Will the Appraiser You Select Withstand IRS Scrutiny?

If your business is in need of an appraisal, it is vital that you select the right appraiser. This case, Estate of Scott M. Hoensheid v. Commissioner (T.C. Memo 2023-34), underscores that point. The charitable contribution deduction claimed by Scott and Anne Hoensheid for a contribution of business stock was disallowed primarily due to the business appraisal not being a "qualified appraisal", that can only come from a "qualified appraiser." The court deemed the requirement for a qualified appraiser as the "most important requirement" of the regulations. Obtaining an appraisal from a non-qualified appraiser does not constitute substantial compliance, as required by tax law for contributions of property exceeding $500,000.

Here are the key reasons why the Hoensheids' appraisal was not qualified:

Appraiser Not Qualified:

• The court found that the appraiser did not "regularly perform appraisals for which he receives compensation," which is a statutory requirement for a qualified appraiser.
• Despite his familiarity with the type of property (closely held automotive businesses), his limited experience—testifying he performed valuations "briefly" and "on a limited basis" and now only "once or twice a year" for prospective clients without charge—meant he did not meet the "regularly performs" standard.
• He lacked appraisal certifications and did not hold himself out as an appraiser.

Substantive Defects in the Appraisal Document:

• Failure to Describe Appraiser's Qualifications: The appraisal document itself failed to sufficiently describe the appraiser’s relevant qualifications and valuation experience, which was limited. This omission was a substantive defect because it deprived the Commissioner of necessary information to assess the appraisal's reliability.
• Incorrect Date of Contribution/Valuation: The appraisal reported June 11, 2015, as the date of contribution and valuation, which was incorrect. The court determined the actual gift date was July 13, 2015. This was not a minor typographical error because significant, value-altering events occurred between those dates.

No Substantial Compliance: The Hoensheids argued for "substantial compliance" to excuse these defects. However, the court found that their appraisal failed to meet multiple substantive requirements, particularly regarding the appraiser's qualifications and the incorrect date with intervening material events.

Qualified Appraisals

The term qualified appraisal means “an appraisal document that is prepared by a qualified appraiser in accordance with generally accepted appraisal standards and otherwise complies with the requirements” of Internal Revenue Code Section 170 and Regulation 1.170A-17. For purposes of this discussion, we have distilled the requirements to the following key points.

What constitutes a qualified appraiser? A few of the key elements include:

• They have earned a recognized appraiser designation for the type of property being appraised from a generally recognized professional appraiser organization based on competency. Alternatively, the person may successfully meet the educational and two-year minimum full-time experience requirements valuing the type of property that is being appraised.
• The appraiser’s education and experience must be verifiable.
• The appraiser must regularly perform appraisals for which the individual receives compensation. That fee cannot be prohibited.  A prohibited fee is one that is based to any extent on the appraised value of the property.
• The appraiser cannot be any of the following: the donor, the donee, a party to the transaction in which the donor acquired the property, an independent contractor who is regularly used by any of the aforementioned parties, or a related party.

As you can see, the requirements are specific, and it is never advisable to save a few dollars and ask the appraiser to provide a summary report or shortened appraisal product. The report content or analysis will be inadequate to meet the regulation for IRS examiner review, or to meet adequate disclosure requirements.  

In the case of Hoensheid, their audit ended in disaster. It cost them $647,489 from the $3,282,511 disallowed charitable contribution. No doubt the parties regretted their decision.

Hopefully, this review can help to serve as a checklist to ensure the choice of appraiser you make is suitable to meet the “qualified appraiser” and ultimately “qualified appraisal” standards. Doing so will not only protect you from a similar fate but also protect your tax planning strategy from being dismantled.

If you are considering a transaction that requires a valuation for tax purposes, R&A CPAs has qualified appraisers to provide the expertise you need and deserve.