Qualified Appraisals and Qualified Appraisers

Expert Tax Valuation Witness Reports, Testimony, Procedure, Law, and Perspective

Michael R. Devitt, Lawrence A. Sannicandro

• Publisher: Wiley
• Year: 2017
• ISBN:
  9781119438175
• Edition: 1
• Topic: Business
• Subtopic: Accounting
• Index: Business

Decode IRS appraisal regulations and find practical solutions to current issues

Qualified Appraisers and Qualified Appraisals provides clarification on complex IRS guidelines, and offers solutions and insight that can help appraisers adhere to the latest Treasury Regulations concerning appraisals submitted in tax matters. From the Uniform Standards of Professional Appraisal Practice to IRS regulations, this book explores the body of law that has arisen around the production of "qualified appraisals" that the government and courts will accept. The discussion covers estate, gift, charitable contribution, income taxes, and more, with expert guidance on the interpretation and application of complex regulations. As appraisers often are called upon to provide expert testimony in court, this book shares effective methods including the novel "hot-tubbing" technique that eliminates the appearance of bias in favor of a less-adversarial discussion. Cases are dissected as they relate to application of existing appraisal laws, and the companion website features checklists, references, and additional cases as they become available.

The IRS regulations on qualified appraisers and qualified appraisals have sparked a storm of controversy, and have raised more questions than they have answered. This book acknowledges the problems and offers solutions to help appraisers produce work the IRS and courts will accept.

• Understand the laws surrounding "qualified appraisals" and "qualified appraisers"
• Gain insight on testifying as an expert, including new techniques
• Explore solutions to common issues the IRS raises with respect to qualified appraisals and qualified appraisers

• Examine cases that illustrate the nuances of appraisal law application

In order for an appraisal to satisfy the government, an appraisal must be performed by a "qualified appraiser" specific for the type of property in question. This broad statement leaves much to question, but Qualified Appraisers and Qualified Appraisals provides the answers appraisers need to comply with the law and produce work that meets the latest standards.

CHAPTER 1
Tax Valuation and the Necessity for Expert Appraisals

SUMMARY

The appraisal profession, which includes specialized valuation determinations of real estate, businesses, interests in businesses, intangible assets, machinery and equipment, and private personal property, has made great strides in the last decade. With these advancements, appraisals have become increasingly technical. Attorneys, return preparers, and appraisers are finding that courts and regulators are much more inclined to scrutinize all aspects of the valuation and appraisal processes. In response, tax professionals increasingly rely upon expert valuators to support tax reporting positions in civil and criminal tax controversies with the IRS, the Tax Division of the U.S. Department of Justice, and state and local tax authorities.

Tax professionals who rely upon valuators, and valuators who provide support to tax professionals, must develop cross-disciplinary skills in valuation and tax to better serve their clients. This chapter summarizes the necessity of involving well-qualified and knowledgeable experts in all aspects of the appraisal process, especially since appraisals often involve significant valuation technicalities and many deal with major sums of money for the participants.

THE NEED FOR VALUATION EXPERTS

Valuation is pervasive in our tax system; complex valuation disputes have filled court dockets for centuries. Approximately 340 sections of the Internal Revenue Code require determinations of fair market value in order to accurately assess and report tax liabilities.¹ Indeed, valuation litigation is so frequent that it accounts for between 20 and 35 percent of all Tax Court cases in which the taxpayers are represented by counsel.²

Valuation methodology has become highly sophisticated, and valuation-related tax issues often perplex even the most experienced tax professionals. It is against this backdrop that knowledgeable valuators have become indispensable to the tax reporting and tax litigation processes. Following are the areas where valuation and tax are likely to overlap.

Valuation in Tax Reporting

As applied to tax reporting, the federal tax law generally requires taxpayers to hire a qualified appraiser to prepare a qualified appraisal in connection with:

• Claiming a charitable contribution deduction of more than $5,000 where the donated property is not cash, publicly traded securities, a qualifying vehicle, or certain intellectual property;³
• Valuing assets of charitable remainder trusts;⁴
• Valuing claims and counterclaims against an estate;⁵ and
• Transferring property to a qualified settlement fund.⁶

Moreover, obtaining a qualified appraisal prepared by a qualified appraiser may help a taxpayer avoid accuracy-related penalties under section 6662 of the Internal Revenue Code.⁷ The terms qualified appraisal and qualified appraiser are technically and specifically defined in the Internal Revenue Code and the federal Treasury Regulations. Chapter 2, Qualified Appraisal, and Chapter 3, Qualified Appraiser, analyze and discuss each of these terms in detail.

As applied to tax reporting, practitioners may hire expert valuators to accurately compute and report tax liabilities. A nonexclusive list of the areas where such expertise is typically utilized is:

1. Charitable contribution deductions, including, but not limited to, donations to real property, personal property, grants of air rights, development rights, and conservation easements;
2. Business formations;
3. Inventory valuations;
4. Corporate mergers, acquisitions, and spinoffs;
5. Allocations of purchase price under section 1060 of the Internal Revenue Code;
6. Business liquidations or reorganizations;
7. Financings;
8. Initial public offerings;
9. Goodwill (both personal goodwill and business goodwill);
10. Intangibles, including valuation of intangibles for transfer pricing purposes;
11. Employee stock ownership plans;
12. Retirement plan actions;
13. Incentive stock options;
14. Compensation received as property;
15. Buy–sell agreements and related consequences;
16. Stockholder disputes and related consequences;
17. Mark-to-market valuations under section 475 of the Internal Revenue Code;
18. Exchanges of property;
19. Estate tax returns;
20. Gift tax returns;
21. Determinations of reasonable compensation;
22. Foreign account reporting (e.g., in connection with reporting Form 8938, Statement of Specified Financial Assets);
23. Collection cases, especially where an offer in compromise is requested (note, Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and Form 433-B, Collection Information Statement for Businesses, require valuation of real estate and businesses); and
24. Marital dissolutions and related reporting.

Valuation in Tax Litigation

Valuation is often implicated in civil tax litigation, and occasionally arises in criminal tax matters. As applied to civil tax litigation where valuation is at issue, expert testimony is routinely sought and can be helpful to document and prove a client's tax reporting position. In addition to the areas identified earlier, which relate to substantive determinations of tax liability, valuation may be implicated in the following penalty-related areas:

1. Substantial valuation misstatement penalty cases; and
2. Gross valuation misstatement penalty cases.

Given the prevalence of valuation in tax, it is important to recognize when an expert valuator can assist in proving and documenting a client's position. It is generally appropriate, and often wise, to hire an expert in litigation whenever doing so will help the trier of fact (and/or the attorney) understand the evidence or decide a fact in issue. As discussed more fully in Chapter 7, From Daubert to Boltar, and Chapter 13, Attorney Involvement, Rule 702 of the Federal Rules of Evidence, provides:

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if:

1. the expert's scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
2. the testimony is based on sufficient facts or data;
3. the testimony is the product of reliable principles...

Table of contents

• Cover
• Title Page
• Table of Contents
• Foreword
• Foreword
• Preface
• CHAPTER 1: Tax Valuation and the Necessity for Expert Appraisals
• CHAPTER 2: Qualified Appraisal
• CHAPTER 3: Qualified Appraiser
• CHAPTER 4: Substantial Compliance vs. Strict Compliance
• CHAPTER 5: Government Expert Witnesses
• CHAPTER 6: The Practicalities of Selection and Preparation of Experts
• CHAPTER 7: From Daubert to Boltar
• CHAPTER 8: Discovery of Expert Material
• CHAPTER 9: Expert Appraisal Reports
• CHAPTER 10: Assessing the Quality of the Appraisal Report
• CHAPTER 11: Concurrent Evidence: A Novel Approach to Expert Testimony
• CHAPTER 12: Penalties Associated with Faulty Appraisals
• CHAPTER 13: Attorney Involvement
• CHAPTER 14: Common Errors with Appraisal Reports and How to Avoid Them
• Table of Cases
• About the Authors
• Index
• End User License Agreement