A. APPRECIATED PROPERTY                                             the value of deductions claimed for donated property
                                                                    as follows:
Introduction                                                        a. Define a “qualified appraisal” as one prepared by
Non-cash contributions, including gifts of art, land,                  a qualified appraiser in accordance with generally
stock, securities, household goods, motor vehicles,                    accepted appraisal standards and applicable
clothing, among other items, are a significant source                  Treasury regulations.
of support for many charitable organizations. Tax laws              b. Define a “qualified appraiser” as an individual who
provide incentives for such contributions by permitting                (1) has earned an appraisal designation from a rec-
taxpayers to take an income tax deduction generally                    ognized professional appraiser organization or has
equivalent to the fair market value of property and                    otherwise met minimum education and experience
other non-cash items donated to a qualified charity.1                  requirements to be determined by the IRS in regu-
Specific rules apply to gifts of property that has appre-              lations; (2) regularly performs appraisals for which
ciated in value since it was acquired by the taxpayer,                 he or she receives compensation; (3) can demon-
while other conditions apply to gifts of conservation                  strate verifiable education and experience in valu-
easements and gifts that have generally depreciated in                 ing the type of property for which the appraisal is
value, such as motor vehicles, clothing, or household                  being performed; (4) has not been prohibited from
items.2 Non-cash contributions accounted for roughly                   practicing before the IRS by the Secretary of the
$34 billion, or 25 percent, of the amounts claimed for                 Treasury, pursuant to 31 U.S.C. 330(c) at any time
charitable contributions by taxpayers who itemized                     during the previous three years; and (5) is not
deductions on their federal income tax returns in 2003.                excluded from being a qualified appraiser under
                                                                       applicable Treasury regulations.3
Statement of Problem                                                c. Direct the Secretary of the Treasury to prescribe
For gifts other than publicly traded securities, problems              by regulation that a qualified appraisal for contri-
have arisen due to the lack of clear, objective standards              butions of real estate claimed to have a value of
for establishing the fair market value of the donated                  more than $100,000 must be prepared by a state
property. Taxpayers who claim a deduction for a single                 general certified real estate appraiser in accordance
item or collection of items valued at $5,000 or more are               with the Uniform Standards of Professional
required to have a qualified appraisal to justify their                Appraisal Practice (USPAP).
claim, but the standards and definitions for qualified           2. Expand penalties on taxpayers who claim a tax
appraisals are vague. As a result, the Internal Revenue             deduction for donated property to include a penalty
Service has reported that some taxpayers have been                  of 10 percent of the amount of the tax not properly
over-estimating the value of donated property when
calculating their income tax deductions.
   The process of identifying, investigating, and litigat-       1 For gifts of ordinary income property (property that would not
ing cases where taxpayers may have overstated the                  have resulted in long-term capital gain if sold on the date of
value of non-cash contributions, thereby reducing their            the contribution), tangible personal property that is used by
tax liability, is very resource-intensive, and the cost may        the donee in a manner unrelated to the donee’s exempt or
exceed the value that would be returned to the                     governmental purpose, and property that is donated to or for
Treasury. Penalties for taxpayers who claim excessive              the use of a non-operating private foundation, the taxpayer’s
values for donated items and appraisers who over- value            deduction is limited to the fair market value of the donated
such items may be too low to deter such actions.                   property reduced by the amount of any gain above the tax-
                                                                   payer’s basis.
Recommendations for Congressional Action                         2 Issues related to gifts of partial interest in the contributed

Congress should amend federal tax laws to:                         property as a conservation or historic façade easement and gifts
1. Strengthen the definition of a qualified appraisal and          of clothing and household items are discussed in 9b and 9c.
   a qualified appraiser for purposes of substantiating          3 Treas. Reg. 1.170A-13(c)(5)(iv).

                               53    Report to Congress and the Nonprofit Sector on Governance, Transparency, and Accountability

   paid if the claimed value of the donated property            non-operating foundation, the amount that can be
   exceeds the correct value of the property by 50              deducted is limited to the lesser of the taxpayer’s basis
   percent or more.4                                            (generally cost) or fair market value. Special rules gov-
3. Impose new penalties on appraisers. First, a penalty         erning the amount that can be deducted also apply for
   (similar in operation to those currently imposed on          contributions of conservation easements, intellectual
   and proposed for taxpayers)5 should be imposed on            property, vehicles7, partial interests in property, scien-
   an appraiser if the value of the property as stated in       tific property used for research, computer technology
   the appraisal exceeds the correct value of the prop-         and equipment to be used by the recipient charity for
   erty by 50 percent or more. The penalty should be            educational purposes, and inventory to be used by the
   10 percent of the amount of the overvaluation, up            recipient charity for the care of the ill, the needy, or
   to a maximum of $10,000 per appraisal (indexed for           infants. No deductions are permitted for contributions
   inflation). Second, a penalty (similar in operation          of services.
   to those currently imposed on tax return preparers)6             To claim deductions for all contributions of property,
   should be imposed on an appraiser who knew (or               taxpayers are required to have a receipt from the char-
   reasonably should have known) that the value of the          ity with its name, the date and location of the contribu-
   property as stated in the appraisal did not have a           tion, and a description of the donated property. If it is
   realistic possibility of being sustained. Appraisers         impractical to obtain a receipt, the taxpayer must have
   would continue to be subject to the current penalty          other reliable records containing this information. No
   of $1,000 under §6701 (aiding and abetting an                deduction is allowed for gifts of $250 or more unless
   understatement of tax) and potential disbarment              the donor has a contemporaneous written acknowl-
   under 31 U.S.C. 330(c) if such penalty was imposed.          edgement from the recipient organization that
4. Mandate electronic filing of Forms 8282 and 8283 as          describes and provides a good faith estimate of the
   soon as feasible, and require donors to complete             value of any goods and services provided to the donor
   information on the appraised value, including the            in exchange for the contribution. The amount of the
   name of the appraiser, before asking the charity to          taxpayer’s deduction must be reduced by the amount
   substantiate that it received the donation and indi-         of any benefit received in return for the contribution.
   cate the condition of the property when it was                   If the taxpayer claims deductions for contributions
   received.                                                    of property that total over $500, the taxpayer must file
                                                                IRS Form 8283 with his or her tax return. If the deduc-
Background                                                      tion claimed for any single item exceeds $500, the tax-
Taxpayers who itemize deductions on their annual                payer must have reliable written records that show
income tax returns are generally allowed to deduct the          when and how the item was acquired and the cost or
fair market value of property (including real estate,           other basis of the item. If the deduction claimed for any
stocks and bonds, antiques, art objects, or interest in
a business) donated to an organization exempt from
taxation under Internal Revenue Code section 501(c)(3)          4 Congress might amend tax code §6662(e) to provide for a
or to a federal, state, or local governmental entity. The         penalty equal to 10 percent of the amount of the underpay-
amount that taxpayers may deduct from their taxable               ment of tax attributable to the substantial valuation misstate-
income varies depending on the type of property con-              ment.
tributed, the type of organization to which the prop-           5 IRC §6662.

erty was contributed, and the taxpayer’s income.                6 IRC §6694.

   For certain types of property, including property            7 The American Jobs Creation Act of 2004 enacted in October

owned by the donor for one year or less, tangible per-            2004 limits the deductions taxpayers can claim for donations of
sonal property that will not be used by the receiving             motor vehicles. If the taxpayer claims a fair market value in
charity for its exempt purposes, business inventory,              excess of $500 and the vehicle is later sold by the charitable
works of art created by the donor, and property (other            organization, the deduction is limited to the gross proceeds
than publicly traded stock) contributed to a private              from the sale.

                               54   Report to Congress and the Nonprofit Sector on Governance, Transparency, and Accountability
single item other than stock exceeds $5,000, the tax-                Many donors who have goods or property that have
payer must have the item appraised by a qualified                appreciated significantly in value would be unlikely to
appraiser and attach to his or her tax return a summary          donate those items to charitable organizations, rather
of the appraisal, a signed declaration of the appraiser,         than simply retain the items for their own enjoyment or
and a signed acknowledgement from the charitable                 sell such items in the market, if their tax deduction were
organization that received the donation. An appraisal is         limited to the original cost or basis of those items. The
also required for contributions of non-publicly traded           after-tax cost of giving would rise significantly for
stock if the deduction claimed exceeds $10,000. If               donors who hold most of their assets in property or
either the claimed deduction is more than $500,000 or            family businesses if deductions for contributions of such
if the donor’s total deduction for art is $20,000 or more,       assets were limited to the taxpayer’s basis in such prop-
a copy of the qualified appraisal must also be filed with        erty, producing a significant disincentive to contribute
the donor’s return. If a charity sells contributed property      such assets to charitable organizations. When signifi-
requiring an appraisal summary within two years of               cant restrictions on non-cash gifts to charity incorpo-
receipt of the property, the charity must file Form 8282         rated into law in the 1986 Tax Reform Act led to a drop
reporting that sale with the IRS.                                in giving, the restrictions were partially repealed by
    A qualified appraisal is a written appraisal that: (1)       Congress in 1990 and fully repealed in 1993.
relates to an appraisal made no earlier than 60 days                 Strengthening appraiser and appraisal standards and
before the contribution and no later than the due date           imposing tougher penalties for improper valuations will
(including extensions) of the return on which the                help to improve the accuracy of values of deductions
deduction is first claimed; (2) is prepared, signed, and         claimed by taxpayers for donated property. In addition
dated by a qualified appraiser; (3) includes a description       to the more stringent definitions recommended for
of the property, the contribution, the appraiser, and the        qualified appraisals and qualified appraisers, federal tax
appraisal methods and results; and (4) does not involve          laws should retain the prohibition on using an inter-
an appraisal fee based on a percentage of the appraised          ested or related party as a “qualified appraiser.”
value of the property (other than certain fees paid to               The Uniform Standards of Professional Appraisal
a generally recognized association that regulates                Practice (USPAP) is recognized in the Financial
appraisers).                                                     Institutions Reform, Recovery and Enforcement Act of
    A qualified appraiser is an individual who: (1) holds        1989 as generally accepted appraisal standards required
himself or herself out to the public as an appraiser or          for use in federally related transactions. USPAP is also
performs appraisals on a regular basis; (2) is qualified to      the required standard for most state appraiser certifica-
make appraisals of the type of property being valued;            tion boards and appraisal trade associations. Just as tax
(3) is independent; and (4) understands that he or she           return preparers are subject to penalties if they willfully
may be subject to a civil tax penalty for an intentionally       or recklessly disregard tax regulations to understate
false or fraudulent overvaluation.                               a taxpayer’s liability, appraisers should be subject to
                                                                 penalties if they intentionally overstate the value of
Rationale                                                        an item by 50 percent or more to assist a taxpayer in
The Panel supports the retention of current tax law              reducing tax liability.
standards that permit taxpayers to take a deduction for              The Forms 8283 filed by taxpayers and the Forms
the fair market value of gifts of appreciated property,          8282 filed by charitable organizations if they sell or
subject to restrictions on particular types of gifts. These      dispose of the property within two years of the dona-
standards have long provided strong incentives to tax-           tion are a potentially valuable source of information
payers to make non-cash contributions to charity that            for the Internal Revenue Service. Mandatory electronic
have become a significant source of support for many             filing of these Forms would facilitate comparability of
charitable organizations, whether they use such contri-          data and provide appropriate audit flags where there are
butions in the course of their exempt activities or re-sell      significant discrepancies between the taxpayer’s claimed
the items to generate revenues to support their pro-             value and amount received by charity.
grams and services.

                               55    Report to Congress and the Nonprofit Sector on Governance, Transparency, and Accountability

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