On November 7th, 2024, the Appraisers Association of America (AAA) hosted an enlightening panel featuring Susan Hunter (moderator), Karin Gross (IRS Counsel), and Meredith Meuwley, AAS (Art Advisory Services). The panel discussed critical updates and best practices for appraisers preparing reports for gift, estate, and non-cash charitable contributions, highlighting the importance of professionalism, due diligence, and adherence to IRS guidelines. Below is a detailed summary and analysis of the discussion, crafted for CPAs, personal property appraisers, and most importantly, the taxpayer.
Appraisal Fundamentals: Essential Components
To meet IRS standards, we were reminded that appraisers must ensure that reports are thorough and defensible. Key elements include:
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Detailed Documentation: Reports should include numbered items, a total item count, cumulative sums, and high-quality images. Condition reports must go beyond vague terms like “good,” providing specific, objective details.
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Accurate Reporting: Double-check client names, value types and definitions, effective dates, valuation dates, and report dates. Use market narratives relevant to the specific assignment.
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Authenticity and Identification: Appraisers are not authenticators, but due diligence must be evident. Cite reputable resources, such as published materials or expert opinions, and explain how items were identified as authentic.
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Glossaries and Definitions: Use clear, consistent terminology, ensuring the report is understandable for IRS and legal audiences.
Comparable Sales: Supporting Value Conclusions
Meredith Meuwley emphasized the importance of carefully selected comparable sales to substantiate valuations:
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Varied Sources: Avoid relying solely on one database for comparables. Use a mix of auction and private sales.
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Detailed Comparisons: Provide descriptions, photos, sale prices, and other relevant details for each comp. For private sales, ensure sufficient documentation to validate claims.
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Asking Prices: While useful for context, asking prices are aspirational and should not be the primary basis for valuations.
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Discuss and Relate: Do not let comparables “speak for themselves.” Clearly explain how each comp relates to the subject property and why it was selected.
For unsold items, consider their relevance to market trends but avoid relying solely on these for value conclusions.
Discounts and Premiums
When applying discounts (e.g., for blockage or fractional interests) or premiums, appraisers must provide market-based justification:
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Market Data: Cite facts and evidence rather than relying on assumptions or “common knowledge.”
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Rationale: Explain why a specific percentage discount or premium is appropriate. We were reminded that 20% is not always the correct blockage discount!
Fair Market Value and Cost Basis
The IRS requires appraisers to adhere to specific valuation methodologies outlined in Publication 561 and USPAP Standards Rule 8-2(a)(x)(3). Consider the following:
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Descending Order of Priority: Selling price, comparable sales, replacement cost, and expert opinion. The most indicative value is sales price.
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Cost Basis: Always request the original cost basis, even if it is outdated or incomplete. Disclose when cost data is unavailable.
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Time Period: Use sales within a reasonable time frame, adjusting for market conditions as needed.
Unique Challenges: Provenance, Ownership, and Ethical Issues
Appraisers must address challenges such as unclear provenance or restricted ownership:
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Provenance: Explain steps taken to establish credibility, especially when physical inspection is impractical. Photographs may suffice with a strong rationale.
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Ethical Issues: Be cautious about items with ownership restrictions or questions about clear title. Fully disclose any relevant details.
Form 8283 Updates
The panel provided critical updates on Form 8283:
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Completeness: Avoid leaving blanks. If referencing attachments, insert a placeholder (e.g., “See Attached”) alongside a corresponding number.
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New Instructions: IRS scrutiny has increased. Ensure appraisals and forms are fully compliant with Publication 526 and the latest IRS guidance. New Form 8283 guidelines have been drafted and will soon be released.
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Accuracy: Misrepresentations can lead to disqualifications and penalties, including a total loss of the charitable deduction.
Considerations for Auction and Private Sales
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Chinese Auction Sales: Use caution when citing auction sales from Mainland China due to ongoing issues with non-payment. Verify consummated transactions before inclusion.
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Time Frames: While the IRS does not enforce a strict timeframe for comparables, appraisers should prioritize relevance and adjust for current market conditions.
Conservation Easements and Partial Interests
The IRS has intensified oversight of conservation easements:
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Valuation Methodology: Use discounted cash flows and support the “highest and best use” claims with factual evidence.
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Undivided Interests: Ensure appraisals address all conditions of transfer and any restrictions impacting value.
Conclusion: Professionalism and Compliance
The panel underscored the need for appraisers to balance technical rigor with transparency and honesty. Misleading or incomplete information jeopardizes clients’ deductions and an appraiser’s credibility. As regulations evolve, appraisers must remain vigilant in adhering to the latest guidance and standards.
This discussion reinforces the critical role of appraisers in ensuring that valuations are not only accurate and defensible but also compliant with the IRS’s stringent requirements. For CPAs and appraisers alike, staying informed and proactive is the key to professional success and client satisfaction.
For further guidance on these updates, refer to Treasury Regulation 1.170, IRC Section 170, Publication 526, and Publication 561.
