The Pension Protection Act of 2006 (signed into law in August 2006) changed the documentation rules for non-cash charitable contributions. The knee-jerk reaction is to focus on these new rules as merely requiring more receipts when we donate household items to a local charity (which has received its share of exposure in the popular press).

However, PPA 2006 also significantly changes valuation rules for more significant charitable contributions, such as gifts of appreciated securities to a Charitable Remainder Trust (often connected with the sale of a closely-held business to shelter gain on the sale from tax).

Under PPA 2006, new statutory definitions for “qualified appraisals” and “qualified appraisers” apply generally to those non-cash contributions greater than $5,000. If your deduction is not supported by a qualified appraisal prepared by a qualified appraiser, you are on dangerously thin ice.

More bad news for appraisers: PPA 2006 gives the IRS expanded powers to sanction appraisers in all tax related circumstances, not just those involving charitable contributions (e.g., estate and gift tax valuations).

A “qualified appraisal” is an appraisal is generally one conducted by a qualified appraiser in accordance with “generally accepted appraisal standards” (and any regulations or other guidance prescribed by the Treasury Secretary).

Prior to PPA 2006, the law did not explicitly require that an appraisal follow appraisal standards (though admittedly, most professional appraisers are trained to follow such appraisal standards). The “Uniform Standards of Professional Appraisal Practice” (USPAP) are cited as an example of generally accepted appraisal standards.

A “qualified appraiser” (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 prescribed by the Treasury Secretary, (2) regularly performs appraisals for which the individual receives compensation, and (3) meets such other requirements as may be prescribed by the secretary in regulations or other guidance.

This definition of a qualified appraiser breaks new ground by requiring explicit professional qualifications.

Interestingly, these two definitions are specifically applicable only to charitable contributions. PPA 2006 makes no reference to estate or gift tax valuations. However…

The IRS now has broader powers to penalize an appraiser when it significantly disagrees with a valuation – and these sanctions are NOT limited to just valuations of charitable contributions, but for all tax purposes.

As these rules have tightened regulation on appraisers, taxpayers should expect the costs of qualified appraisals (and why would you have anything other than a qualified appraisal?) to increase…

For professional investment advice on this topic contact:
Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436