Working Proposal to Eliminate Inflated Personal Property and Deconstruction Material Appraisals

Introduction

Within the industry of personal property appraisal production, many brilliant individuals utilize conservative and accurate valuations and set the standard for the industry. Unfortunately, like any financial sector, there is the potential for abuse. These abuses are typically one of two types and often a combination of both.

• 1.
  The appraiser purposefully inflates appraised values by employing methods such as: inflating quantities of materials or property donated, appraising a higher quality of material or property than what is being donated, haphazardly applying depreciation methods that produce a higher value than one utilizing the correct life of the property, including materials or property on an appraisal that did not actually transfer to a nonprofit and a myriad of additional avenues ending in misrepresentation.
• 2.
  The appraiser lacks adequate education and industry knowledge to determine valuation including the above-referenced metrics such as quantity, quality, deliverables or depreciation methods and may not ensure the donee’s inventory of accepted materials matches what has been included on the appraisal.

It is of critical importance to increase personal property appraiser standards for each interested party in the donation cycle.

• 1.
  The donor of the personal property desires an accurate valuation for their income tax return to substantiate the donation so it is not disallowed.
• 2.
  The nonprofits, government entities and other qualified receiving organizations need property donations to continue fulfilling their individual missions.
• 3.
  The United States Treasury does not want to lose large sums of tax dollars due to inflated values.
• 4.
  Environmental needs mandate promotion of reuse of materials—diverting from the landfill to donation.
• 5.
  Appraisers and appraisal companies would like to work together to establish educational and best-practices as an industry and ensure only those qualified and ethical remain.

U.S. Code §170 Charitable Contributions and gifts provides details of how individuals and corporations can deduct charitable contributions on an income tax return. For donations of property (non-monetary) charitable contributions, an appraisal is required for donations over $5,000. Additionally, the appraisal must be attached to the return if it exceeds $500,000 in value. Furthermore, these appraisals must be produced by a “Qualified Appraiser” as defined below:

(E) Qualified appraisal and appraiser For purposes of this paragraph—

• (i)
  Qualified appraisal The term “qualified appraisal” means, with respect to any property, an appraisal of such property which—
  • (I)
    is treated for purposes of this paragraph as a qualified appraisal under regulations or other guidance prescribed by the Secretary, and
  • (II)
    is conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed under subclause (I).
• (ii)
  Qualified appraiserExcept as provided in clause (iii), the term “qualified appraiser” means an individual who—
  • (I)
    has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in regulations prescribed by the Secretary,
  • (II)
    regularly performs appraisals for which the individual receives compensation, and
  • (III)
    meets such other requirements as may be prescribed by the Secretary in regulations or other guidance.
• (iii)
  Specific appraisalsAn individual shall not be treated as a qualified appraiser with respect to any specific appraisal unless—
  • (I)
    the individual demonstrates verifiable education and experience in valuing the type of property subject to the appraisal, and
  • (II)
    the individual has not been prohibited from practicing before the Internal Revenue Service by the Secretary under section 330(c) [2] of title 31, United States Code, at any time during the 3-year period ending on the date of the appraisal. ¹

The proposals set forth in this analysis have been formulated after studying the appraisal producing industry, in the capacity of a CPA, for a relatively short period of time— approximately one year. To maximize efficacy, input is needed from industry leaders and representatives within specific industries including, but not limited to:

• deconstruction service companies,
• nonprofit organizations receiving deconstructed materials,
• government entities accepting donated commercial property,
• industry organizations such as Build Reuse and USGBC,
• representatives from the three leading personal property appraisal organizations (ISA, AAA and ASA,)
• IRS representatives,
• Local councils who have successfully implemented deconstruction mandates, and
• USPAP

To expedite implementation and review, our approach will encompass distributing this information in the form of letters and guidance requests to the following organizations:

• 1
  IRS—through requests for additional guidance
• 2
  Secretary of the Treasury
• 3
  Commissioner of the Revenue
• 4
  Chief Counsel of the IRS
• 5
  Local congress members from each interested individual or entity’s congressional districts

Sending correspondence in adequate volume to garner the attention of the above listed five categories of representatives is imperative

The purpose of this effort is to shore up the personal property and deconstruction appraisal standards and subsequent tax reporting through form 8283 Noncash Charitable Contributions. ² We believe it is in the best interest of all parties to ensure artificially inflated appraised values are eliminated as much as possible through increased appraiser standards, which will be discussed in detail below. The three-fold benefits we believe will come from this effort are as follows:

• 1
  Environmental Benefits: Numerous studies outline the dangers of increasing C&D waste being tipped to landfills. The EPA’s Design for Deconstruction provides data on carbon emissions from various material components of C&D waste. ³ Additionally, studies by the EPA have shown the breakdown of emissions from landfills including carbon dioxide, methane and nitrous oxide. ⁴ Finally, waste from landfills pose risks to potable water sources. ⁵ A properly executed deconstruction plan mitigates the emissions of these gasses from landfills by diverting the potential waste towards reuse or recycling. With the current climate crisis being at the forefront of political and social planning, deconstruction provides a feasible alternative to demolition and further C&D waste accumulation in landfills
• 2
  Workforce Development: Increases in local mandates for deconstruction, like those implemented in Portland, OR and Milwaukee, WI, have the potential to create jobs within the deconstruction industry requiring specific job training and the potential for long-term employment in a growing economic sector. ⁶
• 3
  Tax Planning: With the changes implemented in the Tax Cuts and Job Act (TCJA) theSchedule A “Itemized Deductions” has been limited with the $10,000 SALT cap, $750,000 mortgage value interest limitation and the removal of Miscellaneous Itemized Deductions. In concert with the removal of the phase-out limitation of the Schedule A, Charitable Contributions (both monetary and non-monetary) remain the only portion of the Schedule A without new imposed limitations. In fact, monetary contributions have been increased to 60% from 50% of AGI while non-monetary have remained at 50%, both with a five year carry-forward. Corporate taxpayers can still donate non-monetary contributions with the 10% net income limitation (with certain add-backs.) Protecting the tax incentives driving individuals or corporations to donate rather than demolish contributes to the accomplishment of the first two benefits while also acting as a legitimate and valuable tax-planning strategy. ⁷

Current Appraiser Standards

USPAP Uniform Standards of Professional Appraisal Practice was adopted by Congress in 1989 and is recognized as promulgating performance standards for appraisers in the United States. USPAP covers both real estate appraisers, which require licensure and personal property appraisers, which do not. The Appraisal Foundation created The Personal Property Appraiser Qualification Criteria that has been effective as of January 1, 2018. ⁸ However, qualifications of personal property appraisers are often achieved by becoming a member of an appraisal organization. The most common three are the American Society of Appraisers (ASA,) International Society of Appraisers (ISA,) and Appraiser Association of America (AAA.) Each organization offers core courses and membership requirements. Some of the requirements of these organizations include the following:

• 30 semester hours of college-level education (an Associate Degree meets this requirement)
• Each course credited toward the required number of qualifying hours should represent a progression by which the appraiser’s knowledge is increased.
• 120 creditable classroom hours
• Completion of a 15-hour Personal Property USPAP Course
• Completion of a course and successfully passing an examination in valuation theory and principles at a minimum of 45 hours
• 60 credit hours of education covering 12 topics emphasizing the appraisal of personal property
• A Bachelors, Masters or Doctoral degree in valuation theory and/or personal property appraisal from an accredited college or university will fulfill the requirement for valuation theory.
• 70 hours of Continuing Education during each 5 years preceding credential renewal—20 hours must be in valuation theory
• 700 hours of personal property appraisal experience
• Increased hours for areas of specialization

Proposed Personal Property Appraisal Standard Enhancements

Upon perusal of these standards outlined above and in more detail from The Appraisal Foundation, one could conclude standards are adequately rigorous to ensure only individuals with high educational attainment and market-centered training comprise the industry. However, here is what has sometimes been observed in practice:

• Prior to 2018, individuals could be “grandfathered” into the main appraisal organizations including the American Society of Appraisers (ASA,) International Society of Appraisers (ISA,) and Appraisers Association of America (AAA) requiring zero hours of any college-level coursework. We suggest it best if appraisers have a college degree but the passing of a rigorous licensing examination, similar in difficulty to the exam required by real estate appraisers, could allow the “grandfathering-in” provision while maintaining a high intellectual standard for appraisers.
• Universal educational standards for each appraisal organization should be implemented. Currently, each organization has varying levels of training and classes required to become a member. However, those with higher standards can allow someone with a membership level from another organization with lower standards to obtain a membership without adhering to their specific training requirements.
• Course specific content with respect to deconstructed material valuation needs to be offered. Very few courses are offered for household property and we have been unable to find any for used building materials. The majority of courses focus on art, antiques, gems, coins and jewelry.
• The holding of an Associate or Bachelor’s degree for holders of an appraisal license is0 strongly recommended, as referenced above.
• We would like to work closely with community college systems to provide both in person and online courses specific to the industry as well as encourage employers to invest in their employees to help defray the costs of the college education. We plan on offering this to our employees with a provision they must continue working for the company for two consecutive years or be required to pay back a portion of the tuition.
• Appraisers could potentially fabricate the number of hours they have worked within the industry with little oversight to reach the mandatory experience hours requirement. Requiring a certain number of verifiable “trainee” hours prior to receiving a license should be implemented. Currently appraisal organizations operate on an honor system, without verification. Real Estate Appraisers are required to provide the address, the type of appraisal and several redacted appraisals demonstrating applicant’s completion. Each appraisal completed correlates with a set number of hours earned per appraisal. Similar standards should apply to personal property appraisers.
• More rigorous examinations are needed, similar to the real estate appraisal industry, with strict oversight of testing facilities. This would also include having an entity separate from the appraisal organization create and administer the examination. Current appraisers should be required to take and pass this exam within a reasonable timeframe before subsequent disqualification.
• Examinations including the production of a “qualified appraisal” should be closely proctored to eliminate cheating on this element of examination since it can be accomplished remotely.
• Ethics complaints should be investigated in a timely manner with suspension of credentials found in a searchable online forum.
• The creation of a Personal Property Appraisal license should be developed. We recommend the leading personal property appraisal organizations to work together to create the licensure exam under the direction of USPAP. The same entity referenced above to administer examinations could govern licensing.
• The overseeing entity could be similar to Virginia’s DPOR (Department of Professional and Occupational Regulations) which governs Real Estate Appraisers as well as other professional occupations within Virginia. The mission of the DPOR is “to protect thehealth, safety, and welfare of citizens of the Commonwealth of Virginia by administeringand enforcing the laws regulating commercial occupations and certain professions as designated by the General Assembly.” Utilizing an online search portal, one can check to ensure proper licensure, report violations or see when someone has been reported and found guilty of violations. In some cases, a suspension of licensing may be enforced
• Outreach to colleges and university business departments to create Associate, Bachelor and Master’s degrees with either a major or a concentrated area of study in Personal Property Appraisals and valuations.
• Encouraging the IRS to provide a list of Qualified Appraisers in conjunction with USPAP to allow the public to quickly search and determine if an appraiser’s claimed qualifications can be substantiated as well as information on college courses and degree attainment.

Current Personal Property and Deconstructed Material Valuation Pitfalls

Proper valuation of deconstructed building materials is critical in producing an accurate appraisal valuation when producing a qualified appraisal. Unfortunately, the practice of utilizing construction software called “RS Means” has been utilized in the personal property appraisal industry when determining valuation. The more conservative, accurate and correct methodology to employ should be the sales comparison approach, in which comparable sales are researched in the subject’s market to determine the Fair Market Value.

As a background, RS Means software is used within the construction industry for producing estimates for new structure base pricing, upon which a profit margin can be calculated and then realized in the final costing model. Additionally, the software allows valuation based on geographical location and incorporates the price variances within different markets like Boston, MA compared to Cincinnati, OH. Hence, the primary usage is for a cost comparison of different property or structure materials in different geographic locations. From the RS Means website, “RS Means data is used by construction professionals to create budgets, estimate projects, validate their own cost data and plan for ongoing facilities maintenance. Localized, accurate and complete, RS Means data is the construction industry standard.” ⁹

There is no indication, whatsoever, that this software was created to produce data to be used for recycled material and in determining the Fair Market Value. The IRS suggests RS Means is recommended software as a means of achieving a cost segregation approach. ¹⁰

In addition to the methodology of the “cost approach” not being a best practice for the valuation of building materials, the RS Means software presents multiple issues resulting in inaccurate assignment valuations. The first issue is life expectancy—building materials have different life expectancies and depreciate at different rates. For example, the life expectancy of brick is 100+ years, whereas the life expectancy of most appliances are under ten. For this reason, applying a single depreciation rate with the “age-life method” for all materials would result in inaccurate valuations. Secondly, there is the issue of updating—it is uncommon to come across a 1950s home devoid of renovation updates. Typically, kitchens, bathrooms and other parts of a home have received updates, creating increased variance in life expectancies of the numerous materials. Older materials can become classified as antiques, consequently increasing their desirability with a resultant corresponding appreciation in value—most assuredly not depreciating. This cannot be accounted for within the confines of RS Means software. Finally, remembering this software’s purpose is one of providing an estimation tool is of primary import and the specific material valuations calculated are to be utilized generally. If a property included high-end upgrades such as Viking appliances, the software does not accommodate categorization for this option and would result in undervaluation. Conversely, a low-end appliance would be overvalued.

Due to the considerations presented above, we recommend specific language barring the usage of RS Means software when valuing deconstructed materials.

Proposed IRS-enacted Appraisal Review Enhancements

Current IRS codifications require the electronic or paper-filed inclusion of the appraisal substantiating the value of donation on form 8283 when the value is in excess of $500,000. We would suggest mandated inclusion of the appraisal in all instances. This allows the IRS immediate access to appraisals for inspection to determine if further review/audit is recommended.

It is recommended that the IRS include an area on form 8283 identifying the appraisal as a deconstructed material appraisal type. This marks the return as requiring subsequent inspection due to the current inflation techniques in wide use throughout the industry. Additionally, for deconstruction donation appraisals, the square footage of the structure could be included on form 8283 in order for a quick calculation of price per square foot. Additionally, the introduction to the appraisal can make mention of outlying items of value such as high-end appliances orantiques to explain a higher square footage rate.

The Art Advisory Panel of the Commissioner of the Internal Revenue was established in 1968. There are now about 20 members divided into the subgroups: “Fine Arts Panel” and “Decorative Arts Panel.” The panel is chartered under the Federal Advisory Committee Act (FACA), an act passed in 1972. ¹¹ Just like the Art Advisory panel is an approved group that meets privately to review art appraisals, a similar panel could be commissioned under the FACA for deconstruction representatives to review appraisals with neutrality. This would ensure deconstruction appraisals remitted to the IRS were reviewed on any basis determined best by the IRS. This could include reviews at random, values above a certain threshold, values by an appraiser found to often inflate values, appraisals to nonprofits believed to often substantiate inflated values implicitly or explicitly. Best-practices could be gathered by the panel through input from industry leaders including those within the deconstruction services, nonprofit recipients of materials, appraisers, tax professionals and government environmental initiative groups.

We also recommend a close review by the IRS of any 8283 with an associated FEIN of an appraiser with a history of inflations and inaccuracies as well as nonprofits and deconstruction contractors appearing to embrace unethical practices. In a relatively small niche market, there appears to be a history of abuse of the deconstruction appraisal and donation process by certain entities. For those within the industry deconstructing, receiving materials and appraising ethically, there will not be reluctance to open their work and practices to examination. As a CPA, I often prepare Schedule Cs and Es with the IRS in mind as I collect client information. If information presented by the client does not appear to align with strict adherence to admissibility under the tax code, I will not complete a return including this potentially falsified information. My work is open to review and I would be able to defend my application of the tax laws on the return. Innocent mistakes found in the process would provide me with a clearer understanding and improve my subsequent work product. The same theory could apply to appraisals and received donated materials. Those operating within the ethical confines of the law will not object to pointed reviews of their processes and products. Innocent mistakes in application of value could be rectified and future products and procedures would become subsequently superior.

Ethics Concerns

Like any financial sector, personal property appraisal production is susceptible to abuses. Per law, an appraiser may not charge appraisal fees based on the value of the appraised property. However, this regulation could be skirted by word-of-mouth throughout the industry, where consumers know to whom they should go to receive inflated appraised values. The IRS is not naïve to these potential abuses and are closely monitoring non-monetary charitable donations on tax returns. We must ensure these tax deductions are protected from unethical practices by appraisers or any other industry players.

In combatting abuses throughout the industry, we suggest the following safeguards to be shored-up and/or implemented:

• Appraisal fees must correlate with the work needed for their completion and never based on the underlying value of the appraised property. This is already a regulation but we have seen it abused in practice. Appraisal companies can produce a detailed estimate of the staff hours needed to complete the appraisal, which can be compared to other similar appraisals to ensure prices are based on work completed not valuation.
• The appraiser should ensure the nonprofit provides a detailed inventory of every donated item crossing their threshold to the appraiser prior to the final appraisal being submitted to the client. Per law, donors can only claim the value for materials or property actually received by the nonprofit. The appraiser can provide the inventory listing to the nonprofit, at the end of the engagement, but the nonprofit must verify they received and accepted every item included on the list
• Appraisers need to revisit the valuation price-points they use in determining Fair Market Value of materials and property. Real-time price comparisons from second-hand sale of similar materials should be made available and used in determination of value. These price-points could potentially be accessed by implementation of an app-based sales mechanism capturing sales in real-time around the nation. An added benefit would the accessibility of sales data in specific geographic regions as a tool in determining accurate and conservative valuation. Building materials on the resale market will be quite different in New York City than in Rosendale, Wisconsin. This would be in the best interest of the IRS to closely follow any implementation of this type of system. The result will most likely be a reduction in appraisal valuations and an associated decrease in the value of tax deductions when more accuracy and regional real-time sales prices are utilized.
• Ethical personal property appraisers can and must work within a collegial collaboration relationship to share research and best-practices. Those within the industry committed to these ethical practices are anxious to shore up standards and work together to ensure these critical tax incentive “carrots” remain in force. The creation of online social media industry groups, appraiser conferences and other modes of collaboration will encourage the promulgation of ongoing best-practices.
• Mutually beneficial relationships between appraisers and nonprofits must be eliminated to ensure appraisals are produced independently of any outside influence from nonprofits leading to unethical practices such as increasing valuations to please a nonprofit’s client,for example.
• All organizations/companies need to remain independent. Appraisers should not have approved deconstruction contractors or nonprofits. Conversely, nonprofits should not have approved appraisers or deconstruction firms and deconstruction firms should nothave approved appraisers or nonprofits.
• The client needs to choose freely with whom they wish to work throughout each portion of the deconstruction/donation cycle. Otherwise, pressure may be placed on the organizations/companies resulting in the conduct of unethical practices to remain on “approved” lists.

Conclusion

Tax incentives produced through the use of Form 8283 are at a critical juncture due to theabuses within the industry and must be protected. We are slowly but surely moving towards an economy with a hopeful trend from demolition to deconstruction as landfill usage is being recognized as an unsustainable alternative to dealing with our waste. The necessity of climate initiatives have generally gained acceptance as a bipartisan and critical effort to set a climate plan into place mitigating further environmental damage. However, we recognize that tax incentives must continue to exist as a tool in the waste diversion arsenal. Deconstruction generally takes longer than demolition, costs sometimes twice as much and requires careful planning and execution. Tax deductions, at the individual or corporate level, can potentially offset these costs or bring the taxpayer slightly ahead financially. It would be naïve to suggest studies by the EPA on C&D waste within landfills producing methane gas, carbon emissions and leakage into groundwater will be enough to change behavior when pushing an environmental choice that will cost more for the consumer and take longer. Local deconstruction ordinance mandates can remain the stick but work in complement with the tax carrots. Our hope is to generate conversations among industry leaders and lead to an action plan to include a defined timeline of expected appraisal standard changes with the unified goal of protecting the tax incentives as one of the best “carrots” we have in our toolshed to accomplish measured C&D waste diversion.

Please provide feedback and further considerations and research to Jessica Marschall: Jmarschall@marschallaccountingservice.com; (414) 217-0147—call or text

Reference Links:

¹ https://www.law.cornell.edu/uscode/text/26/170

²IRS Form 8283 Noncash Charitable Contributions https://www.irs.gov/pub/irs-pdf/f8283.pdf

³Design for Deconstruction, EPA https://www.epa.gov/sites/production/files/2015-11/documents/designfordeconstrmanual.pdf

⁴Landfill Gas Basics, Chapter 2: https://www.atsdr.cdc.gov/HAC/landfill/PDFs/Landfill_2001_ch2mod.pdf

⁵ Leachate from Land Disposed Residential Construction Waste, Journal of Environmental Engineering, 2002: William Weber, Yong-Chul Jang, Timothy Townsend, Steven Laux,

⁶A Report on the Feasibility of Deconstruction: an investigation of deconstruction activity in four cities https://www.huduser.gov/Publications/PDF/deconstruct.pdf

⁷Tax Policy Center’s Briefing Book https://www.taxpolicycenter.org/briefing-book/how-did-tcja-change-standard-deduction-and-itemized-deductions

⁸Appraisal Foundation, Personal Property Appraisal Qualification Criteria https://www.appraisalfoundation.org/imis/TAF/Standards/Qualification_Criteria/Qualification_Criteria__PP_/TAF/AQB_PPAQC.aspx?hkey=36f481cc-8629-47fa-9584-e2dd7f702e88

⁹ https://www.rsmeans.com/

¹⁰ https://www.irs.gov/businesses/cost-segregation-audit-techniques-guide-chapter-3-cost-segregation-approaches#Required_Approach

¹¹ https://itsartlaw.org/2019/06/06/spotlight-irs-art-advisory-panel/