Who’s on First? Finding a Qualified Appraiser for 409A.

By Alex Hodgkin     Add your comments

The last but not least of the three articles on 409A compliance, this one addresses the key: Finding qualified appraisers.

While it does seem clear that using a qualified third-party firm to conduct your business valuation for compliance with 409A helps you sail into that safe harbor, what is not so clear is just how to identify one. Section 409A does not define a qualified business valuation expert, nor does it tell us how to find one. Thankfully, some guidance exists. In its own publications the IRS has offered valuable guidelines regarding the definition of a qualified appraiser. The standards include the following:

  • An appraisal designation from a recognized professional appraiser organization;
  • Regular performance of appraisals for which the individual receives compensation;
  • Demonstration of education and experience in valuing the type of entity subject to the appraisal. (1)

That’s a start. Currently, there are really four recognized professional appraiser organizations, each offering their own valuation credential. These include: 1) American Society of Appraisers (ASA), offering an ASA or AM; 2) American Institute of Certified Public Accountants (AICPA), offering an ABV; 3) National Association of Certified Valuation Analysts (NACVA), offering an AVA, CVA; and 4) Institute of Business Appraisers (IBA), offering a CBA, BVAL, or AIBA. While there is inevitable debate regarding which credential is best, every one of these provides sufficient evidence of the minimum education in the profession requirement under current IRS regulations.

There’s more. Recent court rulings shed additional light. In Herbert V. Kohler, Jr. v. Commissioner of Internal Revenue, United States Tax Court, T.C. Memo 2006-152, July 25, 2006, the court clarified the instances in which the burden of proof shifted to the IRS.(2) In Kohler, the court ruled that the burden of proof shifted to the IRS because the petitioner introduced credible evidence, substantiated material claims, maintained required records, and cooperated with the IRS. In deciding for the taxpayer, the court stated that it was impressed with the valuation methodologies utilized by the taxpayer’s experts, as well as the fact that the expert was a certified appraiser.

When it comes to finding the right valuation firm, then, you should be looking for a set of specific qualifications. First comes the appropriate credential from at least one of the 4 organizations identified above. That credential shows you that the individual offers the essential education in the profession. Remember, of course, that this is a minimum. You really do not want someone who offers no professional appraisal designation valuing your company stock. Equally important, and just as obvious, your appraisal expert should be experienced in valuing just what you are asking him or her to value. It may be obvious, but you probably shouldn’t be asking a real estate appraiser to value your high tech company’s stock options. You wouldn’t ask a bike messenger to fix your Jaguar now would you? The bottom line is that you want an educated, qualified, credentialed and experienced valuation professional.

Author: Alex Hodgkin is one of the co-founders and managing directors of Arcstone Partners. Alex’s bio is readily viewable on their website

References:

  1. Pub. 561, “Determining the Value of Donated Property”, Department of the Treasury, Internal Revenue Service (Rev. October 2005), p. 10
  2. Bravo, Stephen J., “The Burden of Proof”, Business Valuation Review, Winter 2006, p. 136

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