Foreword by Shannon P. Pratt xvii
Foreword by Jay E. Fishman xix
Preface xxi
Chapter 1 Tax Valuation and the Necessity for Expert Appraisals 1
Summary 1
The Need for Valuation Experts 1
Valuation in Tax Reporting 2
Valuation in Tax Litigation 3
Valuation in Business and Familial Matters 4
Valuation Calculation Standards 4
Fair Market Value Defined 5
Implied Assumptions 6
Cash Value and Market Value 7
Computing Fair Market Value 7
Step 1: Calculating Net Asset Value 8
Step 2: Applying Discounts and Premiums 9
Common Tax Appraisal Reports 9
Appraisal Reports to Support Tax Reporting Positions 9
Appraisal Reports to Support Tax Litigation 10
Proliferation of Litigation 10
Conclusion 11
Chapter 2 Qualified Appraisal 12
Summary 12
Defining Qualified Appraisal 12
Situations in Which a Qualified Appraisal May Be Required 13
Qualified Appraisal Requirements for Charitable Contribution Deductions Context 14
Requirements 15
Legislative History 16
Statutory Definition of a Qualified Appraisal 18
Regulatory Definition of a Qualified Appraisal 18
Requirement 1: The 60-Day Requirement: Treas. Reg. § 1.170A-13(c)(3)(i)(A) 19
Requirement 2: The Qualified Appraiser Requirement: Treas. Reg. § 1.170A-13(c)(3)(i)(B) 19
Requirement 3: The Substantive Requirements: Treas. Reg. § 1.170A-13(c)(3)(i)(C) 20
Requirement 3.1: Property Description: Treas. Reg. § 1.170A-13(c)(3)(ii)(A) 20
Requirement 3.2: Tangible Property: Treas. Reg. § 1.170A-13(c)(3)(ii)(B) 21
Requirement 3.3: Date of Contribution: Treas. Reg. § 1.170A-13(c)(3)(ii)(C) 21
Requirement 3.4: Terms of Agreement: Treas. Reg. § 1.170A-13(c)(3)(ii)(D) 22
Requirement 3.5: Identifying Information of the Qualified Appraiser: Treas. Reg. § 1.170A-13(c)(3)(ii)(E) 23
Requirement 3.6: The Qualifications of the Qualified Appraiser: Treas. Reg. § 1.170A-13(c)(3)(ii)(F) 24
Requirement 3.7: Statement of Preparation for Income Tax Purposes: Treas. Reg. § 1.170A-13(c)(3)(ii)(G) 24
Requirement 3.8: Date(s) of Appraisal: Treas. Reg. § 1.170A-13(c)(3)(ii)(H) 25
Requirement 3.9: Appraised Fair Market Value: Treas. Reg. § 1.170A-13(c)(3)(ii)(I) 25
Requirements 3.10 and 3.11: Valuation and Basis Used to Determine Fair Market Value: Treas. Reg. §§ 1.170A-13(c)(3)(ii)(J) and (K) 26
Requirement 4: No Prohibited Fee Arrangement: Treas. Reg. § 1.170A-13(c)(3)(i)(D) 27
The Qualified Appraisal Requirement and Pass-Through Entities 27
Interplay of the Qualified Appraisal and Appraisal Summary Requirements 28
Litigation Concerning Qualified Appraisals 29
Conclusion 29
Chapter 3 Qualified Appraiser 31
Summary 31
Legislative History 31
Statutory Requirements 32
Statutory Requirement #1: Appraisal Designation or Certain Minimum Education and Experience Requirements 33
Statutory Requirement #2: Regularly Performs Appraisals for Compensation 34
Statutory Requirement #3: Verifiable Education and Experience 34
Statutory Requirement #4: Not Prohibited from Practice by 31 U.S.C. § 330(c) 34
Regulatory Requirements 35
Appraiser’s Declaration 35
Regulatory Requirement #1: Declaration That Individual Is an Appraiser: Treas. Reg. § 1.170A-13(c)(5)(i)(A) 36
Regulatory Requirement #2: Declaration That the Appraiser Is Qualified to Value the Property: Treas. Reg. § 1.170A-13(c)(5)(i)(B) 36
Regulatory Requirement #3: Declaration That the Appraiser Is Not an Excluded Person: Treas. Reg. § 1.170A-13(c)(5)(i)(C) 36
Regulatory Requirement #4: Declaration That the Appraiser Understands Consequences of Fraudulent Valuation: Treas. Reg. § 1.170A-13(c)(5)(i)(D) 38
Additional Declaration Requirements of Notice 2006-96 38
Denial of Appraiser Status 39
Appraisals by More than One Appraiser 40
Appraisal Fees 40
Judicial Interpretation of the Requirements 41
Sufficiency of Documentation 41
Scrutiny of Qualifications 42
Excluded Parties 42
Multiple Appraisers 42
Conclusion 42
Chapter 4 Substantial Compliance vs. Strict Compliance 43
Summary 43
Overview of the Strict and Substantial Compliance Doctrines 43
Applicability of the Substantial Compliance Doctrine 44
Judicial Approaches to the Substantial Compliance Doctrine 45
Survey of Cases Applying the Substantial Compliance Doctrine 45
Bond v. Commissioner: The First Application of the Substantial Compliance Doctrine in the Context of the ualified Appraisal Regulation 46
Post-Bond Decisions: Cases Finding Substantial Compliance 47
Supplemental Information from Form 8283 47
Sufficient Information for IRS to Evaluate Reported Contributions as Intended by Congress 48
A New Trend? 48
Post-Bond Decisions: Cases Finding No Substantial Compliance 49
Absence of Qualified Appraisal 49
Flawed Appraisal Reports 50
Post-Scheidelman Cases 53
Judicial Approaches to the Strict Compliance Doctrine 53
The Substantial Compliance Doctrine in the Appellate Courts 54
Reasonable Cause: Codification of the Substantial Compliance Doctrine 55
Conclusion 56
Chapter 5 Government Expert Witnesses 58
Summary 58
The Government’s Need for Expert Testimony 58
IRS Criteria for Expert Selection 59
Internal IRS Valuation Experts 60
IRS Hiring, Training, and Evaluation of Internal Valuation Experts 62
Hiring 62
Training 62
Performance Evaluation and Management Oversight 63
IRS Use of Internal Valuation Expert Witnesses 63
Advantages to Using an Internal Valuation Expert as an Expert Witness 63
The Inherent Bias Problem 63
Court Reactions to Government Employee Expert Witnesses 64
Government’s Decision to Not Present an Expert Witness 66
Conclusion 67
Chapter 6 The Practicalities of Selection and Preparation of Experts 68
Summary 68
Selecting an Appraiser 68
Education, Training, Professional Experience, and Accrediting Organization Participation 69
The American Society of Appraisers 69
The Appraisal Institute 70
The Institute of Business Appraisers 70
The National Association of Valuers and Analysts 71
The American Institute of Certified Public Accountants 71
Being a Good Communicator 71
Offering a Neutral, Detached Opinion of Value 71
Avoiding the Bias Perception 71
Selecting the Expert Who Prepared the Appraisal That Supports the Tax Reporting Position 72
Early and Significant Appraiser Involvement 72
Appraiser Scheduling and Availability 73
Correcting Errors in the Expert’s Report 73
“Skeletons in the Closet” 73
Acquainting the Expert with the Cast of Characters and Venue 73
Attorney Comprehension of Expert Opinions 74
Planning the Testimony 74
Expert Testimony Preparation 74
Conclusion 75
Chapter 7 From Daubert to Boltar 76
Summary 76
Standard of Admissibility for Expert Witness Testimony—The Federal Rules of Evidence 76
Daubert and Its Progeny in Courts Other than the Tax Court 77
Boltar as the Modern Incarnation of Daubert in the Tax Court 81
Daubert Challenges Generally 82
Illustrations of Daubert Factors in Practice 83
Factor 1: Has the theory or technique been tested? 83
Factor 2: Has the theory or technique been subjected to peer review and publication? 84
Factor 3: Is there a known or potential rate of error or standards for the theory or technique applied? 86
Factor 4: Has the theory or technique gained general acceptance? 88
Factor 5: Is the expert testifying about matters growing naturally and directly out of research conducted independent of the litigation? 90
Factor 6: Has the expert unjustifiably extrapolated from an accepted premise to an unfounded conclusion? 93
Factor 7: Has the expert adequately accounted for obvious alternative explanations? 95
Factor 8: Is the expert being as careful as he would be in his regular professional work? 96
Factor 9: Is the field or expertise claimed by the expert known to reach reliable results for the type of opinion the expert would give? 97
Factor 10: Has the theory or method offered by the expert been put to any non-judicial use? 97
Factor 11: Whether the expert’s opinion fails to square with a judge’s opinion and common sense 97
Conclusion 98
Chapter 8 Discovery of Expert Material 99
Summary 99
Overview of Discovery 99
Important Limitations on Discovery 100
The Attorney–Client Privilege 100
Work Product 101
Unfairness Doctrine 102
The IRS’s Summons Authority 102
Procedures with Respect to Expert Witnesses Prepared in Connection with Litigation 103
Discovery in the Courts 103
Tax Court 104
General Provisions Regarding Discovery 105
Interrogatories 107
Production of Documents 108
Depositions 110
Admissions 112
U.S. District Courts 113
General Provisions Regarding Discovery 113
Interrogatories 117
Production of Documents, Electronically Stored Information, and Other Similar Items 117
Depositions 118
Admissions 119
Court of Claims 119
Expert Should Be Present at Opposing Expert’s Deposition 119
Conclusion 119
Chapter 9 Expert Appraisal Reports 120
Summary 120
Valuation Standards 120
Revenue Ruling 59-60 121
USPAP Generally 122
Compliance with USPAP 122
Noncompliance with USPAP Does Not Render an Expert Report Unreliable 122
Appraisal Reports Generally 122
Fair Market Value 123
Contents of the Appraisal Report 123
Table of Contents 123
Executive Summary or Cover Letter 123
Body of Report 124
Identifying the Retaining Party and Other Intended Users 124
Type of Appraisal 125
Standard of Value and Source 125
Effective Date of the Appraisal and the Date of the Report 126
Purpose of the Appraisal and Its Intended Use 128
Summary of the Scope of Work 128
Summary of Information Considered 129
Describing the Subject Property, the Type of Asset, the Interest Valued, and Geographic Data 131
How Title Is Held 132
Restrictions, Hypotheticals, and Limiting Conditions 132
Highest and Best Use 132
Valuation of the Subject Property 132
Summary of Approaches Utilized 134
Reconciliation 135
Consider a Regression Analysis 135
Conclusion of Value 136
Appraiser’s Signature 136
Signed Certification 136
Addenda 138
Work File as Support for an Appraisal Report 138
Contents of Work File 138
Retention Period 139
Conclusion 139
Chapter 10 Assessing the Quality of the Appraisal Report 140
Summary 140
Required Items Under the USPAP and Revenue Ruling 59-60 140
Making the Report Understandable to the Audience 142
Replicability 142
Completeness 142
Internal Consistency 142
Reconciliation 143
Regression Analysis 143
Forecasting Future Results 144
Economic and Industry Sections 144
Supporting Exhibits 144
Comply with Applicable Court Rules 145
The Tax Court 145
The District Courts 146
Conclusion 146
Chapter 11 Concurrent Evidence: A Novel Approach to Expert Testimony 147
Summary 147
A New Approach to Expert Testimony 148
Our Long and Deep Distrust of Partisan Experts 148
Court-Appointed Experts 151
Heating Up the Tub: The Concurrent Evidence Method 152
Expert Bias 155
Foreign Court Experiences 155
American Experience with Concurrent Experts 157
Suggested Four-Stage Hot Tub Approach for Tax Court Judges 159
Stage One: Pretrial Expert Meeting and Joint Report 160
Stage Two: The Expert Oath 161
Stage Three: The Trial Hot Tub Conversation 161
Stage Four: Cross-Examination and Rebuttal 163
Common Misperceptions of the Concurrent Witness Model 164
Myth 1: Concurrent Testimony Replaces the Traditional Model 164
Myth 2: The Consent of Both Parties Is Needed 164
Myth 3: More Work Is Created for the Trier of Fact 164
Myth 4: Concurrent Evidence Is Received Off the Record 165
Myth 5: The Concurrent Witness Model Is an Auction 165
Myth 6: The Lawyers Lose All Control in the Courtroom 165
Myth 7: Hot Tubbing Is Prevalent in Tax Cases 165
Practical Benefits and Claimed Drawbacks 166
Conclusion 169
Chapter 12 Penalties Associated with Faulty Appraisals 170
Summary 170
The Importance and Prevalence of Penalties in Modern-Day Appraisal Practice 170
Framework for Examination 171
Accuracy-Related Penalties Possibly Applicable to Client–Taxpayers 171
The Substantial Valuation Misstatement Penalty 172
Imposition of the Penalty 172
Substantial Valuation Misstatement Penalty Applies on a Property-by-Property Basis 172
Dollar Limitation for Substantial Valuation Misstatements 173
Substantial Valuation Misstatements and Pass-Through Entities 173
Increase in Penalty Rate for Gross Valuation Misstatements 174
Defenses 174
The Gross Valuation Misstatement Penalty 176
Gross Valuation Misstatement Applies on a Property-by-Property Basis 177
Dollar Limitation for Gross Valuation Misstatements 177
Gross Valuation Misstatements and Pass-Through Entities 177
Elimination of Reasonable Cause Exception 178
The Applicability of the Gross Valuation Misstatements to Transactions Determined to Lack Economic Substance 178
Estate or Gift Tax Valuation Understatements 180
Civil Penalties Potentially Applicable to Appraisers 180
The Section 6695A Accuracy-Related Penalty 180
The Statute 181
Statute of Limitations and Collection of Penalty 182
Affirmative Defenses 182
Referral for Professional Sanctions 182
Paid Preparer Penalty—Section 6694 182
The Statute 183
Appraisers as Paid Return Preparers 185
De Minimis Exception 185
Affirmative Defenses 186
Aiding and Abetting an Understatement of Tax—The Section 6701 Penalty 186
The Statute 187
Coordination with Other Penalties 188
Injunctions against Appraisers 188
Effect of Imposition of the Section 6701 Penalty 188
Professional Sanctions 189
Circular 230 Generally 189
Disqualification of Appraisers under Circular 230 189
Monetary Penalty 189
Conclusion 190
Chapter 13 Attorney Involvement 191
Summary 191
Framework for Examination 191
Attorney Involvement in Selecting the Appraiser 192
An Appraiser’s Ability to Withstand a Daubert Challenge 193
The Importance of Having the Attorney Engage the Appraiser 193
Attorney Involvement in the Appraisal Process 194
The Fact-Gathering Process 194
The Report Preparation Process 195
The Review Process 196
Sanctions for Improper Attorney Assistance 197
The Tax Preparation Process 198
Coordinating the Attorney’s and the Appraiser’s Involvement in Negotiations with Tax Authorities 198
Attorney Involvement in Litigation Where Expert Reports Will Be Submitted 199
Discovery and the Expert Appraiser 200
Submitting the Expert Appraisal Report to the Court 200
Motions in Limine 201
Rebuttal Reports 202
Qualifying the Appraiser as an Expert and Satisfying Daubert 203
Cross-Examination and Rehabilitation 203
Cross-Examination 203
Rehabilitating the Expert Witness 203
Conclusion 204
Chapter 14 Common Errors with Appraisal Reports and How to Avoid Them 205
Summary 205
Common Defects with Appraisals 205
Defect 1: Untimely Appraisal Report 206
Requirement and Error 206
Remedy 206
Defect 2: Inadequate Description of Property 207
Requirement and Error 207
Remedy 207
Defect 3: Failing to Analyze Agreements and Restrictions with Respect to the Property 208
Requirement and Error 208
Remedy 208
Defect 4: Qualifications Not Disclosed 209
Requirement and Error 209
Remedy 209
Defect 5: No Statement That Appraisal Was Prepared for Federal Tax Purposes 210
Requirement and Error 210
Remedy 210
Defect 6: Wrong Measure of Value 210
Requirement and Error 210
Remedy 212
Defect 7: Lack of Reconciliation 213
Requirement and Error 213
Remedy 214
Defect 8: Consideration of Subsequent Events 215
Requirement and Error 215
Remedy 216
Defect 9: Tax-Affecting S Corporations 216
Requirement and Opportunity for Error 216
Remedy 217
Potential Defect 10: Failure to Include a Regression Analysis 217
Conclusion 218
Table of Cases 219
About the Authors 223
Index 225
