ASA asks IRS to eliminate Letter 4477 and establish due process for appraiser penalties

Last fall, we reported on the “dangerous” implications of Letter 4477, the IRS internal memorandum that would permit IRS agents and examiners—even those lacking BV accreditation or appraisal experience—to issue a penalty citation without consulting the appraiser or a Field Specialist Engineer (see BVWire™# 85-3). The American Society of Appraisers requested a formal meeting with the IRS, and presented its Statement…Regarding the Process for Assessing Civil Money Penalties Against Appraisers for Valuation Misstatements during a panel discussion in Washington, D.C. on February 18.

“Letter 4477 should be eliminated or its contents changed,” says Jay Fishman, who testified on the ASA’s behalf. Under current procedures, the mere receipt of a 4477 Letter “could be injurious to [an appraiser’s] professional standing and reputation.”

The ASA also generally objects to IRC Sec. 6695A procedures for assessing appraiser penalties, for their failure to define a “key” term in the safe harbor provision; i.e., that the appraised value was “more likely than not the proper value,” as established “to the satisfaction of the Secretary.” “What are the criteria appraisers must meet to pass [this] test?” Fishman asks, in the ASA statement. “What are the criteria and protocols appraiser must understand…to demonstrate that the appraised value is ‘more likely than not the proper value’?” Without answers or published guidance, “appraisers are being denied [due process] protections that Congress intended.”

The ASA also “respectfully” recommends that IRS reinstate its Field Specialist program, so that its valuation specialists can obtain appropriate professional credentials, and to reactivate its Valuation Policy Council “immediately.” We’ve posted the ASA’s complete, strongly worded 9-page statement to BVR’s free downloads.

Softer but similar objections from NACVA

“We acknowledge…that the Statute does not define ‘more likely than not’ and that forthcoming regulations will provide further guidance on this standard,” said Lari Masten, current chair of NACVA’s Executive Advisory Board, who testified before the same IRS panel. NACVA suggests the IRS develop, with the aid and input of all four credentialing organizations, a “quality assessment tool or checklist,” to measure the “more likely than not” standard, and a binding mediation or peer review board, to review the subject appraisal. In five additional short statements, NACVA recommends the IRS:

  • Give an authoring appraiser reasonable notice when it’s examining a related tax return;
  • Assess no penalties when a taxpayer settlement results in an adjusted value;
  • Revise Letter 4477 so that an examiner “MUST” submit referrals to a field engineer for assistance or consultation;
  • Allow the appraiser sufficient notice and time to prepare for a Letter 4477 meeting; and,
  • Make its general 6695A penalty process more public, instead of keeping the appraisal community “in the dark.”

The complete NACVA statement is also now available among our free downloads.

Valuation discounts still under IRS attack

Appraiser penalties aren’t the only item on the IRS’s agenda this year. Consider the Treasury Department’s 2010 Revenue Proposals, aka “The Green Book.” Transfer pricing will continue to be a focus, including a proposal to limit the shifting of income from intangible property transfers. And of course, valuation discounts in the estate and gift tax arena remain a primary concern, as the government seeks to disregard certain restrictions on FLP assets (and any related discounts) if the restrictions lapse after transfer, or family members could remove them.

All that appraisers need to know about current E&G issues. Tune in tomorrow, Thursday March 4th, as Linda Trugman, Jay Fishman, and Chris Treharne discuss “Valuation Issues in Estate & Gift Tax”, a 100-minute teleconference covering all of the latest developments in this complex and ever-changing field. Two CPE credits are available, and it’s right in time for the busy tax season. Find out more and register here.

You can’t pay for press like this: Court of Appeals declares Trugman ‘THE expert’

“It’s better to be lucky than good,” Gary Trugman told the BVWire™, with characteristic modesty, concerning his role in Lemmen v. Lemmen (Mich. App., Feb. 9. 2010). He was referring to this language in the Michigan Court of Appeals decision: “Trugman is perhaps THE most qualified and respected business evaluator in that profession” (quoting from the divorce trial in which Gary Trugman appeared as a rebuttal expert). “Trugman literally wrote the book on business valuation,” the Court continued.

The husband owned a minority (25%) interest in an oil and gas holding company, which his expert valued using the build-up method and a discount rate derived from Ibbotson data, applying it to the company’s projected dividend stream. During deposition, the wife’s attorney questioned the expert’s methodology, and asked who was a top authority in the field. When the expert cited Trugman, the wife brought him in as rebuttal expert. At trial, Trugman testified that the proper method would have been to apply the Ibbotson-derived discount rate to net cash flow and not to “estimated actual dividends at the shareholder level.”

May not be the final word. The trial court accepted Trugman’s testimony (with its memorable plaudits) along with evidence from the wife’s primary expert, who valued the husband’s 25% interest at $17.5 million. However, the trial court also applied minority and marketability discounts, based on the same expert’s valuation of a co-owner’s 25% interest four years before the divorce. A single but strong dissent claimed the discounts contradicted equitable principles, given the company’s substantial liquid resources (combined cash and retained earnings of over $67 million) and the differences between factors surrounding the earlier valuation. Moreover, the dissent advocated adopting the statutory fair value standard in divorce, based on case law from other jurisdictions. The parties obviously have sufficient resources and a precedent-setting issue to appeal to the Michigan Supreme Court—which, as Trugman notes, would concern just the application of discounts and not the discount rate, “which is a lock.” Stay tuned…

In the meantime, look for the complete case digest of Lemmen v. Lemmen in the April Business Valuation Update™; the full-text of the appellate court opinion will be available soon at BVLaw™.

FASB defers proposed standards for financial instruments
In its most recent meeting (Feb. 24), the Financial Accounting Standards Board decided to grant  private banks and other private entities with consolidated total assets of less than $1 billion a four-year grace period to comply with its proposed new rules in Accounting for Financial Instruments. During the four-year delay, however, the qualified entities would still have to disclose certain loans and core deposit liabilities at fair value in the footnotes to their financial statements, as measured by the “exit price” notion of FASB Accounting Standards CodificationTM Topic 820, Fair Value Measurements and Disclosures (formerly FAS 157).
The debate over the deferral was apparently contentious; FASB board members who generally prefer a cost-based approach for measuring and accounting for financial instruments plan to issue formal dissents. According to a public summary of the meeting, the Board also discussed the accounting for financial liabilities under the equity method, and how to address changes in an entity’s own credit risk of financial liabilities measured at fair value.

ASA to clarify its position on possible merger with RICs

This week, the ASA’s Executive Committee plans to clarify certain statements regarding its unification and/or merger with the Royal Institute of Chartered Surveyors (“RICS”) that appeared in its February 17, 2010 BV E-Letter (as reported in last week’s BVWire). The statements made by John Barton, current Chair of the ASA BV Committee, “were his personal comments,” the ASA says, and do not necessarily reflect the decisions made by the ASA Board of Governors during its recent midterm meetings (which Barton did not attend). The potential merger with RICS came up during the Board’s long-range strategic planning discussion, which it presented as one possible option to unit the appraisal community. “At no time has there been any formal proposal to merge,” the ASA adds. “The ASA Board of Governors continues to support efforts to unify the appraisal profession and is committed to pursuing that goal” through continuing educational and other cooperative efforts.


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