At The Green Mission, we attempt to work closely, as colleagues, with other deconstruction and personal property appraisers, nonprofits, 501(c)(3) charities and deconstruction contractors throughout the country who promulgate and work to uphold standards of conservatism and accuracy in appraisal valuation. Deconstruction and personal property appraisers lacking an educational background in a related field such as accounting, finance, construction management, or general business course work at a college level, have been “grandfathered” in prior to industry changes of 2018. The deconstruction appraisal field is relatively small throughout the country. There are some experienced and well-educated appraisers who have years of relevant experience. Unfortunately, the barriers to entry are relatively low and there could potentially be appraisers lacking the experience to properly appraise. Failure to uphold high standards places waste diversion, deconstruction, and nonprofit mission fulfillment at risk of being impeded by inflation of appraised values. The taxpayer pays the brunt of the burden when appraisals are inflated and inaccurate. There are substantial underpayment penalties: 20% if the appraised value or basis is 200% or more of the correct amount and 40% if 400% or more. Often, if a taxpayer is audited and the non-monetary charitable tax deduction is disallowed, the appraiser and nonprofit are not notified. There are few remedies for a taxpayer receiving an unqualified appraisal. A case study recently played out in a court decision from January 2018.
Below are links providing a synopsis of the case, its decision, and the ramifications:
https://www.wealthmanagement.com/philanthropy/charitable-deduction-deconstruction
http://www.parkertaxpublishing.com/public/donation-house-not-deduct.html
http://plannedgiving.uci.edu/?pageID=134&docID=790
What can we learn as an industry from this case?
- 1.
The appraiser first prepared a real estate appraisal for the home to be deconstructed, which resulted in a value of $675,000. This was the wrong type of appraisal to prepare from the outset as the home was to be deconstructed with the several materials donated as personal, not real, property.
The appraiser concluded that moving the entire House to another site would "produce the highest return to the non-profit organization," and was thus superior to deconstruction, which would "destroy” part of the structure during the process." J.R 379. 1
- 2.A second appraisal was prepared to reflect a deconstructed state of the home at less than half the value of the real estate appraisal at $313,000. A separate appraisal was prepared valuing the personal property within the home at $24,000.
- 3.The IRS rejected the first filing, which included the real estate appraisal value. The taxpayers filed an amended return with the lower value. The IRS claimed a land severance was not properly filed in Maryland. Further, even if the severance had been made, the deduction would not have been allowed because the taxpayer did not remit a Qualified Appraisal, which was deficient in several respects.
- 4.The court also determined that, even if the conveyance had been valid, the Manns would not be entitled to a deduction because neither of their appraisals were qualified appraisals. 2
- 5.The first appraisal was deemed unqualified because it was a real estate appraisal. The second appraisal was also invalid because “it calculated the cost to build the house with new materials and subtracted the labor, depreciation and administrative cost.” The nonprofit estimated that less than half the value of the appraised materials would be taken but admitted later that “the recovery effort was less successful than anticipated.” The court correctly reasoned that an appraisal of $313,000 was improper and would not be allowed. The nonprofit gauged a value minimum value of $150,000 but later asserted the efforts to remove materials was not as successful as hoped. For an appraisal to come in at double this benchmarked value would lead one to wonder how a value that high was calculated.
- 6.The nonprofit did not keep a manifest of materials and items removed, which crossed the threshold of their nonprofit. In addition, a portion of the materials would be necessarily destroyed while in the process of training their workforce team. Some materials must purposefully be destroyed for the purpose of training, such as demonstrating how a window can break when too much force is exerted.
- 7.
Additionally, the IRS would not allow the appraisal for personal property because it, too, was deemed Unqualified. The appraisal didn’t include “fair market comparisons for each item, and it arbitrarily depreciated certain items of instead of following its own 42 percent guideline.” 3
A qualified appraisal must include the method of valuation used by the appraiser as well as the specific basis for the valuation, "such as specific comparable sales transactions." 26 C.F.R. § 1.170A-13(c)(3)(ii)(J), (K). Here, the appraisal fails in several ways. First, it does not provide the specific basis and documentation for valuing all of the 40 items of household furniture at $372,000 and instead includes fair-market comparators for only a few items. Second, even if the appraisal could substantiate that sum, its ultimate conclusion as to the donation value of the Personal Property would still be flawed because the appraisal does not adhere to its own avowed methodology, which requires both the deduction of certain costs and then depreciation by 42 percent. Instead, items are depreciated haphazardly. The Adirondack chairs are listed at $149.99 and $129.99 new then valued at $100, a depreciation of between 22 and 33 percent. The gas fireplace, listed as $2,778 new and valued at $2,500, was depreciated by only 10 percent. Because the appraisal is internally inconsistent, valuing items by a method other than the one claimed, the Court finds that it fails to include the explanation of the basis for the valuation required by 26 C.F.R. 1.170A-13(c)(3)(ii)(K) and thus is not a qualified appraisal within the meaning of the applicable regulations. The IRS will thus be granted summary judgment as to the Personal Property donation. 4
This complex case required an understanding of IRS non-monetary contribution charitable tax deductions, coupled with proper application of required appraisal valuation methodology. In the end, these taxpayers lost a valuable tax deduction that could have been realized had IRS guidelines been followed.
Some valuable learning tools from this case:
- 1.Real property appraisals are never appropriate for a deconstruction personal property appraisal. The sum-of-the-parts is always less than the whole when it comes to deconstructed material. The constructive severance principle applies as soon as real property is deconstructed and removed from the structure.
- 2.Deconstructed material value can never be derived from taking costs of building new and depreciating. Please see other TGMI articles detailing the misuse of RS Means and other new construction-related cost software when valuing deconstructed materials. Just like driving a car off the lot cuts the value precipitously. The only appraisal valuation methodology to be used is comparable sales in relevant geographical markets and within a prescribed timeframe. The deconstruction value at which the appraise arrived after first erroneously valuing as real property was still quite inflated due to the utilization of new-cost construction materials with subtracted depreciation.
- 3.The nonprofit must keep an inventory of all accepted donations to be included within the appraisal. Devoid of this inventory, the appraiser cannot ascertain the quantity and quality of materials accepted.
- 4.In addition to losing the deconstructed material donations, the taxpayer also lost their personal property appraisal donation tax deduction because the appraiser did not substantiate the donation through photographs and full inventory.
At The Green Mission Inc, we recognize and strive to uphold IRS qualified appraiser and appraisal standards to ensure that accurate methodology is employed and accurate valuations are realized. Our utmost concern is for the taxpayer and ensuring they are able to take a charitable contribution deduction based on accurate valuations void of inflations or poor methodology. We provide services throughout the United States.
