Just as beauty is in the eye of the holder, it is often said that value is in the eye of the holder since it is a relative term and depends upon the context. In estate planning, the great majority of IRS challenges to wealth transfers focuses on hard to value assets. The New York Times reported that in more than 80% of the gift tax returns audited 1999 for gifts of over $1 million; there were significant “undervalued assets” in the former real estate and family business interests.

In an IRS challenge, the taxpayer generally has the burden to prove that the value was adequately disclosed. Hence, the benefit of creditable valuation report from a qualified appraiser. A good report lessens the chance that the IRS will expend resources to assert a case in order to show that the taxpayer’s position is wrong. It is best to have the appraisal before the transfer since it will, in the final analysis, save attorney’s fees and appraisal fees. Appraisals after the fact are much more difficult to obtain, and since they are not timely, they may be more difficult to defend.

It should be noted that the latest form IRS 709 gift and generation-skipping transfers require the taxpayer to indicate whether a valuation discount is being taken on the transfer. The form requires that substantiation is given for the discount. In order to make a fully disclosed tax filing, it is our suggestion that an appraisal is submitted to provide that substantiation. A qualified appraisal report submitted with the form IRS 709 can get the statutes of limitation running so that the IRS only has three years to audit. However, lack of disclosure of the gift keeps the statute of limitations open for an indefinite period of time. See  IRS Chief Counsel Advice 200221010.

As estate planners, the attorneys at Strauss Attorneys PLLC look for appraisers that have extensive knowledge and experience in valuing the assets to be transferred. Additionally, we look for appraisers who have the right credentials. Since the key to getting the statute of limitations running is “adequate disclosure,” it is critical that the appraiser chosen is qualified to make the appraisal. The appraiser should regularly be in the business of making appraisals and be conversant with the Uniform Standards of Professional Appraisal Practice which is published by the appraisal foundation.

Our role as an attorney is to advise clients in identifying valuation issues, being aware of current legal valuation issues and IRS positions, and advising clients on hiring and reviewing work of the chosen appraiser. In the end, the appraisal needs to be defensible and withstand IRS scrutiny. Helping clients to navigate the difficult waters of valuation is a role that we have played often and are available to consult with clients on the potential impact of valuation issues.

Andy Strauss

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