Appraisers Asked “Why Would a Wealthy Elderly Lady Willingly Destroy Half of the Value of Her Estate?”

During last month’s LA Chapter of the Appraisal Institutes’s IRS Valuation Summit, Judge Mark Holmes of the US Tax Court asked 200 appraisers “Why would a wealthy elderly lady willingly destroy half of the value of her estate?” According to Judge Holmes, this is the question appraisers must ask when attempting to explain why a discount is a valid after a transfer of assets to a legal structure. BVWire News Recently published an article containing several expert responses to Judge Holmes’ question. An excerpt from the article is below:

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Advocacy seems to be the biggest red flag in tax valuations. “I’m afraid I’ve found that for every valuation there’s an equal and opposite valuation,” David Elbaz (Kopple & Klinger), another attorney panelist at the AI meeting, said. “We tell our appraisers to give us an objective response that’s defensible, but we also tell them what we want. “ In this environment, Elbaz says that the first thing his law firm looks at when hiring business appraisal experts is the reputation of the appraisal firm. We then look for expertise, particularly if it’s a unique asset,” he says. “We ask about the right credentials and whether they understand the IRS standards.”

Katharine Davidson (Holland & Knight) looks toward the type of valuation report they need. “It will be attached to the tax returns so it’s an admission of value.” As Judge David Laro predicted at the BVR/San Diego Tax and Valuation Summit two years ago, Daubert challenges are now occurring in Tax Court. Davidson agrees that current cases, particularly the Mitchell and Bolter case from Judge Cohen, show that, now that the floodgates are open, the Tax Court will continue to consider valuation expert Daubert challenges. “Lawyers must vet their appraisers or they risk the chance of having their report thrown out.”

Elbaz comments that appraisal reports that get thrown out usually do so “because of death by a thousand cuts.” So he feels that he needs to look carefully at all assumptions,. And, of course, look to the “wisdom of decisions from [Judge David Laro] and other judges,” Davidson recommends.

Appraiser conflict of interest is becoming a bigger issue too. “If your CPA partners have been receiving big audit fees for years, it won’t look great to the judge if you’re the appraiser,” Davidson says.

“We used to learn this by doing,” commented Espen Robak (Pluris). “But now we’re in a different environment influenced by Daubert and Kumho Tire.”

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David, Why Would Families Destroy Estate Value, Judge Mark Holmes Asks Appraisers, BVWire News, Sep. 5, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.