To Be Certified or Not Certified

The Tax Court Says Certified

A recent Tax Court opinion brought to light the importance of having an appraiser designation from a professional appraiser organization. While the decision is limited to Tax Court cases, it provides a cautionary tale for all who provide business appraisals in litigious situations.

A recent Tax Court opinion brought to light the importance of having an appraiser designation from a professional appraiser organization.[1] While the decision is limited to Tax Court cases, it provides a cautionary tale for all who provide business appraisals in litigious situations.

The case involved a charitable contribution of shares in a closely held corporation. The standard for an appraisal under the tax code may be found in Section 170. It states that as a part of qualifying for a deduction for a contribution of property in excess of $500,000, the taxpayer must attach “a qualified appraisal to the return.” A qualified appraisal is defined as “an appraisal of such property which:

(I) is treated for purposes of this paragraph as a qualified appraisal under the regulations or other guidance prescribed by the Secretary, and

(II) is conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regulations to other guidance prescribed under subclause (I).”[2]

The appraiser valuing the charitable contribution was an investment banker that had no certifications from any professional appraiser organizations and had performed valuations on a limited basis. He went on to say he appraised businesses once or twice a year to solicit clients.[3]

Defining Qualified Appraiser for Tax Courts

In the decision, the Tax Court cited section 170(f)(11)(E)(ii) which defines a qualified appraiser. “A qualified appraiser is an individual who:

(I) has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in regulations,

(II) regularly performs appraisals for which the individual receives compensation, and

(III) meets such other requirements as may be prescribed … in regulations or other guidance.”[4]

The decision went on to say, an appraiser must also demonstrate “verifiable education and experience in valuing the type of property subject to the appraisal. [cite omitted] The regulations add that the appraiser must include in the appraisal summary a declaration that he or she (1) either holds himself or herself out to the public as an appraiser or performs appraisals on a regular basis; (2) is qualified to make appraisals of the type of property being valued; (3) is not an excluded person specified in paragraph (c)(5)(iv) of the regulations; and (4) understands the consequences of a false or fraudulent overstatement of property value. [cite omitted] Finally, [5]the regulations prohibit a fee arrangement for a qualified appraisal based, in effect, on a percentage … of the appraised value of the property.” [cite omitted]

Court’s Concern with Appraiser’s Valuation

The appraiser did not help his situation due to a series of unforced errors in his work. The court reported the following problems:

1. The appraisal did not include the statement that it was prepared for federal income tax purposes;
2. Included the incorrect date of June 11 as the date of contribution;
3. Included a premature date of appraisal;
4. Did not sufficiently describe the method of the valuation;
5. Was not signed by the appraiser or anyone from his practice;
6. Did not include the appraiser’s qualifications as the appraiser;
7. Did not describe the property in sufficient detail;
8. Did not include an explanation of the specific basis for the valuation.[6]

The decision makes clear that all these factors contributed to the appraisal being rejected. It would appear the failure to include any number of the items listed by the court demonstrates the appraiser did not have the education, training, and experience to work as a qualified appraiser.

As noted by one legal site, the appellants (taxpayers) “did not dispute that the appraisal had defects. They sought to rely on the ‘substantial compliance’ doctrine to excuse these stringent substantiation requirements. The Tax Court analyzed the substantial requirement argument but rejected it, stating that the appraisal failed regarding multiple substantive requirements of the applicable regulations.”[7] As a result, no deduction for the contribution was allowed.

Take Aways for Appraisers

This decision highlights three important elements for an appraiser to remain acceptable to the courts and competitive in the marketplace. First, certification. Not only Tax Courts but civil courts continue to view appraisals of businesses with concern. Appraisers who have earned certification from a recognized professional appraiser organization (e.g., NACVA) will have cleared an initial hurdle for acceptance from the court. Second, education. The appraiser should be able to demonstrate ongoing continuing education in the appraisal field. This shows the court and opposing counsel that the appraiser is continuing to stay on top of his or her field and aware of ongoing trends in his or her industry. Third, compliance. Appraisers are taught what is required for the appraisal process and is to be included in their report. The appraisal in this case failed on multiple levels. A qualified appraiser will seek to fulfil all of the required definitions, explanations, and inclusions or will generally note why a certain item has not been included.

Even with these three factors supporting an expert, opposing counsel will still, in many cases, seek to exclude or limit the testimony. Unless the expert has made mistakes in the appraisal, like math errors or false assumptions, an expert’s certification, continuing education, and properly prepared appraisal should allow for his or her testimony at trial.

Conclusion

As the Hoenshied case becomes more known in legal circles, it is possible, if not probable, that attorneys will try to use a similar argument regarding certification and education to undermine the work of nonqualified appraisal experts. Those not having a certification and not having continued to seek educational opportunities in the appraisal field will feel the heat from these arguments. Those having a CVA or similar certifications and having maintained their continuing education will force opposing counsel to seek higher hanging fruit for objecting to an appraisal report.

As full personal disclosure, I do not have an appraisal certification from a recognized professional appraisal organization. In 1999, I attended and completed the Institute of Business Appraisers’ training classes to become an appraiser. I passed the Certified Business Appraisers’ examination but did not submit my field work. Therefore, I did not receive my CBA.

I have continued to value businesses inside and outside of litigious situations for the past 24 years. I have also continued to seek continuing education for the appraisal portion of my practice. Because my practice covers various areas of economic damages, personal, commercial, and business bankruptcy, I participate in a myriad of continuing educational opportunities. Each level of continuing education enhances my ability to perform in all of my areas of work.

My ongoing education and history of providing business appraisals in litigation matters gives me support for continuing to provide acceptable appraisals to the courts. I do this by following the process that is expected to be used for valuing a business.

As a non-certified appraisal expert, I can tell you that this work can be done without a certification. I can also tell you it is a lot easier addressing objections from the opposing side if you have one.

 

[1] Estate of Scott M. Hoensheid, et al. v Commissioner of Internal Revenue, T.C. Memo. 2023-34, Docket 18606-19, 3/15/2023.

[2] Hoensheid, 38.

[3] Noncertified occasional valuer is not a qualified appraiser per Tax Court, BVWire, Issue 254-4, 11/29/2023, BVR.

[4] Hoenshied, 39.

[5] Ibid., 39.

[6] Ibid., 39.

[7] Timing Is Critical for Gift of Appreciated Stock to avoid Capital Gain from Sale of Company, McGuire Woods, 3/20/2023, www.mcguirewoods.com.

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Allyn Needham, PhD, CEA, is a partner at Shipp Needham Economic Analysis, LLC, a Fort Worth-based litigation support consulting expert services and economic research firm. Prior to joining Shipp Needham Economic Analysis, he was in the banking, finance, and insurance industries for over 20 years. As an expert, he has testified on various matters relating to commercial damages, personal damages, business bankruptcy, and business valuation. Dr. Needham has published articles in the areas of financial and forensic economics, and provided continuing education presentations at professional economic, vocational rehabilitation, and bar association meetings. In 2021, Dr. Needham received a NACVA Outstanding Member Award. He is also a member of NACVA’s QuickRead Editorial Board.

Dr. Needham can be contacted at (817) 348-0213 or by e-mail to aneedham@shippneedham.com.