The United States Tax Court recently issued an opinion that contains valuable lessons for any forum. Real estate valuation litigation regularly occurs in the Tax Court.

In Boltar LLC v. Commissioner, the Tax Court granted the government’s motion to strike the taxpayer’s appraisal because it was “unrealiable and irrelevant.” In that case, the IRS and the taxpayer disagreed as to the value of a donated conservation easement on real property located in Indiana. The Court ruled that the taxpayer’s appraiser used the wrong facts and standard in appraising the property and, therefore, struck the appraisal. The government’s notice of deficiency was upheld for the amount stated – only $42,400 out of a total $3,245,000 claimed as a charitable deduction on the partnership return.

Of particular interest was the Court’s harsh criticism of experts acting as advocates for their clients. It stated:

In most cases, as in this one, there is no dispute about the qualifications of the appraisers. The problem is created by their willingness to use their resumes and their skills to advocate the position of the party who employs them without regard to objective and relevant facts, contrary to their professional obligations

In addition, the cottage industry of experts who function primarily in the market for tax benefits should be discouraged. Each case, of course, will involve exercise of the discretion of the trial judge to admit or exclude evidence. In this case, in the view of the trial Judge, the expert report is so far beyond the realm of usefulness that admission is inappropriate and exclusion serves salutary purposes.

The importance of the credibility of experts – and attorneys – cannot be overstated. It is critical to resist the temptation to push experts to unsupportable positions. This is an important lesson for attorneys, experts and clients.

The Treasury Department’s Financial Crimes Enforcement Network issued its Mortgage Loan Fraud update reports for the first 2 quarters of 2010. Those reports included statistics relating to “suspicious activities” regarding appraisal activities. It found that between 5 and 6 percent of the overall reports of suspected mortgage fraud in the first half of 2010 had some connection to appraisal activities. There were 1,577 appraisal related filings in the second quarter of 2010 and appraisal-related suspicious activity was reported in 1,484 filings in the first quarter.

The reports can be found at and

The Appraisal Standards Board of The Appraisal Foundation released its fourth exposure draft of proposed changes to the upcoming 2012-13 edition of the Uniform Standards of Professional Appraisal Practice. USPAP governs most appraisals in the United States. The Appraisal Foundation is a not-for-profit organization that publishes USPAP. Its Appraisal Standards Board is composed of six appraisers who are appointed for three year terms by the Board of Trustees of The Appraisal Foundation.

This exposure draft emphasizes revising USPAP’s reporting requirements and options. “The goal of (USPAP) is to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers,” ASB Chair Sandra Guilfoil wrote in a letter accompanying the recent draft. “This fourth exposure draft continues its refinement of additional changes to USPAP that are intended to improve its clarity, relevance and enforceability.”

The draft is open for public comment through Jan. 14. It can be found at .

Reuters has reported that fair value accounting rules that would require real estate companies to report land and buildings held for investment may become the new standard.

According to Reuters, the Financial Accounting Standards Board has tentatively decided to require fair value accounting for investment property. Fair value accounting practices measure assets by their market worth rather than historical cost. This could impact companies such as real estate investment trusts if they value their holdings based on historic costs, which typically had been counted upon to appreciate each year. However, FASB is examining whether current accounting practices create an unrealistic view of present real estate values given the current state of the economy.

The National Association of Independent Fee Appraisers (NAIFA) has issued a response to the Home Valuation Code of Conduct (HVCC). The HVCC became effective for single-family mortgage loans (except government-insured loans) originated on or after May 1, 2009, and delivered to Fannie Mae and has been a source of controversy for appraisers and lending institutions.

In its response, the NAIFA acknowledges a lot of the concerns about the HVCC that have been expressed by various segments of the mortgage industry. However, the NAIFA puts the responsibility on the lender. The response states:

The fact is that all of the concerns mentioned above are all the responsibility of the lending institution. They are responsible for making sure that the competency of the appraiser and the quality of the appraisal meets the standards required to execute a sound mortgage decision.

The NAIFA will be issuing a “Consumer Guide for Quality Appraisals” which will be available soon at The NAIFA response can be found at


The Appraisal Foundation – a nonprofit organization that establishes standards for appraisers – has announced that it is establishing a “Consistent Enforcement Task Force.” The Foundation stated, that “[w]ith 55 different state real property appraiser regulatory bodies enforcing USPAP, there is a wide range of disciplinary actions taking place. While uniformity may be an unrealistic goal, there is a need for greater consistency in enforcement. One objective is the development of recommended disciplinary guidelines.”

The Task Force will provide a set of recommended disciplinary guidelines. The Task Force is composed of Trustees, current and former state appraiser regulators and an Appraisal
Subcommittee representative.

The U.S. House of Representatives passed the Mortgage Reform and Anti-Predatory Lending Act of 2009. The bill, H.R. 1728, passed by a vote of 300 to 114 on May 7, 2009. The bill includes provisions that will impact appraisers including:

  • Requirements for complete interior inspection appraisals for all subprime loans;
  • Establishment of a federal appraisal independence standard with significant monetary penalties for violations;
  • Modernizing provisions of Title XI of FIRREA to provide additional resources for state enforcement and greater accountability of federal and state appraisal regulators;
  • Required separation and clear disclosure of fees paid to appraisers and fees paid for appraisal administration (i.e., fees paid to appraisal management companies);
  • Limitations on the use of broker price opinions in loan origination; and
  • Registration requirements, and a regulatory framework, for Appraisal Management Companies, with mechanisms to prohibit infiltration by appraisers sanctioned by state regulatory agencies.

The bill now will be considered by the SenateSenate Banking Committee. There is no timetable yet for its consideration.

The United States Tax Court recently found that an appraisal does not necessarily need to comply with the Uniform Standards of Professional Appraisal Practice – commonly known as USPAP – to be admissible or reliable. In Whitehouse Hotel Limited Partnership v. Commissioner of Internal Revenue – filed October 30, 2008 – the IRS’ appraiser submitted an appraisal that did not fully comply with USPAP. The taxpayer argued that the appraiser’s report was per se unreliable since it is not in conformance with USPAP. It further argued that it should not be received into evidence.

The Tax Court rejected that argument and admitted the appraisal into evidence. It offered the following explanation for its holding:

“USPAP is widely-recognized and accepted as containing standards applicable to the appraisal profession. Adherence to those standards is evidence that the appraiser is applying methods that are generally accepted within the appraisal profession. Therefore, at a minimum, compliance with USPAP is an indication that the appraiser’s valuation report is reliable. However, a noncompliant valuation report is not per se unreliable. Full compliance with professional standards is not the sole measure of an expert’s reliability. Petitioner essentially asks the Court to supplant its responsibility to assess an expert’s reliability with a rigid standard of reliability. Sole reliance on USPAP is a far more inflexible definition of reliability than the definition (depending on "reliable principles and methods") incorporated into Rule 702 of the Federal Rules of Evidence. Therefore, we decline to adopt USPAP as the sole standard for reliability of an expert appraiser.”


One concern I hear consistently expressed by appraisers is that there are times when they are pressured to reach a certain number when appraising properties.  Congress is considering legislation that prohibits all parties involved in a real estate transaction from improperly influencing an appraiser.  The legislation is part of an amendment to pending foreclosure prevention legislation known as the Federal Housing Administration Housing Stabilization and Homeowner Retention Act (H.R. 5830).  On April 24, the U.S. House Financial Services Committee agreed by voice vote to add the amendment to H.R. 5830.

The goal of the amendment is to ensure an independent and competently performed appraisal process.  It has been backed by the Appraisal Institute and has bipartisan support in Congress. However, the future of H.R. 5830 is uncertain.  It authorizes the FHA to guarantee billions of dollars worth of refinanced loans if lenders reduce loan amounts to reflect reduced home values.  The measure would require banks to make less money on the loans but it would also reduce their credit exposure, while helping families stay in their homes.  According to the Appraisal Institute, discussions are underway in the Senate on companion legislation to H.R. 5830, where several other questions will likely be addressed at the committee level, including what property standards (FHA or conventional) will be applied to the appraisals and who will actually order the appraisal.

It would be naive to think that this legislation would eliminate all improper behavior.  However, it is a step in the right direction even if it serves to draw attention to this serious problem.