Valuation of Promissory Note for Charitable Donation
Promissory note appraisal for charitable donation substantiation, covering forgiven debt, revolving advances to nonprofits and notes contributed back to the borrowing organization. AppraiseItNow valued a California promissory note executed with a 501(c)(3) school and funded through a decade of operating expense advances, applying an asset approach to a note with no comparable market transactions.
Project Overview
Assignment Summary
The subject of this appraisal was a promissory note originally executed in 2014 between an individual lender and a 501(c)(3) nonprofit elementary school. Structured as a revolving line of credit with a fixed interest rate, the note was used to reimburse the lender for ongoing operating expenses — including property taxes, insurance, utilities, and maintenance — associated with running the school at the lender's property. Advances under the note were made over the course of approximately a decade, accumulating into a significant outstanding principal balance by the time of the contribution. The lender formally notified the school of his intent to forgive the balance, and the school's head issued a contemporaneous written acknowledgment confirming that no goods or services were exchanged in connection with the donation. The appraisal was prepared in accordance with the 2024 Uniform Standards of Professional Appraisal Practice (USPAP), applying the fair market value standard as defined under Treasury Reg. §1.170A-1(c)(2), and was intended for use by the client and the Internal Revenue Service in support of a charitable donation appraisal for a federal income tax filing.
Challenges
One of the primary challenges in this engagement was the highly unique nature of the promissory note itself. Because the note's value was derived from a specific series of advances tied to the operating expenses of a single property over nearly a decade, identifying comparable market transactions was not feasible, which effectively ruled out a Market Approach. Similarly, the Income Approach was inapplicable, as no future income generation was expected beyond the valuation date. An additional complication arose during documentation review — the contemporaneous written acknowledgment issued by the school had initially reflected a miscalculated outstanding balance, which required correction and careful reconciliation against the advance schedule before a final value could be concluded.
Our Approach
Given the nature of the subject interest, the Asset Approach was identified as the most appropriate and reliable method for determining fair market value. The appraiser conducted a thorough review of the promissory note in full, along with a detailed advance schedule provided by the client's representatives that itemized each operating expense draw from the first advance in 2014 through the final one in 2024. The outstanding principal balance was calculated as the cumulative sum of all advances recorded over the life of the note, consistent with the terms of the note and the formal notification of debt forgiveness. Supporting documentation reviewed included the original promissory note, the lender's written notification to the school's board, and the school's contemporaneous written acknowledgment. Throughout the process, the appraiser worked closely with the client's advisory representatives to verify the relevant facts and ensure the final value conclusion met IRS standards for business valuation for charitable donation of noncash charitable contributions.
Project Outcome
The appraisal delivered a well-supported, IRS-ready fair market value conclusion that enabled the client to substantiate his noncash charitable contribution deduction in full compliance with federal tax requirements. By producing a certified business valuation prepared under USPAP and aligned with Treasury Regulation standards, AppraiseItNow gave the client a defensible report to confidently support his income tax filing. Our California certified appraisers ensured the engagement met all applicable qualified appraisal requirements from start to finish.
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Request an AppraisalFrequently Asked Questions
Is forgiving a loan to a nonprofit a deductible contribution?
Contributing a note receivable to the organization that owes it can be a charitable contribution, and it requires a qualified appraisal once the claimed value exceeds $5,000. The deduction is based on the note's fair market value rather than its face amount, which is where an appraisal is needed: a note's collectibility, rate and term determine what it is actually worth.
Why would a note be worth less than its outstanding balance?
Because a buyer would price the borrower's ability to pay, the rate relative to current market rates, and the time until repayment. A note carrying a below-market rate, an uncertain repayment source or an indefinite term is worth less than face. For a note advanced to cover a nonprofit's operating expenses, collectibility is the central question and it drives the conclusion.
Which approach applies to a unique note with no comparable transactions?
The asset approach, working from the note instrument itself and the documented advance schedule rather than from market transactions that do not exist. Every advance, its date and the accrued balance are reconstructed from the records. Where an income approach could not be supported, the report explains why rather than omitting the discussion.
What records does a note appraisal require?
The complete documentary history of the obligation:
- The original note and every amendment or extension
- A schedule of advances with dates and amounts
- Records of any payments or interest accruals
- The written notice of contribution or assignment to the charity
- Financial information on the borrower relevant to collectibility