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.
First, 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.