Use of CPA Who Did Significant Other Work for ESOP and Sponsor as Appraiser Did Not Run Afoul of Independent Appraiser Requirements

At first glance, the case would not have appeared promising for the taxpayer in Val Lanes Recreation Center Corp. v. Commissioner, TC Memo 2018-92.  The IRS had revoked the exempt status of the ESOP of the taxpayer and had done so partially based on the agency’s position that the CPA who performed the appraisal was not an “independent appraiser” as required by IRC §401(a)(28)(C).

The reason for the grim outlook was that the taxpayer had used the same appraiser as had been used in the case of Churchill, Ltd. Emp. Stock Ownership Plan & Tr. v. Commissioner, TC Memo 2012-300 where the Court had agreed with the IRS that the appraiser, who also handled many other duties for the plan, failed both as to his qualifications and his independence under this test, resulting in the loss of tax exempt status of the employee trust.  Another client of the same appraiser had ended up with a similar result in case of Hollen v. Commissioner, TC Memo 2011-2.

But this time the Tax Court found that while there were many similarities in the cases, key facts were different this time that saved the day for the exempt trust.

IRC §401(a)(28)(C) provide the following regarding the independent appraiser requirement for an ESOP:

(C)Use of independent appraiser.—

A plan meets the requirements of this subparagraph if all valuations of employer securities which are not readily tradable on an established securities market with respect to activities carried on by the plan are by an independent appraiser. For purposes of the preceding sentence, the term “independent appraiser” means any appraiser meeting requirements similar to the requirements of the regulations prescribed under section 170(a)(1).

The Court opinion summarizes what those regulations, found at Reg. §1.170A-13(c), provide:

Those regulations specify several requirements for a “qualified appraiser” including that the individual provide a declaration on the appraisal summary that the individual holds himself or herself out to the public as an appraiser or performs appraisals regularly and is qualified to make appraisals of the type of property being valued based on his or her background, experience, education, and membership, if any, in professional organizations. Sec. 1.170A-13(c)(3)(ii)(F), (c)(5), Income Tax Regs.

The appraiser in this case was the CPA that had been working with the taxpayer on various tax matters.  The plan (the ESOP) and the trust holding plan assets (the ESOT) were formed at the CPA’s recommendation, as well as the related entities formed as part of the revised business structure to be used. 

The CPA took charge of applying for the favorable initial determination letter and revising the plan document as requested by the IRS during that process.  In addition, each year the CPA prepared the Forms 5500 for submission to the Department of Labor and IRS.

Finally, the CPA (Mr. Thielking) undertook the annual appraisals of the closely held stock for the ESOP.  As the Court noted:

In addition to preparing Form 5500, Mr. Thielking performed and submitted appraisals valuing petitioner's stock and Essy Management's stock as of the end of the plan year. Each appraisal included the following declaration:

The undersigned holds himself out to be an appraiser.

The undersigned is a certified public accountant who is familiar with the assets being appraised.

The undersigned is not a party to any transaction related to this appraisal.

The undersigned understands that a false or fraudulent overstatement of the value of the property being appraised may subject the appraiser to a civil penalty under Internal Revenue Code section 6701 for aiding and abetting an understatement of tax liability, and consequently, the appraiser may have appraisals disregarded pursuant to 31 U.S.C. 330(c).

The fee charged for this appraisal is not based upon a percentage of the appraisal value of the property.

Appraisals prepared by the appraiser are not being disregarded pursuant to 31 U.S.C. 330(c) on the date the appraisal summary is signed.

The IRS pointed out that the opinion in Churchill had found that “it appears that Thielking was not independent as he was the author and preparer of most of the trust records and returns.”  Mr. Thielking was, yet again, the author and preparer of most of the trust records and returns and, in the IRS’s view, based on those facts alone the trust should be found to have failed to have the assets appraised by an independent appraiser as required by the law.

But the Tax Court did not accept that view.  The plans in Churchill and Hollen were found wanting in numerous respects and the line cited above was one stated in passing by the Court in the Churchill opinion.  In the case before the Court now, the opinion noted:

In Churchill, at *21-*24, the Court first found that the administrative record contained insufficient evidence as to Mr. Thielking's background, education, and experience in valuing the type of business at issue in the case even before stating that Mr. Thielking was not independent. The Court in Churchill, therefore, did not analyze section 1.170A-13(c)(iv), Income Tax Regs., excluding certain persons as “qualified appraisers”, nor did it ultimately rely on its statement regarding Mr. Thielking's involvement in the plan and trust.

The passage from Churchill represented, in the view of the judge hearing this case, something referred to in legal circles as “dicta.”  That term, as defined by Wex on the Cornell University Legal Information Institute website, means:

A statement of opinion or belief considered authoritative because of the dignity of the person making it.  The term is generally used to describe a court’s discussion of points or questions not raised by the record or its suggestion of rules not applicable in the case at bar.  Judicial dictum is an opinion by a court on a question that is not essential to its decision even though it may be directly involved.[1]

Judges will often dismiss items of dicta in a cited case since they had no direct impact on the decision in the case.  In essence, it just becomes the original author’s musings on a point that, in the end, was not relevant to how the case was decided. 

The Court then turned to the specific issues the IRS had raised in this case.  First, the IRC claimed the CPA did not hold himself out to the public as an appraiser of securities.  The Court did not agree that the IRS’s evidence backed up the claim the he failed that part of the test. The Court noted:

Respondent specifically referenced his listing in the Des Moines telephone directory, which only advertised Mr. Thielking as a CPA. However, the record also contains a Des Moines Yellow Pages listing in which Mr. Thielking’s firm identified “Business & Estate Appraisals” as one of its available services. Additionally, there is no requirement in the regulation for an advertisement to the public. Rather, the regulation requires that the individual hold himself out to the public as an appraiser or perform appraisals regularly. Sec. 1.170A-13(c)(5)(i)(A), Income Tax Regs. In the May 28, 2008, protest to respondent’s proposed revocation of the FDL, petitioner explained Mr. Theilking’s background and education. Petitioner also specified that Mr. Thielking taught courses on the appraisal of closely held corporations and performed “literally thousands of appraisals of all sorts.” During the hearing petitioner introduced evidence that Mr. Thielking annually performed approximately 40 appraisals of ESOT-owned closely held business stock. The Court finds that Mr. Thielking did have the appropriate background, education, and experience to value petitioner’s stock and Essy Management’s stock.

But what about the fact that he did significant other work for the plan?  The IRS contended this meant he could not be viewed as an independent appraiser for these purposes.  But, again, the Court did not agree, holding:

Respondent determined in the FRL that Mr. Thielking could not be considered “independent of either the ESOP sponsor or the administration of the ESOP” because he performed various services for the ESOP throughout the year. The regulations regarding “qualified appraisers” specifically exclude those who were donors or donees of the property (or their employees), parties to the transaction in which the donor acquired the property, related parties within the meaning of section 267(b), or an appraiser who is regularly used by any person listed above who does not perform a majority of his or her appraisals made during his or her taxable year for other persons. Sec. 1.170A-13(c)(5)(iv), Income Tax Regs. Respondent appears to argue in favor of a broader reading of the regulations, citing Mr. Thielking’s services as a CPA and overall involvement with the ESOP as evidence as to his lack of independence.

… (Unlike in the Churchill case) [h]ere, the Court reviews the additional exhibits and testimony petitioner introduced in this case and finds that Mr. Thielking was qualified to value petitioner’s stock and Essy Management’s stock. Therefore, the Court must consider whether section 1.170A-13(c)(iv), Income Tax Regs., excludes persons beyond those specifically listed and finds that it does not. Section 401(a)(28)(C) provides that the term “independent appraiser” is similar to the requirements of the regulations for section 170(a)(1), which in turn define “qualified appraiser”. Section 1.170A-13(c)(iv), Income Tax Regs., excludes certain persons from being appraisers because of their inherent lack of independence. Petitioner has established that Mr. Thielking was not disqualified under any of the exclusions.

The Court concludes that the IRS had abused its discretion by revoking the final determination letter for the plan on the basis of the plan not making use of an independent appraiser.