Estate and tax planning should be conservative unless the client is willing to be a guinea pig and possibly subject themselves to opportunity costs due to other techniques not used as well as possible interest and penalties.  In order to be conservative, one must assume that every tax appraisal will be attacked by the IRS.  And if attacked, one must conservatively assume that the matter will wind up in court.

There are three possible forums in which tax matters are litigated, two refund forums that require full payment of the contested taxes, penalty and interest, and the Tax Court, where prepayment is not required.  Proposed audit adjustments involving valuation often are very large.^[1]  One should conservatively assume that the taxpayer will lack the cash to prepay the tax, penalties and interest at the time of the litigation, so the matter will get litigated in the Tax Court since one does not have to pay to play.  Therefore, the most conservative “least common denominator” for a valuation report is to assume that the Tax Court Rules will ultimately apply.

Like all other courts, the Tax Court has some procedural rules that are intended to streamline litigation.  One such rule is Tax Court Rule 143(g)(1), which provides that the direct testimony of an expert witness is set forth in the expert report. 

The Tax Court almost always restricts the ability of an expert witness to supplement his or her report on direct testimony, and it rarely permits supplementation.^[2]  Compounding this limitation is the fact that appraisals may lie dormant for a very long period of time, particularly with respect to estate and gift tax cases, although this is certainly not limited to estate and gift tax cases.

A whole host of things can happen between the time that the business appraisal is conducted and the time that the appraisal is attacked.  In the interim, something may happen to the appraiser before the matter is brought to trial.  Data may be lost.  Indeed, entire files of a business appraiser may either be lost or destroyed, even in the ordinary course of business.^[3]  Therefore, the safest and most conservative type of business appraisal report is the wholly-contained, full and complete business appraisal report since a well written business appraisal report will contain and preserve all of the data necessary to replicate the results and thinking of the business appraiser.^[4]  Obviously, sometimes clients only want a summary or letter report.  As a result, for purposes of file retention, business appraisers should view these appraisal files as different from files for complete reports and perhaps should keep the workpapers for these files for a longer period of time.

[2] See, e.g., Whitehouse Hotel Limited Partnership v. Comr., 131 T.C. No. 112 (2008), rev. and rem. No. 09-60085 (5th Cir. August 10, 2010).

[3] See, e.g., Lawton v. Bank of America Corp., No. ___ (D.R.I. April 14, 2010).

[4] See, e.g., IBA Business Appraisal Standard 1.8 and NACVA Professional Standard 4.3.