I was recently asked to assist with a valuation issue with the IRS. A very competent, ethical business valuer (CPA, CVA, ASA) had developed an appraisal that was under audit by the IRS Small Business Self Employed Estate and Gift Tax division. The auditor was an IRS Estate and Gift Tax Attorney. The auditor had brought on an IRS Engineer that was a CVA to conduct a review of the appraisal. The IRS Engineer had made a determination that the value of the value of the entity was appropriate, but he had some concerns about the discount for lack of control and the discount for lack of marketability. This is not unusual, but in this instance the difference between the taxpayer’s appraisal of the minority interest and the IRS’s review with an opinion of value was less than 10%. In fact it resulted in less than a 5% difference.
Revenue Ruling 59-60 is one of the foundations in the valuation of estate and tax situations. It is part of the training used for anyone that has a designation as a CVA. In section 3.01 it states:
“3.01 A determination of fair market value, being a question of fact, will depend upon the
circumstances in each case. No formula can be devised that will be generally applicable
to the multitude of different valuation issues arising in estate and gift tax cases. Often, an
appraiser will find wide differences of opinion as to the fair market value of a particular
stock. In resolving such differences, he should maintain a reasonable attitude in
recognition of the fact that valuation is not an exact science. A sound valuation will be
based upon all the-relevant facts, but the elements of common sense, informed judgment
and reasonableness must enter into the process of weighing those facts and determining
their aggregate significance.”
It is quite possible for two valuers to complete an analysis and having differing opinions relative to value. This is not an exact science.
I worked at the IRS for 28 years and in my last 11 years I headed up business valuation for the IRS. During that time there was no official policy, but rather there was an unwritten rule that with all of the issues being worked by the business valuers and the level of noncompliance related to valuation, that a difference of less than 10% was not worth pursuing. Rather there is enough poor work in the inventory pool, that cases that have such minor differences should be withdrawn from rather than presented for adjustment to taxpayers. This case clearly falls into that category.
The IRS mission statement states that the mission of the IRS is to:
"provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all."
My concern in this instance is that the taxpayer is not being treated fairly compared to other taxpayers. The appraiser contacted me and I became a consultant on the case through the taxpayer’s estate and gift tax attorney. I reviewed the taxpayer’s appraisal. I reviewed the IRS Review with an Opinion of Value. I offered my services as a disclosure witness on this case. A disclosure witness according to the IRS Internal Manual states:
This serves as authorization for Michael A. Gregory to serve as a witness under Rev. Proc. 68-29 and IRM 184.108.40.206.4.2.1 (04-20-2010). Mr. Gregory has knowledge of facts pertinent to the matter involving the valuation issues in the examination of the Form 706 for the Estate of XXX. This return is currently under examination by Estate Tax Attorney YYY of the ZZZ Office. Mr. Gregory will participate in the following matters until the conclusion of the examination, and through and including the Appeals process, if any:
* telephone conference calls with the examiner, specialist appraisers, their respective managers and higher-level management officials, Appeals Officers and their respective managers
* in-person meetings with the same, wherever held
Mr. Gregory will be in the presence, either via telephone or at the meeting, with a duly authorized representative. The cited provision of the IRM authorizes Mr. Gregory’s presence to provide information to the IRS. This authorization serves the purpose of permitting the IRS to discuss return or return information at such conference calls and meetings.
Serving on this case, the business valuer was able to demonstrate the reasonableness of his approach and that with some minor changes in assumptions this case could easily have been a refund case to the taxpayer. As such the parties remained focused on the issues before them, remained professional and were able to work together to resolve the issue. The keys to resolving this issue were listening to each other, understanding the facts, applying current approaches to the facts and applying the “the elements of common sense, informed judgment and reasonableness (that) must enter into the process of weighing those facts and determining their aggregate significance” consistent with Revenue Ruling 59-60.
Michael Gregory, NSA, ASA, CVA, MBA is an international speaker, that helps organization overcome conflict and enhance effectiveness. Mike is dedicated to making individuals, organizations, thought-leading entrepreneurs and executives more successful. Michael’s books, including The Servant Manager, How to Work with the IRS, Second Edition and his most recent book, now also available as an eBook, Peaceful Resolutions are available at this link. On point resources are available online at www.mikegreg.com and check out the blog. Contact Mike directly at firstname.lastname@example.org or call (651) 633-5311.
About the author
Mike Gregory is a professional speaker, an author, and a mediator. You may contact Mike directly at email@example.com and at (651) 633-5311. Mike has written 12 books (and co-authored two others) including his latest book, The Collaboration Effect: Overcoming Your Conflicts, and The Servant Manager, Business Valuations and the IRS, and Peaceful Resolutions that you may find helpful. [Michael Gregory, ASA, CVA, MBA, Qualified Mediator with the Minnesota Supreme Court]