Looking at the Impact of the Pension Protection Act of 2006

Recent Developments with Qualified Appraiser and Appraisal

Requirements: The Broad Impact on Gift and Estate Tax Returns

Looking at the Impact of the Pension Protection Act of 2006

© ATICG 2008 ATI Capital Group, Inc.2

Pension Protection Act of 2006

• The PPA was signed into law on August 17, 2006

• Section 1219 defines a “qualified appraiser” and a “qualified appraisal”.

• Provides for IRC §6662 valuator penalties under new IRC §6665A


Qualified Appraiser

• A qualified appraiser is someone who:– Is independent as described in IRC §170(a)– Is professionally qualified and described in IRC

§170(f)(11)


Independence

• Under IRC 170(a) Independence is required when valuing property for chartable purposes and is determined to be true if:– He\she is not a party to the transaction– Not related to, or married to, any party involved in the

transaction– Other than in this capacity, acting on behalf of the

Fiduciary\Trustee, is not regularly used by the sponsor or corporation for other professional work

– The majority of completed valuations are not for the parties


Independence (Cont.)

– Holds him\herself out to the public as a valuation professional

– Performs business valuations of this type on a regular basis

– Is qualified to perform this type of valuation for this kind of property by virtue of their background, experience, education, and membership in professional associations

– Fees for this type of work are independent from the value conclusion of the property being valued.


Competence

• IRC §170(f)(11)(E)(ii) defines a qualified appraiser as someone who:– Has earned an appraisal designation from a

recognized professional appraisal organization– Regularly performs appraisals for which the

individual receives compensation– Meets other such requirements as may be

prescribed by the Secretary


Competence (Cont.)

• IRC §170(f)(11)(E)(iii) states that an appraiser shall not be considered qualified unless – he\she demonstrates verifiable education; and– has not been prohibited from practicing before

the IRS by the Secretary at any time during the three year period ending as of the date of the appraisal


Qualified Appraisal Report

• An appraisal shall be considered a qualified appraisal (generally) if:– It is conducted in accordance with generally

accepted valuation standards– Is consistent with the substance and principals

of the “Uniform Standards of Professional Appraisal Practice” or “USPAP” as developed by the Appraisal Standards Board of the Appraisal Foundation


Applicability

Up to this point there was much debate as to if these new rules applied to charitable deductions only or if it also applied to gift and estate tax filings?


IRS Notice 2006-96

• Issued January 17, 2007

• Provides clarification and transitional guidance for the definition of qualified appraiser and qualified appraisal.

• Again specifically mentioning chartable deductions but not gift and estate tax filings.

• Allows for any business valuation designation –does not mention any by name.


• Again mentions “generally accepted appraisal standards” (code for USPAP)

• Minimum education experience after October 19, 2006 for real property:– Licensed or certified to appraise property of the

type in question in the state where the real property is located

Notice 2006-96 (Cont.)



• For property other than real property:– Successfully completed college or professional

level course work relevant to the property being valued

– Obtained two years of experience in buying, selling or valuing property of the type being appraised.

– Fully discloses in the report the qualifications considered qualified by the appraiser.


• Most importantly, the valuation report must contain a signed acknowledgement that the valuator understands that he\she may be subject to fine under IRC §6665A for a “substantial or gross valuation misstatement”.


What about Gift & Estate Taxes???


Joint Committee on Taxation

• Published Technical Corrections on a number of bills on November 17, 2007

• Covers various enacted laws or “Acts” from 2006 back to 1999 including PPA of 2006 and states two technical corrections regarding the PPA of 2006


IRC § 6695A

• First it clearly states that:– “the act omitted to apply IRC §6695A with respect to

substantial valuation misstatements for estate and gift tax proposes and this provision clarifies that the penalty applies for such purpose”; and

– In the cross references as to the application of penalty section Code section 6696(d)(1) relating to the time period to assess the penalty applies (NO STATUTE OF LIMITATIONS).


Finally G.C. Memo AM 2007-17

• Released on November 9, 2007• Confirms that the IRS may assess a 6695A penalty

against appraiser’s for reports dated after May 25, 2007 that are used in conjunction with a gift and\or estate tax filing.

• Affirms the three year statute of limitations shall not apply and that a penalty may be retroactively assessed against reports that do not meet transitional requirements back to August 17, 2006


AM 2007-17 (Cont.)

• The penalty is the greater of; $1,000 or 10% of the understatement (but in no event more than 125% of the gross income received by the appraiser for preparing the appraisal).

• No guidance as to what will be criteria for imposing a three year suspension from practice before the Department of the Treasury!

Why USPAP?

What does it Cover?


The Appraisal Foundation

• Provides uniform standards for:– Real Property Appraisal– Mass Property Appraisal (county tax assessor)– Machinery & Equipment– Personal Property– Business and\or Intangible Property


The Appraisal Foundation (Cont.)

• Has both a “scope” and “reporting” standard for each discipline

• Requirements are general in nature but provide the foundation for proper due diligence, documentation, and reporting a value conclusion.


Professional Declaration

• USPAP requires declarative statement that:– The facts presented in the report are correct and

that the analyses, opinions, and conclusions are limited only to the stated assumptions and limiting conditions in the report and that they are the valuator’s personal and unbiased opinions



– All work was performed under the direct supervision of a qualified appraiser and that they assume all responsibility for their work.

– That the engagement was not contingent on any action, event, opinion, or conclusion.

– That compensation was not contingent developing or reporting a predetermined value or opinion.



– That the valuator has no present or prospective interest in the property being valued.

– That the analysis, opinions, and conclusions are in conformity with USPAP; and now…..

– That the valuator is independent under IRC §170(a), is a qualified appraiser, that the report is a qualified appraisal, and that the valuator signing the report understands that a IRC §6695A penalty may be imposed for substantial or gross valuation misstatements.

Hiring an Appraiser

What qualifications do you look for?


Business Valuation Professional Designations

• National Association of Certified Valuation Analysts. NACVA uses the initials CVA “Certified Valuation Analyst”.– Does not require full time commitment to the

profession.

– Does not “peer review” reports.

– Has a limited training and certification “process”.

– Full reciprocity with no restrictions.

– No requirement to adhere to USPAP


Business Valuation Professional Designations (Cont.)

• Institute of Business Appraiser’s IBA uses the initials CBA “Certified Business Appraiser”– Requires education, training and proof of “work in the

profession”

– Requires training class and exam.

– Requires limited peer review of reports

– Does not require adherence to USPAP

– Full reciprocity with most other designations



• American Institute of Certified Public Accountants AICPA uses the initials ABV “Accredited in Business Valuation”– Requires that the candidate be an AICPA member in

good standing (must be a CPA)

– Prove successful completion of ten valuations

– Prove 80 hours of business valuation education

– Attend three day exam review and pass eight hour business valuation examination.


AICPA -ABV (Cont.)

– AICPA has issued business valuation standards that must be adhered to by professional

– Does not require USPAP per se’– Does not require report peer review– Does not require proof of full time business

valuation experience.– Rigorous continuing education requirement– Mentoring period now required



• American Society of Appraisers uses the initials ASA Accredited Senior Appraiser.

• Governs Real Estate, M&E, Gems & Jewelry, Personal Property and Business Valuation



• Requires relevant college degree for BV:– Economics, Finance, Accounting, Business while

others such as Engineering allowed on a case by case basis.

• Must pass four BV exams each has a three day class or may “challenge” exam without the class.

• Must take USPAP course and pass USPAP exam.• Must pass ethics exam.



• Must submit and pass two (2) BV reports for peer review.

• Must prove five years of full-time business valuation experience.

• Substantial continuing education requirement.

• Reaccreditation required every five years.

Specific Qualifications

What to Look for in addition to the basics


What to look for in a BV Professional (Cont.)

• Specialization is a must! Complexity requires full-time commitment– Divorce– Fair value for financial reporting purposes– Shareholder disputes– Forensic accounting

• They are all specialties and so is Gift and Estate Tax Valuation



• Questions to ask!?– Do they have knowledge of the IRC– How many gift and estate tax engagements do

they perform per year (the individual not the firm).

– Have they been deposed for gift or estate tax cases (tax or federal court experience)

– Have they testified in tax or federal court.– What percent of their cases settle before trial



• Have they ever presented to the Wealth Counsel, National Network, or other legal organizations?

• Are they involved with planning engagements vs. compliance engagements?

• What related experience do they have; like:– ESOP, Sell Side Advisory, or MBO/LBO.


Thank You!

Sam G. Torolopoulos, CPA/ABV, ASA

Business Valuation

ATI Capital Group, Inc.

222 West Las Colinas Blvd., Suite 1346 E

Irving, TX 75039

214-920-1616

Documents

Looking at the Impact of the Pension Protection Act of 2006