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Estate Planning and Estate Administration

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Tax court finds conflict of interest in estate tax appraisal

North Carolina executors of estates with significant assets may wish to be careful who they choose to perform estate tax appraisals. The Internal Revenue Service pays close attention to asset valuations, and the agency may issue a notice of deficiency when the appraised value of an asset differs significantly from its own valuation. The estate of a deceased New York art collector recently discovered this when a tax court ruled that two 17th Century paintings had been undervalued by $1.77 million.

The value of the paintings had been established by an appraiser who was also a leading figure at a major auction house. His appraisal placed a value of $600,000 on the two paintings, and the appraiser also sent a signed letter to the estate proposing that his auction house be granted exclusive rights to sell the paintings for a period of five years. Records indicate that the appraisal was based on a first-hand inspection of the two paintings.

However, the IRS took issue with the appraisal, and the estate was subsequently served with a notice of deficiency that valued the paintings at more than $2 million. A U.S. Tax Court ruled in February 2017 that the auction house appraiser had a major conflict of interest and had deliberately undervalued the paintings in order to earn the right to later auction them.

Experienced estate administration attorneys may seek to avoid this kind of dispute by suggesting that only qualified independent appraisers be used to place a value on assets that could be subject to estate tax. Attorneys could also urge their clients to only retain appraisers who follow the practices laid down in the Uniform Standards of Professional Appraisal Practice. This is because the resulting certification would state that the appraiser had no personal or financial interest in the asset involved.

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