ClarityBV Blog

Congrats to all my accountant friends kicking off a long weekend. I’ve been wondering though…

When will we implement staggered due dates, like many motor vehicle departments have implemented for registration renewals?

So much for that sun-setting estate tax law being patched well before 2010. Recent commentary suggests that Congress is now likely to patch things retroactively. In the meantime, following are links to a couple of interesting studies on the relationship between taxes and death rates.

• Did the Death of Australian Inheritance Taxes Affect Deaths? (pdf)
• Dying to Save Taxes: Evidence from Estate-Tax Returns on the Death Elasticity (pdf)

Don’t be surprised if death rates (or “reported” deaths) are lower the next two weeks and higher the first two weeks in 2010!

Treasury Department Circular No. 230 contains regulations governing the practice of accountants, appraisers, and others before the Internal Revenue Service. (Full text is available in pdf format here.)

Aside from adding to the endless disclaimers at the end of every business email, there are important items related to business valuation.

• § 10.22 Diligence as to accuracy. (b) Reliance on others. Except as provided in §§ 10.34, 10.35 and 10.37, a practitioner will be presumed to have exercised due diligence for purposes of this section if the practitioner relies on the work product of another person and the practitioner used reasonable care in engaging, supervising, training, and evaluating the person, taking proper account of the nature of the relationship between the practitioner and the person.

• § 10.50 Sanctions. (b) Authority to disqualify. The Secretary of the Treasury, or delegate, after due notice and opportunity for hearing, may disqualify any appraiser for a violation of these rules as applicable to appraisers.
  • (1) If any appraiser is disqualified pursuant to this subpart C, the appraiser is barred from presenting evidence or testimony in any administrative proceeding before the Department of the Treasury or the Internal Revenue Service, unless and until authorized to do so by the Director of the Office of Professional Responsibility pursuant to §10.81, regardless of whether the evidence or testimony would pertain to an appraisal made prior to or after the effective date of disqualification.
  • (2) Any appraisal made by a disqualified appraiser after the effective date of disqualification will not have any probative effect in any administrative proceeding before the Department of the Treasury or the Internal Revenue Service. An appraisal otherwise barred from admission into evidence pursuant to this section may be admitted into evidence solely for the purpose of determining the taxpayer’s reliance in good faith on such appraisal.

Many appraisers are concerned about an apparent lack of due process safeguards if the IRS chooses to challenge an appraisers’ work, as indicated in a recent letter (pdf) to the IRS.

My main takeaway is that accountants and appraisers should be extremely cautious about the quality of valuations submitted for tax purposes. Particularly for accountants that occasionally “dabble” in valuations, the risk includes not only monetary penalties, but also the possibility of being barred from future practice before the IRS! In addition, the requirement for diligence as to accuracy precludes a tax preparer from “turning a blind eye” to the quality of third-party valuations.

Now is a good time to consider estate-planning transfers. Business values are down, and it appears the estate tax is here to stay. The window of opportunity may be small given the potential for tax law changes.

1. Market values are down across nearly every part of the U.S. economy. For example, see recent articles in the Wall Street Journal and Yahoo! Finance. This provides an opportunity to transfer a larger portion of a privately held business under current gift transfer limits.
2. Applicable Federal Rates are at historic lows. This makes certain trust planning techniques even more attractive. An article in Forbes last December noted that “Lower business valuations and interest rates make business succession right now a no-brainer.”
3. Estate taxes may be here to stay, but some valuation discounts may not be. See the ABA’s Heckerling Reports announcement of the “Pomeroy Bill” HR 436, which would eliminate certain discounts for lack of control and/or lack of marketability for family-owned businesses.

A few caveats…

1. No one knows for sure what will happen with estate taxes and discounts. These types of changes have been proposed before. However, for business owners already considering transfers, this is just one more reason to make them.
2. Although asset values are down, history has shown that further declines are always a possibility. Making these planning transfers assumes a viable business that is not facing a real risk of disappearing altogether.
3. The IRS continues to challenge discounts and pursue appraiser penalties. Compliance with professional standards and clear documentation are vital to building a strong basis for a valuation opinion.