All too often, clients do not fully comprehend the need to have a detailed real estate appraisal or business valuation report prepared in support of the numbers being used in documents filed with revenue authorities. A 1987 U.S. Tax Court case, Estate of Spruill v. Commissioner, illustrates the weight courts place on a well-documented appraisal report attached to documents filed with the taxation authorities. The case, although involving U.S. estate tax, deals primarily with the valuation of real estate.

The decedent left property comprised of 38 acres of farmland. This land was zoned as residential, but was bordered by a suburban office park and a major regional shopping centre. The executors engaged an attorney and an accountant with extensive experience in estate administration and the preparation and filing of estate tax returns. The accountant hired an appraiser to value the real estate at the date of death. The lawyer and accountant reviewed the appraisal, determined it was reasonable, and filed it along with the estate tax return.

A series of events, including a sale of the farmland over a year after the decedent's death at a price substantially higher than the appraised value, resulted in an examination of the estate tax return and a criminal investigation by the Internal Revenue Service ("IRS"). The advisors to the estate had intended to notify the IRS of the sale, however, the investigation had begun before this could be done.

This divorce case involved an array of financial, valuation and even forensic accounting expert evidence. Some of the comments of the trial judge are included below to show just how difficult and challenging a task the wife’s valuation expert had to confront.

The court, in reviewing the facts of the case and evaluating the circumstances and actions of the executors, concluded, among other things, that:

" ... The returned value reflected the written, well-documented opinion of a widely experienced appraiser recommended to the executors by their attorney. A copy of the report was attached to the estate tax return and it spelled out in detail the basis of the appraisal. It is difficult to believe that one committing fraud would attach to his return a full and complete explanation of what he was doing, especially where, as here, the value of a highly publicized piece of property was the issue ... ."

and

" ... By attaching the appraisal report to the estate tax return, the executors explicitly and openly informed the IRS of the facts relied upon and the reasoning employed in arriving at the value of the property. Nothing was concealed and no one could have been misled in this respect ... ."

While the appraisal was not the only factor which influenced the court, it clearly played a significant role in arriving at its opinion.

Opinions of value used in documents filed with the revenue authorities should be supported by a detailed report as to how the appraiser/valuator arrived at his/her conclusions, including the methodology adopted, the assumptions used and the supporting calculations. Such a report will certainly demonstrate to the authorities that the numbers used were well founded and not just pulled out of the air.