4.25.12. Valuation Assistance

(1) IRM text provides to Estate and Gift Tax examination specific procedures for obtaining real and intangible property valuation assistance. This IRM provides direction which is Estate and Gift Tax specific. These procedures and policies do not apply to Excise or Excise-fuel examinations.

(1) Estate and gift tax examiners and managers assigned to examine and oversee the examination of estate and gift tax returns and issues are responsible for complying with servicewide policies and authorities set forth in IRM 1.2.1.5, Servicewide Policies and Authorities, Policy Statements for the Examining Process.

(2) Examination of estate and gift tax returns should be conducted in a manner that will promote public confidence as stated in the Mission of the Service. See IRM 1.2.1.2.1, Policy Statement 1-1.

(3) Policy Statement 4-52 established a general guideline that examination and processing of returns should be completed within 18 months of the filing date. See IRM 1.2.1.5.18, Policy Statement 4-52, Establishment of 18-month Examination Cycle.

(4) Estate and gift examiners and managers assigned to examine and oversee the examination of international estate and gift tax returns and issues are responsible for complying with all applicable servicewide examination delegation orders and SB/SE delegation orders. See IRM 1.2.2, Servicewide Delegations of Authority, and IRM 1.2.65, Small Business/Self-Employed Division Delegations of Authority.

(5) Section 3504 of RRA 98, Public Law 105-206 requires the Service to include an explanation of the examination and collection process, as well as information about assistance from the Taxpayer Advocate with any first report/notice of proposed deficiency. Pub 3498, The Examination Process, must be used for this purpose.

(6) Statement of Procedural Rules 601.506 requires that examiners must forward any correspondence (or copy), discussions, reports and/or other material to the taxpayer at the same time it is sent to the representative.

(7) The Form 706 return instructions and 26 CFR 20.6018-4, 26 CFR 25.6019-3, and 26 CFR 25.6019–4 list required filing documents.

(1) The National Quality Review System (NQRS) is a web-based review system used by Estate and Gift Tax Policy, Estate and Gift Tax Examination Management and Estate and Gift Tax Quality Measures and Analysis (QMA) to generate and review reports analyzing national quality performance based upon standardized quality attributes set forth in Document 12499, Estate and Gift Tax Examination Embedded Quality Job Aid. NQRS report data is compiled by QMA on a quarterly basis, but ad hoc reports may be obtained monthly. The use of NQRS is explained in additional detail in IRM 4.25.1.8, Manager Embedded Quality Review and Specialty Exam National Embedded Quality Review Programs.

(2) Operational Reviews and related NQRS reports are conducted by Territory Managers and the Chief of Estate and Gift to measure national adherence to quality standards and managerial performance and/or oversight.

(3) Customer (i.e. taxpayer) satisfaction reports are generated by SB/SE Operation Support Research on a quarterly basis. These reports provide masked taxpayer narratives that are responsive to a pre-defined set of survey questions. The quarterly survey reports are to be used to identify areas for examination quality improvement.

(4) Frequent Front-line manager reviews are conducted under the Examination Quality Review System (EQRS), with the frequency based on annual personnel requirements.

(1) The following table sets specific terms, definitions and acronyms used in the Estate and Gift Tax program:

(1) The Estate and Gift Tax program is required to follow all servicewide examination procedures and those set forth in SBSE examining process IRM. The following IRM subsections provide additional information relating to the examination of Estate and Gift Tax returns:

• IRM 4.25.1, Estate and Gift Tax, Estate and Gift Tax Examinations

• IRM 4.25.2, Campus Procedures for Estate Tax

• IRM 4.25.3, Planning, Classification and Selection

• IRM 4.25.4, International Estate and Gift Tax Examinations

• IRM 4.25.5, Technical Guidelines for Estate and Gift Tax Issues

• IRM 4.25.6, Report Writing Guide for Estate and Gift Tax Examinations

• IRM 4.25.7, Estate and Gift Tax Penalty and Fraud Procedures

• IRM 4.25.8, Delinquent Returns and SFR Procedures

• IRM 4.25.9, Requests for Abatement, Claims for Refund and Doubt as to Liability in Estate and Gift Tax Cases

• IRM 4.25.10, Case Closing Procedures

• IRM 4.25.11, Special Examination Procedures

• IRM 4.25.13, Appeals, Mediation and Settlement Procedures

• IRM 4.25.14, Miscellaneous Procedures

(2) The following IRM subsections provide additional information relating to the valuation of property by Engineering, Art Appraisal Services and Outside Fee Appraisers:

• IRM 4.48.1, Overview of Engineering Program

• IRM 4.48.2, Valuation Assistance of Cases Involving Works of Art

• IRM 4.48.3, Tangible Personal Property Valuation Guidelines

• IRM 4.48.4, Business Valuation Guidelines

• IRM 4.48.5, Intangible Property Valuation Guidelines

• IRM 4.48.6, Real Property Valuation Guidelines

• IRM 8.18.1, Appeals, Valuation Assistance, Valuation Assistance Procedures (Art Appraisal Services)

(1) If an examiner has a return under examination that involves a taxpayer’s appraisal of a work of art with a claimed value of $50,000 or more, it must be referred to Art Appraisal Services (AAS) for review by the Commissioner’s Art Advisory Panel (Art Panel) when applicable. AAS may consult with the Art Panel for advisory opinions on value in twice annual meetings.

(2) Exception: Referrals are not required for estate or gift tax cases in which works of art do not form part of the tax base because they pass (or are deemed to pass) to a surviving spouse or to a qualified charity or in matters involving non-taxable returns that are not likely to result in deficiencies. Where referrals would otherwise be required and, due to the application of these exceptions or other considerations (for example, risk analysis) they are not made, documentation of the applicable exception or analysis must be included in the file with an indication of concurrence by the group manager. See IRM 4.10.3.2, Examination Techniques, Risk Analysis and IRM 4.25.1.9.10, Risk Analysis Lead Sheet.

(3) In cases with art work or an art appraisal identified on the classification sheet, group managers will assign (or survey before assignment) cases within 45 days of receipt.

(4) Examiners will make a referral to AAS within 60 days of receipt of the case from the group manager, if the case will be examined and includes a piece of art with a returned value of $50,000 or more and all required information for the referral is contained in the file. If all required information for the referral is not in the file, a document request must be made within 45 days of assignment and documented in the file.

(5) The referral must adhere to the requirements set forth by AAS pursuant toIRM 4.48.2, Valuation Assistance for Cases Involving Works of Art, and IRM 8.18.1, Valuation Assistance Procedures, including the required use of the Specialist Referral System (SRS).

(6) When submitting items to AAS for valuation review, refer to IRM 4.48.2.3, Art Appraisal Services Referral Procedures, for links to a complete listing of required items and information. All required information, including complete appraisals in color and color photographs, should be assembled before making the SRS request for valuation assistance. To allow AAS time to prepare cases for Art Panel review, submissions for the Spring meeting should be received by January 15 and submissions for the Fall meeting should be received by June 15. Please allow ample time for an AAS review considering the Art Panel only meets twice annually and AAS appraisers conduct extensive research and write professional appraisal reports. Submissions to AAS should be made as early in the audit as possible to allow for a typical AAS review, which may take 3-12 months depending upon number of items and complexity. Please call the Director of AAS or the Lead Appraiser prior to making an SRS request for referrals of cases which have less than 16 months left on the statute.

(7) If agreement cannot be reached with the taxpayer, further assistance may be requested of AAS. Taxpayers may request an Appraisal Reconsideration of a proposed valuation adjustment by AAS only if they submit a request in writing which includes substantial evidence which will affect the valuation of the item(s) to support their fair market value opinion. Further, their request must respond specifically to the report issued by AAS. See IRM 4.48.2.1.1, Art Advisory Panel and IRM 8.18.1.9, Reconsideration and Dispute Procedures. If the valuation issue is not ultimately resolved between the taxpayer and AAS and the taxpayer chooses to pursue resolution through participation in Fast Track Settlement, AAS will also participate in this process. See IRM 4.25.13.3, Fast Track Settlement.

(8) In all referred cases as to which a determination of value is rendered by AAS, a Form 8256, Art Valuation, will be provided. This form is a feedback loop that AAS partially completes and includes with its closing memorandum and report, and the referring office completes and returns to AAS upon disposition of the case. The AAS appraiser completes Section I of the Form 8256 and submits it to the referring party with the AAS closing memorandum and report. The referring office completes Section II of Form 8256 and mails a copy of the updated Form 8256 back to AAS upon closure of the examination.

(9) The referring employee’s manager is responsible for ensuring that a copy of the completed Form 8256 is returned to AAS immediately upon disposition of the case.

(10) The originalForm 8256 along with the AAS closing memorandum and report, should be placed in the case file, after indexing it in the exam planning documents and/or lead sheets and workpapers.

(11) To enhance the valuation assistance provided by AAS, examiners are encouraged to include comments with the returnedForm 8256. See IRM 4.48.2.4, Form 8256 Procedures, and IRM 8.18.1.8.3, Receiving Office’s Closing Procedures, for additional information.

(1) When Statement of Value reports (pre-filing requests from taxpayer, per Rev. Proc. 96-15,1996-1 (C.B. 627) are received from the IRS Independent Office of Appeals (Appeals), they will be logged in by Estate and Gift Tax Specialty Examination Headquarters Staff and then forwarded to the Estate and Gift Operations at the Campus (Campus) for suspense. Estate and Gift Headquarters will direct the Campus to take the following actions with respect to the matter:

1. The account will be monitored quarterly to screen for filed returns.

2. When a return filing is detected, the return will be pulled from the Files section and reviewed for consistency with the Statement of Value.

3. If a discrepancy is detected, Campus E&G will forward the file to Estate and Gift Workload Selection and Delivery for classification. If the return is examined, the person to whom the case is assigned will contact AAS to provide information on the disposition of the case.

(2) Consultations: In situations where a mandatory referral is not required, examiners may submit a request for assistance using the Specialist Referral System (SRS). It is understood that AAS will not provide an opinion of value in such situations but may provide comparable sales data sufficient to support risk analysis determinations as to whether a full referral should be made. See IRM 4.10.3.2, Examination Techniques, Risk Analysis and IRM 4.25.1.9.10, Risk Analysis Lead Sheet.

(1) An S Corporation is a domestic business entity that is treated as a corporation for Federal tax purposes. The corporation made an election under IRC 1362(a) to be governed by Subchapter S of the Code.  See IRC 1361 through IRC 1379.  In actual form, such an entity may be a state-chartered corporation or an unincorporated entity, such as a limited liability company.  Subchapter S places limitations on such things as the number and the type of owners (interest holders) and the number of classes of stock.  Generally, electing S Corporations pay no entity level Federal taxes on their income.  Instead, the income and deductions of the entity flow through to the interest holders who are responsible for their appropriate share of the entity’s Federal income tax liability, in a manner similar to partnership taxation models.  Electing S Corporations may still be responsible for State and/or local income or franchise taxes. 

(2) Electing S Corporations are subject to the same valuation considerations that are applicable to any closely held business entity.  Valuation guidance is set forth by Rev. Rul. 59-60. Given the organizational structure necessary to conform to Subchapter S, as opposed to that of otherwise similar closely-held business entities, potential differences in such things as the cost of capital and the marketability of non-controlling interests must be addressed. 

(3) Absent a compelling showing that unrelated parties dealing at arms-length would reduce the projected cash flows on an S Corporation by a hypothetical entity level tax, no entity level tax should be applied in determining the cash flows of an electing S Corporation. 

(4) Prior to referring the S Corporation valuation issue to engineering, the examiner should review the formation and entity governance documentation, previous tax return filings and the taxpayer’s appraisal(s) to determine the taxpayer’s valuation method. Upon completion of this review, the examiner is responsible for setting the scope of the valuation referral and providing instructions to the engineer regarding what entity level taxation should be applied, if any. See Gross v. Commissioner, T.C. Memo 1999-254, aff’d 272 F.3d 333 (6th Cir. 2001), cert. denied, 537 US 827 (2002); Wall v. Commissioner, T.C. Memo 2001-75; Estate of Heck v. Commissioner, T.C. Memo 2002-34; Estate of Adams v. Commissioner, T.C. Memo 2002-80, and Dallas v. Commissioner, T.C. Memo. 2006-212.