The Importance of an Independent Valuation
 By
Jeff Faust, AVA
Not only is an independent valuation a good idea when getting involved in a transaction,
it is also a statutory requirement in many circumstances that involve Employee Stock
Ownership Plans, Estate/Gift Taxes, Charitable Contributions or, most recently,
the granting of Stock Options. And, in most circumstances, a solid independent
valuation can be an insurance policy against tax assessments and accuracy-related
penalties.
Background – The Omnibus Budget Reconciliation Act (OBRA) consolidated
into one Internal Revenue Code section (IRC §6662) several different accuracy-related
taxation penalties:
(1) the negligence penalty
(2) the substantial understatement of income tax penalty
(3) the substantial valuation overstatement penalty
(4) the substantial estate or gift tax valuation understatement penalty
(5) the substantial overstatement of pension liabilities penalty
The accuracy-related penalty is applied to the portion of any underpayment of tax
that is attributable to one or more of the above five issues. All accuracy-related
penalties apply to tax returns due, without regard to extensions, after December
31, 1989.
In controversies with the IRS which concern valuation issues, it is not uncommon
for the IRS to assess accuracy-related penalties.
Impact of an Independent Valuation – Even though the IRS attempts
to assess accuracy-related penalties in valuation cases, the Tax Court has consistently
refused to allow these assessments when the tax payer has acted “reasonably” by
engaging a valuation professional who has obtained proper training in valuation
theory.
Therefore, it is extremely important that the person performing your valuation
not only be independent, but also qualified to perform such a valuation. If the
person performing your valuation, whether or not they are a CPA, does not
regularly perform valuations as part of their practice, for purposes above and beyond
your engagement, chances are they are not qualified to perform the valuation as
it relates to accuracy-related penalties.
For questions or comments, please feel free to contact
Jeff Faust at (510) 797-8661 x249 or jfaust@groco.com.
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