Real Estate Appraiser Specializing in Commercial Industrial Residential Income Land & Single Family Residential Properties Existing or Proposed Construction Estate & Gift Tax Conservation Easements Partial Values Fractional Interests Former Senior Appraiser United States Treasury Department IRS Large Business and International Division California General Certified Real Estate Appraiser FHA Approved

Michael F. Ford #AG002512

 

The following information was taken directly from the IRS appraisal-training manual / program. Real Estate Appraisers will note minor appearing, but significant impact variance between it and their appraisal requirements under USPAP.  Business valuators may recognize verbiage that is more traditionally associated with their discipline(s), and a ‘merging’ of restated ‘common practices’. 

The broad statements and repetitive references to ‘valuators / valuation’ as opposed to appraisers and appraisals is a reflection and indication that IRS still does not recognize that there are substantial differences between real estate appraisal and business valuations; and the professional standards that govern practitioners of each.

Professional Real estate Appraisers will recognize numerous exceptions to the requirements of USPAP. Although it is officially the policy of IRS that they comply to USPAP, many if not most managers continue to hold the position that IRS is not required to comply with USPAP.

REAL PROPERTY APPRAISAL GUIDELINES

 

The purpose of this section is to:

  • Identify differences between the Uniform Standards of Professional Appraisal Practices (USPAP), and
  • Describe the various report types required of, and used by Internal Revenue Service (IRS) Appraisers
  • Background

     

  • IRS policy has been historically decentralized, having evolved from the bottom up. Expectations and quality have varied from function to function as well as from place to place within functions.
  • Establishment of formal valuation guidelines is one part of a multifaceted approach intended to promote a consistent, professional-quality work product among all IRS valuation personnel.
  • Federal tax Administration Appraisals prepared for purposes of federal tax administration must also conform to specific IRS requirements delineated in the income tax and estate & gift regulations of the Internal Revenue Code (IRC), as well as other prescribed procedures and published guidance.
  • Due to the above requirements, IRS deemed it necessary to develop its own formal real estate valuation guidelines.
  • The initial drafts of the guidelines were a compilation of existing valuation standards from various appraisal organizations and USPAP; and the Engineering and other sections of the IRM dealing with valuation.

    There is no “original” material in the guidelines.

    Applicability

    Employees impacted by the Real Estate Guidelines include all IRS personnel engaged in valuation practice (Valuators) that relate to the development, resolution and reporting of issues involving real estate valuations and similar valuations issues.

    Internal Revenue Engineering Training Manual

    Section 2.0

    Development Guidelines

    2.1 Planning

    Valuators are required to adequately plan and managers will supervise the staff in the valuation process. Quality planning is a continual process throughout the valuation assignment.

    2.2 Identifying, or Defining the Assignment

    IRS appraisers and valuators are to ‘consider’ the following factors:

  • Subject to be valued
  • Interest to be valued
  • Effective date of valuation
  • Purpose of the valuation
  • Use of the valuation
  • Statement and definition of value (this will always be one of the various FMV definitions related to the interest & specific purpose and use)
  • Assumptions
  • Limiting Conditions
  • Restrictions
  • Sources of Information
  • 2.3 Documentation

    Valuators should obtain and verify the following, when possible:

  • A complete description of the property, including physical land and building descriptions, legal description, zoning, use, etc.
  • Consideration of rights and encumbrances affecting the property”
  • Sale history of the property prior or subsequent to valuation date
  • Financial data; income and expense statements, rent rolls, leases, etc.
  • Economic outlook and trends for the property in question
  • Such other factors appropriate for consideration.
  •  

    2.4 Analyzing & Developing a Valuation Conclusion

    In developing a valuation conclusion, Valuators must obtain and analyze the relevant information necessary to accomplish the assignment …”

    Industry practice provides that the following factors should be considered:

  • Determine of highest and best use of the property as vacant and as improved
  • Consider the appropriate valuation approaches including:
  • Market or Sales Comparison Approach
  • Income Approach
  • Cost Approach
  •  

    Market / Sales Comparison Approach

  • In this approach, properties similar to the subject that have recently sold, are compared to the subject property.
  • Adjustments are made for date of sale, physical characteristics, location and other factors to determine the value of the subject. Care should be taken to consider the number of sales available, their relative comparability, the degree and rationale for adjustments to the sales and the correlation and reliability of the value indication derived from the sales comparisons.
  • Each sale should include the address of the property; section, block and lot or other legal description; condition; terms of financing; assessed value; zoning; income and expense information and any other factors effecting (sic) the sales price, all depending on availability.
  • Income Approach (also refer to Publication #561)

  • In the Income Approach, the Valuator projects an income stream based on analysis of historical financial and income expense statements, vacancy rates, rent rolls and terms of existing leases.  Value is determined by converting cash flow projections to present value using an appropriate capitalization technique.
  • Care should be taken to justify and support projections of income and expenses including any unusual or non-recurring items. Adjustments to income and expense data should be made as necessary to reflect expected income streams consistent with the capitalization technique selected. The Valuator should justify discount / capitalization rates with market data, surveys or market supported technical computations.
  • Cost Approach

  • In the Cost Approach, an estimated replacement cost of the improvements is computed and then reduced for physical, economic and functional depreciation.  To this result, an amount is added for the value of the underlying land.  This approach is  useful for specialty properties where other approaches lack available data and where land value and depreciation amounts are reasonably determinable.
  • Reconciliation

  • The final opinion of value should consider the appropriateness of each approach to value and the amount, veracity and reliability of the data supporting each approach used. If a particular approach is not utilized, the Valuator should explain the reasons. Large differences between conclusions and different approaches should be explained and reconciled.
  • Developing a Valuation Conclusion

  • Select the approach(es) and methods that best indicate and support the value of the property.
  • Consider and weigh the appropriateness of each approach and reconcile the final opinion of value.
  • Consider marketability and lack of control discounts, legal form of ownership and the effect of contractual and legal restrictions.
  • Weigh such other factors as are appropriate for consideration.
  • 2.6 Reviewing

    General Requirement

  • Form an opinion as to the adequacy and appropriateness of the report being reviewed.
  • Clearly disclose the nature of the review process undertaken.
  • Specific Requirements
  • Identify the taxpayer and the intended use of the valuator’s opinions and conclusions, and the purpose of the review assignment.
  • Identify the report under review, the property interest being valued, the effective date of valuation, and the date of the review.
  • Identify and state the extent of the review process conducted.
  • Form an opinion as to the completeness of the report under review within the scope of work applicable to the review assignment.
  • Form an opinion as to the adequacy and relevance of the data and the the propriety of any adjustments to the data.
  • Form an opinion as to the appropriateness of the valuation methods and techniques used and develop the reasons for any disagreement.
  • Form an opinion as to whether the analyses; opinions and conclusions in the report under review are appropriate, and reasonable, and develop the reasons for any disagreement.

Review with Changes

  • In many cases (you) will be conducting a real estate valuation review with recommended changes.
  • In the event of a disagreement with the report’s factual representations, assumptions, methodology or conclusions, conduct additional fact finding and analysis necessary to make corrections to arrive at an appropriate value for the property.
  • It is anticipated that this section will apply only to cases where disagreement is limited to a few items, the correction of which can be accomplished without a major revamping of the report being reviewed.  This is illustrated in the following examples:

Review with Changes Example #1

  • You are reviewing the valuation of real estate as a minority share of stock in a closely held corporation or partnership.  You agree with the appraiser’s real estate valuation, but disagree with his / her discounts for minority interest and lack of control. (Cross reference to USPAP AO-21, for appraisers).
  • You may accept and incorporate the real estate valuation into your findings, but must independently develop and support your own conclusions with respect to the revised minority interest and lack of marketability discounts.

 

Review with Changes Example #2

  • You are reviewing a valuation in which you disagree with the method used to arrive at a capitalization rate(s).  You disagree with the risk, appreciation, IRR, terminal rates or other factors assumed by the appraiser in direct Discounted Cash Flow (DCF) capitalization rates.
  • Assuming you otherwise agree with the report, you may simply revise the capitalization rate(s) to arrive at an appropriate value.   However, you must fully develop and support your revisions.

 

Review with Changes Example #3

  • You are reviewing the valuation of real estate in which only an income approach was used to determine FMV. The Valuator did not perform a market / comparable sales analysis. You believe a market comparable approach would best reflect value.
  • In this case, the valuation cannot be fixed by making only a few minor changes. Therefore, you should independently develop your own valuation.
  • Section 3.0

    Resolution Guidelines

    3.1 Resolution Guidelines Objective

  • The objective is to resolve the issue as early in the examination as possible. Credible and compelling work by the Valuator will facilitate resolution of issues without litigation.
  • The Valuator will work in concert with the internal customer (always an IRS department or division) and taxpayer to resolve all outstanding issues.                                 
  • 3.2 Arriving at Conclusions

  • Once the Valuator has all the information to be considered in resolving the issue, the Valuator will use his / her professional judgment in considering this information to arrive at a conclusion.
  • Valuators may not have all of the information they would like to have to definitively resolve an issue.  Valuators, therefore, must decide when they have substantially enough information to make a determination.

Section 4.0

    4.1 Reporting Guidelines

    4.1 Reporting Guidelines Overview

  • The primary objective of the report is to provide the ultimate decision maker with convincing and compelling support for the conclusions reached.
  • Valuation reports should contain all the information necessary to ensure a clear understanding of the valuation analyses and demonstrate how conclusions were reached. 
  • Reporting Guidelines
  • Report Contents

  • The type of report depends on the needs of each case.  No particular format applies to all cases.  The (format) will vary depending on whether the case is agreed or unagreed and whether the report is being relied upon by the decision maker (e.g., taxpayer, team manager, appeals officer, attorney, court, etc.).
  • Reports “should be well written, communicate the results and identify the information relied upon in the valuation process. The report should effectively communicate important thoughts, methods and reasoning, as well as identify the supporting documentation in a simple and concise manner, so that the user of the report can replicate the process followed by the Valuator.”
  • Subject to the type of report being written, valuation reports should generally contain sufficient information relating to the items contained in Sections 2.2 (identifying), 2.3 (Documenting) and 2.4 (Analyzing), to insure consistency and quality of valuation reports issued by IRS Valuators.
  • Reports written with respect to Section 2.6 2.8 (Review with recommended changes), should contain, at a minimum, those items in Sections 2.2 ( Identifying), 2.3 (Documenting) and 2.4 (Analyzing) necessary to support the revised assumptions, analyses, and/or conclusions of the Valuator.
  • Application of these provisions are illustrated in the following examples …

    Example #1

    No-change Reports

  • Since the report is not being relied upon by a decision maker, a few paragraphs of explanation will generally suffice.
  • Example #2

    Agreed Reports

  • Agreed reports are not generally relied upon by a decision maker.  Therefore, if agreement is reached with a taxpayer prior to a report being written, you do not have to write a detailed narrative report to support the agreement.
  • You may limit the scope and detail, and include only a brief explanation of the conclusions reached.
  • Agreed Reports
  • Caveat –

  • If you have to write a report prior to getting agreement, and that report is to be relied upon by a decision maker, it should be of the same content and quality as an unagreed report. ***
  • Example #3
  • Unagreed Reports

  • These are relied upon by decision makers.  Therefore, in cases where IRS Valuators independently develop their own valuations, they must prepare narrative reports that fully address all pertinent items in 2.2 (identifying) 2.3 (Documenting) and 2.4 (Analyzing).
  • In cases where IRS Valuators perform a review with recommended changes, they must prepare a limited scope narrative report that fully addresses those aspects of 2.2 (identifying), 2.3 (Documenting( and 2.4 (Analyzing) necessary to explain and support proposed changes. Note that any scope limitations must be clearly stated in the report.
  • Example #4
  • Expert Reports

  • These are requested by Appeals or Counsel in unagreed cases where litigation is anticipated. Since they are relied upon by decision makers, IRS Valuators must prepare narrative reports that fully address all pertinent items in 2.2 (Identifying), 2.3 (Documenting) and 2.4 (Analyzing). These types of reports must also be free from subjectivity, advocacy and tax law interpretation.
  • Statement Required
  • Each valuation report should contain a signed statement that is similar in content to the following:
  • “To the best of my knowledge and belief:
  • The reported analyses, opinions and conclusions are limited only by the reported assumptions and limiting conditions.
  • I have no present or prospective interest in the property that is the subject of this report, and I have no personal interest with respect to the parties involved.
  • I have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment.
  • My compensation is not contingent on an action or event resulting from the analyses, opinions or conclusions in, or the use of, this report.
  • The foregoing information is superseded by IRS IRM 4.48.6, Engineering Program, Real Property Valuation Guidelines.
  • Via Manual Transmittal July 1, 2006 from Kelly Cables for Deborah M. Nolan (then) Commissioner, Large Mid Size Business Division (LMSB); subsequently Large Business and International Division (LB&I).

    IRM 4.48.6 through 4.48.6.4.3 is to be added here as time permits.

    Part 4. Examining Process

    Chapter 48. Engineering Program

     

     

    Section 6. Real Property Valuation Guidelines

    4.48.6 Real Property Valuation Guidelines

    4.48.6.1 (07-01-2006)

    Introduction

    • The purpose of this document is to provide guidelines applicable to all IRS personnel engaged in valuation practice (hereinafter referred to as valuators) relating to the development, resolution and reporting of issues involving real property valuations and similar valuation issues. Valuators must be able to reasonably justify any departure from these guidelines.
    • This document incorporates by reference, the ethical and conduct provisions, contained in the Office of Government Ethics (OGE) Standards of Ethical Conduct, applicable to all IRS employees.
    • Valuations of assets owned and/or transferred by or between controlled taxpayers (within the meaning of Treasury Regulation section 1.482–1(i)(5)) may present substantive issues that are not addressed in these guidelines.

    4.48.6.2 (07-01-2006)
    Development Guidelines

    • Successful completion of a valuation assignment includes planning, identifying critical factors, documenting specific information, and analyzing the relevant information. All relevant activities will be documented in the workpapers.
    • A review appraisal may be the best approach to the assignment.

    4.48.6.2.1 (07-01-2006)
    Planning

    • Valuators will adequately plan the valuation assignment. Their managers will supervise the staff involved in the valuation process. Quality planning is a continual process throughout the valuation assignment.

    4.48.6.2.2 (07-01-2006)
    Identifying

    • In developing a valuation conclusion, valuators should define the assignment and determine the scope of work necessary by identifying the following:
      • Property to be valued
      • Interest to be valued
      • Effective valuation date
      • Purpose of valuation
      • Use of valuation
      • Statement of value
      • Standard and definition of value
      • Subject to be valued
      • Assumptions
      • Limiting conditions
      • Scope limitations
      • Restrictions, agreements and other factors that may influence value
      • Sources of information
    • The interest to be valued at a minimum includes:
      • Fee simple, leased fee, life estates, easements, rights-of-way, etc.
      • Fractional interests
      • Real property held in partnerships, corporations and trusts

    4.48.6.2.3 (07-01-2006)
    Documenting

    • In developing a conclusion, valuators should obtain the relevant information necessary to accomplish the assignment, including:
      • A complete description and location of the property
      • Any consideration of rights or encumbrances such as water, riparian, mineral, easements, and rights-of-way
      • The owner of record and, if practical or available, copies of deeds, plat maps, blueprints and surveys
      • The history of the property, including any sales within the five (5) years preceding the valuation date or any sales since the valuation date to the present. Both periods of sales should include the sales dates, prices, mortgage amounts, and the names of the sellers, buyers and mortgage lenders
      • If, during either of the two preceding periods, the property was rented, then the dates when the property was leased, rental terms, copies of leases, rent rolls and a history of income and expenses
      • Information and, if available, photographs of the subject property and neighborhood if applicable
      • The cost, date and manner of acquisition
      • The appraised fair market value
      • The date (or dates) on which the property was appraised
      • Information relating to any other agreements or understandings entered into (or expected to be entered into) that relates to the use, sale or other disposition of the property, including, for example, any sale of the property since valuation date
      • The economic outlook in general and the condition and outlook of the specific property in particular
      • Such other factors which, in the opinion of the valuator, are appropriate for consideration
    • A complete description and location of the property includes:
      • Street and number, if one exists
      • Section, block and lot number, if one exists
      • Legal description
      • Description of land, including physical features, dimensions, access, etc.
      • Description of improvements, including features, condition, and any forms of physical, functional or economic obsolescence
      • Use(s) to which the property is being put
      • Zoning and permitted uses

    4.48.6.2.4 (07-01-2006)
    Analyzing

    • In developing a valuation conclusion, valuators should analyze the relevant information necessary to accomplish the assignment.
    • Determine the Highest and Best Use of the property as vacant and as improved.
    • Approach to Value --- The Valuation Process. The valuator should determine which methodologies are to be utilized in developing the opinion of value of the subject property. The valuator should consider the appropriate valuation approaches, such as the market approach, the income approach and the cost approach. Professional judgment should be used to select the approach(es) ultimately used and the method(s) within such approach(es) that best indicate the value of the property.
    • In the Market or Sales Comparison Approach, properties similar to the subject properties sold close to the valuation date are compared to the subject property. Adjustments are made for financing, condition of sale, date of sale, physical characteristics and location to indicate the value of the subject. Care should be taken to consider the number of sales available, their relative comparability, the degree and rationale for adjustments to the sales and the relative correlation and reliability of the value indications from the sales.
    • In the Cost Approach, an estimated reproduction or replacement cost of the improvements is computed and then reduced for physical, economic and functional depreciation. This value should be computed as of the date of valuation. To this result, an amount is added for the value of the underlying land. This approach is generally useful for specialty properties where other approaches lack sufficient supporting data and where land value and depreciation amounts are reasonably determinable.
    • In the Income Approach, an income stream is projected based on analysis of historical financial income and expense statements, vacancy rates, rent rolls and terms of existing leases. Value is derived by converting net income/cash flow projections to present value using an applicable capitalization technique reflective of typical investors for the type of property in question. Care should be taken to justify and support projections of income and expenses including any unusual or non-recurring items. Adjustments to income and expense data should be made as necessary to reflect the appropriate income streams consistent with the valuation methodology selected. All discount/capitalization rates should be justified with reliable market data, industry surveys or market supported technical methodology and computations.
    • The reconciliation and final opinion of value should consider the appropriateness of each approach to the value of the specific property, the quantity, veracity and reliability of the data supporting each approach and should logically lead the reader to the final opinion of value. If a particular approach is not utilized or ignored the valuator should explain the reasons for doing so. Large differences between conclusions from different approaches should be explained.
    • As appropriate for the assignment, and if not considered in the process of determining and weighing the indications of value provided by other procedures, the valuator should separately consider the following factors in reaching a final conclusion of value:
      • · Marketability, control, or lack thereof
      • · The legal form of ownership
      • · The security of ownership interest
      • · The effect of relevant contractual and legal restrictions
      • · The market conditions
      • · Other appropriate factors, in the opinion of the valuator
    • The valuator should clearly explain and provide reasoning for the value conclusion.

 

    4.48.6.2.5 (07-01-2006)
    Workpapers

    • Workpapers must document the steps taken and techniques used and provide the evidence to support the facts and conclusions in the final report.
    • Valuators will maintain a detailed case activity record (Form 9984, Examining Officer's Activity Record) which:
      • · Identifies actions taken and indicates time charged
      • · Identifies contacts, including name, phone number, subject, commitments, etc.
      • · Documents delays in the examination
    • The case activity record, along with the supporting workpapers, should justify time spent is commensurate with work performed.

    4.48.6.2.6 (07-01-2006)
    Reviewing

    • In reviewing a real property valuation, and reporting the results of that review, a valuator should form an opinion as the adequacy and appropriateness of the report being reviewed, and must clearly disclose the scope of work of the review process undertaken.
    • In reviewing a real property valuation, a valuator should:
      • Identify the taxpayer and intended uses of the valuator’s opinions and conclusions, and the purpose of the review assignment.
      • Identify the report under review, the property interest being valued, the effective date of the valuation, and the date of the review.
      • Identify and state the scope of the review process conducted.
      • Determine the completeness of the report under review within the scope of work applicable in the review assignment.
      • Determine the adequacy and relevance of the data and the propriety of any adjustments to the data.
      • Determine the appropriateness of the comparable and/or valuation methods and techniques used, and develop the reasons for any disagreement.
      • Determine whether the analyses, opinions and conclusions in the report under review are appropriate and reasonable, and develop the reasons for any disagreement.
    • In the event of a disagreement with the report’s factual representations, underlying assumptions, methodology or conclusions, a valuator should conduct additional fact-finding, research and/or analyses necessary to arrive at an appropriate value for the property.

 

    4.48.6.3 (07-01-2006)
    Resolution Guidelines

    • Valuators will make efforts to obtain a resolution of the case after fully considering all relevant facts.

    4.48.6.3.1 (07-01-2006)
    Objective

    • The objective is to resolve the issue as early in the examination as possible. Credible and compelling work by the valuator will facilitate resolution of issues without litigation.
    • The valuator will work in concert with the internal customer and taxpayer to attempt to resolve all outstanding issues.

 

    4.48.6.3.2 (07-01-2006)
    Arriving at Conclusions

    • Once the valuator has all the information to be considered in resolving the issue, the valuator will use his/her professional judgment in considering this information to arrive at a conclusion.
    • Valuators may not have all of the information they would like to have to definitively resolve an issue. Valuators, therefore, should decide when substantially enough information is available to make a proper determination.
    • Valuators will employ independent and objective judgment in reaching conclusions and will decide all matters on their merits, free from bias, advocacy and conflicts of interest.

 

    4.48.6.4 (07-01-2006)
    Reporting Guidelines

    • Valuators should prepare reports of their findings.
    • This section requires specific information to be included or addressed in each report.

 

    4.48.6.4.1 (07-01-2006)
    Overview

    • The primary objective of a valuation report is to provide convincing and compelling support for the conclusions reached.
    • Valuation reports should contain all the information necessary to allow a clear understanding of the valuation analyses and demonstrate how the conclusions were reached.

 

    4.48.6.4.2 (07-01-2006)
    Report Contents

    • The extent and content of the report prepared depends on the needs of each case.
    • Valuation reports should clearly communicate the results and identify the information relied upon in the valuation process. The valuation report should effectively communicate the methodology and reasoning, as well as identify the supporting documentation.
    • Subject to the type of report being written, valuation reports should generally contain sufficient information relating to the items in Identifying, Documenting, and Analyzing above, to ensure consistency and quality.
    • Reports written with respect to Reviewing above shall contain, at a minimum, information relating to those items necessary to support the revised assumptions, analyses and/or conclusions of the valuator.

    4.48.6.4.3 (07-01-2006)
    Statement

    • Each written valuation report should contain a signed statement that is similar in content to the following

      To the best of my knowledge and belief:
      • The statements of fact contained in this report are true and correct.
      • The reported analyses, opinions and conclusions are limited only by the reported assumptions and limiting conditions.
      • I have no present or prospective interest in the property that is the subject of this report, and I have no personal interest with respect to the parties involved.
      • I have no bias with respect to the subject of this report or to the parties involved with this assignment.
      • I have (or have not) made a personal inspection of the property that is the subject of this report.
      • My compensation is not contingent on an action or event resulting from the analyses, opinions or conclusions in, or the use of, this report.
      • My analyses, opinions and conclusions were developed, and this report has been prepared, in conformity with the applicable Internal Revenue Service Valuation Guidelines.

 

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