8061 / What verification is required to substantiate a deduction for a charitable contribution of $5,000 or more?

In addition to satisfying the requirements described in Q 8060, the qualified appraisal requirement for contributions of property for which a deduction of more than $5,000 is claimed is met if the individual, partnership, or corporation: (1) obtains a qualified appraisal of the property; and (2) attaches to the tax return information regarding the property and the appraisal (as the Secretary may require).¹ Donors who claim a deduction for a charitable gift of property (except publicly traded securities) valued in excess of $5,000 ($10,000 for nonpublicly traded stock) are required to obtain a qualified appraisal report, attach an appraisal summary (containing the information specified in regulations) to their return for the year in which the deduction is claimed, and maintain records of certain information related to the contribution.²

A taxpayer who failed to obtain such an appraisal for a gift of nonpublicly traded stock was denied a deduction, even though the IRS did not dispute the value of the claimed gift.³ The Tax Court distinguished its holding in Hewitt from a 1993 decision in which it had permitted a deduction to a taxpayer who substantially, though not fully, complied with the appraisal requirement. In the earlier ruling, the taxpayer had obtained an appraisal from a qualified appraiser, completed and attached Form 8283, but had failed to include all the information required of an appraisal summary.⁴ The Fourth Circuit Court of Appeals concurred in the Tax Court’s analysis, stating that “Bond does not suggest that a taxpayer who completely fails to observe the appraisal regulations has substantially complied with them.” The Fourth Circuit further stated: “[I]n Bond, the taxpayers made a good faith effort to comply with the appraisal requirement. In the case at bar, the Hewitts utterly ignored the appraisal requirement.”⁵

A qualified appraiser must not be (1) the taxpayer, (2) a party to the transaction in which the taxpayer acquired the property, (3) the donee, (4) an employee of any of the above, (5) any other person who might appear not to be totally independent, or (6) one who is regularly used by the taxpayer, a party to the transaction or the charity, and doesn’t perform a majority of his/her appraisals for other persons.⁶ See, e.g., Davis v. Comm.,⁷ where appraisals were upheld where the appraiser was determined to be financially independent of the donor, and no conspiracy or collusive relationship was established.

In Wortmann v. Comm.,⁸ the Tax Court substantially reduced the taxpayers’ charitable deduction (from $475,000 to $76,200) after it concluded that the property appraisal was dubious and not well supported by valuation methodology.

The appraiser cannot base his fee on a percentage of the appraisal value, unless the fee is based on a sliding scale that is paid to a generally recognized association regulating appraisers.⁹

If the donor gives similar items of property (such as books, stamps, paintings, etc.) to the same donee during the taxable year, only one appraisal and summary is required. If similar items of property are given during the same taxable year to several donees, and the aggregate value of the donations exceeds $5,000, a separate appraisal and summary must be made for each donation.¹⁰ The appraisal summary is signed and dated by the donee as an acknowledgement of the donation.¹¹

Taxpayers making contributions of art appraised at $50,000 or more may wish to request from the IRS a “Statement of Value” (which appears to be the equivalent of a letter ruling as to the value of a particular transfer that is made at death, by inter vivos gift, or as a charitable contribution).¹² The request must include specified information, including a description of the artwork, the cost, manner and date of acquisition, and a copy of an appraisal (which meets requirements set forth in Section 8 of the revenue procedure). The user fee for obtaining a Statement of Value is $2,500 for up to three items of art.¹³