Pension Protection Act – How it Affects Appraisers

By Johanne M. Floser, CBA, CVA

The Pension Protection Act of 2006 (“PPA”) pertains to pensions, right? As with most other bills passed through Congress, this Act contains provisions which may have a farther-reaching impact.

Section 6695A of the Internal Revenue Code (“IRC”) was added as part of Section 1219 of the PPA and calls for monetary penalties against appraisers who knowingly (or reasonably should have known) that the appraisal would be used in connection with a return or a claim for refund, and whose valuation resulted in a “substantial…or gross misstatement” of value.

(See following for relevant Tax Court case)

Tax Court Case Imposes Accuracy-Related Penalty.

In the Estate of Helen P. Richmond, deceased, Amanda Zerbey, Executrix, Petitioner v. Commissioner, T.C. Memo 2014-26, Feb. 11, 2014, the estate retained a tax return preparer CPA, who was not a certified appraiser,  to value the holding company. He determined a value of $3.15 million.

The IRS’ auditor determined a value of $9.2 million.

For the Tax Court case, experts were hired by both sides to value the holding company. The estate’s expert arrived at a $5 million value and the IRS’ expert arrived at a $7.3 million value. The Tax Court found the decedent’s interest to be $6.5 million, which was less than the IRS’ expert but considerably more than the estate’s expert.

Because the original value obtained by the estate was not prepared by a certified appraiser, and was more than 65% less than the valuations determined by both experts for the Tax Court case, the Tax Court found that the estate did not act with reasonable cause and in good faith in reporting the value, and a 20% accuracy-related penalty was imposed and upheld.

Within this context, a “Substantial misstatement”, as defined by IRC Sec. 6662(e)(1), is:

  •  For income tax purposes, a valuation that is 150% or  more of the “correct value”, or
  •  For estate and gift tax purposes (i) a valuation that is 200% or more (or 65% or less) of the “correct value”, or (ii) the net  transfer price adjustment exceeds the lesser of $5,000,000 or 10% of the taxpayer’s gross receipts

Similarly, a “Gross misstatement”, as defined by IRC Sec. 6662(g)(2), is a valuation that is:

  •  A valuation that is 200% or more of the “correct value”, for income tax purposes, or
  •  A valuation that is 400% or more (or 25% or less) of the “correct value”, for estate and gift tax purposes, or
  •  the net transfer price adjustment exceeds the lesser of $20,000,000 or 20% of the taxpayer’s gross receipts.

The intent of the Section 6695A insertion was to ensure that the appraiser/appraisal qualification requirements of IRC Section 170[1] are adhered to.  Secs. 170 (f)(11)(E)(ii) & (iii) define the qualifications the IRS requires all appraisers to possess, and the elements the appraisal must contain. These definitions are applied to all appraisal reports required to be submitted to the IRS, as the penalty provisions of IRC Sec 6695A references them. Simply stated, these qualifications and elements include:

Qualified Appraiser[2]:

To be a qualified appraiser, an individual

  • Has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in regulations prescribed by the Secretary,
  • Regularly performs appraisals for which the individual receives compensation, and
  • Meets such other requirements as may be prescribed by the Secretary in regulations or other guidance.

An individual will not be treated as a qualified appraiser unless he/she demonstrates verifiable education and experience in valuing the type of property subject to the appraisal; and has not been prohibited from practicing before the IRS at any time during the 3‑year period ending on the date of the appraisal.

Qualified Appraisal[3]:

Under IRS prescribed regulations or guidance, a qualified appraisal is a document that is prepared by a qualified appraiser (as defined in paragraph (b)(1) of IRC §170) in accordance with generally accepted appraisal standards within the substance and principles of the Uniform Standards of Professional Appraisal Practice (USPAP), as developed by the Appraisal Standards Board of the Appraisal Foundation.

Section 6695A has a three-year statute of limitations beginning on the later of the return’s due date or filing date[4].  The IRS then considers if there is a more than likely chance the appraiser will prevail in court.[5]  The penalties for substantial or gross misstatements are the lesser of:

  • The greater of $1,000 or 10% of the underpayment attributable to the misstatement, or
  • 125% of the gross income received from preparation of the appraisal.[6]

Those found to have substantially or grossly misstated a value also are subject to referral to the Office of Professional Responsibility for sanctioning (e.g.: exclusion as an expert witness, censure, suspension, disqualification from practicing before the IRS). A firm’s professional liability insurance could also be impacted by a misstatement finding. Ethics compliance with the AICPA and state boards could be affected as well.[7]

The moral of the story here is that when hiring a valuation expert, be sure they possess the necessary skills and training to provide an accurate valuation, not just a CPA who does valuations “occasionally”.  Certified valuation professionals provide not only the knowledge and experience needed, but also demonstrate to the IRS that they are seasoned veterans of valuation, potentially reducing the risk of examination.

[1] IRC §170 pertains to the deduction of charitable contributions

[2] IRS Notice 2006-96 (Internal Revenue Bulletin 2006-46), as amended by IRS Bulletin 2008-40 and IRS Publication 561
[3] Ibid
[4] Internal Revenue Manual, Chapter 1, Section 12, Penalties Applicable to Incorrect Appraisals, §
[5] Ibid, §
[6] Ibid, §
[7] Treasury Department Circular 230

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