Why Should I Only Retain a Certified Valuation Expert?

If you’re thinking of using a non-certified or non-credentialed individual to value a business, consider the following recent judicial ruling.

The United States Tax Court ruled on February 11, 2014** that a valuation conducted by a non-valuation credentialed individual used for an estate tax filing was materially deficient.  The individual who prepared the valuation was both a CPA and a CFP (certified financial planner), had written 10-20 valuation reports, and had testified in court.  However, he lacked a business appraisal certification.

In brief, the court found that the estate had used an inappropriate valuation method (Capitalization of Dividends) versus the Commissioner’s expert (Net Asset Value) which led it to “substantially understate” the value of the estate as it was less than 65% of the Commissioner’s expert’s value.  As a result, the court found “that the estate has not demonstrated that it acted with reasonable cause and in good faith in reporting the value of the decedent’s interest in PHC on the estate tax return.” As a result, the Commissioner’s imposed an accuracy-related penalty in addition to the increased tax due.

The court stated that “in order to be able to invoke ‘reasonable cause’ in a case of this difficulty and magnitude, the estate needed to have the decedent’s interest in PHC appraised by a certified appraiser.  The estate relied on the valuation by [a non-certified appraiser], but did not show that he was really qualified to value the decedent’s interest in the company.” Furthermore, the court asserted that “we cannot say that the estate acted with reasonable cause and in good faith in using an unsigned draft report prepared by its accountant as its basis for reporting the value of the decedent’s interest … on the estate tax return.”  The Tax Court dismissed his valuation, determined that the estate owned an additional $2.8 million, plus a 20% accuracy-related penalty of over $1.1 million dollars.

** CLICK HERE for the details of the case: UNITED STATES TAX COURT, ESTATE OF HELEN P. RICHMOND, DECEASED, AMANDA ZERBEY, EXECUTRIX, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 21448-09.

While this particular case involved an estate tax filing, most business valuations should be performed by a certified valuation professional to ensure accuracy and credibility.