Sloppiness of an appraisal doesn’t matter. Reliability of an appraisal doesn’t matter. Even proper application of facts underlying an appraisal doesn’t matter. What makes an appraisal “qualified,” says the Tax Court, is whether it provides sufficient information to enable the Internal Revenue Service to evaluate an appraiser’s methodology.
Giving, bequeathing and otherwise charitably donating cash is straightforward and easy. Cash embodies the very concept of economic value, after all. On the other hand, non-cash assets must be appraised to determine (and justify) the value claimed by the donor. In short, under such circumstances the appraisal must be a “qualified appraisal.”
The issue of valuation and taxation is an entirely opaque matter, to the tax court and taxpayers alike. WealthManagement.com recently attempted to provide some clarity in an article titled ““Qualified Appraisal” of Façade Easement and Development Rights.”
The article hinges on a fairly recent tax court matter known as Friedman v. Commissioner, but the issue of what qualifies as a “qualified appraisal” is age old. As you may well know, to give an asset that does not have a readily ascertainable monetary value requires a valuation for IRS purposes. This valu-
ation, in turn, requires an independent expert to issue their “qualified appraisal.”
Unfortunately, it is not always a simple matter. For instance, the qualified appraisal of stock in a privately held business is entirely different than the qualified appraisal of a unique piece of art. Moreover, neither the stock nor the art bear any resemblance to the fairly simple qualified valuation of a house.
According to the WealthManagement.com article and the underlying tax case cited involving a façade easement (a fairly intangible asset, you could say), what makes a “qualified” valuation is the clarity of the underlying methodology. Translation: the tax court must at least understand how a value
was determined and that a relevant method was used to get there. Understandably, the tax court is not an expert on any given asset valuation, just the tax law. That said, the tax court may engage their own experts for their own appraisals, especially with items like artwork.
Whatever basis the tax court uses, it just goes to show how intractable the problem of value is to the law. As for you, one planning for your assets and estate, it also goes to show the absolutely essential need to engage a qualified expert to produce a “qualified appraisal” regarding the value of your assets.
You can learn more about this topic as well as other strategies on our website under the tab entitled: estate planning in Virginia. Be sure you also sign up for our complimentary e-newsletter so that you may be informed of all the latest issues that could affect you, your loved ones and your estate planning.
Reference: WealthManagement.com (September 26, 2013) ““Qualified Appraisal” of Façade Easement and Development Rights”