For several years, Judge David Laro has been warning the business appraisal community that some of its methodologies and techniques—for example, its approach to calculating marketability discounts—might not pass muster under the federal Daubert standard for relevance and reliability. (See BVWire #85-2 and BVWire #72-3.)

Less than two weeks ago, the U.S. Tax Court decided just that. In an opinion by Judge Cohen, the court struck down a conservation easement appraisal by a national real estate firm for disregarding the applicable “highest and best use” standard and determining value instead “based on whatever use generates the largest profit, apparently without regard to whether such use is needed or likely to be needed in the reasonably foreseeable future.” The taxpayer tried to argue that Daubert did not apply to federal tax cases, but the court disagreed.  More importantly, in strong language could carry directly into its consideration of business appraisals (and appraisers) in estate and gift tax cases, the court added:

… There is no dispute about the qualifications of the appraisers. The problem is created by their willingness to use their resumes and their skills to advocate the position of the party who employs them without regard to objective and relevant facts, contrary to their professional obligations... In addition, the cottage industry of experts who function primarily in the market for tax benefits should be discouraged... In this case, in the view of the trial Judge, the expert report is so far beyond the realm of usefulness that admission is inappropriate and exclusion serves salutary purposes.

Read the complete digest of Boltar v. Commissioner, 136 T.C. No. 14 (April 5, 2011) in a forthcoming Business Valuation Update; the Tax Court’s decision will be posted soon at BVLaw.