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Business Valuation and Federal Taxes: Procedure, Law and Perspective, 2nd Edition by Shannon P. Pratt, David Laro

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Chapter 6

Penalties and Sanctions

Summary

The tax law is designed to provide disincentives, or sanctions, for valuations that are substantially misstated. These sanctions can seriously increase the costs associated with a transaction. Accordingly, great care must be taken to ensure that the valuation is realistic and within a reasonable range.

An incorrect valuation can result in one or more penalties or sanctions, which can be grouped into four categories:

1. Valuation penalties

2. Preparer and appraiser penalties

3. General penalties

4. Discretionary sanctions

The valuation penalty (I.R.C. § 6662) may be imposed when there is a substantial valuation misstatement (I.R.C. § 6662(b)(3)), or substantial estate or gift tax valuation understatement (I.R.C. § 6662(b)(5)). Tax return preparers and appraisers may be subject to penalties for understating liabilities or values (I.R.C. §§ 6694, 6695, 6695A). General penalties may be imposed where the taxpayer acted negligently (I.R.C. § 6662(b)(1)) or fraudulently (I.R.C. § 6663), or against those who assist a taxpayer to understate a tax liability (I.R.C. § 6701). Discretionary sanctions may be imposed by courts in instances where the taxpayer uses the Court primarily for delay, takes a “frivolous or groundless” position, or unreasonably fails to pursue administrative remedies (I.R.C. § 6673).

Introduction

Some may believe that business valuation is an exercise in guessing or estimating, even if based on some abstract financial principles. ...

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