Several developments in the business valuation environment highlight how quickly the stakes for valuation professionals are increasing: (1) the Pension Protection Act of 2006, and (2) the second exposure draft of the AICPA valuation standards.

President Bush signed the Pension Protection Act of 2006 into law in late August. Only “qualified appraisers” will be eligible to submit appraisals for charitable gift tax purposes. The Act also adds a penalty for appraisals that result in a substantial or gross valuation misstatement.

The new legislation is a result of Congress’s growing alarm in recent years about the poor quality of many tax-related valuations. Prior to the new legislation, there was little guidance and ineffective requirements regulating who could submit valuations to the IRS.

Under the Act, taxpayers are required to obtain a “qualified appraisal” for purposes of substantiating deductions for some charitable contributions of property. The IRS then issued Notice 2006-96 on October 19 providing guidance on the new definitions of “qualified appraisal” and “qualified appraiser” as well as guidance regarding “substantial or gross valuation misstatements.”

The guidance specifically mentions:

• The appraiser must hold an appraisal designation from a business valuation organization and must meet appropriate education and experience requirements.
• The appraisal must comply with generally accepted appraisal standards; specifically mentioned is the Uniform Standards of Professional Appraisal Practice.
• The appraiser must make a statement that he or she understands that a substantial or gross valuation misstatement resulting from an appraisal that the appraiser knows, or reasonably should have known, would be used in connection with a claim for refund, may subject the appraiser to a civil penalty.

For the time being, this legislation is limited to appraisals prepared for charitable contributions. However, it is also generally considered to be an indication of things to come from the IRS with respect to business valuation and appraisals.

Also of keen interest to CPAs is the second exposure draft of the AICPA’s Statement on Standards for Valuation Services, issued on October 16. With an effective date of July 1, 2007, all AICPA members will be required to comply with these standards, regardless of whether the member holds a valuation credential. A number of states across the country, including Michigan, adopt AICPA standards for all their licensed CPAs.

Michigan CPAs and all AICPA members will be required to follow this Standard whenever they perform a business valuation engagement that culminates in the expression of a conclusion of value or a calculated value. The exposure draft may be downloaded from http://bvfls.aicpa.org/.

These developments are indicative of the atmosphere of increased scrutiny with respect to appraisers and their work.

About the Author
Christine Baker, CPA, ABV is principal of The Rehmann Group in the firm’s Grand Rapids office. (indicate practice specialty if appropriate). She serves on the MACPA Litigation/Business Valuation Task Force. Ms. Baker can be reached at clbaker@rehmann.com.

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