Codification of the Definition of Qualified Appraiser and Qualified Appraisal
The PPA adds new Code Sec. 170(f )(11)(E), which codifies the definitions of qualified appraiser and qualified appraisal. The codified definitions apply to all tax returns filed after August 17, 2006 (Act Sec.
1219(c)(1) of the PPA). Until regulations can be promulgated explaining the new definitions, taxpayers and their advisors must look to Notice 2006-96 for guidance.
In addition, the requirements of Reg. §1.170A-13(c) continue to apply, except to the extent that such regulation is inconsistent with new Code Sec.
170(f )(11)(E) (Notice 2006-96, IRB 2006-46, 902). In particular, the fol-lowing requirements continue to apply:
Reg. §1.170A-13(c)(3), which inter alia addresses the requirements for a qualified appraisal
Reg. §1.170A-13(c)(5), which inter alia disqualifies certain persons from acting as a qualified appraiser
Reg. §1.170A-13A(c)(6), which inter alia prohibits contingent fees Reg. §1.170A-13(c)(7), which includes various definitions
Qualified appraiser. The PPA defines a qualified appraiser as one who has:
General expertise, which is satisfied if the appraiser meets certain general professional requirements
Specific expertise, which requires the appraiser to be qualified to appraise the specific type of property that is the subject of the appraisal (Code Sec. 170(f )(11)(E)(ii)(I)).
Notice 2006-96 provides that the determination of whether a person is a qualified appraiser is made as of the date of the appraisal. A qualified ap-praiser must regularly perform appraisals for compensation and must satisfy any other requirements to be prescribed in future regulations (Code Sec.
170(f )(11)(E)(ii)(I)).
The appraiser must have been designated as such by a recognized pro-fessional organization or otherwise meet the minimum educational and experience requirements to be prescribed in future regulations (Code Sec.
170(f )(11)(E)(i)(I)). Notice 2006-96, 2006-46 IRB 902 provides that, un-til such regulations are issued, this requirement is satisfied by an appraisal designation awarded on the basis of demonstrated competency in valuing the type of property that is the subject of the appraisal.
For appraisals of real property made for returns filed on or before Octo-ber 19, 2006, an appraiser will be treated as having the minimum required education and experience if he or she was a qualified appraiser within the meaning of Reg. §1.170A-13(c)(5) with respect to appraisals of the type of property being valued. For returns filed after that date, the appraiser must be licensed or certified with respect to the type of property by the state where the property is located.
Furthermore, the appraiser must demonstrate verifiable education and experience with respect to valuing the type of property that is the subject of the particular appraisal (Code Sec. 170(f )(11)(iii)(I)). Until regulations are issued, this requirement is satisfied if the appraiser makes a declaration in the appraisal that, due to the appraiser’s background, experience,
educa-tion, and membership in professional associations, the appraiser is qualified to appraise the type of property that is the subject of the appraisal (Notice 2006-96; see also Reg. §1.170A-13(c)(5)).
An appraiser is disqualified if at any time during the prior three years the appraiser has been prohibited from practicing before the IRS (Note 2006-96; see also Reg. §1.170A-13(c)(5)). The IRS may disqualify appraisers in certain circumstances, including the assessment of a penalty against the appraiser (31 USC §330(c)).
Qualified appraisal. The PPA provides two requirements for a qualified appraisal:
1. It must be treated as a qualified appraisal under the regulations or other guidance prescribed by the Secretary of the Treasury (Code Sec.
170(f )(11)(E)(i)(I)). Under Notice 2006-96, an appraisal conducted by a qualified appraiser in accordance with generally accepted appraisal standards will be treated as a qualified appraisal if it complies with the requirements of Reg. §1.170A-13(c), except to the extent such regula-tion is inconsistent with new Code Sec. 170(f )(11).
2. A qualified appraisal must be conducted by a qualified appraiser in accordance with generally-accepted appraisal standards and any regulations or other guidance prescribed by the Secretary (Code Sec.
170(f )(11)(E)(i)(II)). Until regulations can be promulgated, this require-ment is satisfied if the appraisal is consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice.
For the Uniform Standards of Professional Appraisal Practice, see www.
appraisalfoundation.org).
Penalties
Penalties applicable to donors. Taxpayers who overstate the value of do-nated property by more than a certain percentage are subject to the Code’s penalties for underpayments of income tax resulting from substantial or gross valuation misstatements (Code Sec. 6662). The penalties apply only if the valuation misstatement causes the tax liability to be understated by at least 10 percent (Code Sec. 6662(d)(1)(A)). Additionally, the understatement must exceed $5,000 ($10,000 for corporations other than S corporations and personal holding companies) before the penalty applies (Code Sec.
6662(d)(1)(A), (B)).
The PPA increases the chances that a donor may be subject to one of these penalties. The PPA reduces the percentage by which the value of the
donated property must be overstated before the overstatement qualifies as a substantial valuation misstatement by 25 percent and by 50 percent for a gross valuation misstatement. Furthermore, the PPA reduces the definitional threshold for a gross valuation misstatement to such an ex-tent that some valuation overstatements previously treated as substantial valuation misstatements are now subject to the more severe penalty for gross valuation misstatements.
For substantial valuation misstatements, the PPA reduces the over-statement threshold percentage by 25 percent. The penalty for a sub-stantial valuation misstatement equals 20 percent of the underpayment of tax resulting from the misstatement (Code Sec. 6662(a)). Prior to the PPA, the value had to be at least 200 percent of actual value of the property before the overstatement was considered substantial (Code Sec.
6662(e)(1)(A), prior to amendment by P.L. 109-280). Under the PPA, a substantial valuation misstatement occurs if donated property is valued at 150 percent or more of its actual value (Code Sec. 6662(e)(1)(A)). The substantial valuation misstatement penalty does not apply if the donor acts in good faith and there is reasonable cause for the misstatement (Code Sec. 6664(c)(1)).
For gross valuation misstatements, the PPA reduces the overstatement threshold by 50 percent. Under the PPA, a gross valuation misstatement occurs if donated property is valued at two or more times its actual value (Code Sec. 6662(h)(2)(A)(i)). This is a substantial change.
Prior to the PPA, the value claimed for donated property had to be at least 400 percent of the property’s actual value before the value was consid-ered grossly overstated (Code Sec. 6662(h)(1), (h)(2)(A), prior to amend-ment by P.L. 109-280). Gross valuation misstateamend-ments are subject to a 40 percent penalty (Code Sec. 6662(h)(1)). In addition, the PPA eliminates the reasonable cause exception in the case of gross valuation misstatements (Code Sec. 6664(c)(2)).
Prior to the PPA, a donor could rely on the reasonable cause excep-tion to avoid a gross valuaexcep-tion misstatement penalty if the donated property’s value was based on a qualified appraisal made by a qualified appraiser and the taxpayer made a good faith investigation of the con-tributed property’s value (Code Sec. 6664(c)(2), prior to amendment by P.L. 109-280).
As a general rule, these changes apply to returns filed after August 17, 2006 (Act Sec. 1219(a)(2) and (c)(2) of the PPA). For donations of façade easements with respect to contributing buildings in registered historic dis-tricts, the revised penalties apply to returns filed after July 25, 2006 (Act Sec. 1219(e)(3) of the PPA).
Penalties applicable to appraisers. The PPA adds Code Sec. 6695A, a new civil penalty applicable to appraisers (Act Sec. 1219(b)(1) of the PPA).
The civil penalty applies to any appraiser who prepares an appraisal that results in a substantial valuation misstatement or a gross valuation mis-statement if the appraiser knew, or reasonably should have known, that the appraisal would be used in connection with a federal tax return or refund claim (Code Sec. 6695A(a)). The amount of the penalty is the lesser of:
The greater of $1,000 or 10 percent of the understatement of tax at-tributable to the valuation misstatement
125 percent of the appraiser’s compensation for the appraisal (Code Sec. 6695A(b)
An appraiser can avoid the penalty by establishing that the appraised value was more likely than not to have been correct (Code Sec. 6695A(c)).
The new civil penalty is in addition to any other penalties provided by law, including the penalty for aiding and abetting the understatement of tax imposed by Code Sec. 6701 (Code Sec. 6696(a)). Unlike the aiding and abetting penalty, which is only assessed against appraisers who have knowledge of the tax understatement, the new civil penalty does not require the appraiser to know that there is an understatement of tax (Code Secs.
6701(a)(3), 6695A(a)(1)).
Knowledge that the appraisal will be used in connection with a tax return or refund claim is sufficient to trigger the penalty (Code Sec. 6695A(a)(1)).
Furthermore, although it appears that Congress intended for there to be a three-year statute of limitation for assessing the new civil penalty, due to sloppy language in the PPA, Code Sec. 6696(d), which establishes the three-year statute of limitations on assessments, does not refer to the civil penalty at all (Act Sec. 1219(b)(2)(B) of the PPA).
The new civil penalty generally applies to appraisals prepared with respect to returns or submissions filed after August 17, 2006 (Act Sec. 1219(e)(2) of the PPA). For appraisals of façade easements granted with respect to contributing buildings, the new civil penalty applies to appraisals used on returns filed after July 25, 2006 (Act Sec. 1219(e)(3) of the PPA).
Lastly, the PPA eliminates the rule that the IRS can only discipline ap-praisers against whom the aiding and abetting penalty has been assessed (31 USC §330(c), prior to amendment by P.L. 109-280). Now the IRS may discipline and bar appraisers from practicing before it if either the civil penalty or the aiding and abetting penalty has been assessed against the ap-praiser (31 USC §330(c)).
In fact, the new law, read literally, permits the IRS to discipline an ap-praiser even if no penalty has been assessed, but that is probably not the
intent and, presumably, will be rectified in the technical corrections act.
An appraiser who has been barred from practice cannot present evidence or testimony in any proceeding before the IRS, and any appraisal prepared by that appraiser has no probative effect.
STUDY QUESTIONS
9. Which of the following professional qualifications is not required under the PPA for qualified appraisers?
a. Regular performance of appraisals for compensation
b. Specific expertise in appraising the specific type of property being appraised
c. Designation by a recognized professional organization or satisfac-tion of minimum educasatisfac-tional and experience requirements to be stated in future regulations
d. All of the above are requirements under PPA for qualified appraisers 10. All of the following are reasons under the PPA for which penalties may
be applied to donors except:
a. Valuation misstatement that causes an individual taxpayer’s tax liability to be understated by at least 10 percent, but only if the amount of the understatement exceeds $5,000
b. Underpayment of tax resulting from substantial or gross valuation misstatements
c. Donated property valued at 150 percent or more of its actual value d. All of the above are reasons penalties may be applied to donors
of property
CONCLUSION
Although the PPA’s temporary increase in the charitable deduction limits substantially encourages qualified conservation contributions in the short term, most of the permanent changes made by the PPA are bad news for preservationists. Most of the PPA’s antipreservation provisions are aimed primarily at efforts to conserve the built environment.
The PPA makes donations of façade easements on rehabilitated buildings less attractive and substantially curtails the benefits of façade easements in registered historic districts. On the other hand, the PPA’s efforts to prevent valuation abuse by donors and appraisers should benefit preservationists, con-servationists, and all other charitable donors by increasing the government’s and the public’s confidence that the system is not being abused.
MODULE 2 — CHAPTER 7