Lawyer Larry and Victor Valuer are having a breakdown. They are in a conversation about how to handle a valuation assignment for Larry’s client, a family looking to make inter generational gifts using a family limited partnership. It can be an expensive process, and the client is going through it with the expectation that they will receive all the tax benefits that are allowed under the law, but they won’t. They are about to get the short end of the stick.
Lawyer Larry has many years of experience with tax planning and sometimes faces IRS audits. The audits are painful. He has become increasingly frustrated when gift and estate returns are submitted to IRS, who then slams the appraisal and assesses a tax deficiency. This is not his fault, but it impacts his clients nonetheless.
The best strategic solution seems to be to limit valuation discounts that are applied to his client’s asset transfers. This reduces the tax leverage that the plan might otherwise have, increasing the client’s tax bill. But, in Larry’s view, this is the best way to avoid IRS scrutiny and protect his client from audit.
IRS, for its part, has been increasingly frustrated with having to wade through taxpayer evidence for value (appraisals) that do little more than talk about discounts, rather than properly analyze market evidence for value and apply it to the taxpayer’s case. It introduced little checkboxes on gift & estate forms to make screening easier. The first line on Form 709 Schedule A asks: “Does the value of any item listed on Schedule A reflect any valuation discount? If ‘yes’ attach explanation.” It’s the explanation that is most often the problem. That has apparently not been effective enough, though, and IRS obtained new powers from Congress to address the problem of inadequate taxpayer “explanations” (appraisals).
Is the solution to have Larry’s clients pay more than they should? After all, gifts are to be reported at their fair market value, according to the law, but it is the taxpayer’s responsibility to prove value. There has been a lot of frustration with appraisers who hold themselves out to the public as being experts in this practice area, but deliver appraisals that the IRS refuses to swallow. If Larry can’t have confidence in expert evidence for value, what else can he do?
There are many steps that Larry can take in his dealings with experts that fall well short of forcing tax overpayment. The issues are described in detail in arecent issue of Steve Leimberg’s Newsletter, and effective steps that the lawyer can take are detailed in an article by Dennis Webb and attorney Susan Beveridge. It is much better for all concerned if the appraiser-provided evidence works; it is absolutely not necessary for taxpayers to end up with the short end of the stick.