Utilizing a Type 409A Valuation Report for a Reward or Property Tax Submitting

Some shoppers and their advisors might imagine it’s okay to make use of a 409A Valuation Report for a present or property submitting. Whereas they might get away with it if there’s no audit, it’s not advisable. Part 409A valuations set up a “protected harbor,” which the IRS acknowledges as an affordable technique to make sure the train value is at FMV. Nonetheless, 409A Valuation Stories aren’t filed with the IRS.

Worth of Fairness Compensation

Inside Income Code Part 409A states that deferrals of compensation underneath a nonqualified deferred compensation plan for all taxable years are presently includible in gross revenue to the extent not topic to a considerable threat of forfeiture and never beforehand included in gross revenue. Compensation is deferrable on inventory choices which can be issued at an train value (that’s, the value at which an underlying safety will be bought or offered when buying and selling a name or put possibility) better than or equal to the inventory’s truthful market worth (FMV) on the grant date.

A privately held firm ought to rent a professional unbiased valuation skilled to find out the FMV of fairness compensation. Valuation professionals are usually engaged to worth a shopper firm’s frequent inventory, and the shopper then makes use of this worth to determine an train value of choices being granted and to find out the FMV (or truthful worth when additionally completed in compliance with Accounting Requirements Codification Matter 718) of the choices.

Property and Reward Tax Valuations

Valuations of companies or enterprise pursuits are sometimes wanted for estate-planning functions, equivalent to in figuring out the possible quantity of property or reward taxes to assist in planning earlier than the proprietor’s loss of life. Within the case of the property of a deceased particular person, a valuation of a enterprise curiosity owned by the property is continuously obligatory for the preparation and submitting of an property tax return (IRS Type 706).

Within the case of a present, a valuation report determines how a lot lifetime exclusion the taxpayer makes use of and establishes a statute of limitations for audit (and generally to pay a present tax). It’s filed with the reward tax return (IRS Type 709). Not like the 409A Valuation Report, the valuation report for reward and property functions is hooked up to the relevant tax return and filed with the IRS.

5 Dangers

Valuations are very purpose-specific. How the shopper will use the valuation dictates the relevant normal of worth, the valuation strategies used, the report’s content material, the depth of due diligence, the efficient date of valuation and the fairness curiosity being valued, amongst different elements. The usual of worth – FMV – is similar for the 409A Valuation Report and reward and property valuations. However then issues diverge. There are a minimum of 5 causes (and different extra refined causes) why there’s threat and attainable legal responsibility in utilizing a 409A Valuation Report for a present or property tax submitting:

1. Basis.  409A valuations are carried out underneath the steering of the AICPA’s Follow Help – Valuation of Privately-Held-Firm Fairness Securities Issued as Compensation – revealed in 2013. Reward and property valuations are topic to numerous IRS income rulings (for instance, 59-60, 77-287 and 93-12), the Inside Income Code (for instance, Chapter 14, Sections 2701-2704) and Tax Court docket priority. These can have a cloth influence on how valuations ready for these totally different functions are accomplished.
2. Audit threat. As a result of valuation reviews ready for 409A functions aren’t filed with the IRS, they’re topic to just about no audit threat if ready by an unbiased third-party valuation skilled. Alternatively, since reward and property valuation reviews are hooked up to the taxpayer’s return and an precise tax is usually payable or, within the case of many reward tax returns, a report of the quantity of a taxpayer’s lifetime exclusion from tax is being made, reward and property valuation reviews have considerably larger audit threat than 409A valuation reviews. Within the occasion of an audit, utilizing a 409A valuation for reward and property functions exposes a shopper to further threat.
3. IRS Satisfactory Disclosure. The present normal for the disclosure of valuations underneath the federal reward tax submitting is printed within the IRS’ “Satisfactory Disclosure Guidelines.”  The three-year statute of limitations on reward taxes begins on the date the Type 709 is filed provided that the reward is “adequately disclosed. The submission of a valuation report ready by a professional appraiser will meet the sufficient disclosure necessities regarding the valuation of any reward switch if the report meets the necessities of Treasury Laws Part 301.6501(c)-1(f)(3). As a result of no such guidelines exist for 409A valuations, 409A Valuation Stories aren’t written to satisfy the IRS Satisfactory Disclosure Guidelines. Consequently, utilizing a 409A valuation report for a present tax submitting runs the chance of an audit indefinitely into the longer term.
4. Underlying curiosity. The underlying fairness curiosity valued in a 409A Valuation Report might differ from the one gifted or includible within the property. For instance, in an property tax scenario, the assorted courses of shares the decedent holds are aggregated for valuation functions.
5. Lawyer/shopper privilege. A shopper’s estate-planning legal professional typically hires the valuation skilled on behalf of the shopper in order that the valuation report is roofed by attorney-client privilege and work product safety in case of an audit. A 409A report isn’t coated.

Whereas there are a number of causes to not use a 409A Valuation Report for a present or property tax submitting, referencing one will be very useful. If a 409A valuation report has not too long ago been accomplished, it helps save time (and, due to this fact, charges) in finishing a present tax valuation. Finally, it’ll depend upon the standard of the 409A report.

Chris Mellen, ASA, MCBA, CVA, ICVS, CM&AA, is a Senior Managing Director with VRC