Not only is an independent valuation a good idea when getting involved in a transaction, it is also a statutory requirement in many circumstances that involve Employee Stock Ownership Plans, Estate/Gift Taxes, Charitable Contributions or, most recently, the granting of Stock Options. And, in most circumstances, a solid independent valuation can be an insurance policy against tax assessments and accuracy-related penalties.



Background – The Omnibus Budget Reconciliation Act (OBRA) consolidated into one Internal Revenue Code section (IRC §6662) several different accuracy-related taxation penalties:

(1) the negligence penalty

(2) the substantial understatement of income tax penalty

(3) the substantial valuation overstatement penalty

(4) the substantial estate or gift tax valuation understatement penalty

(5) the substantial overstatement of pension liabilities penalty

The accuracy-related penalty is applied to the portion of any underpayment of tax that is attributable to one or more of the above five issues. All accuracy-related penalties apply to tax returns due, without regard to extensions, after December 31, 1989.

In controversies with the IRS which concern valuation issues, it is not uncommon for the IRS to assess accuracy-related penalties.

Impact of an Independent Valuation – Even though the IRS attempts to assess accuracy-related penalties in valuation cases, the Tax Court has consistently refused to allow these assessments when the tax payer has acted “reasonably” by engaging a valuation professional who has obtained proper training in valuation theory.

Therefore, it is extremely important that the person performing your valuation not only be independent, but also qualified to perform such a valuation. If the person performing your valuation, whether or not they are a CPA, does not regularly perform valuations as part of their practice, for purposes above and beyond your engagement, chances are they are not qualified to perform the valuation as it relates to accuracy-related penalties.