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Herbert v Kohler US Tax Court Case - What is the Cost of the Valuation for Estate Tax Purposes?? Gift tax purposes?

Posted on May 9, 2014 at 5:35 PM

I am in the process of bidding for a project with an SBA 7a lender.  That is not an estate or gift valuation.  Furthermore, there is a significant difference between a calculation and a valuation; the fomer involves abbreviated procedures ad costs far less!!!


With the SBA 7a program, the lenders will call asking for the project now, not in 2 weeks.  They want the project now.  Now is not always possible; there are "honey-do" jobs and other family obligations that may impede undertaking a vauation.   SBA SOP's require a valuation, not a calculation!  Further, the people preparing the valuation mut be accredited by one of three accrediting orgs; I have a CVA (Certified Valuation Analust) designation and the experience needed to bid for this type of work.


That said, historically, the banks and SBA 7a lenders have contracted with the lowest priced service providers.  These services providers are (in my opinion) valuation mills. Invariably, they do not conduct a site visit, interview management, key employees, look at contracts, assess the competitors (local, regional or national) and their competitors' strength, weaknesses, and assess the subject company's owner's and employees ability to respond to change or new competition.  In 99% of the mill reports, there are some gapping holes.  The SBA 7a lender buys the "valuation" project for $2,300 to $3,000.  


While the "mills" (these are national firms) are staffed by accredited professionals, that fact provides little solace to the buyer that may over pay or the bank that will be left with a business.  Sometimes, the valuation leads to a lower price.  That is the valuation missed important points that are important and set the firm in question apart.  Ultimately, it is bank that hires the valuation expert and makes a judgment call.  In law, that is the equivalent of hiring a newly minted attorney to handle a complex tax or matrimonial matter. Good luck.  


One case worth reading, because in the area of tax, estate and gift and M &A, the courts are beginning to understand that valuation professionals are not all the same (just like, there is a difference amongs attorneys), is Herbert v Kohler.   The critique helps explain the risks of cutting corners. http/ustaxcourt.gov/InOpHistoric/kohler.TCM.WPD.pdf.  The case does not get into understatement penalties and other risks that are very real.  In a recent case, aggressive valuation and appraisal professionals were called on their judgment and ... have been banned from ever appearing before the US Tax Court.  These professionals are now (possibly/very likely) going to loose their professional licenses.  If they loose their licenses ... they had it coming! (Sorry for being harsh)


Going for the lowest cost providers is an option and there are risks that may end up costing alot.  Central Washington Appraisal, Economic & Forensics, LLC is a new firm in Central Washington.  We compete on value and are reasonably priced. We also provide USPAP machinery and equipment appraisals.  We bring experience but ... as a start up in Central Washington, we want to build a business and establish relationships. Call us and let's visit if pricing is an issue in our bid.  Thank you!

Categories: Business Valuation, Exit and Succession Planning

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