The level of detail and the manner of explanation in a valuation report for tax compliance purposes is extremely important as the report serves as the expert’s direct testimony in Federal Tax Court.
It’s interesting to observe the important steps that families take to protect their assets – hiring top wealth management teams, tax consultants, and estate planners. But when it comes to hiring a business appraiser to prepare a valuation for gift or estate tax purposes, they often become fee sensitive, seeking the cheapest route for the valuation report.
What many people don’t realize is that the process is different in the civil court system than in the Federal Tax Court system. In civil court, an appraisal report is submitted as evidence and the appraiser has the opportunity to provide direct testimony regarding his or her analysis, assumptions, approaches, and conclusions as detailed in the report. However, in the Federal Tax Court system, U.S. Tax Court Rule 143 (g) provides that an appraiser’s valuation report received into evidence serves as the expert’s direct testimony and additional testimony is only permitted by the Court to clarify matters.
Therefore, it is extremely important for the taxpayer to hire a qualified, experienced appraiser who can express his or her ideas in a clear, concise manner that can be easily understood by the attorneys and the judges should there be litigation.
In a recent article by John M. DelGrego, CPA, ABV, ASA and Heidi Walker, CPA, ABV, ASA, (*) it was noted that a review of recent Tax Court decisions shows that business valuation experts often fail to be persuasive. Some of the quotes found in these decisions are as follows:
- “It is unclear how the interests were valued”
- “We lend little weight to his seemingly contradictory positions”
- “Because we fail to understand his adjustments, we shall disregard them”
- “The entire valuation process is a boundless subjective inquiry”
It is evident from these quotes that judges are paying close attention to the details of these valuation reports. The saying “you get what you pay for” holds true in business valuation. The taxes saved by hiring a qualified, experienced appraiser to prepare a detailed, well thought out and well-presented report can substantially outweigh the cost of the appraisal itself.
(*)Maine Lawyers Review, “Stakes Are High in Business Valuations for Estate and Gift Tax Reporting” by John M. DelGrego and Heidi Walker, Meyers, Harrison & Pia, LLC