When donating an inter vivos or testamentary gift, or when determining and estate’s value for federal inheritance tax purposes, it is vital that you retain a “qualified personal property appraiser”[1] to research and write a written “qualified appraisal report”. [2] As one respected commentator has stated,

Choosing the proper appraiser is the most important aspect [when dealing with the IRS]. Revenue procedure 66-49 refers to an appraisal by a qualified person and requires the inclusion of a summary of the appraiser’s qualifications [within the written appraisal report]. . . .Obviously, the cost to the taxpayer of having a qualified appraisal report prepared is going to be high because of the detailed information required.[3]

Failure to select a qualified appraiser invites the IRS to reject your appraisal and even to impose onerous penalties against you.

A matter of law, a “qualified personal property appraiser” is:

(A) An individual who is USPAP-qualified[4] and an individual who has earned an appraisal designation from a recognized appraiser organization (such as the International Society of Appraisers or the American Appraisal Association). Such memberships are awarded on the basis of demonstrated competency in valuing personal property

(B) Alternatively, in the absence of having been admitted into a professional appraisal organization, an individual can also become a qualified appraiser if she has met minimum education and experience requirements as set forth by the IRS. Such minimum experience includes the completion of college or professional-level coursework relevant to the specific personal property being valued and such appraiser must have at least two years of experience in the trade or business of selling or valuing the specific item to be appraised.[5]

Both (A) and (B) types of qualified appraisers must regularly prepare appraisals for which they are paid.[6] As to the (A) type of personal property appraiser, even though the appraiser has never written an appraisal report as to the specific media, style or artist involved, her appraisal report will nevertheless be accepted by the courts and the IRS if she states in a declaration within the appraisal report that she possesses the requisite background, experience, education, and skill to become knowledgeable about the property being appraised and that she was able to make a credible determination of value. Both (A) and (B) types of qualified personal property appraisers must also demonstrate that they have not been administratively barred from practicing before the IRS under section 330(c) of title 31 of the United States Code at any time during the three-year period ending on the date of the appraisal. Finally, both qualified appraisers (A) and (B) must demonstrate that they are not statutorily disqualified to act as an appraiser, which usually means:

(1) In the case of an inter vivos or testamentary gift, that the appraiser is not related to the donee or a party to the transaction by which the donor acquired the property to be appraised, or a person employed by, or related to, any of the foregoing. As one commentator has noted, “[t]he regulations are so broad that they appear to disqualify even auction house from being a qualified appraiser if the donor had purchased the property being appraised at auction from that particular auction house.”[7]

(2) In the case of an appraisal presented for federal inheritance tax purposes, the appraiser may not be the beneficiary, a person related to the decedent or beneficiary, or a person who was (or is) employed by the decedent or a beneficiary.[8]

It is critical for a donor or estate representative to carefully choose an appraiser since an appraisal report that is not prepared by a qualified appraiser is liable to be disregarded in toto. See, e.g., In re Stanley P. De Lisser, Debtor, [9] in which the court totally denied a very substantial deduction for the increase of value of donated art and instead used the low cost incurred by the taxpayer when he acquired his art collection. The De Lisser court held:

The appraisal lacks minimal information such as a summary of the appraiser’s qualifications, a statement of the value and the appraiser’s definition of value, the basis upon which his appraisal was made, and the cost, date and manner of acquisitions.

Similarly, in the case of Fuad S. Ashkar,[10] the court emphasized the fact that choosing the right appraisal when dealing with the IRS is vital. In Ashkar, the valuation concerned the donation to a university of fragments of ancient Biblical texts. The donor claimed a $700,000 deduction and submitted an appraisal to support that valuation. The IRS, however, relied on an appraiser who valued the fragments at only $25,000. The court rejected both appraisals, noting that both of the so-called “appraisers” were really only academic scholars having no appraisal experience. Instead of accepting the reports of either unqualified appraisers, the court relied on an actually-made, recent offer to buy the collection of Biblical fragments for $337,500, which happened to be the approximate average of the values presented by the two experts.

Even worse than having your appraisal being disallowed, is retaining an appraiser who submits a report with a “substantial misstatement” or “substantial gross misstatement” of value. In such cases, the donor is exposed to paying large penalties to the IRS.[11] If the stated value in the appraisal for a piece of art is 150% or more than the judicially-determined value, then the IRS will deem the appraisal’s stated value as being a “substantial misstatement of value”. In such a case, the IRS may impose upon the donor a penalty equal to 20% of the amount of the tax underpayment. If, however, the donor’s stated value of art contained in his appraisal report is ultimately found to be 200% or more of the judicially-determined value, then the IRS can impose a 40% penalty on the amount of the underpayment. These rules also apply to the understatement of value in the context of appraisals submitted by the estate representative to the IRS in the context of the payment of federal inheritance taxes.

Finally, the importance of retaining an appraiser who is a member of a professional appraiser organization such as the International Society of Appraisers can prove to be vital since the courts and the IRS might decide not to impose a penalty if the taxpayer proves that he acted in good faith. The first and most important factor in determining the donor’s good faith is whether or not the donor or estate representative relied upon an appraiser who was a professional member of a recognized personal property appraisal organization.[12]

The bottom line: choose your appraiser very carefully.

[1] I.R.C. § 170(f)(II)(E)(ii),(iii).

[2] I.R.C. § 170(f)(II)(E)(ii),(iii).

[3] See Lerner, Ralph & Bressler, Judith, Art Law vol. II, 4th ed. (2012) at 1232, 1238.

[4] USPAP is an acronym for the Uniform Standards of Appraisal Practice.

[5] Treas. Reg. § 170(f)(II)(E)(i).

[6] Id.

[7] See Lerner, Ralph & Bressler, Judith, Art Law vol. II, 4th ed. (2012) at 1235.

[9] 92 U.S. Cas. (CCH) ¶ 50, 353 (Bankr. N.D. Tex. 1990).

[10] See Fuad S. Ashkar v. Comm’r, 61 T.C.M. (CCH) 1657 (1991).

[11] I.R.C. § 6662(h)(1).

[12] I.R.C. § 6664(c).