Valuing the Gift
When gifting property, other than publicly traded stock, valued over $5,000 the IRS generally requires a qualified appraisal to be completed. A donor does not need an appraisal if the property is non-publicly traded stock valued at $10,000 or less. Thus, only gifts of closely held stock and restricted stock that the donor claims a deduction of more than $10,000 require a qualified appraisal. If the donor does not get an appraisal, the charitable deduction will be eliminated to the extent of the donor’s basis. The appraisal cannot be completed prior to 60 days before the date of contribution of the property. Only a qualified appraiser can provide the appraisal report to be submitted in these circumstances. The donor, done or taxpayer claiming the deduction, are not considered qualified appraisers.
The donor is required to attach Section B of IRS Form 8283 to their tax return when the value of their claimed deduction for an item of their donated property is greater than $5,000. If the claim is greater than $500,000 the donor must attach Section B of Form 8283, as well as the qualified appraisal of the property itself. Not attaching the appraisal in this circumstance would disqualify the deduction for the contribution, unless the appraisal was not attached due to reasonable cause and not willful neglect. The IRS may accept or dispute the appraisal upon review and if the value of the donated property is overstated, the donor may be liable for a penalty.
Valuing Restricted Stock and Stock of Closely Held Corporations (S Corps)
Gifts are to be valued as of the date of gift, typically indicated by current arms-length sales. When valuing restricted stock or stock of closely held corporations, this information is seldom available. Thus, valuing these types of securities can be very challenging, making the valuation process more art than science.
The process of valuing restricted stock is generally more complex than valuing publicly traded stock. The nature and length of the restrictions must be taken into consideration by the appraiser. Factors such as resale provisions included in the restriction agreements and the history of freely traded securities of the same class must be measured. It is recommended by the IRS that comprehensive financial information and other relevant documents, such as accounting reports, technical expert reports, etc. that are significant to the value of the restricted stock be kept by the donor.
The IRS has expressed a number of factors that should be considered when determining the fair market value of closely held securities. These include, but are not limited to:
- the company’s net worth
- prospective earning power and dividend paying capacity, and other relevant factors,
- the nature and history of the business, especially its recent history
- the good will of the business
- the economic outlook in the particular industry
- the company’s position in the industry
- its competitors
- its management
- the degree of control of the business represented by the block of stock to be valued
- the values of securities of corporations engaged in the same or similar lines of business that are listed on a stock exchange
Appropriate discounts for lack of marketability, minority interests, and other factors are then applied to establish the fair market value of the stock.
Finding a Qualified Appraiser
A qualified appraiser is defined as someone who has earned their designation from a recognized professional organization or meets certain minimum experience and education requirements. When appraising property other than real property, the appraiser is required to have completed college or professional-level courses applicable to the property being valued. They must have at least two years practicing in the trade or business of buying, selling or valuing the type of property to be valued. Their report is required to define the appraiser’s qualifying education and experience. A qualified appraiser is someone who is paid for the preparation of appraisals and has no restrictions imposed by the IRS three years prior to the date of the appraisal. The payment received for the appraisal may not in any way be tied to a percentage of the appraised value or the outcome of the final value.
When looking for a qualified appraiser to discuss your valuation issues don’t hesitate to call me, Matt, at Analytic Business Appraisers, LLC. I can be reached at 480-857-7449.