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Valuation standards: opposing the inclusion of tax in proposed valuation standards.

The CalCPA Council passed a resolution July 23, 2005 opposing the inclusion of tax in the AICPA's Proposed Statement on Standards for Valuation Services: Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset. This move followed on the heels of the AICPA formally extending the comment period for the exposure draft until Sept. 30, 2005.

If passed, the standard would apply to all CPA members of the AICPA preparing a valuation report. The standard would apply to all forms of tax practice planning and compliance where a valuation is necessary, including income, gift and estate taxes.

To download the exposure draft, go to

Following are excerpts from a comment letter sent to the AICPA by Robert Petersen. More information can be found at

Existing Standards

CPAs providing tax services are subject to the Statements on Standards for Tax Services, which the Tax Executive Committee issued as enforceable standards of conduct in August 2000. They were not new when they became enforceable, rather they had been published over a period of many years, commencing in 1982 as Statements on Responsibilities in Tax Practice.

Regulatory Oversight

The IRS also has regulatory oversight over those providing tax planning and compliance services through its Office of Professional Responsibility. As a key element of that oversight, the Treasury Department long ago issued Circular 230, setting forth Standards of Conduct for tax practitioners.

Coincidentally, Circular 230 has been updated, effective June 20, 2005, setting higher standards for professional conduct, prescribing for the first time the form and content of written tax advice--including valuations and quality assurance for professional tax practices.

While Circular 230 generally applies only to federal tax matters, many states independently have adopted Circular 230 for their state tax planning and compliance practices, and Circular 230 also has become an enforceable standard of conduct for disciplinary action by many state boards of accountancy.

The Internal Revenue Code also includes substantial penalties for valuation misstatements of which a tax practitioner must be aware and protective on behalf of client reporting.

Standards Overload

There has been no demonstrated need for the inclusion of tax services in these valuation standards. Any abuses in tax practice should be addressed by applying the existing enforceable Statements on Standards in Tax Practice and Circular 230.

These tax standards are applied by the Office of Professional Responsibility, many state boards of accountancy, plaintiff lawyers in malpractice cases and the AICPA's own enforcement of its professional ethics cases.

Not in the Public's Best Interest

If these valuation standards are adopted as written, the cost of planning and compliance is going to be significantly increased if there is any valuation aspect to client work.

There is no assurance that the application of the valuation standards will result in a better product for the client. It will give those outside AICPA membership a competitive advantage in the marketplace in containing professional fees and responsiveness to clients.

In addition, the proposed Valuation Standards for Valuation Services apply to all valuation engagements regardless of the value of the subject interest or the tax liability resulting from the compliance reporting. The same valuation standards will be applied in preparing a written valuation report for the individual return of a client who received a $13,000 salary payment in the form of unlisted securities, as for the decedent who has a family limited partnership interest valued at $5 million. This does not make sense.

Don't Serve the Tax Practitioner

The Statement on Valuation Standards for Valuation Services provides two categories of written reports: (1) the Valuation Analysis Report, which is the highest-level report when a full valuation engagement has been completed; and (2) a Calculation Analysis Report that is less comprehensive.

We expect that most CPAs performing valuation services will want to use the more limited report to minimize client time and expense while meeting the valuation standards, if required. The problem is that the Calculation Analysis Report does not meet the requirements of tax practice, and may not comply with the written report equipments of Circular 230.

Assuming the Report on a Calculation Analysis is used, it may be detrimental to a client's interest. The prescribed form of Calculation Analysis Report has two flaws for the tax practitioner: it provides that the result of the engagement is only "expressed as an indication of value;" and it requires language stating, "Had a valuation analysis been performed, the results may have been different and the difference may have been significant."

The valuation standards require a written report be given to the client as more fully explained in the standard. While the written report is not required to be attached to the tax return, it will be available in the event of litigation with the IRS if the value used is challenged.

There is no assurance that a fully completed Valuation Analysis will result in a more precise value than the Report of Calculation Analysis. Yet the difference in the reporting language would falsely provide greater assurance to the client than is warranted in the case of a Valuation Analysis.

By Robert A. Petersen, CPA

Robert A. Petersen, CPA is chair of CalCPA's Government Relations Committee. He can be reached at
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Article Details
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Title Annotation:federal tax
Author:Petersen, Robert A.
Publication:California CPA
Geographic Code:1U9CA
Date:Sep 1, 2005
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