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Qualified Appraisals and Qualified Appraisers

Expert Tax Valuation Witness Reports, Testimony, Procedure, Law, and Perspective

















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To my father, Frank Richard Mascari,

Not a day goes by that I do not think about you and our many fun family times with Mom, Daniel, Barbara, Sandra, Frank, and Connie. At 38 years old, God took you from us way too young. I just wish you could have met my amazing and brilliant wife, Stacie, and our wonderful and loving children, Isabella and Michael. The kind, thoughtful wisdom you imparted to me at a very young age has stayed with me and made me a better man. I will always love you.

—Michael R. Devitt

To my wife, Alyson

—Lawrence A. Sannicandro


Valuators are often called upon to assist tax professionals in connection with the filing of tax returns and in tax litigation. And, while many valuators understand how to value property, few understand the specific technical requirements in tax that can affect the intended purpose of the valuation, whether that purpose be to secure an intended tax benefit in connection with filing a tax return or at trial.

The stakes in tax cases are high and mistakes are costly to everyone involved. Tax authorities frequently audit valuation-related tax issues to disallow tax benefits on hypertechnical grounds that can expose valuators and tax professionals, as well as clients, to significant civil penalties and professional sanctions. One such hypertechnical ground that has been at the forefront of tax litigation in recent years is the disallowance of tax benefits for failing to obtain a “qualified appraisal” prepared by a “qualified appraiser.” What it means to be “qualified” in valuation and tax disciplines is the overarching focus of this book.

This book explains, in stunning detail, what it takes to have a “qualified appraisal” performed by a “qualified appraiser,” requirements that are imposed in various sections of the Internal Revenue Code and related Treasury Regulations. Next, this book highlights the procedural rules and pragmatic considerations that bear on selecting an expert witness, ensuring the witness can testify at trial, and making sure expert witness reports are admitted at trial. Then, this book introduces readers to a relatively new technique some federal courts are using to receive expert testimony: concurrent witness testimony (or “hot tubbing” as it is known more informally). This book also covers a range of other topics, including the proper role of attorneys in the appraisal process; the penalties that can apply to valuators and tax return preparers; and practical strategies to overcome defects in appraisal reports when filing a tax return or during litigation.

The authors are uniquely qualified to educate the reader on the cross-disciplinarian areas of valuation and tax, with an emphasis on qualified appraisals and qualified appraisers. Professor Michael Devitt has more than 30 years' experience practicing complex civil litigation in various jurisdictions around the United States and teaching courtroom evidence and trial advocacy. Lawrence Sannicandro has a wealth of experience, including his former employment as counsel for the IRS and his service as a law clerk with the United States Tax Court. Together, these authors have created an invaluable resource for valuators and tax professionals working on assignments where valuation and tax overlap.

Shannon P. Pratt, CFA, FASA, MCBA, MCBC, CM & AA


Who is a qualified appraiser and what constitutes a qualified appraisal? These are the questions that Professor Michael Devitt and Lawrence Sannicandro, Esq., answer in this volume. These authors provide a thoughtful, detailed practical approach for making such determinations, coupled with explanations designed to continue a necessary dialogue concerning these issues that all appraisal stakeholders should consider.

The authors are uniquely qualified to educate the reader on the issues and nuances of the subjects of qualified appraisers and appraisals. Professor Michael Devitt is both an accomplished lawyer and a highly respected Professor of Law, teaching in the areas of courtroom evidence and advocacy. Lawrence Sannicandro is an experienced tax practitioner. Together, these authors offer the readers vast experience and knowledge that will serve them in this dynamic field of valuation.

Billions of dollars are involved in the multitude of appraisals performed every year. The United States Tax Court is often the forum where many controversial valuation issues are litigated. These adjudications, while specifically pertaining to federal tax issues, have often found application in forums addressing non-tax issues. As such, this book can be seen as addressing the use of qualified appraisers performing qualified appraisals in a much broader context.

Everyone needing an appraisal wants both the appraisal and the appraiser to be qualified. This book addresses the multiple aspects of what it takes, in all appraisal disciplines, to be qualified. It covers topics ranging from the practicalities of expert selection, discovery, and preparation to the evolution of the Supreme Court decision in Daubert and its progeny mandating the trial judge to take a critical look at expert witness admissibility. At the same time, the book addresses a multitude of pragmatic topics such as expert reports and substantial compliance and offers fresh insight on very important valuation topics.

The novel and controversial topic of concurrent witness testimony, often called hot tubbing, is the subject of a very thoughtful chapter. Professor Devitt is a true expert on hot tubbing and a proponent for such methodology's utilization here in the United States. Indeed, Judge David Laro of the United States Tax Court has pioneered Professor Devitt's concepts by adopting the procedure of concurrent witness testimony in the courtroom.

With the proliferation of appraisal designations and the avalanche of written materials, webinars, and conferences available to appraisers and appraisal users, this volume comes at a very propitious time. We owe Professor Devitt and Lawrence Sannicandro a debt of gratitude for assembling a volume that provides clarity on these very important controversial issues.

Jay E. Fishman, FASA


Valuation events and issues permeate our very complex Internal Revenue Code. Billions of dollars are involved in the multitude of appraisals that are performed every year. To state the obvious, valuation is critical to our laws and our business transactions. It is the fabric of estate and gift planning as well as commercial activity.

Approximately 340 sections of the Internal Revenue Code require taxpayers to make fair market value determinations in order to accurately assess and report tax liabilities. Not surprisingly, the Internal Revenue Service (IRS), the IRS Office of Appeals, and the IRS Office of Chief Counsel have developed sophisticated techniques to challenge questionable valuations throughout the audit, litigation, and collection processes. These valuation-related issues are frequently litigated before the United States Tax Court (Tax Court). In 2016 alone, valuation was at issue in one form or another in upwards of 35 percent of all opinions released by the Tax Court where the taxpayer was represented by counsel.

As a result of the significant effect of abusive valuations on tax revenues, Congress, the United States Department of the Treasury, and the IRS have imposed specific technical requirements with which taxpayers must comply to receive many tax benefits. For example, tax law mandates that for charitable contribution deductions of more than $5,000, transfers to charitable remainder trusts and qualified settlement funds, and deductions for claims against an estate, taxpayers must obtain a “qualified appraisal” that is prepared by a “qualified appraiser.”

Over the past ten-plus years, there have been a substantial number of tax controversies as to what constitutes a “qualified appraisal” and who is a “qualified appraiser.” Armed with technical sections of the Internal Revenue Code and the Treasury Regulations, the IRS now vigorously and routinely challenges taxpayer appraisals intended to support and substantiate millions of dollars of tax deductions. Current Treasury Regulations establish multiple, specific requirements that must be met for the appraisal to be qualified and consequently useful to the taxpayer wanting to substantiate a deduction on her tax return. An appraisal that does not meet these mandated standards is likely to fail to achieve its purpose.

In a broader sense, everyone needing an appraisal wants the appraisal to be qualified and the person creating the appraisal analysis to be qualified regardless of whether a tax deduction is at issue. This book addresses the technical and commonsense standards that both the appraisal and appraiser must meet to be successful in the valuation world.

Chapter 1 of this book discusses basic concepts of tax valuation with which all competent valuators and tax professionals must be familiar. This chapter also documents the practical necessity for obtaining reliable expert appraisals in most valuation scenarios.

Chapters 2 through 4 of this book discuss what it takes to have a “qualified appraisal” performed by a “qualified appraiser,” requirements that are imposed in various sections of the Internal Revenue Code and related Treasury Regulations. These chapters address the many technical hurdles necessary to meet and overcome IRS challenges to taxpayer appraisals and appraisers.

Given the omnipresent nature of valuations in the United States tax system, it is wise for valuators and tax professionals to develop wise and knowledgeable cross-disciplinary skills in valuation and tax. This is especially true since courts have adopted detailed rules concerning the qualification of valuators as expert witnesses, the admissibility of expert reports, and the discovery of expert material in connection with litigation. Thus, Chapters 5 through 10 inform readers of the procedural rules and practical considerations that bear on selecting an expert witness and making sure she can testify in a valuation case.

Chapter 11 discusses a relatively new technique some federal courts are using to receive expert testimony: concurrent witness testimony (known colloquially as “hot tubbing”). The authors have a special fondness for this unique chapter. It presents a new and exciting development in expert witness testimony. Attorneys and experts will want to get familiar with this new technique where the parties' experts have a joint discussion with the trial judge explaining their opinions and thoughts on the subject valuation.

Given the ubiquity of valuation in tax, numerous rules have been implemented to ensure that valuators satisfy a minimum duty of competence in tax and that tax practitioners satisfy a minimum duty of competence in valuation. Penalties abound for professionals who fail to exhibit this minimum duty of competence in valuation. Thus, Chapter 12 discusses penalties that can apply to preparers and valuators in connection with faulty appraisal reports.

Many attorneys struggle to understand their role in the appraisal process. Accordingly, Chapter 13 discusses attorney involvement in the appraisal report process during the tax reporting, administrative, and litigation stages of valuation cases.

Finally, Chapter 14 discusses common errors with appraisals and details the steps practitioners should take to remedy these problems in connection with filing a tax return or during litigation.

We would like to thank Judge David Laro for his many years of kind thoughtful mentorship to us both. Judge Laro stands as a shining example of selfless professionalism for us all. With his 25 years of service on the United States Tax Court and his commonsense deep critical thinking, Judge Laro has helped shape and define many areas of the law, including his thoughtful opinions in the area of qualified appraisals.

Many other people contributed to the ideas and concepts discussed in this book. We thank those who have made contributions to this book by way of research, writing, editing, or commenting. We especially thank Dr. Shannon Pratt, CEO, Shannon Pratt Valuations, Inc., Jay E. Fishman, FASA, Managing Director, Financial Research Associates, Jane Larrington, Head of Reference, University of San Diego School of Law, Helen Y. Trac, Esq., Hogan Lovells, and the many wonderfully hardworking and talented individuals from John Wiley & Sons, Inc., including Sheck Cho, Judy Howarth, Shelley Flannery, and Banurekha Venkatesan.

We hope you enjoy reading this book and wish you all the success in presenting your valuation cases and controversies.

Michael R. Devitt
Lawrence A. Sannicandro

Tax Valuation and the Necessity for Expert Appraisals


The appraisal profession, which includes specialized valuation determinations of real estate, businesses, interests in businesses, intangible assets, machinery and equipment, and private personal property, has made great strides in the last decade. With these advancements, appraisals have become increasingly technical. Attorneys, return preparers, and appraisers are finding that courts and regulators are much more inclined to scrutinize all aspects of the valuation and appraisal processes. In response, tax professionals increasingly rely upon expert valuators to support tax reporting positions in civil and criminal tax controversies with the IRS, the Tax Division of the U.S. Department of Justice, and state and local tax authorities.

Tax professionals who rely upon valuators, and valuators who provide support to tax professionals, must develop cross-disciplinary skills in valuation and tax to better serve their clients. This chapter summarizes the necessity of involving well-qualified and knowledgeable experts in all aspects of the appraisal process, especially since appraisals often involve significant valuation technicalities and many deal with major sums of money for the participants.


Valuation is pervasive in our tax system; complex valuation disputes have filled court dockets for centuries. Approximately 340 sections of the Internal Revenue Code require determinations of fair market value in order to accurately assess and report tax liabilities.1 Indeed, valuation litigation is so frequent that it accounts for between 20 and 35 percent of all Tax Court cases in which the taxpayers are represented by counsel.2

Valuation methodology has become highly sophisticated, and valuation-related tax issues often perplex even the most experienced tax professionals. It is against this backdrop that knowledgeable valuators have become indispensable to the tax reporting and tax litigation processes. Following are the areas where valuation and tax are likely to overlap.

Valuation in Tax Reporting

As applied to tax reporting, the federal tax law generally requires taxpayers to hire a qualified appraiser to prepare a qualified appraisal in connection with:

  • Claiming a charitable contribution deduction of more than $5,000 where the donated property is not cash, publicly traded securities, a qualifying vehicle, or certain intellectual property;3
  • Valuing assets of charitable remainder trusts;4
  • Valuing claims and counterclaims against an estate;5 and
  • Transferring property to a qualified settlement fund.6

Moreover, obtaining a qualified appraisal prepared by a qualified appraiser may help a taxpayer avoid accuracy-related penalties under section 6662 of the Internal Revenue Code.7 The terms qualified appraisal and qualified appraiser are technically and specifically defined in the Internal Revenue Code and the federal Treasury Regulations. Chapter 2, Qualified Appraisal, and Chapter 3, Qualified Appraiser, analyze and discuss each of these terms in detail.

As applied to tax reporting, practitioners may hire expert valuators to accurately compute and report tax liabilities. A nonexclusive list of the areas where such expertise is typically utilized is:

  1. Charitable contribution deductions, including, but not limited to, donations to real property, personal property, grants of air rights, development rights, and conservation easements;
  2. Business formations;
  3. Inventory valuations;
  4. Corporate mergers, acquisitions, and spinoffs;
  5. Allocations of purchase price under section 1060 of the Internal Revenue Code;
  6. Business liquidations or reorganizations;
  7. Financings;
  8. Initial public offerings;
  9. Goodwill (both personal goodwill and business goodwill);
  10. Intangibles, including valuation of intangibles for transfer pricing purposes;
  11. Employee stock ownership plans;
  12. Retirement plan actions;
  13. Incentive stock options;
  14. Compensation received as property;
  15. Buy–sell agreements and related consequences;
  16. Stockholder disputes and related consequences;
  17. Mark-to-market valuations under section 475 of the Internal Revenue Code;
  18. Exchanges of property;
  19. Estate tax returns;
  20. Gift tax returns;
  21. Determinations of reasonable compensation;
  22. Foreign account reporting (e.g., in connection with reporting Form 8938, Statement of Specified Financial Assets);
  23. Collection cases, especially where an offer in compromise is requested (note, Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and Form 433-B, Collection Information Statement for Businesses, require valuation of real estate and businesses); and
  24. Marital dissolutions and related reporting.

Valuation in Tax Litigation

Valuation is often implicated in civil tax litigation, and occasionally arises in criminal tax matters. As applied to civil tax litigation where valuation is at issue, expert testimony is routinely sought and can be helpful to document and prove a client's tax reporting position. In addition to the areas identified earlier, which relate to substantive determinations of tax liability, valuation may be implicated in the following penalty-related areas:

  1. Substantial valuation misstatement penalty cases; and
  2. Gross valuation misstatement penalty cases.

Given the prevalence of valuation in tax, it is important to recognize when an expert valuator can assist in proving and documenting a client's position. It is generally appropriate, and often wise, to hire an expert in litigation whenever doing so will help the trier of fact (and/or the attorney) understand the evidence or decide a fact in issue. As discussed more fully in Chapter 7, From Daubert to Boltar, and Chapter 13, Attorney Involvement, Rule 702 of the Federal Rules of Evidence, provides:

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if:

  1. the expert's scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
  2. the testimony is based on sufficient facts or data;
  3. the testimony is the product of reliable principles and methods; and
  4. the expert has reliably applied those principles and methods to the facts of the case.

As applied to tax litigation, it may also be helpful to hire an expert, either in connection with determining value or, as may be relevant in a criminal tax case, establishing tax loss. There are four areas in which an expert valuator may be utilized in such matters:

  1. Determining the actual tax loss;
  2. Assisting with the cross-examination of the government's expert or summary witness;
  3. Challenging the reliability and credibility of the government's expert or summary witness; and
  4. Explaining the correct treatment of the defendant's tax positions.

Valuation in Business and Familial Matters

Valuation disputes frequently arise, and the appraisal process is increasingly scrutinized, in business transactions and familial matters, including estate planning and divorces. The following highlights the importance of the appraisal process in these prevalent modern-day matters:

  1. For Gift, Estate, and Income Tax (including charitable contribution deductions)—Appraisals will be reviewed by the IRS and are likely to be reviewed by appropriate state and local tax authorities;
  2. For Employee Stock Ownership Plans (ESOPs)—Appraisals are subject to attack by plan participants, the Department of Labor, and the IRS;
  3. For Buying or Selling—Appraisals are subject to negotiation by sellers/buyers, and the results of one or more appraisals may dictate the purchase price between the parties in the context of, for example, a buy–sell agreement;
  4. For Dissenting or Oppressed Stockholder Actions—Appraisals are subject to review and critique by the opposing stockholder's expert;
  5. For Property Taxes—Appraisals are reviewed and certified by the taxing authority;
  6. For Liability Cases (including insurance reimbursements)—Appraisals are subject to review and critique by opposing experts; and
  7. For Marital Dissolution Matters—Tax and valuation is routinely implicated in divorces, where appraisal reports are subject to review and critique by the opposing spouse's expert.


Almost all appraisals must be conducted under the rubric of some valuation standard, which is to say that the subject property's value must be measured. The appropriate measure of value depends upon the purpose for which the valuation is obtained. There are numerous measures of value that may be encountered in connection with a tax matter, including:

  1. Fair market value, which is the appropriate measure of value for the overwhelming majority of tax matters;
  2. Market value, which may be utilized by valuators who prepare an appraisal report in accordance with the Uniform Standards of Professional Appraisal Practice (sometimes referred to herein as “USPAP”);
  3. Fair value, which may apply under state statutes governing dissenting stockholder and minority oppression actions, as well as under generally accepted accounting principles (“GAAP”);
  4. Quick sale value, which may apply in connection with IRS collection matters;
  5. Salvage value, which may be used to compute allowable depreciation for tax purposes; and
  6. Investment value, which connotes value to a particular investor or owner.

Most clients, and many tax practitioners for that matter, have never thought about the technical requirements with which an appraiser must comply when providing an appraisal under any given valuation standard. Choosing the proper valuation technique in a tax matter or an appraisal assignment is an important decision that should be thoughtfully undertaken by both the valuator and the tax practitioner.

Valuation standards for value determinations can be established by federal or state statute, case law, or agreement among the parties (e.g., buy–sell agreements). Although it is the tax practitioner's responsibility to identify the appropriate measure of value to be utilized in any given matter, it is also essential for the appraiser to assist the tax practitioner so as to create parity between the tax and valuation assignment. It is also imperative for the expert appraiser to be intimately familiar with the appropriate mechanism for determining value under the identified valuation standard.

By “standards” in this context, we mean definitions of value. These are not to be confused with rules for conducting and reporting appraisals, such as the USPAP, which are discussed in Chapter 9, Expert Appraisal Reports.

Set forth ahead in more detail are the most common measures of value applicable to appraisals. As will be seen, these valuation standards are often complex and can vary drastically, mandating the involvement of a qualified experienced professional appraiser. We emphasize fair market value over the other measures of value because fair market value is the measure of value generally required in federal tax matters.

Fair Market Value Defined

In the United States and Canada, the most commonly acknowledged standard of value is fair market value. It is this standard that applies to most U.S. federal and state tax issues relating to corporate, estate, gift, and individual income taxes, including, for example, valuation of property for estate and gift tax purposes and charitable contribution deductions. This is an important point to stress since some valuators fail to properly utilize a true fair market value as the appropriate measure of value in federal tax matters, even though they are required to do so.

The definition of fair market value is one of the most important definitions in tax. The U.S. Treasury Regulations define fair market value of property as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”8 Included within this definition are a number of implied assumptions.

Implied Assumptions

Within the tax valuation industry, there is a general consensus that fair market value presumes that an arm's-length transaction exists where both the buyer and the seller have the ability and the willingness to effectuate a cash transaction. Within this definition, market refers to all potential buyers and sellers of assets in a situation where neither party is being forced to buy or sell.

When determining fair market value, an appraiser must identify the hypothetical willing buyer and hypothetical willing seller, making sure the two individuals are dealing with one another at arm's-length in the hypothetical sale. And an appraiser should not allow her fair market value determinations to be set by a price with parties driven by motivations not present in the typical hypothetical seller and buyer. In Canada, however, fair market value may include the value of synergies with a particular buyer.9

Consistent with this rationale, the Tax Court has mandated using the following six principles for fair market value determinations:

  1. Fair market value is the price that a willing buyer would pay a willing seller, both persons having reasonable knowledge of all relevant facts and neither person being under any compulsion to buy or to sell.
  2. The willing buyer and the willing seller are hypothetical persons, rather than specific individuals or entities, and the characteristics of these hypothetical persons are not necessarily the same as the personal characteristics of the actual seller or a particular buyer.
  3. Fair market value is determined as of the valuation date, and no knowledge of unforeseeable future events which may have affected the value is given to the hypothetical persons.
  4. Fair market value equals the highest and best use to which the property could be put on the valuation date, and fair market value takes into account special uses that are realistically available due to the property's adaptability to a particular business.
  5. Fair market value is not affected by whether the owner has actually put the property to its highest and best use. The reasonable, realistic, and objective possible uses for the property in the near future control the valuation thereof.
  6. Elements affecting value that depend upon events or a combination of occurrences which, while within the realm of possibility, are not reasonably probable, are excluded from this consideration.10

It is important to remember that fair market value determinations are inherently factual in nature and that the trier of fact in any tax controversy “must weigh all relevant evidence of value and draw appropriate inferences.”11 Expert judgment is a critical part of this calculation. It is important that all evidence considered and all assumptions and inferences made be disclosed in the appraisal report.

Cash Value and Market Value

The terms cash value and market value are occasionally used interchangeably with fair market value. Indeed, real estate appraisers generally use the term market value in an attempt to denote the concepts of fair market value. An independent board of the Appraisal Foundation provides, through USPAP Advisory Opinion 22, the following definition of market value:

[T]he most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition are the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

  1. The buyer and the seller are typically motivated;
  2. Both parties are well informed or well advised and acting in what they consider their best interests;
  3. A reasonable time is allowed for exposure in the open market;
  4. Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
  5. The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.12

The Appraisal Foundation emphasizes that the definition of market value connotes an exchange that occurs for cash or cash equivalents.13


A complete discussion of the various approaches to calculate fair market value is outside the scope of this book, but practitioners should understand the basic principles by which fair market value is computed.

The value of any property (real, tangible, intangible, and personal) can be calculated in a two-step process. Under step 1, valuators compute the subject property's net asset value. Under step 2, valuators apply appropriate valuation discounts and premiums to adjust the net asset value.

Step 1: Calculating Net Asset Value

This first step employs the three most common approaches to determine net asset value: the market approach, the income approach, and the asset-based approach.

The market approach assumes that the value of property can be determined by reference to the value of comparable properties for which values are known as a result of recent sales or quotes on a readily tradable market. Under the market approach, the valuator compares the subject property to similar comparable properties that were sold in an arm's-length transaction reasonably proximate to the valuation date. The value of the subject property is determined by taking into account the sales prices of comparable properties that were sold proximate to the valuation date and adjusting the value of each comparable property for features unique to the subject property, but not possessed by the comparable property. The market approach is most appropriately used when comparable properties have qualities substantially similar to those of the subject property.

The income approach assumes that the value of the subject property can be determined by computing the present value of the estimated future cash flows that may be realized with respect to that property. Within the income approach, there are at least two accepted methods: the discounted cash flow method, which typically uses a static growth rate assumption to estimate future cash flows; and the income capitalization method, which typically uses a variable growth rate assumption to estimate future cash flows.

The asset-based approach (also known as the cost approach) generally assumes that the value of property can be determined by calculating the cost to reproduce it, less any applicable depreciation or depletion. The approach is slightly more nuanced in business valuations. In that situation, valuators generally value the business or business interest by determining the cost to reproduce it and focusing on the company's net asset value (i.e., the fair market value of its total assets minus its total liabilities). In practice, the fair market value of assets (e.g., marketable securities or real estate valuation) is substituted for the respective book values on the balance sheet of the company being valued.

Valuators typically do not value property under just one approach. Rather, property is often valued under each of the above-referenced approaches, and the indicated value in each approach is weighted to derive a final opinion of value. In addition to containing the items discussed in Chapter 9, Expert Appraisal Reports, an appraisal report should:

  1. Reconcile the different conclusions of value derived from the various approaches;
  2. Explain the weighting of each valuation approach in determining a final opinion of value;
  3. Disclose any assumptions that were made in valuing the property; and
  4. Provide sufficient details and explanations about how the final opinion of value was derived so that another valuator can replicate this work after reviewing the report of related workpapers.

Step 2: Applying Discounts and Premiums

The second step in determining fair market value is to apply appropriate discounts and premiums. There are numerous types of valuation discounts and premiums, some of which are appropriate at the owner level, some of which are appropriate at the entity level, and some of which apply principally to property that can be jointly held (e.g., real estate, art, and collectibles). Among the types of valuation discounts and premiums are:

  1. Discount for lack of marketability;
  2. Blockage or market absorption discounts;
  3. Lack of control discount;
  4. Lack of voting rights discount;
  5. Control premium/minority interest discount;
  6. Discount for built-in capital gain;
  7. Key person discount;
  8. Discount for contingent liabilities;
  9. Portfolio discount;
  10. S corporation premiums; and
  11. Fractional interest or partition discounts.

The fair market value of property can generally be computed by adding and subtracting appropriate premiums and discounts from the property's net asset value.


The valuation process, including any assumptions, is generally documented in a written report. The contents of the report will depend upon the purposes for which the report was procured.

Appraisal Reports to Support Tax Reporting Positions

An appraisal report is sometimes required to support a tax reporting position. For example, federal tax law generally requires taxpayers to hire a qualified appraiser to prepare a qualified appraisal in connection with:

  • Claiming a charitable contribution deduction of more than $5,000 where the donated property is not cash, publicly traded securities, a qualifying vehicle, or certain intellectual property;
  • Valuing assets of charitable remainder trusts;
  • Valuing claims and counterclaims against an estate; and
  • Transferring property to a qualified settlement fund.

The requirements of a qualified appraisal are discussed in Chapter 2, Qualified Appraisal, and the requirements of a qualified appraiser are discussed in Chapter 3, Qualified Appraiser.

In other cases, even though a qualified appraisal is not required, clients or practitioners may desire to obtain an appraisal report to support a tax reporting position. We discuss best practices with respect to such appraisal reports in Chapter 9, Expert Appraisal Reports.

Appraisal Reports to Support Tax Litigation

Expert witness reports, which differ from appraisal reports used to support a tax reporting position, may be advisable where the question of value is to be litigated. The requirements for such reports are technically and specifically defined in applicable court rules. The requirements for appraisal reports to support litigation are discussed in Chapter 13, Attorney Involvement.


In the past decade, courts have increasingly scrutinized appraisals and the underlying mechanics of such appraisals. Litigation is especially prominent in the area of qualified appraisals required to support a charitable contribution deduction. As a general matter, courts are becoming more sophisticated with respect to all types of appraisals. The degree of sophistication, however, varies among the courts and even among judges in the same court.

It is incumbent upon the lawyer and the valuation expert to explain to the court and the trier of fact, whether sophisticated or not, why the submitted appraisal best meets the applicable valuation methodology. An expert can be technically qualified and still not be a good expert in a litigation setting. Thus, unless the expert can adequately explain her appraisal methodology and how her appraisal fits into the particular valuation context at hand, the judge and/or finder of fact may very well find fault with the appraisal. In all situations, the appraiser must be a good communicator, with the ability to teach the judge and the trier of fact complex concepts of finance that may be outside their realm of knowledge; this is especially true in the areas of valuing businesses, business interests, and intangible assets.

Knowledgeable judges are not shy about criticizing unreliable work by appraisers. For example, one court excluded the report of the taxpayer's real estate appraiser as unreliable and inadmissible per rule 702 of the Federal Rules of Evidence, Daubert v. Merrell Dow Pharmaceuticals, Inc.,14 and United States Tax Court Rule 143(g) because the expert made no effort to determine the highest and best use of property after the grant of a conservation easement.15 Similarly, in Kohler v. Commissioner,16 the Tax Court gave no weight to a stock valuation opinion of the IRS's expert where the expert spent little time with the company's management, invented his own expense structure for his income approach analysis, and decided not to use an unreliable dividend-based method despite the fact that the company had historically paid large dividends. In giving the expert's opinion no weight, the Court noted the lack of customary certification of the expert's report and that his report was not prepared in accordance with all USPAP standards. The Court also placed no weight on the expert's report in Estate of Renier v. Commissioner,17 where the report contained no explanation of, or analytical support for, the various rules of thumb employed in reaching several of his valuation estimates, thus making it almost impossible for the Court to assess the merits of his conclusions.

Therefore, regardless of whether a qualified appraisal prepared by a qualified appraiser is required in connection with a tax reporting position, it is beneficial to retain an appraiser who is not only “qualified,” but also well-qualified. These court-driven criticisms of expert appraisers can be avoided by careful expert selection and thorough and thoughtful preparation. Selection and preparation of appraisers is the subject of Chapter 6, The Practicalities of Selection and Preparation of Experts.


Expert valuators and tax practitioners must develop cross-disciplinary skills in valuation and in tax. This cross-disciplinary approach first requires valuators and tax practitioners to recognize that fair market value is the proper standard of value for federal tax purposes, and then to understand how fair market value is computed. Within the cross-disciplinary approach, it is important for all professionals to appreciate: the gambit of appraisal reports that may be required; how valuators will prepare those reports; how practitioners will use those reports and what penalties may apply for faulty appraisals; and what judges look for in deciding a valuation case.