Page 30 - Business Valuation for Estates & Gift Taxes

Chapter 5

Elements and Attributes of Reports

This chapter discusses the elements and attributes of a valuation report that are considered to be best
practices. It is recommended that valuation reports prepared for estate and gift tax purposes follow the
reporting provisions of VS section 100, Valuation of a Business, Business Ownership Interest, Security,
or Intangible Asset (AICPA, Professional Standards). Although a full discussion of the requirements of
VS section 100 is beyond the scope of this practice aid, there are certain items that are particularly im-
portant in documenting a valuation for estate and gift tax purposes.

The business valuation report that is attached to the gift or estate tax return serves as support for the fair
market value of a specific asset reported on the tax return. It is usually the only document presented to
the IRS that will be used to determine whether the related asset’s fair market value reported on the return
should be accepted as filed or should be challenged. The IRS business valuation guidelines fn 1 state that
"the primary objective of a valuation report is to provide convincing and compelling support for the
conclusions reached." It is the taxpayer’s best opportunity to persuade the IRS that the value reported is
correct and should be accepted.

An effective estate or gift tax valuation report should be both well-written and well-organized. VS sec-
tion 100 describes three report types: (1) detailed report, (2) summary report, and (3) calculation report.
For estate and gift tax purposes, valuation analysts should prepare only written detailed reports to ensure
the IRS receives the most comprehensive support for the values presented in the tax return. Therefore,
this practice aid will address only the preparation of a detailed report for a valuation engagement that
expresses a conclusion of value.

When dealing strictly with federal gift tax returns, the United States Treasury Department has promul-
gated regulations that require adequate disclosure of all gifts that are in excess of the annual exclusion
amount in the year the gift is made. Given the robust disclosure requirements needed to support present
interest assertions and valuations, the taxpayer is serving in his or her best interest by retaining a valua-
tion analyst to prepare and submit detailed valuation report to the IRS.

These regulations do not apply to estate tax returns and are not codified in any rules or regulations that
apply to estate tax returns; however, there are similar disclosure and documentation requirements that
carry their own penalties for non-compliance. The estate’s executor, with the valuation analyst’s assis-
tance, should always submit a detailed report with the estate tax return to help mitigate subsequent in-
quiries and requests for supporting documentation from taxing authorities and to ensure that the statute
of limitations begins on the timeline the IRS can conduct an audit of the return. fn 2

fn 1
Department of the Treasury, Internal Revenue Service, IRM 4.48.4, Engineering Program, Business Valuation Guidelines 4.1.1,
Issued July 1, 2006.

fn 2
See earlier discussion on this topic in chapter 1, “Scope.”

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