and the Changing Valuation Field
Edward F. Saroney III
2005 - The business valuation field has undergone a dramatic
transformation. The Uniform Standards of Professional Appraisal
Practice (USPAP) standardized the performance and reporting
of business valuations. In addition, two court rulings, Daubert
v. Merrell Dow Pharmaceuticals [509 U.S. 579 (1993)]
and Kumho Tire Company v. Carmichael [119 S. Ct.
1167 (1999)], have had significant ramifications on the field.
USPAP, Daubert and Kumho, and the IRS’ regulations
on adequate disclosure of gifts have all significantly improved
what had been inconsistent and unreliable valuation practices.
of Court Rulings
Daubert, the Supreme Court designated four factors
to consider when determining if expert scientific testimony
is admissible: whether a theory or technique: 1) has been
tested; 2) has been subjected to peer review; 3) has a known
error rate; and 4) is generally accepted within that particular
and Kumho set no new standards, but highlighted
the already existing points under Federal Rule of Evidence
702. This rule states that an expert must have knowledge,
skill, experience, training, or education and that the expert’s
testimony must be based upon sufficient facts and data.
introduced a database “The Financial Expert Testimony–Admissibility
Standards Database” for the purpose of tracking challenges
to Daubert. Since 1993, there have been more than
3,700 challenges, nearly half resulting in partial or total
exclusion of the expert’s testimony.
Disclosure of Gifts
IRS’ rules for the adequate disclosure of gifts state
that the statute of limitations on the assessment of a gift
(usually three years) will start running only if the gift
is adequately disclosed on the gift tax return (Treasury
Regulations section 301.6501), defined as reported in a
manner adequate to apprise the IRS of the nature of the
gift and the basis for the value reported. Treasury Regulations
section 301.6501(c)-1 then states that adequate disclosure
on a return must contain the following information:
A description of the transferred property and any consideration
received by the transferor.
The identity of, and relationship between, the transferor
and each transferee.
A detailed description of the method used to determine
the fair market value of the property transferred, including
any financial data used in determining the value of the
A statement describing any position taken that is contrary
to any proposed, temporary, or final regulation, or revenue
ruling, published at the time of the transfer.
IRS further states that an appraisal meets the adequate
disclosure requirements only if it is prepared by an appraiser
who satisfies all of the following requirements:
The appraiser holds out to the public as an appraiser
or performs appraisals on a regular basis.
The appraiser is qualified to make appraisals of the property
The appraiser is not the donor or the donee of the property
or a member of the family of the donor or donee [as defined
in section 2032A (e)(2)], or any person employed by the
donor, the donee, or a member of the family of either.
addition, Treasury Regulations section 301.6501(c)-1 indicates
that an appraisal must contain all of the following:
The date of the transfer, the date on which the transferred
property was appraised, and the purpose of the appraisal.
A description of the property.
A description of the appraisal process employed.
A description of the assumptions, hypothetical conditions,
and any limiting conditions and restrictions of the transferred
property that affect the analysis, opinions, and conclusions.
The information considered in determining the appraised
value, including, in the case of an ownership interest
in a business, all financial data that was used in determining
the value of the interest that is sufficiently detailed
so that another person can replicate the process and arrive
at the appraised value.
The appraisal procedures followed, and the reasoning that
supports the analysis, opinions, and conclusions.
The valuation method being utilized, the rationale for
the valuation method, and the procedure used in determining
the fair market value of the asset transferred.
The specific basis for the valuation, such as specific
comparable sales or transactions, sales of similar interests,
asset-based approaches, and merger-acquisitions transactions.
are not “automatic experts” in business valuations.
A CPA must demonstrate knowledge, skill, experience, training,
or education in business valuations. Otherwise, the CPA
runs the risk of having the testimony disqualified, or having
a gift of stock pulled back into a decedent’s estate
at fair market value years beyond the statute of limitations.
that want to serve as valuation experts are advised to strengthen
their specialty credentials (see Exhibit).
All of the accrediting organizations require extensive training,
ending with an examination. The AICPA and the National Association
of Certified Valuation Analysts require that candidates
already possess the CPA license. Of the more than 330,000
CPAs in the United States, there are over 1,700 ABV and
approximately 3,700 CVA credential holders.
F. Saroney III, CPA, ABV, CVA, is a principal at
Fagliarone Group, CPAs, Syracuse, N.Y.