CPAs and the Changing Valuation Field

By Edward F. Saroney III

Ramifications of Court Rulings

In 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 community.

Daubert 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.

Deloitte 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.

Adequate Disclosure of Gifts

The 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 interest.
• 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.

The 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 being valued.
• 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.

In 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.

Credentials

CPAs 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.

CPAs 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.

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