We welcome back guest blogger Cindy Charleston-Rosenberg. Cindy is a past president and a certified member of the International Society of Appraisers. She and I both posted on the Tax Court’s earlier decision in the Kollsman case. Now, the 9th Circuit, in an unpublished opinion, has affirmed the Tax Court’s opinion. I am somewhat surprised that the taxpayer appealed this case because the burden to overturn the Tax Court’s decision was high. The 9th Circuit seemed to have little trouble finding that the Tax Court correctly relied on the appraiser used by the IRS and dismissing the taxpayer’s appraiser who came burdened with conflict problems and a desire not to use comparables in setting a value. The 9th Circuit stated “The Tax Court did not err in rejecting Wachter’s (the petitioner’s appraiser) opinion in part because he did not support his valuations with comparable sales data.” The 9th Circuit did not directly address the conflict of the taxpayer’s appraiser that greatly influenced the Tax Court to ignore or deeply discount his opinion but instead continued to focus on the deficiencies of his opinion stating “the Tax Court did not err in finding that Wachter failed to explain the nearly fivefold increase in value between his valuation and the sale price.” As Cindy explains and as we discussed in the prior posts, getting the right appraiser makes a huge difference in getting the “right” outcome. Trying to fix a problem with an appraisal through an appeal will generally not end well. Keith
On July 26, 2019, The Appraisal Foundation released a press statement urging legal advisors and wealth managers, in light of the recent affirmation of Kollsman v Commissioner, (T.C. Memo. 2017-40) to recognize the primacy of the personal property appraisal profession. The Appraisal Foundation is the nation’s foremost authority on valuation services, authorized by Congress as the source of appraisal standards and appraiser qualification criteria.
The 9th Circuit affirmation of Kollsman establishes that attorneys and other allied professionals should, as a minimum standard of care, recognize appraising as a professional discipline distinct from other types of art market expertise. From the Foundation’s release:
read more...with this ruling, the competency and professionalism of personal property appraisers has been confirmed for the second time by the judicial system in the United States … wealth managers and estate attorneys now have a greater fiduciary duty to their clients to fully understand appraiser qualification criteria and appraisal standards when vetting personal property appraisal experts.
The Tax Court decision in Kollsman essentially disregarded an appraisal submitted by a high ranking executive of a premiere auction house as lacking basic qualification, credibility, support and objectivity. The decision relied almost exclusively on the opinion of the IRS expert, who was a relevantly credentialed, professional appraiser. The 9th Circuit opinion found the Tax Court did not err in rejecting the auction house expert’s opinion, in part because it was not supported by comparable sales data and failed to consider relevant past sales. In disregard to established caselaw and standard professional appraisal practice, the auctioneer testified that when he arrived at his valuations, he was “not interested” in comparables, and had only reviewed comparables after the IRS challenged his methodology. In finding the auction house appraisal to be “unreliable and unpersuasive” the Tax Court opinion deemed the omission of comparables supporting the valuations to be “remarkable”, stating; “we have repeatedly found sale prices for comparable works quite important to determining the value of art”. In contrast, the court found the credentialed appraiser engaged by the IRS explained his methodology, relied on comparables, and conducted research as to the impact of the subject property’s condition to an expected level of professional performance and objectivity.
To help ensure a trustworthy level of professional competency, The Appraisal Foundation’s sponsoring professional personal property organizations, the International Society of Appraisers, the Appraisers Association of America, and the American Society of Appraisers, have embraced and are bound to implement the Personal Property Appraiser Minimum Qualification Criteria in issuing credentials to members. Each organization maintains a public registry where the appraiser’s level of credentialing, areas of specialization, education and experience may be accessed and confirmed. Members of these associations earn their credentials through a stringent admissions, training and testing process. They are required to comply with IRS guidelines and the Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice (USPAP), are bound to continuing education requirements and to submit to the oversight of their professional organization’s ethics committee.
As a member of the Appraisal Foundation’s Board of Trustees, I welcome the opportunity to collaborate with the legal and wealth management professions on best practices in identifying and engaging qualified appraisers, particularly for IRS use appraisals. As we see here, every appraisal report submitted to the IRS has the potential to become the subject of litigation. Procedurally Taxing readers are invited to review my earlier post for an in-depth analysis of the implications of the original ruling, and Keith Fogg’s earlier coverage of this case highlighting the avoidable perception of bias when engaging an expert seeking any involvement in the sale of purchase of the subject of an appraisal.
Last September the American College of Trust and Estate Counsel (ACTEC) Regional Meeting in Baltimore hosted a panel addressing this issue. The feedback from the considerable post-presentation engagement from attendees was that the qualification criteria for real property appraisers are well understood by the legal profession. However, qualification criteria and practice standards for personal property and business valuation experts, sourced by the same authority, are clearly less so, often with devastating outcomes for consumers.
In the wake of the Kollsman affirmation,particularly as the ruling applies to the benefits of engaging relevantly credentialed experts for IRS valuations, and critically, the Appraisal Foundation’s now public stance on this issue, it will be increasingly difficult for tax and legal advisors to defend engagement of less than fully qualified valuation experts.
Way back during my own IRS days there was an Estate & Gift Tax Attorney permanently stationed at the Holtsville, NY Service Center (when IRS Campuses were still called “Service Centers”); his function was to classify E&G returns (i.e., first opportunity for the return to be accepted as filed). From time to time backlogs developed, so other E&G attorneys were sent out to help whittle down the load, and being that I was the one who lived the furthers east on Long Island, it usually meant a day in Holtsville for me instead of having to ride the Silver Snail into Manhattan.
My first time out there, the three of us who were given the Holtsville detail were told by the regular guy that certain appraisers of real estate were highly reliable, while certain others, not so much, and that with the former, if realty valuation was the only reason to subject the return to audit, to push it on through to acceptance; conversely, the returns that had appraisals by questionable appraisers were to be scarlet-lettered for audit for that reason alone.
When I spoke to one of the valuation people in Manhattan later that week, he pulled out a “white list” and a “black list” of various appraisers, and told me that if there were no comparables in ANY appraisal then there had better be a clear and convincing reason enunciated as to why not.
Bottom line: The selected appraiser can make the difference between the return getting audited or getting waved through as filed. {Though they might be in need of “training cases” when a whole group of newbies onboards.}.
[On one occasion when I was a newbie, I had occasion to speak with one of the IRS appraisers who specialized in jewelry and antiques. He had previously had his own jewelry manufacturing business, and seemed to know just about everyone in the Diamond District on 47th Street. I showed him a list of jewelry that was attached to a Form 706 Estate Tax Return, and told him that there was a safe deposit box opening slated two weeks thenceforth. He pointed out two items on the list, and told me that he wanted to be at the box opening. Sure enough, one of the pieces described as silver was actually platinum.]
So yes, I, for one, have great respect for qualified and competent professional appraisers. Sometimes a real expert is needed. If you have a major health issue, would you go to a physician who puts on a mask, beats a drum and shakes a rattle while singing “Oooh eee oooh ah ah, Ting Tang, wallawalla Bing Bang”?
Kenneth, thank you so much for your comments. It’s my understanding that an appraiser’s qualification and known track record for objective and supported appraisal conclusions is a still a major factor in whether or not an art appraisal is challenged. It’s also my understanding that every art appraisal submitted to the IRS above $50,000 is reviewed by the AAS. Best practice is to engage a credentialed appraiser more likely to submit a supported report.
Yes, Cindy, all types of art (“paintings, drawings, prints, sculptures, antiques, ceramics, decorative arts, textiles, carpets, silver, rare manuscripts, antiquities, ethnographic art, collectibles, classic automobiles, and historical memorabilia”) that equal or exceed that magic $50,000 threshold go to the AAS, which then has the discretion to consult with the Art Advisory Panel. IRM 4.48.2.2.
https://www.irs.gov/irm/part4/irm_04-048-002
As a licensed broker for 40 years without a grievance, I felt it important to lend opinion and experience. There are 3 distinct methods for valuing property, two of which DO NOT INCLUDE ‘comps.’ I spent much time in the “art world”, where only comps are relevant but most is such artist’s recent prices. My experience with IRS is the opposite, where they induced a lower court to ignore sworn pleading with a seasoned CPA opinion, in addition to my own for qui tam seeking $Millions FOR IRS. All lawyers who will sue IRS for NOT collecting tax due from those who defraud our People write to: V_liptak@mail.com
This is important information for those of us with clients whose artwork is worth $2 million, or maybe just half a million. However, it’s also important to remember that the primary reason IRS requires appraisers is to discourage ordinary people from claiming more than minimal amounts for items with values in four figures, not seven.
From the Form 8283 instructions: “You must include with your return a qualified appraisal of any single item of clothing or any household item that is not in good used condition or better for which you deduct more than $500.”
Think about that for a moment. What does “not in good used condition or better” mean? Does it also include “not in excellent used condition”? And does “not in good used condition” modify just “household item,” or does it also encompass “clothing”?
Suppose my client has a 1960s television, not in working condition. It’s probably not worth much, except to movie set designers who are working on a film about once upon a time in Hollywood. But what if its previous location was the White House, or the Vatican? Or what about a child’s dress from the 1930s? It is torn and stained, but it was worn by Shirley Temple.
The client just needs a $5,000 valuation to get her taxable income down to zero. But IRS says she needs, first, to find a “qualified appraiser.” This is someone who:
1. The individual either:
a. Has earned an appraisal designation from a recognized professional appraiser organization for
demonstrated competency in valuing the type of property being appraised, or
b. Has met certain minimum education and experience requirements.
2. The individual regularly prepares appraisals for which he or she is paid.
3. The individual demonstrates verifiable education and experience in valuing the type of property being appraised. To do this, the appraiser can make a declaration that, because of his or her background, experience, education, and membership in professional associations, he or she is qualified to make appraisals of the type of property being valued. The declaration must be part of the appraisal. However, if the appraisal was already completed without this declaration, the
declaration can be made separately and associated with the appraisal.
There may be people out there who match these qualifications and can be found with a diligent search. They probably charge $500 or more per item, for the required appraisal. (That appraisal cost used to be deductible, but is no longer.) The tax savings may not be much more than that.
The purpose of requiring a “qualified appraisal” from a “qualified appraiser” is clearly not fairness for the average taxpayer. The purpose is to discourage any deduction for items that might belong in a museum, but instead turn up on eBay.
I know nothing about art appraisals, but initially wondered why the estate did not hire a new expert for trial. Then I saw that one of the paintings sold at auction for $2.4 million before the IRS issued the notice of deficiency. The estate may have tried to hire a new expert, but could not find anyone who would give a lower appraisal than the IRS in light of the sale, even though it was more than 3 years after the date of death.
The other thing I noticed was the IRS initially proposed a value of $2,075,000 in the notice of deficiency that was increased to $2.6 million in an amended answer 2 years later. The appeal to the 9th Circuit may be due to a potential malpractice claim in the background that resulted in the appeal. The estate could have limited its tax exposure by accepting not petitioning the Tax Court, paying the tax in the notice of deficiency and pursuing a refund action closer to the statute of limitations.
Joel, interesting point. Can you say a little more about malpractice exposure with this fact pattern? Are you aware of case law where an attorney or other fiduciary has been held personally liable for failure to engage qualified experts?
Cindy, I am unaware offhand of any malpractice exposure cases involving appraiser malpractice (though I am sure that a few of them are out there).
I do, however, know about a case where the attorney engaged an accountant who, though a recognized expert in a particular industry, totally lacked expertise in the matter involving the case I had with the attorney when I was with the IRS. Both attorney and accountant were sued for malpractice; I presumed that such would happen, and saw the case on a court calendar after leaving the employ of the IRS. Of course, I cannot divulge any details, but the case seemed to have settled.
Thank you Kenneth. I am particularly interested in cases involving attorney and tax preparer fiduciary accountability for accepting less than relevantly qualified expert opinions, similar to the situation you described. I understand settled cases can’t be a cited but if you, or any followers of PT are aware of caselaw where an attorney or CPA has been held responsible for accepting unqualified experts in any area of specialization, citations would be much appreciated,
Cindy, like Kenneth, I am unaware of any cases involving appraiser malpractice.
My point on the potential malpractice claim was not related to the appraisal but instead to the estate choosing to filing a tax court petition. The IRS notice proposed a valuation of $2 million even though one of the paintings had already sold for $2.4 million. The taxpayer could have accepted the $2 million. Instead it filed a tax court petition which allowed the IRS to obtain a new appraisal for $2.6 million and increase the amount of tax due.
Joel, I am in complete alignment with you and Keith on this. Given the fact pattern in this case, particularly the outcome of the ultimate sale, is surprising the estate appealed.