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Qualified Appraisals and Qualified Appraisers: Expert Tax Valuation Witness Reports, Testimony, Procedure, Law, and Perspective

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Qualified Appraisals and Qualified Appraisers: Expert Tax Valuation Witness Reports, Testimony, Procedure, Law, and Perspective

Michael R. Devitt, Lawrence A. Sannicandro

ISBN: 978-1-119-43757-4 December 2017 256 Pages

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Description

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.

Foreword by Shannon P. Pratt xvii

Foreword by Jay E. Fishman xix

Preface xxi

Chapter 1 Tax Valuation and the Necessity for Expert Appraisals 1

Summary 1

The Need for Valuation Experts 1

Valuation in Tax Reporting 2

Valuation in Tax Litigation 3

Valuation in Business and Familial Matters 4

Valuation Calculation Standards 4

Fair Market Value Defined 5

Implied Assumptions 6

Cash Value and Market Value 7

Computing Fair Market Value 7

Step 1: Calculating Net Asset Value 8

Step 2: Applying Discounts and Premiums 9

Common Tax Appraisal Reports 9

Appraisal Reports to Support Tax Reporting Positions 9

Appraisal Reports to Support Tax Litigation 10

Proliferation of Litigation 10

Conclusion 11

Chapter 2 Qualified Appraisal 12

Summary 12

Defining Qualified Appraisal 12

Situations in Which a Qualified Appraisal May Be Required 13

Qualified Appraisal Requirements for Charitable Contribution Deductions Context 14

Requirements 15

Legislative History 16

Statutory Definition of a Qualified Appraisal 18

Regulatory Definition of a Qualified Appraisal 18

Requirement 1: The 60-Day Requirement: Treas. Reg. § 1.170A-13(c)(3)(i)(A) 19

Requirement 2: The Qualified Appraiser Requirement: Treas. Reg. § 1.170A-13(c)(3)(i)(B) 19

Requirement 3: The Substantive Requirements: Treas. Reg. § 1.170A-13(c)(3)(i)(C) 20

Requirement 3.1: Property Description: Treas. Reg. § 1.170A-13(c)(3)(ii)(A) 20

Requirement 3.2: Tangible Property: Treas. Reg. § 1.170A-13(c)(3)(ii)(B) 21

Requirement 3.3: Date of Contribution: Treas. Reg. § 1.170A-13(c)(3)(ii)(C) 21

Requirement 3.4: Terms of Agreement: Treas. Reg. § 1.170A-13(c)(3)(ii)(D) 22

Requirement 3.5: Identifying Information of the Qualified Appraiser: Treas. Reg. § 1.170A-13(c)(3)(ii)(E) 23

Requirement 3.6: The Qualifications of the Qualified Appraiser: Treas. Reg. § 1.170A-13(c)(3)(ii)(F) 24

Requirement 3.7: Statement of Preparation for Income Tax Purposes: Treas. Reg. § 1.170A-13(c)(3)(ii)(G) 24

Requirement 3.8: Date(s) of Appraisal: Treas. Reg. § 1.170A-13(c)(3)(ii)(H) 25

Requirement 3.9: Appraised Fair Market Value: Treas. Reg. § 1.170A-13(c)(3)(ii)(I) 25

Requirements 3.10 and 3.11: Valuation and Basis Used to Determine Fair Market Value: Treas. Reg. §§ 1.170A-13(c)(3)(ii)(J) and (K) 26

Requirement 4: No Prohibited Fee Arrangement: Treas. Reg. § 1.170A-13(c)(3)(i)(D) 27

The Qualified Appraisal Requirement and Pass-Through Entities 27

Interplay of the Qualified Appraisal and Appraisal Summary Requirements 28

Litigation Concerning Qualified Appraisals 29

Conclusion 29

Chapter 3 Qualified Appraiser 31

Summary 31

Legislative History 31

Statutory Requirements 32

Statutory Requirement #1: Appraisal Designation or Certain Minimum Education and Experience Requirements 33

Statutory Requirement #2: Regularly Performs Appraisals for Compensation 34

Statutory Requirement #3: Verifiable Education and Experience 34

Statutory Requirement #4: Not Prohibited from Practice by 31 U.S.C. § 330(c) 34

Regulatory Requirements 35

Appraiser’s Declaration 35

Regulatory Requirement #1: Declaration That Individual Is an Appraiser: Treas. Reg. § 1.170A-13(c)(5)(i)(A) 36

Regulatory Requirement #2: Declaration That the Appraiser Is Qualified to Value the Property: Treas. Reg. § 1.170A-13(c)(5)(i)(B) 36

Regulatory Requirement #3: Declaration That the Appraiser Is Not an Excluded Person: Treas. Reg. § 1.170A-13(c)(5)(i)(C) 36

Regulatory Requirement #4: Declaration That the Appraiser Understands Consequences of Fraudulent Valuation: Treas. Reg. § 1.170A-13(c)(5)(i)(D) 38

Additional Declaration Requirements of Notice 2006-96 38

Denial of Appraiser Status 39

Appraisals by More than One Appraiser 40

Appraisal Fees 40

Judicial Interpretation of the Requirements 41

Sufficiency of Documentation 41

Scrutiny of Qualifications 42

Excluded Parties 42

Multiple Appraisers 42

Conclusion 42

Chapter 4 Substantial Compliance vs. Strict Compliance 43

Summary 43

Overview of the Strict and Substantial Compliance Doctrines 43

Applicability of the Substantial Compliance Doctrine 44

Judicial Approaches to the Substantial Compliance Doctrine 45

Survey of Cases Applying the Substantial Compliance Doctrine 45

Bond v. Commissioner: The First Application of the Substantial Compliance Doctrine in the Context of the ualified Appraisal Regulation 46

Post-Bond Decisions: Cases Finding Substantial Compliance 47

Supplemental Information from Form 8283 47

Sufficient Information for IRS to Evaluate Reported Contributions as Intended by Congress 48

A New Trend? 48

Post-Bond Decisions: Cases Finding No Substantial Compliance 49

Absence of Qualified Appraisal 49

Flawed Appraisal Reports 50

Post-Scheidelman Cases 53

Judicial Approaches to the Strict Compliance Doctrine 53

The Substantial Compliance Doctrine in the Appellate Courts 54

Reasonable Cause: Codification of the Substantial Compliance Doctrine 55

Conclusion 56

Chapter 5 Government Expert Witnesses 58

Summary 58

The Government’s Need for Expert Testimony 58

IRS Criteria for Expert Selection 59

Internal IRS Valuation Experts 60

IRS Hiring, Training, and Evaluation of Internal Valuation Experts 62

Hiring 62

Training 62

Performance Evaluation and Management Oversight 63

IRS Use of Internal Valuation Expert Witnesses 63

Advantages to Using an Internal Valuation Expert as an Expert Witness 63

The Inherent Bias Problem 63

Court Reactions to Government Employee Expert Witnesses 64

Government’s Decision to Not Present an Expert Witness 66

Conclusion 67

Chapter 6 The Practicalities of Selection and Preparation of Experts 68

Summary 68

Selecting an Appraiser 68

Education, Training, Professional Experience, and Accrediting Organization Participation 69

The American Society of Appraisers 69

The Appraisal Institute 70

The Institute of Business Appraisers 70

The National Association of Valuers and Analysts 71

The American Institute of Certified Public Accountants 71

Being a Good Communicator 71

Offering a Neutral, Detached Opinion of Value 71

Avoiding the Bias Perception 71

Selecting the Expert Who Prepared the Appraisal That Supports the Tax Reporting Position 72

Early and Significant Appraiser Involvement 72

Appraiser Scheduling and Availability 73

Correcting Errors in the Expert’s Report 73

“Skeletons in the Closet” 73

Acquainting the Expert with the Cast of Characters and Venue 73

Attorney Comprehension of Expert Opinions 74

Planning the Testimony 74

Expert Testimony Preparation 74

Conclusion 75

Chapter 7 From Daubert to Boltar 76

Summary 76

Standard of Admissibility for Expert Witness Testimony—The Federal Rules of Evidence 76

Daubert and Its Progeny in Courts Other than the Tax Court 77

Boltar as the Modern Incarnation of Daubert in the Tax Court 81

Daubert Challenges Generally 82

Illustrations of Daubert Factors in Practice 83

Factor 1: Has the theory or technique been tested? 83

Factor 2: Has the theory or technique been subjected to peer review and publication? 84

Factor 3: Is there a known or potential rate of error or standards for the theory or technique applied? 86

Factor 4: Has the theory or technique gained general acceptance? 88

Factor 5: Is the expert testifying about matters growing naturally and directly out of research conducted independent of the litigation? 90

Factor 6: Has the expert unjustifiably extrapolated from an accepted premise to an unfounded conclusion? 93

Factor 7: Has the expert adequately accounted for obvious alternative explanations? 95

Factor 8: Is the expert being as careful as he would be in his regular professional work? 96

Factor 9: Is the field or expertise claimed by the expert known to reach reliable results for the type of opinion the expert would give? 97

Factor 10: Has the theory or method offered by the expert been put to any non-judicial use? 97

Factor 11: Whether the expert’s opinion fails to square with a judge’s opinion and common sense 97

Conclusion 98

Chapter 8 Discovery of Expert Material 99

Summary 99

Overview of Discovery 99

Important Limitations on Discovery 100

The Attorney–Client Privilege 100

Work Product 101

Unfairness Doctrine 102

The IRS’s Summons Authority 102

Procedures with Respect to Expert Witnesses Prepared in Connection with Litigation 103

Discovery in the Courts 103

Tax Court 104

General Provisions Regarding Discovery 105

Interrogatories 107

Production of Documents 108

Depositions 110

Admissions 112

U.S. District Courts 113

General Provisions Regarding Discovery 113

Interrogatories 117

Production of Documents, Electronically Stored Information, and Other Similar Items 117

Depositions 118

Admissions 119

Court of Claims 119

Expert Should Be Present at Opposing Expert’s Deposition 119

Conclusion 119

Chapter 9 Expert Appraisal Reports 120

Summary 120

Valuation Standards 120

Revenue Ruling 59-60 121

USPAP Generally 122

Compliance with USPAP 122

Noncompliance with USPAP Does Not Render an Expert Report Unreliable 122

Appraisal Reports Generally 122

Fair Market Value 123

Contents of the Appraisal Report 123

Table of Contents 123

Executive Summary or Cover Letter 123

Body of Report 124

Identifying the Retaining Party and Other Intended Users 124

Type of Appraisal 125

Standard of Value and Source 125

Effective Date of the Appraisal and the Date of the Report 126

Purpose of the Appraisal and Its Intended Use 128

Summary of the Scope of Work 128

Summary of Information Considered 129

Describing the Subject Property, the Type of Asset, the Interest Valued, and Geographic Data 131

How Title Is Held 132

Restrictions, Hypotheticals, and Limiting Conditions 132

Highest and Best Use 132

Valuation of the Subject Property 132

Summary of Approaches Utilized 134

Reconciliation 135

Consider a Regression Analysis 135

Conclusion of Value 136

Appraiser’s Signature 136

Signed Certification 136

Addenda 138

Work File as Support for an Appraisal Report 138

Contents of Work File 138

Retention Period 139

Conclusion 139

Chapter 10 Assessing the Quality of the Appraisal Report 140

Summary 140

Required Items Under the USPAP and Revenue Ruling 59-60 140

Making the Report Understandable to the Audience 142

Replicability 142

Completeness 142

Internal Consistency 142

Reconciliation 143

Regression Analysis 143

Forecasting Future Results 144

Economic and Industry Sections 144

Supporting Exhibits 144

Comply with Applicable Court Rules 145

The Tax Court 145

The District Courts 146

Conclusion 146

Chapter 11 Concurrent Evidence: A Novel Approach to Expert Testimony 147

Summary 147

A New Approach to Expert Testimony 148

Our Long and Deep Distrust of Partisan Experts 148

Court-Appointed Experts 151

Heating Up the Tub: The Concurrent Evidence Method 152

Expert Bias 155

Foreign Court Experiences 155

American Experience with Concurrent Experts 157

Suggested Four-Stage Hot Tub Approach for Tax Court Judges 159

Stage One: Pretrial Expert Meeting and Joint Report 160

Stage Two: The Expert Oath 161

Stage Three: The Trial Hot Tub Conversation 161

Stage Four: Cross-Examination and Rebuttal 163

Common Misperceptions of the Concurrent Witness Model 164

Myth 1: Concurrent Testimony Replaces the Traditional Model 164

Myth 2: The Consent of Both Parties Is Needed 164

Myth 3: More Work Is Created for the Trier of Fact 164

Myth 4: Concurrent Evidence Is Received Off the Record 165

Myth 5: The Concurrent Witness Model Is an Auction 165

Myth 6: The Lawyers Lose All Control in the Courtroom 165

Myth 7: Hot Tubbing Is Prevalent in Tax Cases 165

Practical Benefits and Claimed Drawbacks 166

Conclusion 169

Chapter 12 Penalties Associated with Faulty Appraisals 170

Summary 170

The Importance and Prevalence of Penalties in Modern-Day Appraisal Practice 170

Framework for Examination 171

Accuracy-Related Penalties Possibly Applicable to Client–Taxpayers 171

The Substantial Valuation Misstatement Penalty 172

Imposition of the Penalty 172

Substantial Valuation Misstatement Penalty Applies on a Property-by-Property Basis 172

Dollar Limitation for Substantial Valuation Misstatements 173

Substantial Valuation Misstatements and Pass-Through Entities 173

Increase in Penalty Rate for Gross Valuation Misstatements 174

Defenses 174

The Gross Valuation Misstatement Penalty 176

Gross Valuation Misstatement Applies on a Property-by-Property Basis 177

Dollar Limitation for Gross Valuation Misstatements 177

Gross Valuation Misstatements and Pass-Through Entities 177

Elimination of Reasonable Cause Exception 178

The Applicability of the Gross Valuation Misstatements to Transactions Determined to Lack Economic Substance 178

Estate or Gift Tax Valuation Understatements 180

Civil Penalties Potentially Applicable to Appraisers 180

The Section 6695A Accuracy-Related Penalty 180

The Statute 181

Statute of Limitations and Collection of Penalty 182

Affirmative Defenses 182

Referral for Professional Sanctions 182

Paid Preparer Penalty—Section 6694 182

The Statute 183

Appraisers as Paid Return Preparers 185

De Minimis Exception 185

Affirmative Defenses 186

Aiding and Abetting an Understatement of Tax—The Section 6701 Penalty 186

The Statute 187

Coordination with Other Penalties 188

Injunctions against Appraisers 188

Effect of Imposition of the Section 6701 Penalty 188

Professional Sanctions 189

Circular 230 Generally 189

Disqualification of Appraisers under Circular 230 189

Monetary Penalty 189

Conclusion 190

Chapter 13 Attorney Involvement 191

Summary 191

Framework for Examination 191

Attorney Involvement in Selecting the Appraiser 192

An Appraiser’s Ability to Withstand a Daubert Challenge 193

The Importance of Having the Attorney Engage the Appraiser 193

Attorney Involvement in the Appraisal Process 194

The Fact-Gathering Process 194

The Report Preparation Process 195

The Review Process 196

Sanctions for Improper Attorney Assistance 197

The Tax Preparation Process 198

Coordinating the Attorney’s and the Appraiser’s Involvement in Negotiations with Tax Authorities 198

Attorney Involvement in Litigation Where Expert Reports Will Be Submitted 199

Discovery and the Expert Appraiser 200

Submitting the Expert Appraisal Report to the Court 200

Motions in Limine 201

Rebuttal Reports 202

Qualifying the Appraiser as an Expert and Satisfying Daubert 203

Cross-Examination and Rehabilitation 203

Cross-Examination 203

Rehabilitating the Expert Witness 203

Conclusion 204

Chapter 14 Common Errors with Appraisal Reports and How to Avoid Them 205

Summary 205

Common Defects with Appraisals 205

Defect 1: Untimely Appraisal Report 206

Requirement and Error 206

Remedy 206

Defect 2: Inadequate Description of Property 207

Requirement and Error 207

Remedy 207

Defect 3: Failing to Analyze Agreements and Restrictions with Respect to the Property 208

Requirement and Error 208

Remedy 208

Defect 4: Qualifications Not Disclosed 209

Requirement and Error 209

Remedy 209

Defect 5: No Statement That Appraisal Was Prepared for Federal Tax Purposes 210

Requirement and Error 210

Remedy 210

Defect 6: Wrong Measure of Value 210

Requirement and Error 210

Remedy 212

Defect 7: Lack of Reconciliation 213

Requirement and Error 213

Remedy 214

Defect 8: Consideration of Subsequent Events 215

Requirement and Error 215

Remedy 216

Defect 9: Tax-Affecting S Corporations 216

Requirement and Opportunity for Error 216

Remedy 217

Potential Defect 10: Failure to Include a Regression Analysis 217

Conclusion 218

Table of Cases 219

About the Authors 223

Index 225