Russell Glazer Advises on What to Look For in a Valuation Report for Gifting

What to Look for in a Valuation Report for Gifting

By: Russell T. Glazer

The IRS requires that a valuation report submitted with a gift tax filing contain certain minimum elements.  If the report is lacking in any material way, the typical three-year statute of limitations, limiting the IRS’ ability to question the valuation and the tax return, may not begin to run, so that there is no date after which the IRS loses its right to audit the return.

IRS Regulations require that the valuation of a gift of an interest in a privately held company be supported by several disclosures.  This requirement can be satisfied by the inclusion with the gift tax return of a valuation report prepared by an appraiser which includes, among other things, descriptions of the “appraisal process employed…the assumptions, hypothetical conditions, and any limiting conditions and restrictions on the transferred property that affect the analyses, opinion, and conclusions…the information considered in determining the appraised value, including…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 procedures followed, and the reasoning that supports the analyses, opinions, and conclusions…the valuation method 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, merger-acquisition transactions, etc.”

In addition to the IRS’ requirements, a report prepared by a credentialed valuation expert must comply with the reporting standards of each professional business valuation organizations to which the expert belongs.  These standards typically require disclosure of the valuation approaches that have been rejected as well as those that have been employed.

The exact content of the report is left to the discretion of the appraiser.  However, the ultimate objective of the report is to provide the IRS with sufficient information and analysis for them to assess the validity of the valuation process and conclusion.  If such information is withheld from the IRS, they may claim that inadequate information was presented for the IRS to properly assess the valuation conclusion, and that therefore the three-year statute of limitations never commenced.  This exposes the return to audit for an indefinite period of time, and a potentially negative outcome.