Invitation to Comment on IRS-Treasury Code

Important information for NABE members:

NABE member Patrick Anderson has alerted NABE that the IRS and Treasury are inviting comments on a code that would require appraisers be “qualified” to appraise non-cash charitable contributions. The deadline for submitting comments is January 17, 2007.

The intent of the of the IRS code was to reduce the abuses caused by poorly done, and in some cased deliberately exaggerated, appraisals for personal property, such as artwork or residential real estate that were contributed to charity and for which an income tax deduction was claimed. However, the code itself may also apply to business interests, including equity in a business and loans to a business, business property, and intellectual property such as patents and licenses.

The IRS and Treasury are inviting comments on sections of the code dealing with generally accepted appraisal standards, appraisal designation from a recognized professional appraisal organization, minimum education and experience requirements, verifiable education and experience in valuing the type of property subject to the appraisal, and potential impact any guidance may have on small businesses.

Patrick has composed a draft letter with his recommendations for “qualified” appraisals and appraisers. Also, he has provided the following additional information:

Background

The IRS has requested comment on the definition of "qualified appraiser" and "qualified appraisal" under the newly adopted section 170(f)(11) of the Internal Revenue Code, which governs charitable deductions, and section 6695A governing substantial valuation misstatements. The notice is number 2006-96 and is available at:

http://ftp.irs.gov/pub/irs-drop/n-06-96.pdf

Comments are due by January 17, 2007.

The current transitional guidance relies heavily on USPAP to describe a qualified appraisal.
USPAP is described at:

http://www.appraisalfoundation.org/s_appraisal/sec.asp?CID=68&DID=97

The transition guidance also relies heavily on credentials provided by organizations like ASA and IBA, as well as accountant organizations like AICPA. Some of these credentials (e.g. ABV) are available only to accountants; others are available to those that pass courses and meet other practice requirements. As has been fairly widely noted, there is wide variation in the requirements for these credentials. In general, practicing as a forensic economist—even one with significant commercial damages and business valuation work—will not qualify you for any of them.

Concerns for Forensic and other Business Economists

Although the new law was focused on abuses in charitable giving deductions, the resulting guidance will inevitably leak into qualifications that are asserted, and perhaps enforced, on forensic economists and business economists performing commercial damages, antitrust, and business valuation work. Therefore, I believe members of the profession should jointly or individually provide the IRS comments on the proposed guidance in a timely manner.

In particular, I suggest that economists comment on the following:

the use of these standards for commercial damages, antitrust, and business valuation work.
the importance of proper economic causality and grounding in any valuation of a business or business-related asset.
avoidance of narrow credentialism
risks of allowing poor appraisals simply because they meet “paperwork” standards, such as those prepared using software that generates a “report” using a small information set.
recognition of business economics work and training as qualifications