their own appraisal even if they have the requisite experience and education. Whitty cites tax court cases in which the donor, who was technically qualified as an expert appraiser, made a donation using his own estimate of the property’s value.

That violated the independence requirement and proved to be a costly mistake, says Whitty: “He had all the credentials. He could have given somebody else an appraisal and he would have been a qualified appraiser for that. But when he did it on his own to save a few bucks he ended up losing the deduction for that charitable contribution.”

Watch the Timing

The valuation must be contemporaneous with the time of the transfer. It can take time to appraise collectibles, Whitty observes, so clients shouldn’t put off the valuation until the last minute, particularly if they’re up against a tax-filing deadline.

That does not mean that the appraisal report has to be in the client’s hand at the time that of the donation, but the report must provide the valuation as of the transaction date. “That report might come weeks or even months later but the appraiser needs to understand that it’s an appraisal as of that transaction date and the appraisal report needs to reflect that,” says Whitty.

Don’t Fudge Numbers

Clients can desire different results for an appraisal, depending on the valuation’s purpose: high values for donations and lower values for estate taxes, for instance. While it might be tempting to try influencing an appraisal, that tactic can backfire, says Whitty.

The IRS uses an independent review board for major charitable gifts and the Service doesn’t tell board members whether the valuation is for a charitable deduction or for an estate or a gift tax valuation. “So the people on this independent review board are going to stay as close as possible to the standard of what a willing buyer would pay a willing seller,” Whitty says.

“The full quote for that standard is, ‘The price at which a willing buyer would pay a willing seller both being aware of all relevant facts and neither being under any compulsion to buy or sell,’ he adds. "That is the gold standard for fair market value valuation under the Internal Revenue Code and it applies both in the context of charitable donations and the estate and gift tax transfers.”

Know the Documentation Thresholds

Clients need to recognize the IRS rules regarding the substantiation (i.e., documentation) required to support their claimed donations. Pub. 561 states: “Generally, if the claimed deduction for an item or group of similar items of donated property is more than $5,000, you must get a qualified appraisal made by a qualified appraiser. You must also complete Form 8283, Section B, and attach it to your tax return.” There are exceptions to the general rule, though:

“If you claim a deduction of $20,000 or more for donations of art, you must attach a complete copy of the appraisal. If you claim a deduction of more than $500,000 for a donation of property, you  must attach the appraisal.”

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