What Really Counts as Qualified Appraisal and Adequate Disclosure

Transferring a business interest requires a qualified appraisal that meets disclosure mandates. Adequate disclosure is essential to start the statute of limitations on gift tax and avoid potential valuation-related penalties.

However, the exact meaning of “qualified appraisal” and what constitutes “adequate disclosure” can be a gray area. The regulations tell us that a qualified appraiser who possesses the necessary expertise must conduct the appraisal for the IRS to deem it qualified.

The appraisal report itself must adhere to generally accepted appraisal standards. Determining whether you have a qualified appraiser and a report that adheres to the required standards requires close attention to detail.

When looking for answers, it helps to consider the regulatory background as well as prior court decisions and how tax court judges have interpreted the language.

Regulatory Rules

The IRS has three years to assess gift tax after filing Form 709, unless the return lacks adequate disclosure, which keeps the statute of limitations open indefinitely. Treasury regulations define adequate disclosure as providing enough detail for the IRS to understand the gift’s nature and value, including:

• Description of the property and consideration received
• Donor-donee relationship
• Valuation method with either a qualified appraisal or detailed fair market value analysis
• Disclosure of any legal positions contrary to IRS regulations

Adequate disclosure starts the three-year limit, while failure allows indefinite IRS challenges. Compliance is best ensured through a qualified appraisal, which must be conducted by a qualified appraiser who has relevant expertise and follow professional standards.

Two Tax Court decisions provide an excellent opportunity to revisit what constitutes a qualified appraisal and what it takes to meet adequate disclosure.

WT Art Partnership

Oscar Tang, through WT Art Partnership LP, had donated valuable Chinese paintings worth more than $73 million to the Metropolitan Museum of Art. The valuations were supported by appraisals from China Guardian Auctions Co. Ltd., but the IRS disallowed the deductions.

The agency argued that the appraisals failed to meet the qualified appraisal and qualified appraiser requirements under Section 170(f)(11) of the tax code. Specifically, the IRS noted that a company can’t serve as an appraiser and found no evidence that China Guardian Auctions met the necessary qualifications.

The Tax Court agreed the appraisals were non-compliant but allowed the deductions under the “reasonable cause and no willful neglect” exception. Tang had acted in good faith, relying on professional advice and a reputable auction house. The court deemed Tang’s reliance reasonable and excused the technical noncompliance.

This case underscores the strict appraisal standards under Section 170 and the importance of compliance. But it also highlights that honest mistakes, paired with reasonable reliance on professional advice, may be excused under the reasonable cause exception.

Schlapfer v. Commissioner

Despite not being as recent as WT Art, further insight is provided in the 2023 Schlapfer case. Swiss national Ronald Schlapfer transferred a life insurance policy funded with cash and stock to relatives in 2006, but a clerical error delayed the legal transfer to 2007.

In 2013, as part of the IRS Offshore Voluntary Disclosure Program, he filed a protective 2006 gift tax return reporting the transfer. The IRS argued the gift occurred in 2007, and because no 2007 return was filed, the gift wasn’t adequately disclosed, leaving the statute of limitations open indefinitely.

The Tax Court sided with Schlapfer, ruling that his 2006 return “substantially complied” with disclosure requirements despite technical flaws. It provided enough information for the IRS to understand the gift’s nature, value, and existence, starting the three-year statute of limitations upon filing in 2013. Because the IRS issued its deficiency notice in 2019, the assessment was time-barred.

The court clarified that adequate disclosure rules aim to provide the IRS with enough information to decide whether to audit, not to demand a strict adherence to every detail.

Substantial compliance, supported by attached documents, can meet disclosure requirements even if imperfect. Schlapfer’s information (including the gift’s value, parties involved, and financial data) was deemed adequate.

Practical Guidance

These cases emphasize the importance of balancing technical compliance with substantial compliance when advising on gifts, estate valuations, and charitable contributions:

Obtain a qualified appraisal: For valuable assets such as business interests, real estate, artwork, or other difficult-to-value property, hire a qualified appraiser with proven credentials, recognized designations, and expertise in the asset type. Ensure the appraiser adheres to professional standards, such as the Uniform Standards of Professional Appraisal Practice, and provides a thorough report.

Include required documentation: Attach the full appraisal and all relevant details to gift tax returns to ensure compliance with IRS requirements.

Document good-faith efforts: Maintain evidence of due diligence can help establish reasonable cause if issues arise despite your efforts. For instance, if you relied on an appraiser who turned out not to be qualified, evidence that you vetted the appraiser’s reputation or were advised by a reputable expert to use them could help establish reasonable cause.

Adequate disclosure and qualified appraisals are the cornerstones of risk management in gift and estate tax reporting. Schlapfer teaches that providing comprehensive information, even if not perfectly formatted, can protect your client by starting the statute of limitations. WT Art case teaches that the IRS expects strict adherence to appraisal qualifications, and while leniency is possible for a good-faith mistake, one should never bank on it.

A prudent estate planner will take these lessons to heart: meticulously comply with disclosure regulations, insist on qualified appraisers and thorough reports, and review every return for completeness. By doing so, you minimize audit risk and preserve your client’s tax benefits.

The cases are WT Art Partnership v. Commissioner, T.C., No. 28440-15, 4/9/25 and Schlapfer v. Commissioner, T.C., No. 28440-15, 5/22/23.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Carsten Hoffmann is managing director and regional leader at Stout.

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