In this blog and with this post, I reintroduce “Mercer’s Musings” because I would like to reflect on a number of seemingly unsettled issues in the business valuation world.
This first musing relates to the need (or not) to comply with the Uniform Standards of Professional Appraisal Practice promulgated by The Appraisal Foundation in gift and estate tax appraisals prepared for the Internal Revenue Service.
In a previous post on this blog, I wrote:
… appraisers who must follow USPAP, and that includes all members of the American Society of Appraisers and any appraisers conducting appraisals for gift and estate tax purposes or for other purposes involving the federal government, these standards apply. The rules apply, practically, to almost all appraisers, including those holding ABV and CVA designations (emphasis added).
I said “practically” because I had not seen a specific requirement for business appraisers to follow USPAP; however, I did rely on the advice of a number of prominent gift/estate tax attorneys who had advised me that following USPAP was, in their opinion, required for IRS-related appraisals.
Some have said that I am wrong on this point. Let’s address this.
Upon a bit of research, it is clear that any (real estate) appraiser who performs appraisals of properties for mortgages must comply with USPAP. That, apparently, is a fact.
Regarding business appraisers, I cannot find a direct requirement that USPAP be followed. However, I can say that a number of high-end gift and estate tax attorneys have suggested to me that the requirement exists.
It is clear that appraisers holding the AM, the ASA, and the FASA designations from the American Society of Appraisers must comply with USPAP for all appraisals rendered, including those related to gift/estate taxes. We must also comply with the ASA Business Valuation Standards and the Principles of Appraisal Practice and Code of Ethics of the American Society of Appraisers.
The question for today is: Should appraisers credentialed by the other two major credentialing societies in the United States, i.e., the AICPA (ABV designation) and NACVA (CVA designation), comply with USPAP in gift/estate tax-related appraisals?
This is a different question than: “Are all appraisers required to comply with USPAP…”
Qualified Appraisals and Qualified Appraisers
According to § 1.170A-17(a)(1) of the Internal Revenue Code, which defines the term “qualified appraisal” for charitable gifting appraisals as:
(a) Qualified appraisal —
For purposes of section 1.170(f)(11) and §1.170A–16(d)(1)(ii) and (e)(1)(ii), the term qualified appraisal means an appraisal document that is prepared by a qualified appraiser (as defined in paragraph (b)(1) of this section) in accordance with generally accepted appraisal standards (as defined in paragraph (a)(2) of this section) and otherwise complies with the requirements of this paragraph (a).
(2) Generally accepted appraisal standards defined. For purposes of paragraph (a)(1) of this section,generally accepted appraisal standards means the substance and principles of the Uniform Standards of Professional Appraisal Practice, as developed by the Appraisal Standards Board of The Appraisal Foundation. (emphasis in original, bold added)
The term qualified appraiser is also defined as:
Qualified appraiser. A qualified appraiser is an individual with verifiable education and experience in valuing the type of property for which the appraisal is performed.
1. The individual:
a. Has earned an appraisal designation from a generally recognized professional appraiser organization, for the type of property being valued; or
b. Has met certain minimum education requirements and 2 or more years of experience in valuing the type of property being valued. To meet the minimum education requirement the individual must have successfully completed professional or college-level coursework obtained from:
i. A professional or college-level educational organization,
ii. A professional trade or appraiser organization that regularly offers educational programs in valuing the type of property, or
iii. An employer as part of an employee apprenticeship or education program similar to professional or college-level courses.
2. The individual regularly prepares appraisals for which they are paid.
3. The individual is not an excluded individual (defined later). (bold in original, emphasis added).
Examining the Definitions
Qualified appraisers must deliver qualified appraisals according to the cited regulations for appraisals for the IRS pertaining to charitable giving. Many attorneys suggest that the definitions are also relevant for gift/tax-related appraisals.
It is clear that appraisers holding credentials of the American Society of Appraisers must comply with USPAP and the ASA Business Valuation Standards of the ASA. It is also clear that appraisers holding the ABV (Accredited in Business Valuation) credential of the AICPA must comply with the Statement on Standards for Valuation Services (VS Section 100). Similarly, appraisers holding the CVA (or predecessor designations) of the National Association of Certified Valuation Analysts (NACVA) must follow its Professional Standards.
Recall the last paragraph in the definition of “qualified appraisal” from above:
(2) Generally accepted appraisal standards defined. For purposes of paragraph (a)(1) of this section, generally accepted appraisal standards means the substance and principles of the Uniform Standards of Professional Appraisal Practice, as developed by the Appraisal Standards Board of The Appraisal Foundation. (emphasis in original, bold added)
To help address the question, I again consulted with several prominent tax attorneys. One attorney I talked to said there appears to be some “wiggle room” in the definition of qualified appraisal quoted above. There is a small difference between saying that a qualified appraisal must comply with USPAP and the actual language in the regulation.
Another attorney I consulted said any appraiser who does not comply with USPAP “is asking for a Daubert methodology challenge” and any appraiser who does not follow USPAP is “opening himself or herself up to ‘admitting’ that he or she did not comply with USPAP.”
The first question this attorney said he would ask an appraiser not complying with USPAP, even though complying with another set of standards, is:
Question: “Does your appraisal report comply with the Uniform Standards of Professional Appraisal Practice?”
If your response to the question is “No,” it could be problematic.
If your response is “No, but I don’t have to comply,”, it might still be problematic.
You would have to “prove” to the Court that the standards you followed were a) “generally accepted appraisal standards,” and b) that those standards “conform to the substance and principles of the Uniform Standards of Professional Appraisal Practice, as developed by the Appraisal Standards Board of The Appraisal Foundation.”
An appraiser who chooses not to comply with USPAP is open to questions comparing his or her standards with those of USPAP. For example, USPAP’s Standards Rule 9-4(d) states:
(d) An appraiser must, when necessary for credible assignment results, analyze the effect on value, if any, of the extent to which the interest appraised contains elements of ownership control and is marketable and/or liquid.
Comment. An appraiser must analyze factors such as holding period, interim benefits, and the difficulty and cost of marketing the subject interest.
Equity interests in a business enterprise are not necessarily worth the pro rata share of the business enterprise interest value as a whole. Also, the value of the business enterprise is not necessarily a direct mathematical extension of the value of the fractional interests. The degree of control, marketability and/or liquidity or lack thereof depends on a broad variety of facts and circumstances that must be analyzed when applicable. (bold in original, italics added)
Suppose an appraiser complying with other standards and not USPAP was asked: “Do your standards contain “…the substance and principles of the Uniform Standards of Professional Appraisal Practice, as developed by the Appraisal Standards Board of The Appraisal Foundation?”
It took just a couple of minutes to determine that there is no mention of a holding period, interim benefits, or distributions in either the AICPA’s SSVS or NACVA’s Professional Standards. The only mention of dividends in the Professional Standards is in a list of factors from Revenue Ruling 59-60. There are two mentions of dividends in SSVS, in definitions of equity cash flow and invested capital net cash flow. This is not a criticism of either set of standards. However, a non-complying appraiser is open to the obvious question:
“Did you not comply with USPAP to avoid this very specific guidance?”
So my last question in Mercer’s Musings #1 is my answer to the first question above:
“If I held an ABV credential or a CVA credential and did not hold the FASA designation, why wouldn’t I insure that my tax-related appraisals comply with USPAP?”
As always, comments are welcome.
Until next time, be well!