In this second part of a two-part series, we have collected eight examples of mistakes that valuation experts have made, as reported in federal courts tax decisions (see Value MattersTM, Issues No. 4, 2013 for “16 Mistakes to Avoid in Valuations: According to the Tax Court.”) It is important to note that there are two sides to every story, and courts do not always get it right. For this reason, we do not name any valuators in this collection of mistakes to avoid.

1. Insufficient Due Diligence

In Freeman Estate v. Commissioner (T.C. Memo 1996-372), the taxpayer’s valuator failed to ask the subject company’s president whether he had plans for an IPO. In the Tax Court’s opinion:

The corporation had an initial public offering of stock in June 1990, at a price of $10 per share. The possibility of an initial public offering was discussed at a meeting of the board of directors of the corporation on August 24, 1989. In his report, [the valuator] states specifically that (1) during his interview with Bernard V. Vonderschmitt, president … he did not inquire as to whether, on October 22, 1989, the corporation had any plans for a public offering of stock, and (2) he did not consider the potential for a public offering in carrying out his valuation assignment.

Petitioner has cited to us no authority prohibiting an inquiry into plans for a public offering. We assume that a potential purchaser would be interested in such plans and might pay a premium depending on her judgment of the likelihood of such an offering.

Likewise, in Bennett Estate v. Commissioner (T.C. Memo 1993-34), the Tax Court criticized a valuator for failing to investigate as would a hypothetical willing buyer:

Compounding this shortcoming is [the valuator’s] exclusive reliance upon the numbers listed on Fairlawn’s balance sheets with no further investigation or due diligence. [The valuator] himself acknowledged at trial that a hypothetical willing buyer would look behind the balance sheet numbers in evaluating their correctness and in applying valuation methods. Although [the appraiser] stated that he was not able to obtain requested documents from Fairlawn, we feel that [he] did not perform sufficient due diligence in this matter.

It is imperative that the valuator document all due diligence efforts in the valuation report, because the valuator may not get a chance to do so on the witness stand. Include unsuccessful efforts to obtain important information, with a legitimate explanation of why the effort failed (See, e.g., Winkler Estate v. Commissioner, T.C. Memo 1989-231).

Another example of lack of due diligence, as well as incorrectly written descriptive report, is where the valuator failed to make relevant inquiries in Ansan Tool and Manufacturing Co. v. Commissioner (T.C. Memo 1992-121).

[The valuator] had not discussed Mario Anesi’s departure from petitioner with management to determine whether customers would leave or stay with petitioner. It is also unclear how [he] determined that only 10 percent of sales would be lost if Mario Anesi competed against petitioner, nor why the 10 percent loss would be limited solely to the first year after he left petitioner.

2. Unforeseeable Subsequent Events

A dilemma inherent in retrospective valuations is that life and business carry on after the valuation date. Consequently, the post-valuation-date events and cycles become known to valuators during the valuation process. The uncertainties, economic or otherwise, that exist on the valuation date can be lost when subsequent reality becomes visible and measurable. The problem that occurs when future expectations blend into history is that events subsequent to the valuation date are not supposed to be considered in a valuation, except to the extent that such events and conditions could have been knowable or reasonably foreseen.

A valuator’s observations and perspective could potentially be influenced by subsequent events. This can be equally true of the information and feedback provided by the various stakeholders to a valuation event. The question often becomes whether that information was knowable as of the valuation date. Love Estate. v. Commissioner (T.C. Memo 1989-470) is instructive on this issue:

… after Mrs. Love’s death, Praise was determined to be in foal. Surely, this increased her value considerably. Respondent’s expert assumed for the purpose of his valuation that Praise was pregnant at the date of Mrs. Love’s death, although it was impossible to ascertain pregnancy on that date. A hypothetical willing buyer would not have been aware that Praise was in foal. The report of respondent’s expert, therefore, contravenes the regulations by making use of hindsight.

A tax valuation is made as of a certain date; for example, date of death or date of a gift. Generally, a valuator should only consider circumstances in existence on the valuation date and events occurring up to that date. The courts, however, have allowed evidence of subsequent events if those events were reasonably foreseeable as of the valuation date (Spruill Estate v. Commissioner, 88 T.C. 1197 (1987)).

3. Improper Reliance on a Draft Valuation Report

Valuators sometimes have to rely on the work of other valuators whose work may be in progress at the same time. In Cloutier Estate v. Commissioner (T.C. Memo 1996-49), a valuator lost credibility for failing to follow up on a work-in-process:

[O]ne of the appraisals on which [the valuator] purported to rely was merely a draft of an appraisal, and [the valuator] never spoke to the author concerning the author’s completion of that draft or about any of the information contained therein.

4. Ignoring Asset Appraisals in Other Disciplines

In Ford Estate v. Commissioner (T.C. Memo 1993-580), the taxpayer’s expert used historic book value of assets in the net value approach, even though asset appraisals had been obtained and were available. The Tax Court said:

[P]etitioner’s expert valued the assets of each company using unadjusted book value, thereby undervaluing the assets themselves. Petitioner’s expert generally used historic book value as a factor in his formula, notwithstanding that petitioner had obtained appraisals as of the valuation date for certain of the Ford companies’ assets, namely, the real estate owned by Ford Mercantile and Ford Dodge, the securities issued by unrelated entities that were owned by Ford Mercantile, Ford Dodge, Ford Real Estate, and Ford Moving, as well as the cars, trucks, trailers, and securities issued by unrelated entities that were owned by Ford Van.

5. Use of Data with Caveats or Warnings

In Haffner’s Service Station, Inc. v. Commissioner (T.C. Memo 2002-38), a valuator used data that was subject to an explicit warning by the publisher of the data:

[The valuator] acknowledged at trial that the general data was unreliable, he stated specifically that he knew that Robert Morris’s publication warns readers explicitly that the data is not statistically accurate and should not be relied upon or used in a legal proceeding. [The valuator] attempted to rationalize his reliance on the Robert Morris compilation by stating: “Unfortunately, I had to use what was available. It was … the best stuff around. I have to concede that they’re flawed.” We find this attempt unavailing.

6. Using an Ancient Comparable Sale

The market approach is premised on the use of sales that occur reasonably close to the valuation date. In Hagerman Estate v. United States (81 AFTR2nd Par. 98-771(C.D. III. 1998), the court pointed out:

He relied particularly on Sale 2 finding the subject farm was of the same value. Unfortunately for Plaintiffs, the sale price for Sale 2 was as previously indicated 20 years outdated. Clearly, [the valuator’s] valuation of Farm 4 is seriously flawed.

7. Neglecting to Identify an SIC

In Jann Estate v. Commissioner (T.C. Memo 1990-333), a valuator referred to a Standard Industrial Code in his report, but failed to identify what category that number referred to:

[The valuator’s] report referred to comparable companies but did not identify them; did not state whether [he] used average earnings or a weighted average earnings in his analysis; referred to a standard industrial classification number but did not identify it; and did not explain how he arrived the price-earnings ratio of 9.8.

8. Failure to Proofread

The last mistake on this list, fittingly, is from Hinz Estate v. Commissioner (T.C. Memo 2000-6), in which the valuator apparently neglected to proofread his report, and the Tax Court socked it to him: When asked why his expert witness report relies on a statute that had been repealed years earlier, [the valuator] replied as follows:

“I think this is boilerplate that was put in by my secretary over the last–ever since 1992, and I have never taken it out.” Also, in some instances, the textual descriptions of properties in [the valuator’s] written report did not match the properties listed in the accompanying matrix. It was as though [the valuator] had revised parts of a draft of his report but inadvertently kept parts of former drafts that no longer fit the revised draft.


In this article, we presented eight mistakes made by valuation experts, as reported in federal courts in tax decisions. Just because one judge in one case calls something a mistake doesn’t make it a mistake in all cases. But we think the above examples are indeed instructive in most valuation situations.

L. Paul Hood, Jr., Esq.
The University of Toledo Foundation

Timothy R. Lee, ASA
Mercer Capital

Note: This article originally appeared in the September/October 2013 issue of The Value Examiner. It was adapted from Chapters 17-18 of A Reviewer’s Handbook to Business Valuation by L. Paul Hood, Jr., and Timothy R. Lee, (John Wiley & Sons, New Jersey, 2011). For book details, see or