The following is the Introduction to Chapter 16 of Volume 2 of Major Tax Planning for 1994, John R. Cohan, Chair, proceedings of the Forty-Sixth Tax Institute of the University of Southern California Law center. (The entire chapter is too long to put on the Web, but may be obtained at most libraries containing legal and tax resources, such as a county law library or a university library.)
The valuation of property which does not have a readily available market is necessarily imprecise. Fair market value is a question of fact to be determined from the entire record.
This paper is not, however, intended to present an all-inclusive review of the valuation cases nor a detailed review of the actual methodologies that appraisers may employ to determine value for any particular type of property.
The risk of valuation controversy should concern to the estate planner. Valuation issues arise in many ways in a planner's practice. The obvious examples are gifts and the determination and of the taxable estate for death tax purposes. Other areas where valuation planning is of concern, for example, involve by-sell agreements, not-pro rata distributions of assets among a decedent's beneficiaries, funding QTIP and bypassed trusts, determination and of basis on death, proper allocation of a transferor's generation-skipping transfer tax exemption, and various estate freezing the options under Chapter 14 of the Internal Revenue Code of 1986, as amended. A comprehensive knowledge of the valuation process may help to reduce or eliminate valuation conflicts with the IRS and/or the courts.
It is the purpose of this paper to (1) acquaint the estate planner with a few selected issues that may arise in working with appraisers and (2) give the planner a "feel" for the evidence required to enhance the chances of sustaining the planned estate and/or gift tax results. In this regard, the paper is divided into these parts:
- "Fair Market Value: the Meaning in the Estate and Gift Tax Law" -.sets out the definitions involved in the estate planning valuation process.
- "IRS Appraisal Views and Requirements" - reviews perceived requirements promulgated by the IRS for its acceptance of valuation appraisals.
- "Federal and Tax Court Views on Appraisals and Appraisers" -helps the planner identify and, hopefully, "circumvent" deficiencies found by the courts in appraisers and appraisal methodology.
- "A Suggested General Appraisal Methodology" - sets out general appraisal appraisal methodology which planners may want their appraisers to follow.
- "Finality of Valuations" - discusses the estate and gift tax statute of limitations.
- "Conclusions" - develops a few important issues in which the planner must be cognizant.
The contents of this publication are for information purposes only and are not meant nor should be construed to be legal advice. Note, also, the date of the document. Laws are constantly changing, and are subject to differing interpretations. We, therefore, urge you to do additional research or to contact your own legal or tax counsel before acting on the information contained herein.
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