Qualified Property Appraisers for Estate Tax Purposes

By: Pamela K. Wheeler and David W. Wulfers

When valuing assets for estate tax purposes, qualified appraisals should be used. A qualified appraisal is one which satisfies certain requirements set forth in the Internal Revenue Code, regulations and other documentation published by the Internal Revenue Service (“IRS”). The reasons to use qualified appraisals include avoiding IRS penalties for under-reporting values, as well as avoiding the over-valuation of properties. Each may result in the taxpayer being caught with having used a bad value. Those penalties can range from 20% to 40% of the portion of the underpayment attributable to any substantial estate tax valuation understatement.

In the case of valuing assets, other than money and publicly traded securities,^[1] that are being donated to a non-profit entity for which a deduction in excess of $5,000 will be reported, it is a mandatory IRS requirement that a qualified appraisal/appraiser be used.^[2] Although the IRS requirements for such transactions are not required for valuations of assets for estate tax reporting purposes, it is recommended qualified appraisers be employed and those individuals prepare appraisals which satisfy the IRS requirements for a qualified appraisal. Since the appraisal reports must be attached to the estate tax return and will thus be reviewed by IRS, qualified appraisals will likely be more persuasive than appraisal reports which do not meet IRS standards.

Effective July 30, 2018, the IRS issued new final regulations providing “guidance concerning substantiation and report requirements for cash and noncash charitable contributions.”^[3] These final regulations include a new section, § 1.170A-17 Qualified appraisal and qualified appraiser, which may be helpful in understanding what to look for when employing an appraiser for valuation of assets for estate tax reporting purposes.^[4] Section 1.170A-17 was effective on and after January 1, 2019, and may be relied upon for appraisal for returns filed after August 17, 2006.^[5]

Qualified Appraisals

Although not mandatory, it is recommended that appraisals obtained for establishing values of estate assets meet the IRS requirements for a qualified appraisal. Treas. Reg. § 1.170A-17^[6] defines a qualified appraisal as, in part,

(a) Qualified appraisal—(1) Definition. For purposes of section 170(f)(11) and § 1.170A‑16(d)(1)(ii) and (e)(1)(ii), the term qualified appraisal means an appraisal document that is prepared by a qualified appraiser (as defined in paragraph (b)(1) of this section) in accordance with generally accepted appraisal standards (as defined in paragraph (a)(2) of this section) and otherwise complies with the requirements of this paragraph (a).

(2) Generally accepted appraisal standards defined. For purposes of paragraph (a)(1) of this section, generally accepted appraisal standards means the substance and principles of the Uniform Standards of Professional Appraisal Practice, as developed by the Appraisal Standards Board of the Appraisal Foundation.^[7]

Information Which Should Appear in a Qualified Appraisal

Treas. Reg. § 1.170A-17(a)(3) describes what a qualified appraisal document must include. It provides in part,

(i) The following information about the contributed property:

(A) A description in sufficient detail under the circumstances, taking into account the value of the property, for a person who is not generally familiar with the type of property to ascertain that the appraised property is the contributed property.

(B) In the case of real property or tangible personal property, the condition of the property.

(D) The fair market value, within the meaning of § 1.170A‑1(c)(2), of the contributed property on the valuation effective date;

* * *

(iv) The following information about the appraiser:

(A) Name, address, and taxpayer identification number.

(B) Qualifications to value the type of property being valued, including the appraiser’s education and experience.

(C) If the appraiser is acting in his or her capacity as a partner in a partnership, an employee of any person, whether an individual, corporation, or partnership, or an independent contractor engaged by a person other than the donor, the name, address, and taxpayer identification number of the partnership or the person who employs or engages the qualified appraiser;

(v) The signature of the appraiser and the date signed by the appraiser (appraisal report date);

(vi) The following declaration by the appraiser: “I understand that my appraisal will be used in connection with a return or claim for refund. I also understand that, if there is a substantial or gross valuation misstatement of the value of the property claimed on the return or claim for refund that is based on my appraisal, I may be subject to a penalty under section 6695A of the Internal Revenue Code, as well as other applicable penalties. I affirm that I have not been at any time in the three‑year period ending on the date of the appraisal barred from presenting evidence or testimony before the Department of the Treasury or the Internal Revenue Service pursuant to 31 U.S.C. 330(c)”;

(vii) A statement that the appraisal was prepared for [estate] tax purposes;

(viii) The method of valuation used to determine the fair market value, such as the income approach, the market‑data approach, or the replacement‑cost‑less‑depreciation approach; and

(ix) The specific basis for the valuation, such as specific comparable sales transactions or statistical sampling, including a justification for using sampling and an explanation of the sampling procedure employed.^[9]

Although not required by Treas. Reg. § 1.170A-17, one may consider including a summary section in the appraisal. Treas. Reg. 1.170A-13(c)(4)(i) defines an appraisal summary as,

(A) Is made on the form prescribed by the Internal Revenue Service;

* * *

(C) Is signed and dated by the qualified appraiser (within the meaning of paragraph (c)(5) of this section) who prepared the qualified appraisal (within the meaning of paragraph (c)(3) of this section); and

(D) Includes the information required by paragraph (c)(4)(ii) of this section.

Treas. Reg. 1.170A-13(c)(4)(ii) describes what is to be included in the appraisal summary. It provides in part,^[10]

An appraisal summary shall include the following information:

(A) The name and taxpayer identification number of the [decedent] . . . ;

(B) A description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property that was appraised is the property . . . ;

(C) In the case of tangible property, a brief summary of the overall physical condition of the property at the time of the contribution;

(D) The manner of acquisition (e.g., purchase, exchange, gift, or bequest) and the date of acquisition of the property by the [decedent], . . . ;

(E) The cost or other basis of the property adjusted as provided by section 1016 [26 USCS § 1016];

* * *

(I) The name, address, and (if a taxpayer identification number is otherwise required by section 6109 [26 USCS § 6109] and the regulations thereunder) the identifying number of the qualified appraiser who signs the appraisal summary and of other persons as required by paragraph (c)(3)(ii)(E) of this section;

(J) The appraised fair market value of the property on the date of [death of the decedent];

(K) The declaration by the appraiser described in paragraph (c)(5)(i) of this section;

(L) A declaration by the appraiser stating that –

(1) The fee charged for the appraisal is not of a type prohibited by paragraph (c)(6)^[11] of this section; and

(2) Appraisals prepared by the appraiser are not being disregarded pursuant to 31 U.S.C. 330(c) on the date the appraisal summary is signed by the appraiser; and

(M) Such other information as may be specified by the form.

Qualified Appraisers

In addition to requirements for a qualified appraisal, that appraisal should be performed by a qualified appraiser. The term qualified appraiser is defined in Treas. Reg. § 1.170A-17(b) which provides in part,

(b) Qualified appraiser—(1) Definition. For purposes of section 170(f)(11) and § 1.170A‑16(d)(1)(ii) and (e)(1)(ii), the term qualified appraiser means an individual with verifiable education and experience in valuing the type of property for which the appraisal is performed, as described in paragraphs (b)(2) through (4) of this section.

(2) Education and experience in valuing the type of property—(i) In general. An individual is treated as having education and experience in valuing the type of property within the meaning of paragraph (b)(1) of this section if, as of the date the individual signs the appraisal, the individual has—

(A) Successfully completed (for example, received a passing grade on a final examination) professional or college‑level coursework, as described in paragraph (b)(2)(ii) of this section, in valuing the type of property, as described in paragraph (b)(3) of this section, and has two or more years of experience in valuing the type of property, as described in paragraph (b)(3) of this section; or

(B) Earned a recognized appraiser designation, as described in paragraph (b)(2)(iii) of this section, for the type of property, as described in paragraph (b)(3) of this section.

(ii) Coursework must be obtained from an educational organization, generally recognized professional trade or appraiser organization, or employer educational program. For purposes of paragraph (b)(2)(i)(A) of this section, the coursework must be obtained from—

(A) A professional or college‑level educational organization described in section 170(b)(1)(A)(ii);

(B) A generally recognized professional trade or appraiser organization that regularly offers educational programs in valuing the type of property; or

(C) An employer as part of an employee apprenticeship or educational program substantially similar to the educational programs described in paragraphs (b)(2)(ii)(A) and (B) of this section.

(iii) Recognized appraiser designation defined. A recognized appraiser designation means a designation awarded by a generally recognized professional appraiser organization on the basis of demonstrated competency.^[12]

In addition to requirements for a qualified appraiser, one should also be aware that Treas. Reg. § 1.170A-17(b)(5) describes various individuals who are defined not to be qualified appraisers.^[13]

If estate assets include ownership interest of the decedent in a business entity and a business appraisal is obtained for those assets, the business appraiser should agree to prepare the appraisal to conform to the above regulation and with various IRS revenue rulings, including Rev. Rul. 59-60, 1959-1 C.B. 237. Although Rev. Rul. 59-60 outlines approaches, methods and factors to be considered in valuing shares of capital stock in closely held corporations for estate and gift tax purposes, its application was extended to income and other tax purposes as well as to business interests of any type in Rev. Rul. 65-192 at 3.02 and 4.01, 1965-2 C.B. 259 (superseded in part by Rev. Rul. 68-609, 1968-2 C.B. 327).

Reasons to Use a Qualified aAppraiser for Valuation of Assets for Estate Tax Reporting Purposes

Tax Court decisions involving valuation of assets in estates indicate that if a taxpayer uses a well‑qualified independent appraiser, the taxpayer has a good chance of blocking an inflated IRS valuation. An example is Estate of Vinson v. Commissioner, 1963 Tax Ct. Memo LEXIS 273, T.C. Memo 1963-70, 22 T.C.M. (CCH) 280.

In Vinson, the estate reported a value of $157,000 on the estate tax return as the value of approximately 428 acres of land. The IRS appraiser valued the land at $897,422. The IRS determined a deficiency in petitioner’s estate tax in the amount of $450,866.94. After the case was tried in tax court, the court used petitioner’s expert appraiser’s value of approximately $240,000 as the value. The court noted petitioner’s appraiser was well qualified, having engaged in appraisal work for approximately 29 years, a member of the “Cleveland Real Estate Board; the American Institute of Real Estate Appraisers; the Society of Residential Appraisers; and the American Right-of-way Association.” 1963 T.C. Memo LEXIS 273 at *13, n.2. The court also noted that petitioner’s appraiser taught appraisal classes in college and continuing education courses and had written articles and books on appraising. Id.

As all appraisals are attached to the estate tax return, the use of a qualified appraiser should help prevent costly litigation as to estate tax values. Even if there is litigation, the tax court gives credence to appraisals by qualified appraisers. Pittsburgh Plate Glass Co. v. Commissioner, 1965 Tax Ct. Memo LEXIS 170, at *5, T.C. Memo 1965-159, 24 T.C.M. (CCH) 884, (“The evidence presented shows that the purchaser employed a reputable appraisal company to determine the fair market value of the existing properties to be transferred, that company made a thorough examination of those properties and gave a detailed report to the purchaser showing its method and conclusion as to the fair market value of the properties. The best evidence in this record of the fair market value of the properties in question is that appraisal.”).

It is equally important not to have an inflated appraisal as the taxpayer may be bound by it. Climer v. Commissioner, 1994 Tax Ct. Memo LEXIS 24 at *19, T.C. Memo 1994-29, 67 T.C.M. (CCH) 2017 (“Values for property as reflected on Federal estate tax returns are treated as admissions and lower values generally should not be substituted without cogent proof by the estate’s representative that the values reflected on the returns were erroneous.”). Also of concern is, if an inflated appraisal is obtained but a second appraisal was used, the higher appraisal may be discoverable if a case goes to tax court. For that reason, most return preparers use qualified appraisers for all appraisals.^[14]

Reliance on a qualified appraiser also should help an estate avoid Internal Revenue Code § 6662 penalties (“Imposition of accuracy-related penalty on underpayments”). The regular accuracy-related penalty under § 6662 is “an amount equal to 20 percent of the portion of the underpayment * * * attributable to . . . [a]ny substantial estate . . . tax valuation understatement.” 26 U.S.C. § 6662(a) and (b)(5). If there is gross valuation misstatement, the penalty is doubled to 40%. 26 U.S.C. § 6662(h)(1). “There is a gross valuation misstatement when the value of any property claimed on an estate . . . tax return is 40% or less of the amount determined to be correct.” Fed. Tax Coordinator 2d ¶ V-2252 (R.I.A.) (footnote omitted). If the estate relied on qualified appraisers these penalties should be waived.

Doerner, Saunders, Daniel & Anderson, LLP provides this content for informational purposes only. It is not intended to provide legal or other professional advice nor does the transmission of this information create an attorney-client relationship between any attorney of the Firm and the reader. If you seek legal advice or assistance, please consult with a competent attorney familiar with the applicable laws. If you wish to initiate possible representation by an attorney with this Firm, please call the attorney of your choice. You will be advised of our processes to avoid conflicts of interest and requirements of our letter of engagement before the commencement of representation.

^[1]“Publicly traded securities” is defined in Treas. Reg. § 1.170A-13(c)(7)(xi)(A) as “securities (within the meaning of section 165(g)(2) of the Code) for which (as of the date of the contribution) market quotations are readily available on an established securities market.”

^[2]Treas. Reg. § 1.170A-13(c)(1).

^[3]https://www.govinfo.gov/content/pkg/FR-2018-07-30/pdf/2018-15734.pdf).

^[4]Comments in the Federal Register publishing § 1.170A-17 state “[t]hese regulations are promulgated under [American Jobs Creation Act of 2004] and [Pension Protection Act of 2006] provisions that apply only to income tax deductions for charitable contributions under section 170.” Federal Register: Substantiation and Reporting Requirements for Cash and Noncash Charitable Contribution Deductions, printed version PDF (https://www.govinfo.gov/content/pkg/FR-2018-07-03/pdf/2018-15734.pdf) at p. 10.

^[5]Treas. Reg. § 1.170A-17(c).

^[6]Effective July 30, 2018.

^[7]Cf. the definition of qualified appraisal in Treas. Reg. § 1.170A-13(c)(3)(i). The IRS commented in publishing the new regulations “any substantiation and reporting rules contained in these final regulations that are in addition to the rules in current regulations reflect statutory substantiation and reporting requirements.” Federal Register: Substantiation and Reporting Requirements for Cash and Noncash Charitable Contribution Deductions, printed version PDF (https://www.govinfo.gov/content/pkg/FR-2018-07-03/pdf/2018-15734.pdf) at p. 11. Thus the rules in § 1.170A-13 should also be reviewed.

^[8]“The valuation effective date is the date to which the value opinion applies.” Treas. Reg. § 1.170A-17(a)(5)(i).

^[9]Cf. Treas. Reg. § 1.170A-13(c)(3)(ii) which describes information an appraisal document should include.

^[10]Several of these requirements are the same as those described for the qualified appraisal.

^[11]Under Treas. Reg. § 1.170A-13(c)(6) and § 1.170A-17(a)(9) a prohibited appraisal fee is an appraiser’s fee based on a percentage of the appraised value of the property.

^[12]Cf. Treas. Reg. § 1.170A-13(c)(5) describing requirements for a qualified appraiser.

^[13]Cf. Treas. Reg. § 1.170A-13(c)(5)(iv) describing qualified appraiser exclusions.

^[14]If there are real property tracts of little value, then valuations made by the county assessor where the real property is located may be appropriate to consider.

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