Valuation: General and Real Estate (Portfolio 830)

Detailed Analysis

I. Introduction

A. Purpose and Scope

B. Role of the Estate Planner in the Appraisal Process

C. The Relevant Code Sections

D. Importance of Valuation for Transfer Tax Purposes

E. General Comments on Valuation Jurisprudence

F. Gift Tax Valuation Finality and Ability of IRS to Revisit Valuation of Gifts for Estate Tax Purposes

1. Adjusted Taxable Gifts as Reported on the Estate Tax Return

a. Gifts Made Prior to August 6, 1997

b. Gifts Made on or After August 5, 1997

2. Gift Tax Statute of Limitations

a. Generally

b. Gifts Made After December 31, 1996

G. Burden of Proof and Valuation Litigation

1. Examinations Commencing On or Prior to June 22, 1998

2. Examinations Commencing After June 22, 1998

3. Taxpayers Arguing Against a Valuation Return Position

4. Asking IRS for Valuation Assistance or Rulings

II. General Rules of Valuation

A. Fair Market Value

1. General

2. Relevant Market

3. Impact of Use on Fair Market Value

4. Impact of State Probate or Inheritance Tax Valuation on IRS

5. Individual Components of “Fair Market Value” Standard

a. Hypothetical Willing Buyer-Hypothetical Willing Seller

b. Highest and Best Use

c. No Compulsion to Buy or to Sell

d. Reasonable Knowledge

B. Valuation Date

1. In General

2. Alternate Valuation Date

C. Overview of the Methodologies and Approaches to Valuation

1. Present Value

2. Section 7520

D. Market Approach to Valuation

1. Actual Sales

a. Sales Within a Reasonable Time

b. Auction Sales

c. Unaccepted Offers

d. Relevant Markets

e. Expenses of Sale

2. Comparable Sales

a. Similar Property

(1) General

(2) Real Property

(3) Entities

b. Dissimilar Property

c. Timing of Comparable Sales

d. Effect of Method of Financing

3. Effect of Economic Conditions

4. Effect of Zoning and Land Restrictions

5. Probate Court Appraisal

6. Summation of Market Approach

E. Income Approach to Valuation

1. Rules of Thumb

2. Gross Income

a. Vacancy Factor

b. Effective Gross Income

3. Net Income

a. Expenses

b. Capitalization Rate

c. Capitalization Methods

(1) Direct Method

(2) Mortgage-Equity Method

(3) Discounted Cash Flow Method

(4) Ellwood Method

(5) Residual Method

F. Cost Approach to Valuation

1. General Description

2. Estimated Reproduction or Replacement Cost

G. Local Assessed Values

1. Use in Establishing Basis for Depreciation

2. Use in Valuation Cases

H. Adjustments to Value

1. Marketability/Minority

2. Blockage

3. Control Premium

4. Fractional Interest Discount

5. Retroactive Adjustment

6. Other Adjustments

I. Final Determination of Value

III. Special Use Valuation of Real Estate - § 2032A

A. Introduction

1. Exception to Highest and Best Use Valuation

2. Overview of § 2032A

3. Other Transfer Taxes

B. Qualification Requirements

1. In General; Elections

2. Pre-Death Qualified Use

3. Pre-Death Material Participation

4. Percentage Tests

5. Qualified Heir

6. Indirectly Owned Property

C. Computation of Value

1. In General

2. Capitalization of Rents

3. Five-Factor Method

D. Requirement to File Appraisal

E. Recapture and Other Downsides of § 2032A

IV. Special Valuations Rules - Chapter 14

A. Background - Former § 2036(c)

B. Overview and Scope of Chapter 14

C. Transfers of Interests in Corporations and Partnerships: § 2701

1. Gift Tax Analysis

2. Controlled Entities

3. Marketable Interests

4. Mechanics of Valuation

D. Transfers of Interests in Trust: § 2702

1. Retained Interests

2. Personal Residence

3. Tangible Property

4. Mechanics of Valuation

a. The Grantor Retained Income Trust (GRIT)

b. The Grantor Retained Annuity Trust (GRAT)

c. The Grantor Retained Unitrust (GRUT)

d. Qualified Personal Residence Trust (QPRT)

E. Buy-Sell Agreements: § 2703

F. Impact of Certain Lapsing Rights: § 2704

G. Other Provisions

1. Extension of Gift Tax Statute of Limitations

2. Special Adjustment to Avoid Double Taxation

V. Specific Types of Property

A. Real Estate

1. Apartment Building

2. Office Building

3. Shopping Center

4. Hotel/Office Complex

5. Residential Property

6. Vacant Land

7. Leasehold Interests

8. Option to Purchase

9. Conservation and Facade Easements

10. Other Interests in Real Property

B. Stocks and Bonds

1. Listed and Over-the-Counter Stocks

2. Bonds

3. Restricted Securities

4. Mutual Funds

5. Options

6. Closely Held Corporations

C. Partnerships, LLC's and Joint Ventures

1. General Treatment of Value

2. Restrictive Agreements

a. Traditional Analysis

b. Chapter 14 Analysis

D. Sole Proprietorships

E. Mortgages, Notes and Cash

F. Insurance, Annuities, Life Estates, Terms for Years, and Future Interests

1. Life Insurance

a. In General

b. Alternate Valuation

c. Entity-Owned Policies

d. Simultaneous Death of Owner and Insured

2. General Discussion of Annuities, Life Estates, Terms for Years, Remainders, and Reversions Valued Pursuant to § 7520

a. Application of § 7520 to Valuation Provisions

b. Special Rule for Charitable Transfers

c. Operation of § 7520

d. Planning Implications

3. Annuities

4. Life Estates and Terms for Years

5. Remainder and Beneficial Interests

G. Other Types of Property

1. Household and Personal Effects

2. Goodwill

3. Franchise Rights

4. Retirement and Deferred Compensation Benefits

5. Miscellaneous Interests

a. Royalties

b. Patents

c. Contingent Claims for Services

d. Interest-Free Loans

e. Timber

f. Works of Art

g. Other Property Interests

VI. Accuracy-Related Penalties

A. Prior Law and Overview of Current Law; Subjectivity Implications

B. Understatement Penalties

C. Misstatement Penalty

D. Negligence or Disregard of Rules and Regulations

VII. Appraisals and Expert Witnesses; Appraisal Standards; Appraisal Process

A. Appraisal Standards

1. General

2. USPAP

a. Types of Guidance

b. Standards

c. USPAP Applicability

B. Types of Appraisers; Appraisal Associations

1. General

2. Appraisal Trade Associations

a. ASA

b. Business Appraisal Trade Associations

(1) ASA

(2) IBA

(3) NACVA

(4) AICPA

(5) Association for Investment Management and Research

c. Real Property Appraisal Trade Associations

(1) ASA

(2) Appraisal Institute

(3) ASFMRA

(4) NAIFA

C. Review of Appraisals

D. Federal and State Regulation of Appraisers

E. General Advisability of Appraisals

F. IRS and Valuation

G. Appraisers as Expert Witnesses

H. Appraisal Reports

I. Art

J. Assembling Information

1. General Data

2. Specific Data

3. Comparable Data

4. Maps

VIII. Other Tax Issues

A. Income Tax Basis

B. Payment of Donor's Taxes or Indebtedness

C. Noncash Charitable Contributions

D. Information to Be Submitted with Return

E. Section 1060 - Special Allocation Rules for Certain Acquisitions

F. Foreign Property