Valuing and Substantiating Charitable Contributions

Editor: Albert B. Ellentuck, Esq.

Establishing fair market value (FMV) of a charitable contribution of real estate, stock, or financial instruments is generally not an issue for a taxpayer due to the availability of appraisals and market quotes. However, many taxpayers have problems placing a value on clothing and other household items gifted to charity. The burden of establishing FMV is on the taxpayer.

Many taxpayers value clothing and household items as a percentage of the original cost of the item (depending on its condition). However, IRS Publication 526, Charitable Contributions, states that the use of such formulas is not acceptable. For used clothing, the prices buyers actually pay in used clothing stores such as consignment or thrift shops can be used.

Contributions of used clothing and household items that are not in "good" condition or better are completely disallowed. The statute does not define the term "good." The term "household items" means furniture, furnishings, electronics, appliances, linens, and similar items (but not food, paintings, other art objects, antiques, jewelry, gems, or collections) (Prop. Regs. Sec. 1.170A-18(c)). An exception to the general disallowance rule allows deductions for single used household items that are not in good condition or better if they are valued at more than $500 by a qualified appraisal that is filed with the return (Prop. Regs. Sec. 1.170A-18(b)). Also, the IRS is authorized to issue future rules that could completely disallow deductions for certain used clothing and household items that are deemed to have minimal value (such as underwear and socks) regardless of condition. For affected contributions by a partnership or S corporation, the restrictions apply at the entity level, and deductions are disallowed at the partner or shareholder level (Sec. 170(f)(16)). For further assistance, taxpayers should review IRS Publication 561, Determining the Value of Donated Property.

Stocks traded on a stock exchange are valued at the average between the highest and lowest selling prices (not the closing price) on the contribution date (IRS Publication 561). If the securities are not traded on that day but within a reasonable time before and after, FMV is determined using a weighted average of the highest and lowest selling prices before and after the contribution date.

Substantiating Contributions

The recordkeeping and filing requirements for charitable contribution deductions vary based on whether the contribution is made in cash or property and the amount of cash or the value of the property contributed.

Property Contributions of More Than $5,000

When the value of donated property, other than publicly traded securities (or group of similar property (e.g., a stamp or coin collection)), exceeds $5,000, a written appraisal (by a qualified appraiser) is required and the appraiser must sign the taxpayer's Form 8283, Noncash Charitable Contributions (Regs. Sec. 1.170A-13(c)). If the claimed deduction exceeds $500,000, the qualified appraisal must be attached to the donor's income tax return (Sec. 170(f)(11)(D)). The appraisal must be done not earlier than 60 days before the donation and received by the donor no later than the due date (including extensions) of the taxpayer's return.

However, a written appraisal is not required if the property is (1) publicly traded securities or (2) nonpublicly traded stock valued at $10,000 or less. Failure to comply with the written qualified appraisal requirements results in a charitable deduction limited to basis rather than FMV (Hewitt, 109 T.C. 258 (1997), aff'd, 166 F.3d 332 (4th Cir. 1998)) or even a total disallowance of the deduction (Alli, T.C. Memo. 2014-15). Thus, even though various courts, at their discretion, have used a lower "substantial compliance" standard (e.g., Herman, 73 F. Supp. 2d 912 (E.D. Tenn. 1999), and Bond, 100 T.C. 32 (1993)) for having a qualified appraisal, taxpayers (and practitioners) should pay particular attention to the qualified appraisal requirements when such donations are made.

The Pension Protection Act of 2006 (PPA), P.L. 109-280, explicitly sets out the procedures to be followed; strict compliance appears necessary to claim the deduction. The PPA specifies that when a charitable contribution appraisal is required to be performed, it must be performed by a qualified appraiser, defined as an individual who:

  1. Has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements that will be set forth in the regulations;
  2. Regularly performs appraisals for which he or she is compensated;
  3. Can demonstrate verifiable education and experience in valuing the type of property subject to the appraisal;
  4. Has not been prohibited from practicing before the IRS at any time during the three years preceding the appraisal; and
  5. Meets other requirements prescribed by the IRS in the regulations or other guidance (Sec. 170(f)(11)(E)).

Appraiser Minimum Requirements

The PPA expanded the definition of a qualified appraisal for qualifying charitable property and placed in the statute a requirement that the appraisal must be done by a qualified appraiser in accordance with generally accepted appraisal standards (e.g., in accordance with principles developed by the Appraisal Standards Board of the Appraisal Foundation) (Sec. 170(f)(11)(E)). In August 2008, proposed regulations were released providing some guidance; however, these regulations are not effective until finalized.

A qualified appraiser is an individual with verifiable education and experience in valuing the relevant type of property being appraised. These requirements are satisfied if the individual has either: successfully completed professional or college-level coursework in valuing the relevant type of property and has at least two years of experience in valuing such property; or has earned a "recognized appraisal designation" for the relevant type of property. A recognized appraisal designation means one awarded by a recognized professional appraiser organization on the basis of demonstrated competency (e.g., Member of the Appraisal Institute, Senior Residential Appraisal, Senior Real Estate Appraiser, or Senior Real Property Appraiser) (Prop. Regs. Secs. 1.170A-17(b)(1) and (2)).

However, the following individuals cannot be qualified appraisers for the appraised property (Sec. 170(f)(11)(E)(iii) and Prop. Regs. Sec. 1.170A-17(b)(5)):

  1. An individual who receives an appraisal fee based to any extent on the appraised value of the property;
  2. The donor;
  3. Except in limited circumstances, a party to the transaction in which the donor acquired the property;
  4. The donee;
  5. Certain persons related to, or regularly used as an appraiser by, persons in categories 1—4 and who does not perform a majority of his or her appraisals for others during the tax year; and
  6. An individual who has been prohibited from practicing before the IRS at any time during the three-year period ending on the date of the appraisal.

A qualified appraisal is a document prepared in accordance with generally accepted appraisal standards and that satisfies several other criteria (Prop. Regs. Sec. 1.170A-17(a)). (See Prop. Regs. Sec. 1.170A-17(a)(3) for detailed information regarding necessary content of a qualified appraisal.) 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 (Prop. Regs. Sec. 1.170A-17(a)(2)).

Note: Under certain circumstances, an appraiser is subject to a penalty for excessive appraisal value (Sec. 6695A(b)).

Notice 2006-96 provides transition guidance on the definitions of qualified appraisal and qualified appraiser until the proposed regulations are finalized. Practitioners are urged to review the rules and terms in this notice and to watch for these proposed regulations to become final.

Pursuant to Notice 2006-96, an appraisal will be treated as a qualified appraisal if it complies with the requirements of the current regulations in Regs. Sec. 1.170A-13(c). Among these requirements are that the appraisal must be done by a qualified appraiser no earlier than 60 days before the contribution and received by the donor no later than the due date (including extensions) of the return on which the charitable deduction is first claimed. IRS Publication 561 contains additional information concerning valuation and appraisals, and Regs. Sec. 1.170A-13(c)(3) provides the detailed requirements of an appraisal.

Notice 2006-96 provides that an appraiser is considered to have met the minimum education and experience requirements if (1) for real property, the appraiser is licensed or certified for the type of property being appraised in the state in which the appraised real property is located, or (2) for other than real property, the appraiser has (a) successfully completed college or professional-level coursework that is relevant to the property being valued; (b) obtained at least two years of experience in the trade or business of buying, selling, or valuing the type of property being valued; and (c) fully described in the appraisal the appraiser's education and experience that qualify the appraiser to value the type of property being valued.

Note: The appraiser's fee is not deductible as a charitable contribution but can be deducted as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit (Rev. Rul. 67-461; IRS Publication 526).

For contributions of art with an appraised value of $50,000 or more, taxpayers can request an IRS Statement of Value (which can be relied on when preparing returns). (Under limited circumstances, the IRS may issue such a statement for items appraised for less than $50,000.) The request must be made before the return first claiming the contribution deduction is filed. Rev. Proc. 96-15 (modified by Announcement 2001-22 and Rev. Proc. 2016-1) provides a detailed listing of what must be included with the request, including a user fee of $5,700 for up to three items, plus $290 for each additional item. Because of its cost, taxpayers generally prefer to obtain their own appraisals rather than request an IRS Statement of Value.

Caution: The IRS's Statement of Value must be attached to the taxpayer's return regardless of whether the taxpayer agrees with it. If a different value is used, information substantiating that value must be attached to the return.

Penalties for Valuation Misstatements

The Code imposes accuracy-related penalties on taxpayers who substantially misstate the value of donated property. The threat of these penalties should be additional incentive for taxpayers to fully comply with the property appraisal requirements and recognize the importance of getting appraisals done by qualified appraisers.

Under Sec. 6662(b)(3), a 20% penalty is assessed on any tax deficiency in excess of $5,000 that is attributable to a substantial valuation misstatement. A substantial valuation misstatement occurs when the claimed charitable deduction is 150% or more of the amount determined to be the correct valuation (Sec. 6662(e)(1)). If the claimed amount is more than 200% of the correct amount, a gross valuation misstatement occurs, in which case the penalty is 40% rather than 20% of the tax underpayment attributable to the excess valuation (Sec. 6662(h)).

Although reasonable cause is allowed as an exception to the Sec. 6662 accuracy-related penalties, a special rule applies when the penalty relates to charitable donations of property (other than publicly traded securities). The reasonable-cause exception does not apply to gross valuation overstatements. However, a taxpayer can use reasonable cause as a way to avoid an understatement penalty for a "substantial" valuation overstatement, but only if the amount the taxpayer claimed for the charitable donation was based on a qualified appraisal done by a qualified appraiser and, in addition to obtaining the appraisal, the taxpayer made a good-faith investigation of the value of the donated property (Sec. 6664(c)(3)).   

This case study has been adapted from PPC's Guide to Tax Planning for High Income Individuals, 17th edition, by Anthony J. DeChellis and Patrick L. Young. Published by Thomson Reuters/Tax & Accounting, Carrollton, Texas, 2016 (800-431-9025;



Albert Ellentuck is of counsel with King & Nordlinger LLP in Arlington, Va.


Tax Insider Articles


Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.


Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.