| EXECUTIVE SUMMARY | |  The Pension Protection Act of 2006 changed tax valuation matters that affect how appraisals of non-cash contributions are considered by the IRS.
The IRS now has greater authority to impose penalties on appraisers who value property at an amount that the IRS later disputes. The penalties create new risks for CPAs placing values on properties that appear on tax returns by shifting some of the responsibility from the taxpayer to the appraiser. If the IRS and Treasury decide to specify the professional responsibilities of appraisers, additional sanctions are possible for appraisers with a history of problems or misconduct in this area. Michael A. Crain, CPA/ABV, is managing director of The Financial Valuation Group, Fort Lauderdale, Fla., and chairman of the AICPA Business Valuation Committee. The author wishes to thank Howard Lewis, IRS national engineering program manager, for providing information for this article. |  he Pension Protection Act of 2006, which was signed into law in August 2006, changed valuations for tax matters in two areas. It changed the statutory definitions of qualified appraisal and qualified appraiser for charitable contributions. These changes affect how the IRS considers appraisals of non-cash contributions. The PPA also granted the IRS new powers to sanction individuals who perform valuations for any tax purpose. In expanding the penalties the IRS may impose on appraisers, the law shifts some responsibility for accurate valuations from the taxpayer to the appraiser. The IRS Office of Professional Responsibility (OPR) will probably issue new guidance on the responsibilities of appraisers.
NEW DEFINITIONS APPLIED TO CHARITABLE CONTRIBUTIONS
Qualified appraisal. Taxpayers must obtain a qualified appraisal to substantiate deductions for some charitable contributions under IRC § 170(f)(11). In general, a taxpayer needs a qualified appraisal for many types of non-cash donations with a value of more than $5,000. The PPA says a qualified appraisal is an appraisal of any property that (1) is treated as a qualified appraisal under regulations or other guidance prescribed by the Treasury secretary and (2) is conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed by the secretary. Prior to the PPA, the law did not explicitly require that an appraisal follow appraisal standards. These two new definitions currently affect only charitable contributions. The present law does not use the two terms in gift and estate tax matters.
In October 2006, the IRS issued transitional guidance in Notice 2006-96 on the two new definitions. The guidance says an appraisal that meets the requirements of the notice will be considered a qualified appraisal for purposes of § 170(f)(11). The guidance cites the Uniform Standards of Professional Appraisal Practice (USPAP) as an example of generally accepted appraisal standards. USPAP is promulgated by The Appraisal Foundation and provides broad valuation guidance for various types of property such as real estate, personal property and businesses. CPAs who follow the new AICPA valuation standard, Statement on Standards for Valuation Services no. 1, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset , should also comply with the PPA requirement for using generally accepted appraisal standards. Qualified appraiser. In general, the PPA says a qualified appraiser is 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 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. The PPA tightened the definition of a qualified appraiser by requiring explicit professional qualifications and conformity to generally accepted appraisal standards. The transitional guidance in Notice 2006-96 defines an appraisal designation and the appropriate level of education and experience for an appraiser valuing the type of property. The guidance requires the appraiser to file a statement acknowledging that he or she may be subject to a civil penalty for a substantial or gross valuation misstatement of the value of property that the appraiser knows, or reasonably should have known, would be used in connection with a return or claim for refund. NEW IRS POWERS TO SANCTION APPRAISERS IN ALL TAX AREAS
The PPA expanded IRS authority to sanction appraisers in all tax matters including estate and gift, and income taxation. The law adds a penalty provision for appraisals that result in a substantial or gross valuation misstatement in IRC § 6662. The PPA also created IRC § 6695A for these types of valuation misstatements. The IRS will probably issue interim guidance that specifies the professional responsibilities for appraisers. The Treasury Department may also issue related regulations. Should these responsibilities be required through notice or regulation (any new regulations would become part of Treasury Circular 230), the IRS could impose sanctions on appraisers who fail to meet their professional responsibilities. IMPLICATIONS
The IRS now has broader powers to penalize an appraiser when it significantly disagrees with a valuation. CPAs performing valuations for tax purposes will need to develop appropriate evidence supporting their conclusions. One particular challenge will be to support valuation discounts on ownership interests in businesses or holding companies for marketability and control factors. These are especially common in the gifting of interests of family limited partnerships. The AICPA’s new valuation standard, SSVS1, will help CPAs reach supportable conclusions. The changes may also mean additional compliance costs for taxpayers. These costs may change how donors make charitable contributions of non-cash properties.  | |
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