Property tax overvaluation problem

     The Atlanta Journal-Constitution recently published a series of investigative articles reporting that properties in Georgia are over¬valued by as much as 13 percent by county tax assessors because the assessors have not been equipped to handle rapidly declining markets. Other states likely have similar problems.
     Because the assessed values often are presented in support of valuation claims, there exists a need for experts to value real property in ways that factor out tax assessor errors. Valuation experts should be prepared to defend their calculations in a declining market because, to some extent, they’re working in uncertain territory.

Real property scams

      Adding to the assessor valuation prob¬lem is the recent increase in activity of so-called “sovereign citizens,” “adverse possession” holders, squatters, gypsies and other scam artists.
     Sovereign citizens are the most egregious. They bedevil mortgage lenders by making absurd claims in state and federal courts to under¬mine legitimate mortgage foreclosure processes. They invade and occupy vacant foreclosed properties without paying compensation to the owners, depressing rental values and delaying sales.
     Sovereigns believe they are not subject to law. They file bogus liens and Uniform Commercial Code (UCC) security statements claiming security interests in real estate.
     They quit-claim real estate to one another to cloud title, which affects the calculation of comparables. They attempt to frustrate mortgagees by submitting fraudulent “administrative judgments” against lenders to offset legitimate mortgages.
     They even retaliate against judges and government officials by filing maritime liens against them, reasoning that human bodies are composed of 90 percent water and therefore are subject to admiralty law. These activities are commonly known as “paper terrorism.”
     These fraud artists upset the valuation process by skewing the values of the properties they temporarily control, curving compa¬rables upward or downward. It’s important to consider telltale signs of fraud, such as the existence of UCC security interest filings relating to real estate, “estates” of living persons or dramatic changes in value in recent conveyances.

Market comparables and omitted records

     Realty valuations typically involve comparing recent sales or rentals of similar local properties. The service level can range from a basic review of tax assessor valuations to a sophisticated analysis performed by a qualified appraiser. The type of valuation might differ depending on whether it is done for tax reporting, litigation, business dissolution or simply resale.
     Valuation deficiencies are also found when the expert wasn’t given complete or accurate information. For example, when a valuation is based on the client’s deed and mortgage records, but later quit claims, liens, trust deeds or other clouds to the title are not provided to the expert, valuation errors may surface at inopportune moments – such as during trial.
     It’s important to look at the documents yourself because many closing attorneys or agents neglect to discuss form-of-title issues with their clients. Your client might tell you he owns his property with his wife as a joint tenant with right of survivor¬ship, but a deed review might show that he owns it in fee simple absolute (or perhaps the wife is the sole owner).
     Another problem occurs when the valuation expert does not have complete or true information regarding transfers to or from corporations, LLCs, trusts or other statutory entities.
     Names are important. “John Doe 1, Inc.” is not the same entity as “John Doe 2, Inc.,” or “John Doe d/b/a John Doe 1, Inc.” Transfers to or from expired or administratively dissolved legal entities can be ignored or set aside, which can have devas¬tating effects on real property valuation. In other words, the chain of title might be marred by questionable or void conveyances.

Rental vs. resale

     Interestingly, the nationwide mortgage crisis hasn’t seemed to affect rental prices. This suggests that the real estate market simply has adjusted from an occupant-ownership market to a rental market.
     One question, then, is whether to value a particular parcel on its anticipated sale price or its value as a going-concern rental. Which is the more accurate measure of value?
     When valuing real estate, it’s always helpful to start with a title search to expose any clouds on title. Such matters should be told to the valuation expert. The expert then should be able to interpret the various possible clouds on title and analyze the sale vs. rent issue to accurately determine the property’s true market value. – Gregory T. Douds, J.D., CPA

Callout: Valuation experts should be prepared to defend their calculations in a declining market because, to some extent, they’re working in uncertain territory.
Callout2: Adding to the assessor valuation problem is the recent increase in activity of so-called “sovereign citizens,” “adverse possession” holders, squatters, gypsies and other scam artists.

Nearly 300,000 people use the numbers 123456 as their password!

That’s according to Consumer Reports magazine, whose research also found that more than half of the adults in the United States have at least six password-protected accounts. And, you guessed it, 20 percent of them use the same password for most of their accounts.

With computer hackers becoming increasingly more sophisticated, creating strong passwords and storing them safely has never been more important.

One in seven commercial sites are vulnerable to what’s called SQL attacks, in which the hacker tricks a commercial computer by using the hacker’s own programming instructions, according to the research.  While banking and healthcare sites are harder to break, retail and financial service sites are more vulnerable and actually performed below the overall average.

The consumer group offers the following tips to create pass¬words that will do what they’re supposed to do – protect your accounts.
Never use the same password twice. If a hacker finds one, he’ll have access to other accounts with that password.
Make passwords longer. Research found that nearly a third of people use passwords of seven characters or less. Those take only two hours to break. Eight characters would last 10 days, and nine characters over two years.
Make passwords more complex. Using your dog’s name and 123 just doesn’t cut it anymore. Include at least one upper¬case letter (not the first one), numeral and special character (*).
Try to make the password memorable. Perhaps use the first letters of a sentence or favorite movie so you can remember it. Using a similar character pattern from site to site is fine, if it isn’t obvious to others but helps you to remember passwords.
Don’t use the obvious. Avoid children’s and spouse’s names, birthdates, anniversaries, addresses, etc.
Be careful where you store your passwords. Nearly one quarter of respondents kept a written list of their passwords in their wallet, near their computers or in another predictable    place. Try not to write them down, and if you do, keep them locked up.
Secure your computer. Use security software that you keep updated.
Don’t tell anyone your password. Never give your pass¬word by email, by phone, in person or on a social network.

Kirkland, Thomas, Watson & Dyches is a CPA firm in Columbia, South Carolina that serves clients nationwide.

To check on the status of your federal tax refund, go to the following link:

https://sa1.www4.irs.gov/irfof/lang/en/irfofgetstatus.jsp

To check on the status of your South Carolina tax refund, go to the following link:

https://www.sctax.org/refundstatus/refund.aspx

Kirkland, Thomas, Watson & Dyches is a CPA firm in Columbia, South Carolina that serves clients nationwide.

Business valuation can seem to be as simple as a multiple paid against your last year’s earnings.

But the truth is, valuation is an ever-evolving field, and recent advances continue to affect how valuations are performed. The goals are still to determine “What is the right multiple?” and “What discounts or premiums apply?”

Recent changes in the “how of getting there” are going to have a direct effect on business owners and investors.

For those actively involved in acquiring companies, significant advances are being discussed and taught regarding the way that acquired intangible assets are valued and tested for impairment. The impact of these changes on financial statements cannot be ignored.

How much amortization expense is recordable, how financial ratios that are relied on by investors and other third parties are computed – all are affected by these changes. Even how much time is expected of CFOs and audit teams focusing on what is often the last set of entries before accounting books can be closed is changing.

The interaction of debt at a parent/holding company and its acquired subsidiary is also changing, introducing new uncertainty over how inventive, highly structured deals will play out on the financial statements prepared for outside parties.

There is some good news, however. A recent announcement gives a break to small nonpublic companies concerning the level of initial testing to check for impairment of certain intangibles.

For those more concerned about using stock and options as compensation and as sweeteners in financing arrangements, the analysis is becoming more advanced and complex. This isn’t as terrible as it first sounds. One benefit comes from the standardization of the models and techniques that are being taught. The uncertainty over how much difference in opinion might arise between your valuation expert and an adversarial expert (from the IRS, for example) should diminish as the tools to value complex securities become more commonly applied.

In the past, the lack of clarity over how much the securities were worth created a barrier to their utilization. As analysis of them becomes more consistent, complex securities become a more viable tool to better match the incentives and payoffs for executives to reach for the hurdles and thresholds that make businesses succeed.

 Also, as the understanding improves of how volatility affects complex securities’ values, so does the judgment and advice of when to use them and how to structure them.

 In the world of valuations for wealth transfer, the age-old debate over marketability and control discounts continues, but more emphasis than ever is being placed on tying the analysis to specific, relevant data.

Tax Court cases, and the experts testifying in them, generally have moved beyond qualitative judgments over discounts and have embraced thinking about shareholder-level returns and considering the kinds of information that real investors find relevant in buying and selling securities.

New studies and databases are cropping up that specifically address issues that, in the past, were purely the realm of “appraisal judgment,” and in which the older and more experienced appraiser was given more deference and credibility. These new stores of information are altering the arguments, much like new weaponry changes how battles are fought.

What used to pass for good enough – even a few years ago – is unlikely to stand up to the rigor expected nowadays. This doesn’t necessarily mean that valuation discounts or results have changed drastically, but it does mean that – if challenged – an analysis submitted to audit and headed for Tax Court had better be prepared to reconcile against this new wealth of information that the court is aware of and expects to hear about.

At the same time, a well-prepared analysis, relying on good information, improves its intangible value of “That report looks thorough and well done. Find a weaker one to challenge.”

Like many professions, valuation continues to evolve, creating the need for more specialized knowledge to properly help clients meet their needs. Advances in valuation theory and practice are increasing the complexity of the valuation models and analyses routinely performed, which does create concern over how many new ways errors can find their way into such analyses.

On the other hand, improved valuation models and better data are helping fine-tune value estimates. This will lead to more tailored solutions for business owners and for investors in all types of securities.

Be sure to ask how your valuation adviser is staying up to speed with these changes.

Real estate fraud is one of the fastest growing white collar crimes in the United States. Some fraud has been perpetrated by lenders themselves, who made bad loans and then sold them to investors.

However, lenders are also increasingly becoming victims of fraud. Mortgage fraud has increased by staggering proportions.

In 2002, banks filed 5,623 reports of mortgage fraud according to FBI statistics. Five years later, the number of mortgage fraud cases reported was nearly 48,000.

Despite the depressed real estate market and the glut of foreclosed properties, mortgage fraud continues to climb. According to the mortgage fraud index on www.mortgagedaily.com, the dollar amount of loans involved in mortgage fraud exceeded $5 billion in 2009 and was already at more than $4.1 billion for the first two quarters of 2010.

Fraud for profit

Mortgage fraud can be divided into two categories: fraud for property and fraud for profit.

In fraud for property, the borrower makes misrepresentations with the goal of obtaining a loan to buy a home. Fraud for property is only a small percentage of mortgage fraud and involves less risk to the lender because the fraud perpetrator intends to pay the mortgage.

The vast majority of mortgage fraud is fraud for profit. Here, the goal is money. Fraud for profit may involve corrupt industry insiders or fabricated documents. The two primary methods of fraud used are false identities and phony or dishonest appraisals.

One of the top mortgage fraud schemes is the practice of acquiring property, having it appraised for far more than it is worth and then selling it for the inflated price and pocketing the profit. The sale often is made to a “straw buyer,” an accomplice who will simply walk away from the mortgage and let the bank foreclose.

Documents may be fabricated to create the appearance that the straw buyer is creditworthy. Sometimes the sale is to an innocent buyer who later learns that what he or she bought isn’t worth what the appraisal said.

A fraud perpetrator may pose as someone who owns property and hire others to impersonate employers, appraisers, etc., when the lender phones to verify employment, income and credit. Fraud perpetrators also may use identity theft techniques to acquire personal information sufficient to submit loan applications in the names of persons who own property or have credit.

Fraud perpetrators may attempt to sell property twice by scheduling closings with two different lenders so closely timed that the transactions do not appear in the property records in time to tip off title-search companies.

Flipping and short sales

Lenders are under severe pressure because the number of foreclosures and the drop in property values make their collateral worth less than the loan. This has led to an increase in the number of “short sales” – sales for less than the amount owed on the mortgage. This situation has created a new opportunity for fraud. Perpetrators may negotiate a short sale using dishonest appraisals.

Also, burdened with too many distressed properties and desperate to cut costs, banks may use computer programs to estimate values or turn to real estate agents who provide what are known as “broker price opinions,” or BPOs, at a relatively inexpensive price. The real estate agent hired to estimate the property’s value may also end up being the listing agent on the sale of the house when it is flipped for a higher price. Obviously, this can create a conflict of interest and a motive to underestimate the property’s value for purposes of the short sale.

Parties negotiating the short sale may already have a buyer lined up at a higher price and immediately flip the property and pocket the profit.

Fighting fraud

The Financial Fraud Enforcement Task Force, established by the Obama administration to combat financial crimes, announced in June 2010 the results of a nationwide takedown, Operation Stolen Dreams, which targeted mortgage fraud perpetrators throughout the country and is the largest collective enforcement effort ever brought to bear in confronting mortgage fraud.

In only a few short months, Operation Stolen Dreams had involved 1,215 criminal defendants nationwide – with 485 arrests – who are allegedly responsible for more than $2.3 billion in losses. As of June 2010, the operation has resulted in 191 civil enforcement actions, which have resulted in the recovery of more than $147 million.

Although the $3.245 million contribution deduction was supported by an appraisal conducted by a qualified appraiser, the court refused to accept the appraisal report, calling it unreliable and irrelevant. Instead, the court accepted the appraisal conducted by the IRS’s experts, which valued the charitable contribution at $31,280. (See Boltar LLC v. Commissioner (136 TC No. 14, April 5, 2011).

In 2003, Boltar granted an easement to a land trust restricting the use of approximately eight acres of land in Indiana. In addition to the property that was the subject of the tax litigation, Boltar also owned a number of contiguous parcels of land, much of which was forested wetlands. The parcel affected by the easement was zoned for single-family residences.

In determining the fair market value of a qualified conservation easement, the regulations generally look to the value of comparable easements. If there are an insufficient number of comparable easements, then the regulations state that the value of the ­contributed easement is equal to the difference between the fair market ­value of the property it encumbers, ­before the granting of the restriction, and the fair market value of the ­encumbered property after the granting the restriction.

In other words, when there are insufficient sales to determine the value of the easement, then a before-and-after valuation approach must be used.

Boltar engaged the services of an appraiser who valued the ­unencumbered property at $3.27 million. The appraiser determined that the highest and best use for the eight acres would be a 174-unit condominium development, consisting of 29 hypothetical buildings, each containing six units. The appraiser reduced this amount by the enhancement in value of Boltar’s adjacent properties as a result of the donation of the easement.

The IRS’s appraiser determined the highest and best use of the property was development of eight to 16 single-family homes, making the unencumbered property worth $100,600.

The IRS argued that condominiums could not be built on the property, which was zoned for single-family homes. The IRS further argued that the hypothetical 29-building condominium project cited by Boltar’s appraiser was designed for a 10-acre site, while the land that was the subject of the easement was no more than eight acres.

Before the trial commenced, the IRS filed a motion to exclude Boltar’s appraisal report on the basis that the report was neither reliable nor relevant. The IRS argued that Boltar’s appraiser failed to:

• · Properly apply the before-and-after methodology
• · Value all of Boltar’s contiguous landholdings
• · Take into consideration zoning restraints and density limitations
• · Consider pre-existing conservation easements

As a result, the IRS contended that Boltar’s appraiser valued the land by reference to a hypothetical development project that could not fit on the land, was not economically feasible to construct and would not be legally permissible to be built in the foreseeable future.

The IRS argued that Boltar’s appraiser departed from the legal standard to be applied in determining the highest and best use of property and instead determined a value “based on whatever use generates the largest profit, apparently without regard to whether such use is needed or likely to be needed in the reasonably foreseeable future.”

The Tax Court concluded that the valuation submitted by Boltar’s appraiser was not sufficiently based on facts or data, and the report did not state the facts or data as support for the conclusions. The court found that the report was too speculative and unreliable to be useful. As a result, the court ruled that the report was inadmissible.

Without Boltar’s valuation report, the court had only the report of the IRS’s appraiser in evidence. Boltar offered no defense against the IRS’s appraiser. As a result, the court upheld the valuation as determined by the IRS.

The role of the accountant is so crucial for the successful operations of a business that CPAs have always been looked to with respect for their ability to advise business owners on a myriad of topics. It has long been established that the CPA must meet certain standards of independence, objectivity and integrity when performing attest services such as financial statement audits or reviews. Similarly, certain standards are called into play when a CPA performs a business valuation.

Clearly, it is the objectivity and integrity of the CPA that attorneys seek when hiring a valuation analyst. Even more, these qualities must be beyond reproach when considering the fact that often the CPA is an expert who may be called upon to testify at trial or even to assist in mediating the case between all parties.

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