New Standards for Appraisers

Section 170(f)(11) of the IRS Code now provides statutory definitions of a qualified appraisal and a qualified appraiser. According to the new law, a qualified appraisal is conducted by a qualified appraiser in accordance with generally accepted appraisal standards. The Uniform Standards of Professional Appraisal Practice (USPAP) is mentioned as an example of such acceptable standards.

Substantively, according to the transitional guidance, a qualified appraiser is an individual who:

• Has earned an appraisal designation from a recognized professional appraisal organization or has otherwise met minimum education and experience requirements. This designation should have been awarded on the basis of demonstrated competency in valuing the type of property appraised.
• Regularly performs appraisals for which the individual received compensation,
• Demonstrates education and experience in valuing the type of appraised property. Membership in a professional association contributes to a finding of qualifications.
• Has not been prohibited from practicing before the IRS during the 3-year period ending on the date of the appraisal.

For real estate property in tax matters filed after Oct. 19, 2006, the appraiser must be licensed or certified in the state in which the appraised real estate is located.

For tax matters involving 'property other than real estate' after Feb. 16, 2007, the appraiser should have:

• Successfully completed college or professional-level course work relevant to the property being valued.
• Obtained at least two years experience in the trade or business of buying, selling or valuing the type of property being valued, and,
• Fully described the appraiser's education and experience to demonstrate qualification.

More toothy ' but somewhat vague ' provisions of the Pension Protection Act of 2006 enacted under IRC Sec. 6695A are penalties on any 'person who prepares an appraisal' if the appraisal results in substantial or gross misstatement. Penalties imposed on the appraiser range from $1000, to 125% of the appraisal fee, to 10% of the amount of underpayment of tax resulting from the appraisal.

As a result, look for impacts in the way your appraisers conduct their assignments. Costs may increase, and the information gathering process may become more difficult and take longer. Appraisers may fear being caught in the net of penalty provisions that generically would be applied to work requirements constituting an appraisal.

Anticipated Release of New Standards

Standards for Valuation Services by the American Institute of Cert-ified Public Accountants (AICPA)

In the past five years, the AICPA has promulgated various drafts of business valuation appraisal standards for its members. Three other recognized societies encompassing business valuation work have codified standards: the American Society of Appraisers, the Institute of Business Appraisers, and the National Association of Certified Valuation Analysts. The most recent AICPA exposure draft had a comment period ending Dec. 15, 2006. While as of this writing the adoption date for new standards has not been released, most CPAs who are also appraisers believe that these standards will be adopted soon, with likely 'teeth' later in 2007.

Far-Reaching Impact Is Possible for Matrimonial Attorneys

With adoption of these standards, it is not clear that an 'accountant' is, in fact, immediately credentialed and qualified to undertake a business appraisal without the AICPA's own ABV credential ' Accredited in Business Valuation. CPAs who have this credential may list their certification as 'CPA/ABV.' Expect challenges to CPAs opining in valuation matters who lack the AICPA's credential.

In addition, the new AICPA standards distinguish the scope of work involved in a business valuation as either an appraisal or a calculation. While an appraisal is normally expected to provide an objective opinion of the value of business equity, a 'calculation' is something based less on valuation approaches/methods 'agreed upon with the client,' and may be challenged as to the scope of an expert's opinion. The anticipated standards note several bright line factors:

• A calculation engagement does not include all of the procedures required for a valuation engagement; and
• Had a valuation engagement been performed, the results may have been different.

Consequently, if your expert (or the opposing expert) proffers a 'calculation' work product opinion, explore the differences of what was actually done, and if the 'calculation' will be acceptable and credible for asset valuation purposes.

Concluding Thoughts

Looking ahead into this year and 2008, we will no doubt be struggling with the application of these new changes for appraisers. Since better information generally conveys more power, the matrimonial attorney who is knowledgeable of the recent shifts in how appraisal work is to be conducted should have a sustained benefit over opposing counsel practicing with outdated knowledge. Understand these changes. Expect a higher level of service from your appraisers!

Rob Schlegel, ASA, MCBA, a member of this newsletter's Board of Editors, is a Principal with Houlihan Valuation Advisors in Indianapolis. He is an Accredited Senior Appraiser (Business Valuation) with the American Society of Appraisers and a Master Certified Business Appraiser with the Institute of Business Appraisers. Schlegel regularly teaches appraisal methods and financial ratio analysis to appraisers nationwide and Indiana CPAs and attorneys.

Since mid-2006, several extraordinary changes have taken place with regard to 'raising the bar' of valuation practitioners. Family law attorneys need to recognize these changes and be prepared to demand better expert appraisal services. Not only will you be more able to challenge the unprepared novice, but you should expect that your expert appraiser may well be challenged by competent opposing counsel.

Each of these changes is aimed at improving the quality of appraisal work. Some changes, federal in character, are aimed at transfer tax situations that will likely have an impact on other appraisal matters, such as valuations of tangible and intangible property required in matrimonial law. Substantively, two seismic shifts are occurring:

• New definitions of 'qualified appraisal' and 'qualified appraiser' for federal tax purposes; and
• New standards of practice anticipated to be adopted by the American Institute of Certified Public Accountants that should undermine casual valuation opinions provided by CPAs.

Expectations for a 'Qualified Appraisal'

On Aug. 17, 2006, the President signed the Pension Protection Act of 2006 (P.L. 109-280), which contained a number of provisions related to tax appraisals of property. On Nov. 13, the IRS issued guidelines (IRS Notice 2006-96) regarding appraisal requirements for non-cash charitable contributions. While the immediate view is that application is limited to tax matters of contributed property, most appraisers are anticipating expanded application to other tax matters and matrimonial valuations. After all, why would an appraiser deemed 'not qualified' for federal purposes be recognized as competent for valuing property subject to marital division?

Section 170(f)(11) of the IRS Code now provides statutory definitions of a qualified appraisal and a qualified appraiser. According to the new law, a qualified appraisal is conducted by a qualified appraiser in accordance with generally accepted appraisal standards. The Uniform Standards of Professional Appraisal Practice (USPAP) is mentioned as an example of such acceptable standards.

Substantively, according to the transitional guidance, a qualified appraiser is an individual who:

• Has earned an appraisal designation from a recognized professional appraisal organization or has otherwise met minimum education and experience requirements. This designation should have been awarded on the basis of demonstrated competency in valuing the type of property appraised.
• Regularly performs appraisals for which the individual received compensation,
• Demonstrates education and experience in valuing the type of appraised property. Membership in a professional association contributes to a finding of qualifications.
• Has not been prohibited from practicing before the IRS during the 3-year period ending on the date of the appraisal.

For real estate property in tax matters filed after Oct. 19, 2006, the appraiser must be licensed or certified in the state in which the appraised real estate is located.

For tax matters involving 'property other than real estate' after Feb. 16, 2007, the appraiser should have:

• Successfully completed college or professional-level course work relevant to the property being valued.
• Obtained at least two years experience in the trade or business of buying, selling or valuing the type of property being valued, and,
• Fully described the appraiser's education and experience to demonstrate qualification.

More toothy ' but somewhat vague ' provisions of the Pension Protection Act of 2006 enacted under IRC Sec. 6695A are penalties on any 'person who prepares an appraisal' if the appraisal results in substantial or gross misstatement. Penalties imposed on the appraiser range from $1000, to 125% of the appraisal fee, to 10% of the amount of underpayment of tax resulting from the appraisal.

As a result, look for impacts in the way your appraisers conduct their assignments. Costs may increase, and the information gathering process may become more difficult and take longer. Appraisers may fear being caught in the net of penalty provisions that generically would be applied to work requirements constituting an appraisal.

Anticipated Release of New Standards

Standards for Valuation Services by the American Institute of Cert-ified Public Accountants (AICPA)

In the past five years, the AICPA has promulgated various drafts of business valuation appraisal standards for its members. Three other recognized societies encompassing business valuation work have codified standards: the American Society of Appraisers, the Institute of Business Appraisers, and the National Association of Certified Valuation Analysts. The most recent AICPA exposure draft had a comment period ending Dec. 15, 2006. While as of this writing the adoption date for new standards has not been released, most CPAs who are also appraisers believe that these standards will be adopted soon, with likely 'teeth' later in 2007.

Far-Reaching Impact Is Possible for Matrimonial Attorneys

With adoption of these standards, it is not clear that an 'accountant' is, in fact, immediately credentialed and qualified to undertake a business appraisal without the AICPA's own ABV credential ' Accredited in Business Valuation. CPAs who have this credential may list their certification as 'CPA/ABV.' Expect challenges to CPAs opining in valuation matters who lack the AICPA's credential.

In addition, the new AICPA standards distinguish the scope of work involved in a business valuation as either an appraisal or a calculation. While an appraisal is normally expected to provide an objective opinion of the value of business equity, a 'calculation' is something based less on valuation approaches/methods 'agreed upon with the client,' and may be challenged as to the scope of an expert's opinion. The anticipated standards note several bright line factors:

• A calculation engagement does not include all of the procedures required for a valuation engagement; and
• Had a valuation engagement been performed, the results may have been different.

Consequently, if your expert (or the opposing expert) proffers a 'calculation' work product opinion, explore the differences of what was actually done, and if the 'calculation' will be acceptable and credible for asset valuation purposes.

Concluding Thoughts

Looking ahead into this year and 2008, we will no doubt be struggling with the application of these new changes for appraisers. Since better information generally conveys more power, the matrimonial attorney who is knowledgeable of the recent shifts in how appraisal work is to be conducted should have a sustained benefit over opposing counsel practicing with outdated knowledge. Understand these changes. Expect a higher level of service from your appraisers!

Rob Schlegel, ASA, MCBA, a member of this newsletter's Board of Editors, is a Principal with Houlihan Valuation Advisors in Indianapolis. He is an Accredited Senior Appraiser (Business Valuation) with the American Society of Appraisers and a Master Certified Business Appraiser with the Institute of Business Appraisers. Schlegel regularly teaches appraisal methods and financial ratio analysis to appraisers nationwide and Indiana CPAs and attorneys.