The Importance of Hiring a Qualified Appraiser

A recent IRS case highlighted the importance of hiring a qualified appraiser for asset and business transactions. "Qualified” is a definition provided by the IRS. A person cannot legitimately claim to be “Qualified” if they don’t meet the definition provided by the IRS.

Here is an AI summary, which is actually a pretty good summary of the situation. The Hidden Risk of Using Unqualified Business Appraisers:

Choosing a business valuation provider based solely on price can be a costly mistake. Appraisers who lack recognized credentials or fail to follow professional standards may deliver reports that look polished but are fundamentally flawed. Here's why it matters:

• Regulatory and legal risk: The IRS requires business valuations for tax purposes to follow recognized standards (Rev. Rul. 59-60, Publication 561). Reports by unqualified appraisers can trigger audits and tax penalties or be rejected outright.

• In litigation, expert valuations must meet the Daubert standard. Courts regularly exclude non-compliant or non-credentialed valuation reports.

• Professional standards exist for a reason. Organizations like NACVA, ASA, and AICPA set professional standards (e.g., USPAP, SSVS1) that ensure valuation reports are consistent, reliable, and defensible. Reports that deviate from these standards can contain material misstatements or unsupported conclusions, which can lead to financial harm or liability.

How to Identify a Qualified Appraiser:

• Look for credentials from NACVA (e.g., CVA), ASA, or AICPA (e.g., ABV).

• Ask if the report complies with USPAP and SSVS1 standards (VERY IMPORTANT).

• Ensure the appraiser has experience with your type and size of business.

• Further Reading and References:

• IRS Publication 561: https://www.irs.gov/publications/p561

• NACVA Standards and Ethics: https://www.nacva.com/page/standards_overview

• Business Valuation Resources: https://www.bvresources.com/

• ASA Business Valuation Standards: https://www.appraisers.org/Disciplines/Business-Valuation

Real-world consequences exist for failure to use a qualified appraiser who not only arrives at a reasonable number but also writes the report in the correct format. Many appraisers offer cut-rate appraisals because their reports do not meet the required parameters. Look for phrases like “Indication of Value” to identify situations where the report probably will not meet the required standard.

If you do not want to take my word for this, here are some court cases for your reading pleasure:

• In Estate of Gallagher v. Commissioner (T.C. Memo 2011-148), the Tax Court rejected an appraisal for methodological flaws and lack of reliable inputs.

• Estate of Scott M. Hoensheid v. Commissioner (T.C. Memo 2023-34). In this 2023 Tax Court case, the estate utilized an investment banker, who lacked formal appraisal credentials, to value closely held stock for a charitable donation. The court determined that the individual did not meet the IRS’s definition of a “qualified appraiser,” leading to the disallowance of the charitable deduction. The court emphasized that “mere familiarity with the type of property being valued does not by itself make [someone] qualified.”

• Appraiser disqualified for contingent fee arrangement: In a Colorado case, the appraiser was disqualified after the court found his fee was contingent upon the appraisal outcome, a direct violation of impartiality standards. The court concluded that his financial interest compromised the appraisal’s fairness and credibility, rendering the valuation inadmissible.

• Connelly v. United States (2021). In this case, a buy-sell agreement lacked specific qualifications for appraisers, merely requiring five years of experience in appraising similar businesses. The absence of mandates for formal education or recognized valuation credentials led to concerns about the credibility of potential appraisals under the agreement. This underscores the importance of clearly defining appraiser qualifications to ensure reliable valuations.

• Miller Kaplan: “Risks of Unqualified Appraisers”. An article by Miller Kaplan highlighted a scenario where a novice appraiser used outdated data spanning two decades to value an event planning company. This approach failed to account for significant industry changes, such as the impact of the COVID-19 pandemic, leading to a flawed valuation. The case exemplifies how a lack of current industry knowledge and proper methodology by unqualified appraisers can result in inaccurate valuations.

  
  

To meet IRS requirements, the appraiser must meet the IRS’s definition of “Qualified.” The report must meet the applicable standard. The methods used must be recognized.

Hiring a cut-rate appraiser may save upfront money, and if you don’t get caught, you might be fine. However, a poor report can derail business sales, financing, estate planning, and dispute resolution. And believe me, if a dispute arises involving a poorly written report and the other side has a good expert, you will lose.

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NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.

None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.