ACRL News Issue (B) of College & Research Libraries 52 A closer eye on appraisals By John R . P a y n e Assistant to the Director University o f Texas at A ustin The new tax law and its effect on gifts, donors, and appraisers. T he Tax Reform Act of 1984, which becam e ef­ fective on Jan u ary 1, 1985, will have a dram atic im pact on gift acquisitions by librarians. These are some of th e features of the new legislation: • A ppraisals for gifts valued over $5,000 are m andatory. • Libraries are required to provide a form al ac­ counting to the IRS and to past donors about the disposition of gifts held less th an tw o years. • New penalties are levied to donors and a p ­ praisers for the over-evaluation of gifts. • Appraisers who have perform ed work u n ac­ ceptable to th e IRS in the past are prevented from subm itting subsequent appraisals for income tax purposes. These new and tougher laws reflect a m ore criti­ cal ap p ro ach by th e IRS for reg u latin g th e a p ­ praisal of donated property. The m ain points of the Act can be sum m arized as follows:1 1. A “qualified appraisal” is required for all con­ tributions valued at $5,000 or m ore and m ust be filed w ith the tax return. Essentially this legislates the need for appraisals on a m uch broader scale th a n before. A “qualified appraisal” m ust include the following: a) a description of the property appraised; l“The Tax Reform Act of 1984,” Conference R e­ port on the D eficit Reduction A c t o f 1984: Federal Taxes, bulletin 29 Extra, June 29, 1984. Explana­ tion o f the Tax Reform A c t o f 1984 (Chicago: C om ­ merce C learing House, 1984). b) the fair m arket value of the property on the date of contribution and the specific basis for the valuation; c) a statem ent th a t the appraisal was prepared for income tax purposes; d) the qualifications of the appraiser; e) th e sig n a tu re an d ta x p ay er id e n tific a tio n num ber (TIN) of the appraiser. 2. W hile the Act does not say w h at a “qualified appraiser” is, it does say th a t he m ay not be: a) the taxpayer m aking the donation; b) the donee; c) any person employed by, related to, or in close association w ith the donor; d) a p arty to the transaction in w hich the tax­ payer acquired the property. This is perhaps the most questionable aspect of the new law , for it precludes from the appraisal ac­ tivity those booksellers who have been instrum en­ tal in the form ation of collections and who w ould be em inently qualified to judge their fair m arket value. 3. A new provision concerning the disposition of donated property is of greatest concern to lib rari­ ans. If property is sold, exchanged, or otherwise disposed of by the receiving institution w ithin two years after its receipt, the institution m ust make a statem ent for the IRS and the original donor giv­ ing: a) the nam e, address, and TIN of the donor; b) a description of the property; c) the date of the contribution; d) the am ount received on the disposition; 53 e) th e d ate of such disposition. Institutions are subject to penalties ranging from $50 to $50,000 per year for failure to comply. Essentially this provides a second o p p ortunity for th e IRS to verify the accuracy of th e original a p ­ praisal. For if a gift to a lib rary valued at $5,000 is sold or tra d e d by th e lib rary w ithin tw o years for less th a n th a t am ount, th e IRS m ay feel it has re a ­ son to question th e accuracy of the initial appraisal. 4. Appraisals w ill not be accepted if th e fee is based on a percentage of the appraised value of the property. 5. O th er items discuss: a) additional taxes to be levied to the taxpayer re­ sulting from un d erp ay m en t of taxes based on inac­ cu rate appraisals; b) th e refusal by th e IRS to accept appraisals by persons w ho have p rep ared inaccurate appraisals in the past; c) the civil p enalty of $1,000 th a t can be imposed against an appraiser for aiding and abetting an u n ­ derstatem ent of tax liability by providing inaccu­ ra te appraisals. Art appraisals T he p rim ary area of abuse of evaluations has tr a ­ ditionally been w ith th e fine arts. K aren C arolan, senior appraiser w ith th e IRS N ational Office, in ­ dicates th e problem becam e ap p aren t 20 years ago: “In the 1960s a rt over-valuations w ere so serious th a t th e art w orld realized th a t Congress m ight lim it th e tax deductions for charitable donations. W ith less incentive for people to give a rt objects aw ay, few er objects w ould be bought and donated. As a result, the IRS got together w ith a rt dealers and m useum officials to develop a system to m oni­ to r v alu e s. T h e C o m m is s io n e r’s A rt A dvisory Panel, established in 1968, was the resu lt.”2 In N o­ vem ber 1980 the Art P rin t Advisory Panel was a u ­ thorized to deal w ith abusive tax shelters in the area of m ultiple a rt works (prints). T he latest de­ velopm ent, in June 1984, was the expansion of the original Art Advisory Panel from its original 12 m em bers to 22 in order to deal w ith prim itive and oriental art. These tw o panels are supported by the Art V aluation G roup in the N ational Office of the IRS. Panel m em bers include a rt and p rin t dealers, m u seu m d ire c to rs , c u r a to rs , p u b lis h e rs , a n d scholars. They m eet tw ice a year in W ashington, serve tw o to three year term s, and are not paid for their services. T he purpose of th e panels is to m ake recom m en­ dations to th e IRS regarding th e acceptability of taxpayer appraisals based on an exam ination and discussion of all rele v an t docum ents. A fter th e 2K aren C arolan, “D ocum enting Art Appraisals for F ederal Incom e Tax Purposes—Estates, Gifts and Incom e Tax; Art Tax Shelter Problem s.” In Representing Artists, Collectors, and Dealers 1983 (New York: Practicing L aw Institute, 1983), p.472. panel m eetings, th e N ational Office a rt appraisers p rep are valuation reports on the rejected apprais­ als an d taxpayers are notified of th e ir findings through th e D istrict Office. All appraisals of a rt w ith a claim ed value of $20,000 or m ore are autom atically referred to the a p p ro p riate panel. A ppraisal values norm ally are in th e five to six figure range. In 1982 (the latest More stringent rules govern donors’ activities. available figures) th e Art Advisory Panel reviewed 727 items w ith an aggregate taxpayer valuation of $84 m illion. T he panelists recom m ended adjust­ m ents of approxim ately $15 m illion, am ounting to a n 11% r e d u c tio n of c h a r ita b le c o n tr ib u tio n claims and 28 % increase of estate and gift apprais­ als. From 1980 to 1983 th e Art P rin t Panel evalu­ ated approxim ately 1,030 p rin t images w ith an ag­ gregate taxpayer valuation of approxim ately $176 m illion. T he p an el reco m m en d ed reductions of $174 m illion or 99% of th e total recom m ended v alu e.3 T he Art Advisory Panels are now , how ever, u n ­ der investigation by th e House G overnm ent Activi­ ties Subcom m ittee for th eir nearly exclusive depen­ dence on appraisers d ra w n from th e Art D ealers Association of Am erica (ADAA). Form ed in 1962, the ADAA has been doing appraisals since its incep­ tion, and w hile some have been questioned by the IRS, few if any have been challenged successfully. T he Subcom m ittee is concerned about the possible conflict of interest w hen IRS panel m em bers (i.e., ADAA members) are evaluating appraisals re n ­ dered by other ADAA m em bers. I t has been re­ ported th a t suggestions for reform will be fo rth ­ com ing in th e Subcom m ittee’s re p o rt.4 It is im p o rtan t to note th a t the IRS has no plans for an advisory panel for books and archives b e­ cause abuse in th e evaluation of these kinds of m a ­ terials is not sufficient to w a rra n t such a panel. Appraisals and IRS regulations T he basis of the IRS regulations is R evenue Pro­ cedure 66-495 from th e In te rn a l Revenue Code of 1954, w here “F air M arket V alue” is defined as “the 3C arolan, ib id ., p.476. 4“W hen Appraisers C ollide,” A rt & A u ctio n , Ju ­ ly/August 1984. 5Internal R evenue Service Guidelines fo r A p ­ praisals o f D onated Properties; R evenue Procedure 66-49 in Internal R evenue R ulletin (July-D ecem ­ ber 1966), pp. 1257-59. 54 price at which property will change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both hav­ ing reasonable knowledge of relevant facts.” Sales of comparable property. The use of “com­ parables” is recognized by the IRS as an acceptable approach to determ ining fair m arket value. This is the process of draw ing valid correlations between Evaluation of gifts to libraries should be based on Fair Market Value. property to be appraised and similar or “com para­ ble” property th a t has recently been sold. The weight given to each sale must take several things into consideration: 1) the degree of similarity between the property sold and the appraisal property; 2) the tim e of the sale (that is, how close it is to the valuation date); 3) the circumstances of the sale; 4) the condition of the m arket in which the sale took place. Opinions of experts. Opinion evidence is also ac­ cepted by the IRS as a means of determ ining fair m arket value. The weight given to opinion evi­ dence, however, depends on its origin and the th o r­ oughness w ith which it is supported by experience and facts. The underlying facts must support the opinion; otherwise such expert opinion will be dis­ counted. Appraisal form at. Revenue Procedure 66-49 re­ quires the following to be p a rt of each appraisal re­ port: 1) a statem ent of value and the appraiser’s defi­ nition of th a t value, i.e. F air Market Value; 2) the basis upon which the appraisal was m ade, including any restrictions, understandings, or cov­ enants lim iting the use or disposition of the prop­ erty; 3) a complete description of the item; 4) a statem ent of the factors upon which the ap­ praisal was based, including the use of com para­ bles such as prices quoted in book dealers’s cata­ logues and recent auction results; 5) a summary of the appraiser’s qualifications; 6) the dates on which the property was examined and on which the appraisal was made; 7) the signature of the appraiser. IRS review of valuation appraisals W hile the IRS is responsible for reviewing ap­ praisals, it is not responsible for making them , and the burden of supporting fair m arket value rests w ith the taxpayer (and his appraiser). The IRS does not give recognition to any appraiser or organiza­ tion of appraisers and does not accept appraisals w ithout question. Thus while an appraiser’s m em ­ berships in professional associations will be points in his favor, they do not remove him from question. Furtherm ore, the IRS does not approve valuations or appraisers before the actual filing of a tax return, nor does it issue advance rulings approving or dis­ approving appraisals. In other words, there are no trial runs. The resolution of questions about valuations of charitable contributions is the responsibility of the IRS Appeals Officer. His or her purpose is to resolve controversies w ithout litigation in a m anner fair to the government and the taxpayer. In reviewing an income tax return the IRS may accept the claimed value of the donated property or make its own de­ term ination of fair m arket value. In either case the IRS has the following options: 1) to contact the taxpayer for more inform ation; 2) to refer the valuation problem to an IRS ap­ praiser or valuation specialists; 3) to contract w ith an independent appraiser to reappraise the property; 4) to refer works of art to the appropriate advi­ sory panel. Professional appraisal associations After the IRS the most im portant organizations offering guidelines for appraisers are these three appraisal associations: • American Society of Appraisers, Paul L. O ’ Rrien, Executive Director, P.O . Box 17265, W ash­ ington, DC 20041; (703) 620-3838. • A ppraisers Association of A m erica, V ictor W iener, Executive D irector, 60 East 42nd Street, New York, NY 10165; (212) 867-9775. •In tern atio n al Society of Appraisers (An Asso­ ciation of Personal Property Appraisers), Maurice E. Fry, President, P.O . Box 726, Hoffman Estates, IL 60195; (312) 882-0706. Membership in these associations requires: 1) specialized knowledge of one or more kinds of property; 2) submission of representative appraisal re­ ports; 3) five years of full tim e experience or its equiva­ lent; 4) a w ritten examination (ASA only); 5) adherence to the societies’s code of ethics and professional conduct.6 While the IRS provides guidelines for the con­ ten t of appraisal reports, the appraisal associa­ tions’s code of ethics concerns additionally the ap- American Society of Appraisers, The Principles o f Appraisal Practice ana Code o f Ethics (Wash­ ington: The Society, 1968). Last reprinted August . 55 praiser’s duties and responsibilities to his client, to other appraisers, and to the public at large. The following is a composite of guidelines by the three associations. Appraiser’s duties and responsibilities 1. W hile there are several kinds of value—retail, forced sale, replacem ent value for insurance p u r­ poses, etc. —it is the appraiser’s responsibility to as­ certain w hich is pertinent to the particular under­ taking and to explain and describe w h at is m eant by the p articu lar value chosen. The evaluation of gifts to libraries should be based on F air M arket Value. 2. T he relationship betw een client and appraiser is not one of principal and agent. The appraiser’s prim ary obligation to his client is to reach com plete and accurate conclusions and num erical results re­ gardless of the client’s wishes. Thus if the client w ants a book valued at $1,000 w hile its real value is $500, the appraiser m ust stand by his judgm ent. T he appraiser is th e expert. 3. The em ploym ent to conduct an appraisal is a confidential m a tter between the appraiser and his client and m ust not be discussed w ithout the cli­ en t’s consent. W hile the knowledge th a t a very fine library is being appraised w ould be of considerable interest to the book w orld, th a t inform ation is not for the appraiser to share. Similarly, the appraised value of a property and the contents of an appraisal report are private m atters. 4. It is good practice for the appraiser to prepare a w ritten contract covering objectives, scope of work, tim e of delivery of report, fees, etc. 5. Collaboration between appraisers is desirable in some situations, such as to expedite the com ple­ tion of work or to obtain the benefit of a com bined judgm ent. In such cases all collaborators should sign a joint report. Unethical appraisal practices 1. It is unethical for an appraiser to contract for work for a fixed percentage of the am ount of value. The Tax Reform Act of 1984 emphasizes this. 2. In some cases w here tw o or more appraisers have been engaged by a single client to m ake inde­ pendent appraisals of the same property, the client has th e rig h t to expect opinions th a t have been reached independently. It is thus unethical for a p ­ praisers to collaborate or consult w ith one another or make use of each other’s findings. M any other duties, responsibilities, and unethi­ cal practices are outlined in various publications by the appraisal associations. The fullest is presented by the International Society of Appraisers. The Association of College and Research Libraries A position on the appraisal of gifts was devel­ oped by ACRL in 1960 and revised in 1973. It can 56 be summarized by saying th at the library is recog­ nized as an interested party when receiving dona­ tions and should be removed from the actual ap­ praisal process other than to facilitate th at process by directing donors to price guides, giving refer­ ences to qualified appraisers, and helping w ith clerical work such as preparing a list of the dona­ tion. The question about who should pay for ap p raisals—the donor or the lib ra ry —falls in ACRL’s judgm ent to the donor.7 7“ S tatem ent on A ppraisal of G ifts,” C & RL News, March 1973, p.49. Reprinted in ACRL’s Summary The Tax Reform Act of 1984 serves notice to do­ nors and receiving institutions th at closer attention will be given to valuations of donations. Supple­ menting the new tax law is a host of regulations by the IRS and other agencies th at establish an accept­ able framework for gift appraisals. The prim ary ef­ fect of the new law is to encourage responsible be­ havior of donors and appraisers, while librarians must take on new procedures for the control and docum entation of their collections. ■ ■ Guidelines on Manuscripts and Archives (1977). How to participate in ACRL Information for new members and potential members. T o join To take a continuing education course W rite or call the Association of College and Re­ To receive a course brochure, write Gail Russell search Libraries for application forms and infor­ at the ACRL office. To register, use information mation: ACRL Office, 50 E. Huron St., Chicago, published in C&RL News or in the course bro­ IL 60611-2795; (312) 944-6780. chure. To learn about ACRL’s current programs, officers, To establish a local chapter of ACRL and units Check the procedures listed in “Guidelines for Check the A L A Handbook of Organization and ACRL Chapters” (available from the ACRL of­ read College O Research Libraries News regularly fice) . Send a petition with the signatures of at least (as a member of ACRL, you will receive both pu b ­ 25 ACRL members to the ACRL office for a p ­ lications) . proval by the Board of Directors. To a tte n d conference program s, ACRL Board To request a speaker in the Chapter Visits program meetings, or committee meetings W rite Cathleen Bourdon at the ACRL office and For information on time, places, and general specify your date and topic. Eight chapters qualify program content, consult C&RL News, American each year for a free visit from ACRL officers or Libraries, and the official conference program s staff. and schedules. For additional information, contact To serve on ACRL’s committees or to participate in the ACRL office. ACRL’s sections and discussion groups To attend preconferences Familiarize yourself with the work of the u n it— For information about time, place, and precon­ check the ALA Handbook o f Organization for the ference theme, check CC-RL News and American unit’s statem ent of responsibility, read about the Libraries. For additional information and registra­ work of the unit as reported in C&RL News and tion materials, w rite to the ACRL office. Am erican Libraries, attend the meetings of the