Proposed regs explain strict charitable contribution substantiation & appraisal rules Preamble to Prop Reg 08/06/2008; Prop Reg § 1.170A-15, Prop Reg § 1.170A-16, Prop Reg § 1.170A-17, Prop Reg § 1.170A-18

Mike Habib, EA

IRS has issued proposed regs explaining the charitable contribution substantiation changes made by the American Jobs Creation Act of 2004 (AJCA) and the Pension Protection Act of 2006 (PPA). The proposed regs, which would be effective for contributions made after the date final regs are issued, also would provide guidance on what constitutes qualified appraisals and qualified appraisers for purposes of the substantial rules for noncash gifts.

Background. As toughened by the AJCA and PPA, the following rules apply for cash and noncash charitable contributions:

• • A taxpayer can’t deduct any contribution of a cash, check, or other monetary gift unless he maintains as a record of the contribution a bank record or a written communication from the donee organization showing its name, plus the date and amount of the contribution. (Code Sec. 170(f)(17)) For contributions of property (other than cash), the taxpayer must have a receipt from the donee and keep records showing the donee’s name and describing the gift.
  • No charitable deduction is allowed for any (cash or property) contribution of $250 or more unless the taxpayer substantiates it by a contemporaneous written acknowledgment (not just a cancelled check) from the donee (or its agent). (Code Sec. 170(f)(8)(A)) Goods or services that have insubstantial value and certain annual membership benefits the charity provides to the taxpayer, the taxpayer’s employees, or the partners of a partnership donor, in exchange for the contribution are disregarded in determining the $250 threshold.
  • For noncash contributions that are:

(1) more than $500 but not more than $5,000, the donor must attach to its return a description of the contributed property. This requirement doesn’t apply to a C corporation. (Code Sec. 170(f)(11)(B))

(2) more than $5,000 but not more than $500,000, the donor must obtain a “qualified appraisal” and attach to its return information about the property and appraisal (i.e., appraisal summary) as required by IRS. (Code Sec. 170(f)(11)(C))

(3) more than $500,000, the donor must attached a qualified appraisal to its return. (Code Sec. 170(f)(11)(D))
The above requirements in (2) and (3) don’t apply to certain categories of contributions, including qualified vehicle donations. (Code Sec. 170(f)(11)(A)(ii)(I)) IRS will disallow a deduction for property contributed if the above reporting requirements aren’t met unless the failure was due to reasonable cause. (Code Sec. 170(f)(11)(A))

• • A qualified appraisal is one that is: (1) treated as a qualified appraisal under regs or other guidance issued by IRS, and (2) conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regs or other guidance issued by IRS. (Code Sec. 170(f)(11)(E)(i)) A qualified appraiser is an individual who has earned an appraisal designation from a recognized professional organization or has otherwise met minimum education and experience requirements under IRS regs; regularly performs appraisals for compensation; and meets any other such requirements prescribed by IRS. (Code Sec. 170(f)(11)(E)(ii)) However, an individual won’t be considered a qualified appraiser for any specific appraisal unless he demonstrates verifiable education and experience in valuing the type of property subject to the appraisal, and hasn’t been prohibited from practicing before IRS at any time during the three-year period ending on date of the appraisal. (Code Sec. 170(f)(11)(E)(iii)) A penalty is imposed under Code Sec. 6695A on any person who prepared the appraisal and who knew, or reasonably should have known, the appraisal would be used in connection with a return or claim for refund. Notice 2006-96, 2006-46 IRB 902, provided interim guidance on the new rules for appraisals and appraisers (see Federal Taxes Weekly Alert 10/26/2006)
  • Special rules apply for charitable contributions of motor vehicles, boats and airplanes that aren’t in the taxpayer’s inventory or held for sale in the ordinary course of his business (qualified vehicle donations), if the donation’s claimed value exceeds $500. (Code Sec. 170(f)(12))
  • Deductions aren’t allowed for contributions of clothing and household items (e.g., furniture, furnishings, electronics, appliances) that are not in good used condition or better. However, a deduction may be allowed if the amount claimed for the item exceeds $500 and the taxpayer includes a qualified appraisal of the item with his return. (Code Sec. 170(f)(16))

The proposed regs provide a number of clarifications as well as some liberalizations, including the following.
Basic recordkeeping rule. For purposes of the basic recordkeeping rules in Code Sec. 170(f)(17), a monetary gift would include a transfer of a gift card redeemable for cash, and a payment made by credit card, electronic fund transfer, online payment service, or payroll deduction. A bank record would include a statement from a financial institution, an electronic fund transfer receipt, a canceled check, a scanned image of both sides of a canceled check obtained from a bank website, or a credit card statement. Written communication would include electronic mail correspondence. (Prop Reg § 1.170A-15(b))

However, the need to obtain and retain a bank record or written communication would not apply to transfers to certain trusts (e.g., a charitable remainder annuity trust or a charitable remainder unitrust), or to unreimbursed expenses of less than $250 incurred by a donor incident to rendering services for a charity. (Prop Reg § 1.170A-15(e), Prop Reg § 1.170A-15(g))

Noncash substantiation requirements. The proposed regs would clarify that donors who make contributions of $250 or more but not more than $500 must obtain only a contemporaneous written acknowledgment, as required by Code Sec. 170(f)(8) and Reg. § 1.170A-13(f)), and needn’t obtain any other written records. (Prop Reg § 1.170A-16(b)) The proposed regs explain in detail how donors making noncash contributions or more than $500 would have to complete Form 8283 (Noncash Charitable Contributions). They also would provide that the rules for substantiation that must be submitted with a return also apply to the return for a carryover year under Code Sec. 170(d). (Prop Reg § 1.170A-16(c) through Prop Reg § 1.170A-16(f)))

To satisfy the “reasonable cause” exception to the noncash substantiation requirements, a donor would have to submit with the return a detailed explanation of why the failure to comply was due to reasonable cause and not to willful neglect. He also would have to obtain a contemporaneous written acknowledgment and a qualified appraisal, if applicable. (Prop Reg § 1.170A-16(f)(6)) These rules would supersede Reg. § 1.170A-13(c)(4)(H), which provides that a taxpayer who fails to file an appraisal summary (Form 8283) with the return may provide it within 90 days of a request from IRS, and the deduction will be allowed if the donor’s original failure to file the appraisal summary is a good faith omission. Consistent with the Congressional purpose for enacting Code Sec. 170(f)(11) to reduce valuation abuses, IRS anticipates that the “reasonable cause” exception would be strictly construed to apply only when the donor meets the requirements for the exception as specified in the regs. (Preamble to Prop Reg 08/06/2008)

Qualified appraisals. The proposed regs generally follow the guidance in Notice 2006-96, and would provide that a qualified appraisal is one prepared by a qualified appraiser in accordance with generally accepted appraisal standards, defined as the substance and principles of the Uniform Standards of Professional Appraisal Practice (USPAP), as developed by the Appraisal Standards Board of the Appraisal Foundation. (Prop Reg § 1.170A-17(a)) IRS says it’s aware that some appraisers of historic conservation easements have stated that local ordinances restricting modifications of a facade should be disregarded because local governments do not enforce these ordinances. In IRS’s view, an appraisal that does not take into account a local ordinance is not consistent with the substance and principles of USPAP. (Preamble to Prop Reg 08/06/2008)

The valuation effective date (the date to which the value opinion applies) generally would be the date of the contribution. Where the appraisal is prepared before the contribution date, the valuation effective date would have to be no earlier than 60 days before the date of the contribution and no later than the date of the contribution. The date the appraiser signs the appraisal report (appraisal report date) would have to be no earlier than 60 days before the contribution date and no later than the due date (including extensions) of the return on which the deduction is claimed or reported. (Prop Reg § 1.170A-17(a)(5)(i))

Qualified appraisers. Code Sec. 170(f)(11)(E) establishes minimum education and experience requirements for an appraiser generally, and requires verifiable education and experience in valuing the type of property subject to the appraisal. IRS says it is sufficient for an appraiser to satisfy the more stringent requirement of verifiable education and experience in valuing the type of property subject to the appraisal. Satisfaction of that requirement would also satisfy the minimum education and experience requirement. (Prop Reg § 1.170A-17(b), Preamble to Prop Reg 08/06/2008)

The proposed regs would provide that an individual has verifiable education and experience if he has successfully completed professional or college-level coursework in valuing the relevant type of property and has two or more years experience in valuing that type of property. Because significant education and experience are required to obtain a designation from a recognized professional appraiser organization, appraisers with these designations would be deemed to have demonstrated sufficient verifiable education and experience. Additionally, education would be defined broadly to include coursework obtained in an employment context, provided it is similar to an educational program of an educational institution or a generally recognized professional appraisal organization. (Prop Reg § 1.170A-17(b)(2))

Among other statutory requirements, a qualified appraiser must be an individual who “regularly performs appraisals for which the individuals receive compensation.” (Code Sec. 170(f)(11)(E)(ii)(II)) IRS says the quoted term is generally encompassed by the experience requirement and does not need to be separately met. (Preamble to Prop Reg 08/06/2008)

Clothing and household items. The proposed regs would clarify that to qualify for the more-than $500 exception from the “good used condition or better requirement,” a donor would have to submit with the return on which the deduction is claimed a qualified appraisal prepared by a qualified appraiser, and fill out Section B of Form 8283. (Prop Reg § 1.170A-18(b))

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