Appraisal Requirements for Charitable Contribution Deductions
Levine, Mark Lee, Real Estate Issues
MOST TAXPAYERS ARE FAMILIAR WITH THE BENEFIT of charitable contribution deductions, as provided under the federal income tax law, Code Section 170. (1) These deductions have been in existence for many decades, and most taxpayers recognize the importance of taking what can be significant deductions on their federal and state tax returns.
When donating to charity, assuming the gift is otherwise qualified, (2) taxpayers generally are able to deduct the fair market value of the contribution. The definition of what is "fair value," or "fair market value," along with other related questions as to value, the type of value, etc., is a major issue in federal tax law, as it is within the appraisal industry. However, the summary position is that the meaning of fair market value involves an exchange between a willing buyer and willing seller, without undue pressure. This approach has come from case law. The tax code has no singular definition of fair market value for all purposes.
Generally speaking, one of the major concerns with a charitable gift is determining the fair market value on the date of the charitable contribution, since the fair market value is normally the amount that can be deducted for federal tax purposes. (3) The fair market value is the crucial consideration as to the amount of the deduction; thus the requirements to determine fair market value must be met.
The Code [section] 170 regulations specify the requirements for supporting the deduction relative to a proper appraisal. There have been many articles and discussions on these regulations as to what constitutes a proper appraisal as well as the issue of who is an approved appraiser for purposes of the tax requirements. (4) Not surprisingly, valuation issues spawn much controversy. The regulations, under Treasury Reg. [section] 1.170A-13, and generally under Code [section] 170, attempt to place more controls on the valuation issue because of the importance of this deduction and the concern as to what constitutes fair value.
Valuation of specific property has been in the news of late regarding gifts of paintings, conservation easements, (5) and even contributions of automobiles to charities. In the latter case, Congress recently saw fit to provide additional legislation which limits the deductibility of contributions of automobiles, especially because of what were thought to be abuses. (6)
Although Congress attempted to tighten the restrictions of charitable contribution deductions in some cases, along with the Treasury's issuing Treasury Reg. [section] 1.170A-13 on substantiation of the fair market value of a charitable contribution, there continues to be additional concern with such contributions, and the determination of the fair market value of the gifts. As a result, the IRS promulgated additional Proposed Regulations on the subject of the charitable contribution deduction and substantiation requirements. Some of the original Regulations ([section] 1.170A-13) were generated by the Treasury as a result of Acts by Congress, which were passed in 2004 and 2006. These Acts attempted to strengthen the requirements for such deductions. (7) The Proposed Regulations under Treasury [section] 1.170A-17 go further to strengthen the requirements.
PROPOSED REGULATIONS ON SUBSTANTIATION AND REPORTING FOR NON-CASH CHARITABLE CONTRIBUTIONS
Under the Proposed Regulations, (8) the Treasury states: "These Proposed Regulations provide guidance concerning substantiation and reporting requirements for cash and non-cash charitable contributions under Section 170 of the Internal Revenue Code." In particular, the Proposed Regulations were issued in response to additional requirements for substantiation and support for charitable contributions that were provided for under the American Jobs Creation Act of 2004 (9) and under the Pension Protection Act of 2006. The Proposed Regulations are intended to apply to contributions that occur after the date the regulations are published as Final Regulations. …