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Monday, March 26, 2007


Internal Revenue Code Section 6695A imposes penalties directly on appraisers when their appraisals are used to support a substantial valuation misstatement or a gross valuation misstatement. The penalty can be significant – it is generally the greater of 10% of the resulting tax underpayment, or 125% of the fee paid to the appraiser. However, no penalty is imposed if the appraiser can show that the value established in the appraisal was more likely than not the proper value.

The American Bar Association Section of Real Property, Probate and Trust Law has studied this new Code Section and provided comments. The task force addressing the issue noted various questions about the new statute, and also gave its recommendations for how those questions should be resolved.

Some of the comments include:

  1. Will the provision apply to estate and gift tax valuations or solely to income tax valuations? The task force recommends that the penalties be limited to appraisals for charitable contribution purposes.
  2. Who are the persons that can be penalized? Does it include return signers and preparers, executors, or others? The task force recommends that the statute be clarified to limit penalties to "qualified appraisers" (a defined term under the law).
  3. What constitutes an appraisal? For example, is a best guess valuation by a CPA an appraisal subject to penalty? The task force recommends limiting such appraisals to the strictly defined term "qualified appraisal" under Code Section 170.
  4. Do persons who assist in the preparation of the appraisal become subject to penalty, or only the person (or firm) who signs the appraisal? The task force desires to limit the persons at risk to the appraisal firm itself and the person signing the appraisal.
  5. How should the penalties be applied when one appraiser relies in part on another appraisal?
  6. At what point in a tax controversy will the penalties be imposed? The task force recommends only after the final resolution of the case.
  7. Will the penalties apply to appraisers hired by the government in a tax controversy? For the sake of fairness, the tasks force suggests that such appraisers be subject to penalty.

The task force also recommends that the appraisers be able to assert a "reasonable cause" defense, since some types of properties are subject to a wide variation in value that can unduly punish appraisers, and that appraisers will have a hard time arguing that the appraisal was more likely than not the proper value when it has already determined that valuation misstatement has occurred.


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