By Marcie D. Bour, CPA/ABV, CVA, CFE, ,MAFF, ABAR, CDBV
Reports providing the value for businesses and business interests can vary in form. Sometimes the form is dependent upon the client’s objective, and others it is based on what is appropriate for the intended users and use of the report.
When it comes to reports used for gift tax or estate tax reporting, appraisers must comply not only with the appraisal standards of their professional societies but also with the regulations and rulings set forth by the Internal Revenue Service (IRS). Typically, a detailed appraisal report is submitted to the IRS along with a gift or estate tax return.
A business appraisal report can be described as detailed, summary, calculation or restricted use. The way a report is described will vary based on the valuation professional standard(s) that the appraiser follows. The American Institute of CPAs’ “Statement on Standards for Valuation Services, No. 1” (SSVS 1) and the National Association of Certified Valuators and Analysts’ “Professional Standards” offer three options: a detailed report, a summary report and a calculation report. The “Uniform Standards of Professional Appraisal Practice” (USPAP) Standard 10-2 identifies two types of business valuation reports: an Appraisal Report and a Restricted Use Appraisal Report.
All of the standards have minimum disclosure requirements when for reports. In general they provide that the appraiser’s findings and conclusions should understandable to an informed reader. The valuation standards have similar requirements. There are limited exceptions for reports done for regulatory or litigation matters.
Treasury Regulation Section 301.6501(c)-1 provides the disclosure for reported gift transfers. Reports for gift or estate reporting should include a description of the appraisal process, assumptions, hypothetical conditions, limiting conditions and restrictions, information considered, appraisal procedures followed, methods used, and the appraiser’s reasoning and rationale in determining the value. IRS Revenue Ruling 59-60 is the cornerstone for gift and estate tax valuations. The valuation standards of the appraisal societies incorporate the Revenue Ruling 59-60 factors such as the nature of the business, economic outlook, book value, earning capacity, dividend-paying capacity, goodwill or intangible value, sales of stock, and market prices of similar stocks.
What is important to know is the analysis and valuation process necessary to reach an opinion of value is the same for a report that provides detailed information and a report that presents a more condensed presentation. The difference between a summary report and a detailed appraisal report lies in the length and depth of the narrative discussion in the report. A report attached to a gift or estate tax return must contain the required information to provide the IRS reviewer with sufficient information to reach the same conclusion as the appraiser when reviewing the return. Beneficiaries of an estate or gift donors do not always understand that a well-thought-out and well-written report can save them time and additional fees by avoiding an audit.
Appraisal Services:
The American Institute of CPAs and the National Association Valuators and Analysts provide for different levels of valuation services:
- Conclusion of value is defined in SSVS 1 as “An estimate of the value of a business, business ownership interest, security or intangible asset, arrived at by applying the valuation procedures appropriate for a valuation engagement and using professional judgment as to the value or range of values on those procedures.” A conclusion of value is common referred to as an opinion of value.
- Calculation of value is defined in SSVS 1 as “An estimates to the value of a business, business ownership interest, security, or intangible asset, arrived at by applying valuation procedures agreed upon with the client and using professional judgment as to the value or range of values based on those procedures.” A calculation of value does not reach a conclusion or opinion.
A calculation of value is a limited scope report. The client and the appraiser agree to the procedures which will be performed in reaching the calculation of value. These shorter reports do not include all the procedure that would would be done to reach a conclusion of value. Accordingly, calculation reports have a caveat that “If I were to consider other methodology other than what was agreed upon with the client, the resulting value could be materially different.”
Depending upon the purpose of the engagement, a specific level of service may be appropriate. The following are some examples:
- Estate or gift tax reporting – conclusion of value
- Litigation (Shareholder dispute, bankruptcy, divorce, etc.) – conclusion of value
- Internal planning purposes – either conclusion of value or calculation of value
- Financial reporting – conclusion of value
- Transfer of ownership – either conclusion of value or calculation of value, depending upon the user
- Mediation or settlement – calculation of value, assuming the client agrees and understands that the report will not be submitted to the court as an opinion
For more information regarding the appropriate level of service in your circumstance, please call Marcie Bour at 954.232-0760 or contact her by email for more information.