IRS Appraisal Symposium: FMV Requires Use of “Most Common” Market
(by William Novotny Sept. 2008) The Los Angeles Chapter of the ASA recently sponsored an IRS symposium entitled Practicing Before the IRS – A Guide for Personal Property Appraisers at the Atrium Hotel in Irvine, CA.
The symposium was well-attended and featured four key IRS speakers and Joy Berus, an attorney specializing in art law. From the IRS were Brenda Woolbert, CPA, CVA (Team Manager for the IRS Engineers and Appraisers office in Laguna Niguel, CA); Michael Zarefsky, Esq., CPA, IRS Attorney – Advisor; Susan Kassell, Esq. (Senior Counsel in the IRS Office of the Associate Chief Counsel, Income Tax & Accounting, Washington, DC) and Karen Carolan (Chief, Art Appraisal Services, Chair, Commissioner’s Art Advisory Panel Department of the Treasury, IRS, Washington, DC). Topics included the appraiser’s responsibilities, the requirements for estate and charitable contribution appraisals, IRS proposed changes and appraiser qualifications.
Though familiar with the complexity of IRS regulations, participants were surprised to learn that there are 243 sections of the IRS Code regarding the use of fair market value. There are over 15 million tax returns filed annually in which taxpayers have valuation issues. As might be expected, abuses and disputes regarding valuations occur.
How to minimize problem areas? All agreed that transparency is the key with appraisals. The IRS needs the appraiser to disclose relevant facts, the methodology employed and the analysis that supports the value opinion in a manner that is consistent with the requirements of a recognized performance standard such as the Uniform Standards of Professional Appraisal Practice (USPAP). Valuation issues are fact and market-data driven. The IRS looks for a well-documented proof of value.
Appraisals having a single item with a fair market value of $20K or more must be accompanied by a full market study, including comparable sales as well as an analysis that supports the value conclusions. These assignments also have additional requirements such as the inclusion of photographs. These requirements apply to any appraisal report that is submitted to the IRS whether for estate tax, gift tax or charitable contribution. Every appraiser should have a copy of IRS Pub 561 (Determining the Value of Donated Property) and IRS Pub 526 (Charitable Contributions) which contain more information regarding these as well as other IRS report content requirements.
It was noted that all tax-related appraisals are reviewed; some are selected for close scrutiny. As value increases, the appraiser’s development and reporting requirements increase. The standard of proof is based on what the appraiser “should have known.” More than one hundred appraisers have been referred for penalty investigation. Six appraisers have been penalized a proposed total of $150K.
The Pension Protection Act of 2006 raised the bar for appraisers. It expands the definition of qualified appraiser and qualified appraisal. Appraisals must be written in compliance with an accepted standard such as USPAP. In addition, whether an appraiser is “qualified” can be based on having an earned designation from a recognized professional appraisal association, or on having equivalent education/experience with similar objects. A description of the “equivalent education/experience with similar objects” must be detailed in the report. Michael Zaresfsky provided an acronym for requisite qualifications – SKEET: Skill, Knowledge, Education, Experience and Training.
What is fair market value? Discussion focused on the meaning of “most common market” i.e., the market in which the sales of comparable properties most frequently occur to the public. The most common market must be identified for each object being valued, and need not always be at auction — particularly when the auction level does not have the highest frequency of sales to the end user. It was noted that if most sales occur in a retail gallery for a work of art, then the retail gallery market is, by definition, the most common market.
At the end of the day, it was apparent to all that by writing appraisals in conformance with USPAP and by adhering to IRS regulations for appraisal content and methodology, the professional appraiser will not only serve his or her client well, but will also help maintain the public’s trust in our profession.
© 2008 William M. Novotny, ISA AM