I. INTRODUCTION

A valuation report from a “qualified appraiser”[1] is required by the Internal Revenue Service (IRS) in various situations, including in some donations of property, certain estate tax filings and gift tax returns as well as other transactions between related parties.  Even where a qualified valuation is not required under applicable tax law, it is highly recommended to obtain one in order to limit unnecessary exposure to audits and deficiency proceedings.

Valuations are typically conducted by accredited valuers or appraisers who have expertise in the specific type of asset or investment being valued. For example, a real estate appraiser may be hired to value a piece of real property, while a business appraiser may be hired to value a corporation or limited liability company. The process of conducting a valuation typically involves gathering data about the asset or investment, analyzing the data, and applying relevant valuation techniques to arrive at a fair value.

Techniques vary depending on the asset or investment being valued. For example, a real estate appraiser has several available tools available to him or her that can be used to properly value an asset. These techniques include (i) the “sales comparison approach,” which involves comparing the property being appraised to similar properties that have recently sold; (ii) the “cost approach,” which involves estimating the cost of replacing the property being appraised, less any depreciation; and (iii) the “income approach,” which involves estimating the future income that the property is expected to generate and discounting it back to its present value. Business valuers may use similar techniques, such as the income approach or the market approach, to value a company.

II. DONATIONS OF CRYPTOCURRENCY AND OTHER PROPERTY

Donations of property (paintings, antiques, and other objects of art)  are one of the situations where a qualified appraisal is required by the IRS. If an individual donates property to a charitable organization and claims a charitable deduction of more than $5,000, they must obtain a qualified appraisal of the property and attach it to their tax return.[2] This requirement exists to ensure that the donated property’s value is accurately reflected in the tax return and to prevent individuals from claiming a higher deduction than the property’s actual value.

Valuations are also becoming increasingly important in the context of digital assets and cryptocurrencies. A recent memo from the IRS stated that if a taxpayer claims a charitable contribution deduction of more than $5,000 for donated cryptocurrency, the taxpayer must obtain a qualified appraisal to qualify for a deduction.[3] The memo also stated that the reasonable cause exception will not excuse noncompliance with the qualified appraisal requirement if a taxpayer determines the value of the donated cryptocurrency based on the value reported by a cryptocurrency exchange on which the cryptocurrency is traded.

It is important to note that the IRS does not always require a qualified appraisal or valuation report in every situation. For example, if the fair market value of the property being donated is less than $5,000, an appraisal is not required. To be sure, the taxpayer will still need to have some evidence of the property’s value, such as a thrift store receipt or a dealer’s price list.[4] Additionally, if an individual donates publicly traded securities, such as stocks or bonds, an appraisal is not required, but the taxpayer will still need to determine the fair market value of the securities on the date of the donation. If an individual makes a cash donation, an appraisal is not required, but they should keep a record of the donation, such as a bank record or a receipt from the charity.

For donations of property exceeding $500,000, it is crucial to include a qualified appraisal of the property when claiming the deduction on your tax return. However, this requirement does not apply to contributions of cash, inventory, publicly traded stock, or intellectual property. Failing to obtain a qualified appraisal and attach it to your return, if necessary, will result in the disqualification of the deduction unless you can demonstrate reasonable cause for not including the appraisal, rather than willful neglect.⁴

III. ESTATE AND GIFT TAX CONSIDERATIONS

Similarly, in the event that a decedent’s estate exceeds the exemption amount, which is $12.92 million in 2023, or if the decedent’s estate is required to file an estate tax return, the estate tax return requires a qualified appraisal of the value of the property listed therein. The purpose of this requirement is to determine the estate tax owed and to prevent undervaluation of the estate’s assets, which would result in a lower estate tax liability.

Gift tax returns also require an appraisal if the value of the gift exceeds the annual exclusion amount, which is $17,000 in 2023.[5] This requirement exists to ensure that the value of the gift is accurately reflected in the gift tax return and to prevent individuals from claiming a higher deduction than the gift’s actual value.

IV. BANKRUPTCY, DIVORCE, FINANCIAL, AND OTHER LEGAL CONSIDERATIONS

Certain transactions between related parties may also require an appraisal if the transaction involves the transfer of property. The purpose of requiring an official valuation report in these situations is to prevent individuals from undervaluing the property and avoiding taxes or other obligations.

While the need for official valuations in various tax-related situations is clear, qualified valuations may also be necessary for other legal and financial purposes.

In divorce proceedings, a valuation may be necessary to determine the value of marital property and divide it equitably between the parties. During mergers and acquisitions, the value of the company being acquired or merged with must be established to determine a fair price for the transaction. Shareholder disputes may also require a valuation to resolve disagreements about the value of a company. Additionally, companies may be required to conduct valuations for financial reporting purposes, such as to determine the value of intangible assets or goodwill or to comply with accounting standards. During bankruptcy proceedings, a valuation may be necessary to establish the value of the company’s assets and to determine how to distribute the proceeds from the sale of those assets. In cases of litigation and dispute resolution, valuations may be required to support claims or challenge the claims of the parties involved.

The need for official valuations is not limited to tax and legal purposes. Valuations are also used in finance and investment contexts. For example, companies may need to conduct valuations to determine the fair value of their assets for financial reporting purposes, to determine the value of a potential acquisition, or to determine the value of a new investment. Investors may also need to conduct valuations to assess the potential return on investment for a particular asset or company. Valuations can help investors make informed decisions about buying, selling, or investing in a company or asset and can provide greater confidence in the value of their investments.

V. CONCLUSION

In conclusion, valuations from qualified appraisers are necessary in various tax-related situations to ensure accurate reporting of the value of assets and to prevent undervaluation of assets to avoid taxes or other obligations. Valuations are also necessary for other legal and financial purposes, such as estate and gift tax planning, divorce proceedings, mergers and acquisitions, shareholder disputes, financial reporting, bankruptcy proceedings, and litigation and dispute resolution. Valuations are typically conducted by accredited valuers or appraisers using relevant valuation techniques specific to the asset or investment being valued. The need for qualified valuations is becoming increasingly important in the context of digital assets and cryptocurrencies, and compliance with official valuation requirements is necessary to qualify for certain deductions, to avoid penalties, and to limit exposure to the risk of deficiency letters.

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[1] The term qualified appraiser means an individual with verifiable education and experience in valuing the type of property for which the appraisal is performed, as described in paragraphs (b)(2) through (4) of 26 CFR § 1.170A-17.

[2] See Treas. Reg. § 1.170A-13(c)(1) which provides, in pertinent part.. In general. If the aggregate value of charitable contributions of property made by a taxpayer during the taxable year exceeds $5,000, the taxpayer must obtain a qualified appraisal for each item of property with a claimed value in excess of $5,000.

[3] Chief Counsel Advice (CCA) 202302012, Qualified Appraisal Requirements for Charitable Contributions of Cryptocurrency, January 13, 2023, https://www.irs.gov/pub/irs-wd/202302012.pdf

[4] Internal Revenue Service. (2023, January). Determining the value of donated property. Publication 561. Cat. No. 15109Q. Retrieved from https://www.irs.gov/publications/p561.

[5] IRS.gov. Frequently Asked Questions on Gift Taxes. Accessed June 30, 2023. https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes.