Admit report weaknesses up front, before other side does

BVWireIssue #81-2
June 10, 2009

As judges boost their knowledge and more IRS engineers and appraisers become BV-credentialed, they are better able to spot the weaknesses in valuation reports. Should you admit them up front? It’s a question that Mike Eggers, principal of American Business Appraisers in San Diego, recently asked a panel of distinguished experts at NACVA and the IBA’s 2009 Consultants Conference in Boston. Absolutely, responded U.S. Tax Court judge, the Honorable David Laro. “If you don’t address them, the other side will, or the court will have questions.” For example, since deciding Mandelbaum in 1999, Laro has become well acquainted with the five models most commonly used to calculate marketability discounts. Now, if a report does not include all of them, “I may think you’re being less than candid.” However, if the appraiser discusses and analyzes the omitted methods, explains why they were not applicable to the case, “then you’ll raise the sophistication of your report up a notch.”

What other elements must a report have? Ethics, independence, intellectual honesty, and transparency, Laro said. “When you offer a report that is free of bias and advocacy, independently arrived at and transparent, then this is the best we can have.” Howard Lewis, former national program manager of the IRS and current IBA executive director, seconded these requirements, as applied to the Service. “It is not the job of the IRS to be advocates,” he said. IRS appraisers and examiners are “charged with the responsibility to be fair, honest and unbiased.” At the same time, they regularly see only the worst-case appraisals, and this system-bias led even Lewis to develop a bias early in his career, which he focused on correcting in later years, in both himself and his fellow engineers. The point: “Understand the perspective of the IRS,” he said. “Maybe it could even be something to talk about.”

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