More on Kollsman

Fellow appraiser Cindy Charleston Rosenberg, ISA CAPP who has been tracking trade and professional publications on the Kollsman decision sent me an interesting post from John Russell, J.D., ASA's Senior Director of Government Relations and Business Development. I am please to serve on TAFAC's Personal Property Issues Committee with John, and he has a great grasp of what is happening within the appraisal community, government entities and with allied professionals through his gov relations and bus development position.

I am really pleased to see that each of the major appraisal organizations (ISA, AAA and ASA), as well as the Appraisal Foundation have all come out and acknowledged the importance of the original Kollsman decision and it being upheld and strengthened by the appeals court.

John Russell writes in the ASA Newsroom

Is Kollsman a Major Shift? Three Takeaways from the Upheld Tax Court Decision, and One Thought

By John Russell, J.D., ASA’s Senior Director of Government Relations and Business Development

Much has been discussed in the wake of the 9th Circuit’s decision upholding the Tax Court opinion in Kollsman v. Commissioner, and how the decision impacts estate and gift valuations moving forward. While the practices of executors, attorneys, and accountants won’t change overnight because of Kollsman, the case does provide three good talking points for appraisers when explaining why an objective appraisal is the best choice in estate or gift situations.

The Tax Court clearly held Wachter’s interest in consigning the paintings against him.
The simultaneous acts of providing an opinion of fair market value and offering to consign the works at auction worked to irreparably damage Wachter’s ability to posit an objective opinion of value. In fact, the court felt that Wachter had “a direct financial incentive to curry favor with Mr. Hyland by providing…’lowball’ estimates that would lessen the Federal estate tax burden…”[1] No matter what followed, it would be difficult if not impossible for Wachter to be perceived as neutral, disinterested, and objective – the most essential traits of a professional appraiser.

In talking about Kollsman, the need for objectivity in the valuation is the biggest takeaway. The other issues identified by the Tax Court with Wachter’s opinion could have been rectified at any point between the original valuation date and the subsequent litigation, but once compromised it is virtually impossible to reestablish objectivity. That’s not to say you can’t provide other related services to a client for whom you’ve completed an appraisal for IRS-related purposes; you can, but it’s best not to solicit those other services and instead rely on the client asking for those services only after you’ve completed your appraisal assignment. The murkier the timing or the more direct the solicitation, the closer you get to an objectivity problem.

Diligence in obtaining “reasonable knowledge of relevant facts” matters.
The condition of the paintings in Kollsman was a significant factor identified by Wachter that, in his opinion, affected the value of the works. If true, then, why did Wachter not take the logical step of determining the costs and risks associated with restoring the paintings? That question clearly bothered the Tax Court, who not only pointed to the Estate Tax regulations in their opinion, but underscored the need to discover and investigate “those facts that a reasonable buyer or seller would uncover during the course of negotiations.”[2] To that end, the Tax Court found that “given the dirty condition of the paintings on the valuation date, a reasonable investigation into their values would involve at the very least seeking an opinion from a conservator about the risks and likely outcome of having them cleaned.”[3]

Appraisers who regularly perform tax related valuations not only understand relevant regulations, but legal precedents that can also affect their assignments. By explaining these relevant legal and regulatory requirements to potential clients, an appraiser not only establishes their own credibility, but makes clear that anything less than a competent professional appraiser performing the valuation injects the risk of overlooked or unknown elements that, if absent, can seriously undermine the legitimacy of an opinion of value.

The days of “because I said so” are long gone.
On the issue of comparable sales and their use, the Tax Court was most pointed: “Mr. Wachter…has provided no comparables to support his valuations. This omission is remarkable. We have repeatedly found sale prices for comparable works quite important to determining the value of art.”[4]

The absence of such basic valuation tenets from a proffered valuation is a fatal flaw in the eyes of the Tax Court. It is essential for appraisers to substantiate their opinions, and be further prepared in the event the Service challenges their findings. Being able to explain to a potential client not only what the report will provide, but how the workfile requirements of USPAP afford further documentation with each assignment, provides one last key differentiator appraisers can lean on when explaining why their services are the right choice in estate and gift assignments.

 So Where does IRS Valuation Go From Here?

Clearly, the Tax Court was quick to point out the ways in which Wachter’s valuation fell short of their expectations. In many ways, the deficiencies in Wachter’s opinion are ones that, if we were dealing with a charitable contribution issue, would be covered by Section 170’s requirement for a “qualified appraisal.” His lack of impartiality from the outset, however, would fall short of meeting the “qualified appraiser” threshold. So – if the deficiencies identified by the Tax Court are, in large part, dealt with for charitable contributions – why not simply extend the requirements in charitable contribution to estate and gift? Not only would it provide more concrete expectations on both the professional and the product they deliver to both clients and the Service, it would eliminate the current two-tiered approach to valuation that currently exists.  

Source: ASA Newsroom

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