Contributions of noncash property might provide a donor an opportunity to receive a fair market value (FMV) tax deduction without being taxed on built-in gains of the contributed assets. However, donors need proper documentation. Recent IRS guidance and court cases such as Keefer et al. v. United States, Lim v. Commissioner of Internal Revenue, Corning Place Ohio LLC v. Commissioner of Internal Revenue, and Brooks v. Commissioner of Internal Revenue serve as reminders to donors that failing to strictly meet the substantiation requirements under IRC Section 170 and the regulations for noncash charitable contributions will result in disallowance of a deduction for the contribution.
General contribution rules
Noncash charitable contributions with an FMV of more than $500 and less than $5,000
Donors are required to obtain contemporaneous written acknowledgment (CWA) from the charity receiving the contribution that includes the description of any noncash property contributed, whether the charity provided any goods or services in exchange for the gift, and, if so, a description and good faith estimate of the value of those goods or services. In addition, donors are required to attach Form 8283, “Noncash Charitable Contributions,” to their income tax return, and complete Section A of the form. In addition, donations of more than $500 for any single item of clothing or household item that is not in at least “good used” condition require donors to also complete Section B and attach an appraisal to their return.
Noncash charitable contributions with an FMV of more than $5,000
Donors are required to obtain a CWA, attach Form 8283 to their income tax return, and complete Section B of the form. Generally, noncash contributions with an FMV of more than $5,000 also will require a “qualified appraisal” as defined in U.S. Department of the Treasury Regulation Section 1.170A-17. In addition, the Form 8283 will need to be signed by the charity receiving the donation, as well as the qualified appraiser. A qualified appraisal is required to be attached to the donor’s tax return only for donations of art valued at $20,000 or more, a qualified conservation contribution of an easement on the exterior of a building in a registered historic district, or donations with an FMV of more than $500,000.
A qualified appraisal is not required for contributions with an FMV of more than $5,000 for the following types of property:
- Certain publicly traded securities for which market quotations are readily available
- Certain intellectual property, like a patent
- A vehicle (including a car, boat, or airplane) for which a CWA was obtained and for which the taxpayer’s deduction is limited to the gross proceeds from its sale
- Inventory and other similar property described in IRC Section 1221(a)(1)
Crowe observation
Although a qualified appraisal is not required in these cases, donors still are required to substantiate the FMV of the charitable contribution.
Special rules
Other rules might apply for the contributions of certain noncash assets, like motor vehicles, boats, and airplanes, and for contributions of noncash assets to donor-advised funds.
Qualified appraisal and qualified appraiser
Qualified appraisal
A qualified appraisal is an appraisal that is signed and dated by a qualified appraiser and that is prepared in accordance with generally accepted appraisal standards for the type of contributed property. For an appraisal to be a qualified appraisal, no part of the appraisal fee can be based on a percentage of the appraised value of the property. The appraisal must be dated no earlier than 60 days before the date the property was contributed and no later than the due date, including extensions, of the income tax return on which the tax deduction is claimed. Additionally, the valuation effective date must be no earlier than 60 days before the date of the contribution and no later than the date of the contribution.
For contributions made on or after Jan. 1, 2019, Treasury Regulation Section 1.170A-17 requires a qualified appraisal to contain the following:
- A statement that the appraisal was prepared for income tax purposes
- A description and physical condition of the tangible or real property in sufficient detail to determine that the property appraised is the property that was contributed
- The date or expected date of the contribution (valuation effective date), the appraised FMV on the date of contribution, and the method of valuation used to determine the FMV, including the specific basis for the valuation
- The terms of any agreement by the donor and the charity that relates to the use, sale, or other disposition of the donated property, including any agreement that:
- Temporarily or permanently restricts the charity’s right to use or dispose of the donated property
- Earmarks donated property for a particular use
- Reserves to, or confers upon, anyone any right to the income from the donated property or to the possession of the property, including the right to vote donated securities, to acquire the property by purchase or otherwise, or to designate the person having the income, possession, or right to acquire the property
- The name, address, and taxpayer identification number of the qualified appraiser
- The qualifications of the qualified appraiser who signs the appraisal, including the appraiser's background, experience, education, and any membership in professional appraisal associations
- A declaration by the qualified appraiser that states verbatim the following language set forth in Treasury Regulation Section 1.170A-17(a)(3)(vi): “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 USC 330(c).”
Qualified appraiser
A qualified appraiser is an individual with verifiable education and experience in valuing the type of property for which the appraisal is performed. The individual must have earned an appraisal designation from a generally recognized professional appraiser organization for the type of property being valued or must have met certain minimum education requirements with two or more years of experience in valuing the type of property being valued. The individual also must regularly prepare appraisals for which they are paid and must not be a party related to the contribution transaction.
Looking ahead
The charitable contribution deduction substantiation rules are complex. The IRS closely scrutinizes whether documentation is complete and if a qualified appraisal is required as well as whether the strict rules under the regulations have been followed. Donors should consult with their tax advisers to determine if they have the proper documentation to claim a charitable deduction on their income tax return.
