Attorney Suggests Three Exceptions/Clarifications to Charitable Appraisal Rules

Attorney Suggests Three Exceptions/Clarifications to Charitable Appraisal Rules

News story posted in IRS Notices on 12 April 2012| 1 comments
audience: National Publication | last updated: 12 April 2012
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Summary

In response to IRS Notice 2012-25, which requests items for inclusion in the 2012-2013 Guidance Priority List, attorney Lawrence P. Katzenstein of of Thompson Coburn LLP has suggested three exceptions or clarifications be made to the qualified appraisal requirements for charitable contributions.

Full Text:

To: Catherine V. Hughes
From: Lawrence P. Katzenstein
Date: April 3, 2012
Re: Guidance Priority List

I am writing as suggested by Notice 2012-25 to suggest three items for inclusion in the 2012-2013 Guidance Priority List. All three deal with exceptions or clarifications which I suggest be made to the qualified appraisal requirements for charitable contributions. I make these suggestions as an individual and not as a representative of any of the professional organizations to which I belong.

As you know, Internal revenue Code 170(f)(11)(C) requires a qualified appraisal as a condition of deductibility for most charitable contributions which are not cash or marketable securities. Code section 170(f)(11)(H) provides that the Secretary may by regulation provide that some or all of the requirements of section 170(f)(11), including the qualified appraisal requirement, do not apply in appropriate cases. I believe that three exceptions to the qualified appraisal requirement would simplify tax administration and encourage charitable contributions.

1. Since the best evidence of fair market value for property contributed to charity is an actual sale of the property by the charity, I suggest the Service make an exception to the qualified appraisal requirement if the charitable donee sells the contributed property to an unrelated third party before the due date (without extensions) of the tax return reporting the charitable contribution.1 Taxpayers could still obtain an appraisal if they wished but would not be required to do so. The actual sale amount would not be binding on the Service but would be prima facie evidence of fair market value which the Service would be free to rebut with other evidence. Appraisals can be both expensive and time-consuming and I have seen donors decide not to make charitable gifts because of the expense, delays and inconvenience of a qualified appraisal. It is difficult to imagine what abuses could be possible if the donor's charitable deduction equals what the charity actually received on sale of the contributed property. The theory behind Code section 6050L, which requires charitable donees to report dispositions of donated property, is that an actual sale by the donee is the best evidence of fair market value, and that theory also justifies not requiring qualified appraisals in such cases.

2. I suggest that the Service clarify that in cases in which a charitable remainder trust is entirely invested in cash or marketable securities, no qualified appraisal is required for a contribution of part or all of a beneficiary's remaining annuity or unitrust interest to the charitable remainder beneficiary. The contribution results of course in a collapse of the trust and termination of part or all of the trust in favor of the charity. Because the gift of the remaining life or term interest is not strictly speaking a gift of cash or marketable securities, many advisers are suggesting to their clients that a qualified appraisal is necessary in this case. If the trust assets consist solely of cash or marketable securities, valuation of the life or term interest is simply a matter of looking at the IRS actuarial tables. A donor who creates a charitable remainder trust funded with cash or marketable securities is contributing a trust remainder interest to the charity rather than cash or marketable securities but no one suggests in that case that a qualified appraisal is necessary. I suggest the Service clarify that an appraisal is also not necessary if a donor contributes to the charity the remaining term or life interest in the trust rather than a remainder interest.

3. I suggest that the Service make a further exception to the qualified appraisal requirements for certain gifts to charity of life insurance policies. (One of the problems with such gifts is even knowing who a qualified appraiser is.) I suggest that the value provided on a form 712 could be used to establish a rebuttable presumption of value. Part 2 of form 712 is specifically designed to provide a value for policies with living insureds. Line 59e provides a net total value of the policy for gift or estate tax purposes and it seems to me that if the value on a form 712 is good enough for gift or estate tax purposes, it should be good enough to provide at least a rebuttable value for charitable deduction purposes. I do not suggest that the form 712 value be binding on the Service -- it would always be open to the Service to argue that the value should be lower -- but the taxpayer could rely on a form 712 value in lieu of an appraisal. A taxpayer could still obtain a qualified appraisal in special cases where the form 712 would undervalue the policy (such as where the donor has reduced life expectancy) but a qualified appraisal would not be necessary if a form 712 is submitted in lieu of an appraisal.

I would be happy to discuss these suggestions with you or your colleagues.


FOOTNOTE

1 It may be that a shorter period of time such as 90 days or six months would be more appropriate.


END OF FOOTNOTE

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Comments

Re: Attorney Suggests Three Exceptions/Clarifications to ...

I wholeheartedly agree! Without these exceptions, the unintended consequences of these onerous rules will have a stifling effect on well intentioned Development shops who seek to remain compliant, while still affording their donors all opportunities to gift.

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