Curtis R. Kimball, ASA, ARM
President Vinewood Investment Analytics Inc.
Abstract: In the Hoensheid v. Comm case decision filed March 15, 2023, the Court decided that the taxpayers’ appraisal work was “deficient with respect to several key substantive requirements” for both the appraisal report and the appraiser’s qualifications. This article discusses specific points of that decision as it relates to appraisal practice and summarizes the ruling of the US Tax Court. A transcript of the Findings is provided.
In a memorandum case decision filed March 15, 2023,[1] the US Tax Court found that the taxpayers failed to properly and timely set up and document a charitable donation of closely held business stock shortly before the sale of the company in 2015.
[1] Estate of Scott M. Hoensheid, Deceased, Anne M. Hoensheid, Personal Representative, and Anne M. Hoensheid, Petitioners v. Commissioner of Internal Revenue, Respondent (TCM 2023-34, dated March 15, 2023).
As part of the lack of proper documentation, the Court found that the taxpayer’s valuation was not a qualified appraisal under Section 170 of the Internal Revenue Code (IRC). Furthermore, the investment banker leading the deal who prepared the report was deemed not to be a qualified appraiser, due to his lack of appraisal credentials and the occasional nature of his valuation practice.
Because of timing and documentation problems, the taxpayers were deemed to have created an anticipatory assignment of the sale income from the shares and no charitable gift deduction was allowed.
The Internal Revenue Service also alleged other deficiencies and proposed additional accuracy-related penalties. The Court ultimately decided not to apply penalties due to the taxpayer’s good faith reliance on professional legal advice concerning these penalty issues.
The third generation of the Hoensheid family decided to explore the sale of their family business, Commercial Steel Treating Corp. (CSTC), toward the end of 2014. One family member, Scott, and his wife, Anne, (the Hoensheids, or taxpayers) decided to make a charitable contribution of some of their appreciated shares to a charitable donor advised fund (DAF) to be administered by a major national charitable financial advisory firm. CSTC and the Hoensheids engaged legal counsel and an investment banking firm to advise and assist on the deal and on the charitable gift transaction.
To qualify for a charitable gift of stock, a transfer must be completed before a definitive purchase agreement is executed. If not, then tax law deems that the taxpayer is instead making an anticipatory assignment of his capital gains income and thus incurs a capital gains tax. If not properly documented, the charitable gift deduction will be disallowed.
In the timeline running down to the sale date in 2015, a number of documents had to be created and signed to complete the transfer to the DAF. The attorneys and the charitable financial advisory firm were not helped by their client, Scott, who insisted he wanted to “wait as long as possible” to gift the stock until he was “99% sure” that the deal would go through. The court decision revealed that there were delays, misunderstandings, and documentation finalization issues on the transfer. These problems ultimately resulted in the charitable gift occurring on July 13, 2015, instead of the taxpayer’s originally intended (and reported) transfer date of June 11, 2015. The sale of CSTC effectively closed on or about July 15, 2015.
The taxpayers and their legal counsel also realized that a qualified appraisal was necessary to follow charitable contribution reporting requirements. A Form 8283 must be filed by the taxpayer and signed by the charitable entity receiving the gift and signed by the appraiser opining on the fair market value of the gift. The investment banking firm leading the sale process agreed to provide the valuation report and sign the Form 8283, despite the fact that its engagement letter did not state that such appraisal services were part of its scope of work.
On the first issue, the Court decided that the “realities and substance” of the evidence of the charitable transfer and the evidence of the sale process indicated that the sale of CSTC was “a virtual certainty” just prior to the completion of the transfer of the Hoensheids’ stock to the DAF, which the Court determined to be as of July 13, 2015. Thus, the transfer occurred too late to be a gift of the closely held stock but was rather a gift of the anticipatory assignment of a fixed right to income.
The taxpayer can still receive a charitable deduction for the income anticipatorily assigned to the charity if proper documentation is in accordance with federal tax regulations under IRC Section 170. The Hoensheids argued that they were in substantial compliance with the IRC regulations.
In this case the Court decided that the taxpayers’ appraisal work was “deficient with respect to several key substantive requirements” for both the appraisal report and the appraiser’s (i.e., the investment banker who acted as the appraiser) qualifications.
The Court concluded that the investment banker was not a qualified appraiser under the regulations. He and his firm did not hold himself out as an appraiser to the general public and he did not possess any certifications from professional appraisal organizations. He conducted valuations on a limited basis only once or twice a year and the Court said that a number of his valuations were uncompensated work for companies for which his firm was acting, or hoped to act, as sales intermediary. While not having a professional certification is not an automatic disqualifier, the totality of the investment banker’s background and work apparently influenced the Court’s thinking in this case.
The Court also found that the appraisal report attached to Form 8283 was materially deficient. The report lacked a sufficient description of the appraiser’s qualifications. The report used the taxpayers’ intended, but incorrect, date of transfer reported as June 11, 2015, and thus the valuation date was wrong. A number of material events took place between June 11 and the actual transfer and closing dates in July 2015 and were thus not included in the report. The Court also concluded that the report had other defects such as a lack of sufficient description of the appraisal methodology.
Lastly, the Court determined that the taxpayers did not have reasonable cause to rely in good faith on the defective appraisal. The Court concluded that the record was not sufficient to show that Scott (an experienced businessman) or his attorney did enough due diligence on the investment banker’s qualifications or his report to determine if these were in compliance with the regulations.
But the Court did conclude that the resulting underreporting of income—because the taxpayers were not entitled to a charitable deduction—did not deserve to be further hit with an accuracy-related penalty under IRC Section 6662(a). This was because the “issue was not so clear cut” that the taxpayers would have reasonable knowledge beyond reliance on their legal counsel’s advice.
Curtis R. Kimball, CFA, ASA, ARM, president of Vinewood Investment Analytics Inc., has appeared over seventy times as valuation expert witness in U.S. District Court, U.S. Tax Court, U.S. Court of Federal Claims, U.S. Bankruptcy Court, various state courts, and alternative dispute resolution venues such as IRS audits and appeals proceedings.
Curtis holds designations as a Chartered Financial Analyst
(CFA) from the CFA Institute and Accredited Senior Appraiser (ASA) in business
valuation and appraisal review and management from ASA. Post-retirement, Curtis
continues as consultant to Willamette Management Associates where he worked as
a senior managing director. Email crkimball@vinewoodinv.com