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What it's worth: taking the guesswork out of appraisals

By Richard M. Weatherford author of article
Source: Interloc News, April 1997

Most booksellers, particularly those living relatively close to a school, library, museum, or university, are called upon sooner or later to appraise printed, manuscript, and photographic materials for donation or insurance purposes. Since the mid1980s, when the IRS began questioning appraisals more frequently and issuing more specific rules governing them, fewer and fewer antiquarian booksellers have been motivated to perform appraisals. Many feel they are just not worth the trouble. Others fear incurring the wrath of the IRS if the appraisal is questioned. Still others prefer to discourage donors from sending collections into the black hole of institutional collections where they may be lost to the marketplace and, possibly, to view and study forever.

Of course, appraisals are not necessary in all cases. I make it a policy not to appraise materials that are worth less than the appraisal fee. I also advise clients that they can use a formula to derive the value of inexpensive materials they are donating when the cumulative value of those materials is less than the $5000 minimum the IRS requires for a written appraisal. Still, there may be cases when a donor or institution will request a written appraisal for inexpensive materials. In these cases, I do the work, but I charge for it.

Fair Market Value

Booksellers are most often called in to perform appraisals on property donated to qualified non-profit organizations, which is really the focus of this article. But you may follow most of these guidelines when doing work for insurance companies as well.

Qualified, non-profit organizations include universities, museums, schools, libraries, religious organizations, federal, state, and local governments, non-profit hospitals, war veterans' groups, public parks, and such groups as the Salvation Army, Red Cross, United Way, etc.

The purpose of these appraisals is to determine the "Fair Market Value" of the donated materials so that the donor may claim a deduction against income taxes. The IRS defines Fair Market Value as the price property would sell for on the open market. It assumes a willing buyer and a willing seller, neither under any constraint, or pressure, to buy, and both being fully aware of all relevant facts relating to the material exchanged. Fair Market Value is, then, determined by the marketplace. Intrinsic or sentimental value, on the other hand, is the value an item has to the owner. Because this sentimental value does not usually translate into commercial or market value, it is not taken into account when determining Fair Market Value.

Fair Market Value is difficult to define with absolute certainty. Most of us understand that out-of-print books, manuscripts and photographs do not really have any "value" until they exchange hands. Prices of manufactured books, including new books, are set by formulas relating to production and advertising costs. As soon as a book passes into the used book market, its value is determined by other, more subtle supply and demand factors. Examples abound of how these factors change. The prices commanded by works of such writers as Kipling, Ford Madox Ford, and Thomas Hardy has fluctuated considerably over time, as they have gone in and out of fashion.

In 1994, The ABAA Newsletter reported that "President Clinton's budget, restored donors' rights to deduct the current full market value for gifts of fine arts—including books and manuscripts—to non-profit cultural institutions." This change allowed more donations for qualified institutions. It also increased the need for appraisals, and as a result, the IRS is probably looking more carefully at how Fair Market Value is determined and what evidence is presented to support the value claimed.

Two Kinds of Appraisals

Most booksellers are asked from time to time for an "appraisal." What customers actually want to know is how much something is worth in preparation for selling it. When you buy books from a private individual, library, or bookseller and make an offer on them, you are not appraising them. You are determining a wholesale price for them.

An appraisal, on the other hand, places you in a different relationship to the books and to the person owning them. When you buy, you do so at wholesale. When you appraise, you do so at Fair Market Value. IRS regulations stipulate that you may not appraise books and then purchase them. Nor can you sell property to someone and then appraise it. Thus, a bookseller who develops all or part of a collection for a client may not then appraise that collection for estate or donation purposes. This may seem illogical, since the dealer who develops a collection is likely to know more about the collection than anyone else, but the IRS is a stickler for "arm's length" appraisals, those done by a disinterested third party who has not been involved in the purchase or sale of the items being appraised.

This also means that the library, museum, school, or other qualified institution receiving the gift cannot be involved in appraising property donated to it. A librarian who works in an institution that is receiving a gift also cannot participate in the appraisal, except to assist in cataloguing the materials. The appraiser must still view the material personally, since the appraiser is responsible for the accuracy of the catalog.

If you are unsure of your legal right to perform an appraisal or about the validity of the appraisal you submit, ask for assistance from a colleague or an attorney. The IRS will answer questions about appraisal procedures in general, but it will not pass judgment on appraisals before they are actually submitted with a tax return. Their reasons for this should be fairly obvious: they do not want to be constrained by the opinion of a field agent or telephone help person, and they do not want to give an opinion about a preliminary appraisal only to have it changed when it is officially submitted.

Ground Rules

For these reasons, appraisers should know the ground rules, particularly in terms of what is required of the appraiser and the document itself.

1. The owner of the property may not be involved in determining the value of the property. I have been called by people who said they had a collection of books that they would like appraised for a particular amount of money. If I said I would appraise them for their fair market value, not for the value the owner placed on them, they said they would continue to shop around to get their price.

Even though you are hired by a client to do an appraisal, your primary responsibility is to render an independent, carefully documented judgment regardless of the client's wishes. To give a value to something simply because the client wants it that way is, in the eyes of the IRS, to knowingly participate in fraud. You are, after all, the expert, and you may have to defend your opinions in court.

2. Fair Market Value is just that. The same market value appraisal should apply to all situations: tax, estate, insurance. Appraisers who artificially inflate or deflate the value of items depending upon the circumstances of the valuation run the risk of censure by the IRS and insurance companies.

3. All tax deductible gifts valued at more than $5,000 must be accompanied by a written, detailed appraisal. The appraisal document, including inventory, must be submitted no earlier than 60 days before transfer of the gift to the qualified institution or group and no later than the due date, including extensions, of the tax return on which the charitable contribution deduction is first claimed for the donated property.

4. The donor must give up all rights to the property donated. Such gifts are called "free and unencumbered." If stipulations as to the use of the property are included, these must be taken into account when the appraised value is set. For example, if a donor wants to give a set of Cook's voyages to a library but wants to keep the Atlas volume for a while, the set must be valued for what it would sell for without the Atlas. Most institutions are reluctant to accept gifts to which rules are attached about how long the institution must keep the property, who can and cannot use it, where it must be housed, etc.

5. Membership in a professional association, including appraisal associations and the ABAA, may be taken into account in reviewing the appraisal itself, but the IRS does not automatically accept or give extra weight to appraisals submitted by members of any group. The criteria for acceptance of the appraisal are accuracy and the amount of research supporting the valuation. As IRS Bulletin 561 puts it, "The appraiser's opinion is never more valid than the facts on which it is based; without these facts, it is simply a guess."

6. Appraisers who are not attorneys or accountants should avoid giving legal or tax advice. Stick to your business; whatever you tell a client may be subject to review in a courtroom.

7. You may not base all or part of the fee for an appraisal upon a percentage of the appraised value of the property. For obvious reasons, basing the fee on the value of the property tends to inflate the appraised value. What the IRS is looking for is an independent judgment derived from and supported by market research.

8. If two or more appraisers have been contracted to evaluate the property of a client, they must reach their conclusions independently. Some clients will want to hedge their bets by getting two opinions, or the IRS or an insurance company may want a second opinion on something. These opinions must be reached independently.

What the Appraisal Must Contain

The first rule of a good appraisal is that the more detail and market data support given to your findings, the better your case will be. It must also contain the following:

1. A complete, detailed description of the property, including a standard bibliographical and a physical description of the item and its condition. The purpose is to allow the IRS to determine if the property being donated is in fact the property which appears in the description. They want to avoid having donors get an appraisal (and deduction) for items in fine condition and then having them donate similar items in poor condition or in cheap book club editions.

Some donors may provide an inventory to lessen the fee the donor will have to pay for the appraisal. You may use this so long as you check it, item by item, for accuracy and include your own notes as to condition, edition, and collation. If you are called upon to appraise, say, 5,000 books worth $2.5 each, you may describe them in lots or groups. A word of caution: describing books in lots does not mean stating something like, "A large group of attractive green and brown books." There must still be some descriptive grouping, including subject matter and condition.

2. The date or expected date of the contribution. As mentioned earlier, the appraisal itself may not be made earlier than 60 days prior to the date of contribution nor later than the due date, including extensions, of the return on which the contribution is first claimed. Example: If the donation is officially made on December 15th, the appraisal could he done as early as October 16th or by April 15th, if the tax return was submitted on that date (assuming you could do the appraisal and submit the report on the same day) or even later if there were extensions. The point is that the appraisal should reflect the market value of the material at the time it is donated.

3. The terms of any agreement or restrictions on behalf of the donor relating to the use, sale, or other disposition of the property contributed. A deduction may not be claimed for property that is merely loaned or stored. It must be donated. Some restrictions on its use may be stated, so long as they do not effectively negate the transfer of ownership and control to the institution.

4. The name, address, and social security number of the appraiser. They may want to ask questions or have you give a deposition later regarding the appraisal, although in my experience having to answer follow-up questions about appraisals is rare.

5. A detailed description of the appraiser's background and qualifications. This should include advanced academic degrees, if any, work experience germane to the appraisal project, membership in professional associations, other clients, and any other information that will support your qualification to do the appraisal. Let's face it—the appraisal is an educated guess. Your job is to make the best guess, support it, and then show why you were qualified to make the guess in the first place.

6. A statement of the purpose of the appraisal— donation for income tax deduction, valuation of property for sale, insurance or estate purposes, etc.

7. The appraised fair market value of the property, along with a copy of IRS Form 8283 "Noncash Charitable Contributions Appraisal Summary" with Parts 2 and 3 filed in by the appraiser.

8. The method used to determine the Fair Market Value of the property appraised. This section should include references to auction sales and price guides, comparable sales, etc. A word of caution here: auction sales are no longer considered the authority for fair market prices. Unless you can show that the items being auctioned were similar in most respects to the ones being appraised and that there were no unusual circumstances in existence during or before the auction which artificially inflated or deflated the prices, it is wise not to rely upon auctions as your sole authority. Also use dealer catalogs, actual public and private sales, and, of course, any written authority to support your evidence.

9. A description of the fee arrangement between the appraiser and the donor. In appraisals of books, manuscripts, and related materials, fees may not be based upon the value of the items being appraised. Some appraisers charge a flat fee, some an hourly rate plus expenses like travel, secretarial assistance, photocopying, and the like. Most appraisers charge a special daily rate if court appearances and depositions are required.

IRS Forms and Publications

The IRS will supply you with one copy of each publication along with any forms you will need. Taxpayers Service will provide additional information and can be reached at 1-800.829-1040. Call 1-800-TAX-FORM (1.800- 829-3676) to request the following publications. Please note that you should always get the most current forms and publications, since there are likely to be some changes year for year. All these forms have been revised for 1996 returns.

  • Publication 561—Determining the Value of Donated Property
  • Form 8283—Noncash Charitable Contributions (Appraiser fills in Sec. B, Parts 1 & 3)
  • Form 8282—Donee Information Return (include when the appraisal is sent to the donor)

Other Publications which may be of interest:

  • Publication 526—Charitable Contributions
  • Publication 544—Sales and Other Dispositions of Assets

The Appraiser and the Client

The relationship between the client and the appraiser is a complex one. If you do an appraisal, you will, of course, be employed by a client. You are that client's agent, but your primary responsibility is to render an independent, carefully documented judgment regardless of the client's wishes.

Whatever the client wants, remember that you have a responsibility to defend your opinions, possibly in court. If your opinions, are backed up by facts, if you have prepared your appraisal as if your were going to have to defend it to disinterested, impartial judges, if you are honest and use your common sense in preparing your report, and if you have the courage of your convictions and those convictions are well supported by research, then you will have done the best you can.

Even while you are remembering your independence, you should also remember that the appraisal you do for a client belongs to that client. It is your responsibility to keep confidential all aspects of the appraisal, including the nature of the material being evaluated and the name of the client. If, for example, a client seeks an appraisal of materials being donated to a library and that library wants a copy of the appraisal for its files, you should leave it to your client to decide if he or she wants the library to have that information. Also, if you are working on an estate collection that would be of interest to colleagues in the book trade, you should remember that information about the collection is not yours to share. That right belongs to the client.

Some appraisers draft a contract covering objectives of the appraisal, the work to the done, the time the report is to be delivered, fees, etc. A contract may not always be required by the client, but it is a good idea to have one available. Some clients will request one, and for your own protection you should make it very clear, in writing, what you will do for the client, what your fees are, and when and in what form the appraisal will be delivered.

Finally, since the IRS got more interested in appraisals and, as a result, in the taxes they were losing to deductions, many booksellers and other authorities have become worried about exposing themselves via their appraisals to the scrutiny of the IRS. This is unfortunate. Whenever I have been called in by the IRS to review an appraisal of printed materials, the appraisal in question has invariably been submitted by someone who is unfamiliar with the book, manuscript, and photographic marketplace. The research has been practically non-existent, and the description of the materials has been, to put it charitably, inadequate.

Experienced booksellers are unlikely to make these mistakes. They know how to conduct research, how to describe a book, how to tell which edition they are examining, and how to catalogue their results. This is all that is required to provide a good appraisal. Booksellers should not fear them, and they should seek the advice of more experienced colleagues if they have questions and concerns.

Interloc News April 1997