For some assets, there is only one way to find a true value, notes Adriane Berg, an attorney in Lebanon, N.J. "That's the price a willing buyer pays a willing seller at the moment of sale," she says. "Any time before or after, value is a matter of opinion."

Assets subject to this uncertainty include real estate, business interests, collectibles and intellectual property. Most of your clients will own at least some of these items and may need to assign them a value for a variety of purposes, such as a potential sale, inheritance or gift.

More or Less

A smart advisor will fill in the appraiser about the purpose of the evaluation at the time of the engagement. "When an appraiser asks why you want an asset valued, the question is really whether you want the appraisal to be high or low," Berg explains. "There is nothing ethically wrong with indicating how the appraisal will be used."

Why is doing this so important? When appraising a gift or an inherited asset, the owner will probably benefit most from a valuation on the low side, which will reduce the tax consequences. If the asset involved is 20% of a family business, for example, then a generous discount for lack of control and marketability might be desirable.

A business owner evaluating a firm for sale, on the other hand, benefits from a high valuation. Take, for example, the case of an accountant or attorney negotiating a buy-sell agreement in case of disability. "You would not want your interest discounted," says Martin Shenkman, an estate attorney in Paramus, N.J. "You would want a full payment of what your 20% interest is worth." When seeking out an appraiser, then, you need to check out two types of qualifications: knowledge of the asset, plus familiarity with the particular purpose involved.

You might suggest the client's attorney be the one to hire the appraiser, to keep the process confidential under attorney-client privilege. This way, if one appraiser's report comes in too high or too low, the client can seek out another.

Trumping the IRS

A rock-solid appraisal can provide significant tax savings, as was evident in a case that came before the Tax Court in 2006. Frederic Kohler, grandson of the founder of the company that makes plumbing fixtures, died suddenly while the company was being reorganized to eliminate outside ownership. Kohler had owned 13% of the stock of this closely held business.

Valuing the shares—and therefore, calculating the estate tax due—came down to a dispute between appraisers. Kohler's estate hired appraisers who put the stock's value at $47 million because of the various restrictions on stock sales that resulted from the reorganization. The IRS expert valued the shares at nearly $145 million and said the reorganization—which was completed two months after Kohler's demise—should not affect the estate's value. The IRS wanted an additional $54 million in estate tax plus an $11 million penalty.

"The Tax Court thoroughly discredited the IRS' valuation expert," says Blanche Lark Christerson, managing director of Deutsche Bank Private Wealth Management in New York. According to the court, the government appraiser prepared his report incorrectly, used the wrong valuation methods and didn't really understand Kohler's business. By contrast, the Tax Court found the estate's valuation experts thoughtful and credible. "The estate didn't owe extra tax or a penalty," Christerson says.

That's not to say that the Tax Court always sides with taxpayers' appraisers. In the Holman case, decided by the Tax Court in May of this year, a married couple formed a family limited partnership (FLP) and contributed millions of dollars worth of Dell stock to it. Then they gave FLP interests to their children. The court considered several issues, including the valuation of the partnership.

The main valuation question was the size of the discount from the Dell shares' trading price because the shares were held in an FLP. The Holmans claimed a 35% discount because the partnership interests were not easily salable; the IRS appraiser conceded only a 12.5% discount. The difference amounted to hundreds of thousands of dollars in gift tax.

The Tax Court came down on the side of the IRS expert, finding some of the testimony of the taxpayers' appraiser to be unpersuasive, illogical and without sufficient analytical support. As Shenkman interprets this opinion, "Guesstimates without quantitative substantiation won't be acceptable."

Looking Ahead

Not every appraisal involves big-money gift or estate tax issues. In the case of inheritance, a client may want simply to document a step-up in basis in advance of a future sale, says Eva Rosenberg, an enrolled agent in Northridge, Calif., and creator of the website TaxMama.com. An appraisal also might be worthwhile for assets that have not been inherited. Collectibles, for instance, may come with little documentation. "A solid appraisal can give an object provenance when it's time to sell, even if it was bought at a flea market," says Berg, whose latest book is How Not to Go Broke at 102!