legally protecting yourself as an appraiser

PRESENTED BY:

KIRSTEN RABE SMOLENSKY, JD, ISA AMSCOTTSDALE APPRAISAL SPECIALISTS, LLC

SCOTTSDALE, AZ

Legally Protecting Yourself as an Appraiser

DISCLAIMER

I only have an active legal license in the state of Arizona.

Everything in this talk is for informational purposes only. It shall not be construed as legal advice.

If you need legal assistance, please seek the advice of an attorney licensed to practice law in your state.

Types of Legal Liability

There are many ways an appraiser can “get in trouble”, but we are going to focus on three areas of potential legal liability:

1. Tort Liability (most likely)

2. Liability Under Government-Based Regulatory Systems (e.g., the IRS)

3. Criminal Liability

WHAT IS A TORT??

Tort Liabilityi.e., Negligence

A Tort is a Civil Wrong

(Your client suing you in court for $$$$$$)

No, it is not a cake!

Premises Liability (Slip and Fall)

Premises Liability (Slip and Fall)

Negligence (e.g., Auto Accident, etc.)

Negligence (e.g., Auto Accident, etc.)

Examples of Torts

Tort Law Has Multiple Origins

But it is mostly Common law (i.e., case law written by a judge)

ORStatutory (i.e., statutes

written by the legislature)And it is often State dependent

PROFESSIONAL NEGLIGENCE1.DUTY2.BREACH3.CAUSATION4.DAMAGES

The Biggest Tort Risk for Appraisers?

Hypothetical Case

You are appraising a large estate and miss a “high value item”, e.g., a painting, an important Chinese porcelain vase, or a Paul Revere teaspoon.

The estate sells the item at the FMV listed in your appraisal. E.g., in an estate sale for $50

Your mistake is later revealed when the item is sold at auction for much more!

The estate sues, seeking to claim the difference between auction sales price the $50 it received.

1. DUTY1. DUTY 2. BREACH2. BREACH

What is an appraiser’s duty to his or her client?

What sets the standard of care?

Basically when you fail to follow the standard of care.

The Elements of a Malpractice Case

3. CAUSATION3. CAUSATION 4. DAMAGES4. DAMAGES

Did the breach of the appraiser’s duty CAUSE a harm to the plaintiff?

Did the plaintiff suffer damages?

The Elements of a Malpractice Case

THE APPRAISER MUST PAY THE PLAINTIFF’S DAMAGES AND

“PUT THEM IN THE POSITION THEY WOULD HAVE BEEN HAD IT

NOT BEEN FOR THE APPRAISER’S NEGLIGENCE”.

RESULT?

PRIMARILY THE

IRS

Liability under Government-Based Regulatory Systems

Appraiser PenaltiesIRC 6695A, Substantial and Gross Valuation Misstatements Attributable to Incorrect

Appraisals

“An appraiser who prepares an incorrect appraisal may have to pay a penalty if:

The appraiser knows or should have known the appraisal would be used in connection with a return or claim for refund, and the appraisal results in the 20% or 40% penalty for a valuation misstatement described later under Penalty.

The penalty imposed on the appraiser is the smaller of:

1. The greater of: a. 10% of the underpayment due to the misstatement, orb. $1,000, or2. 125% of the gross income received for the appraisal.” IRC

§6695A

BASICALLY YOU ARE LOOKING AT A MAX FINE OF 125 % OF YOUR FEE!

Applicable to estates and charitable contributions.

ALSO . . . § 6701

Section 6701 imposes a penalty on “any person who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document, who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and who knows that such portion (if so used) would result in an understatement of the liability for tax of another person.” The penalty applies with respect “to each such document,” and is in the amount of $10,000, if the document relates to the tax liability of a corporation, and $1,000 if the document relates to the tax liability of any other person. § 6701(b).

AND . . .

Appraisers can be barred from practicing before the IRS after a notice and hearing.

AND . . .

Generally the §6695A and §6701 cases against the appraiser AFTER the client has already been to tax court.

The findings in tax court regarding the appraisal serve as a guide to the IRS as to whether to bring a case (Internal Revenue Manual 20.1.12.3).

While the IRS is to keep the tax case separate from the appraiser penalty case . . . The client can still sue you civilly for professional negligence if they lose their tax case! You might have to pay their tax bill!

And finally . . . CRIMINAL LIABILITY

Huillier Indicted and Arrested in Scottsdale

Article in the Maine Antique Digest March 2009 by Alan M. Petrillo

“The owner of an antiques appraisal business in Scottsdale, Arizona, has been indicted and arrested on fraud and felony theft charges in connection with allegedly defrauding people out of cash and property that police estimate totals $2.5 million. Robert Huillier, 48, was taken into custody on an outstanding warrant without incident at 3 p.m. Tuesday, January 6, as he sat in his car in an apartment complex parking lot. Huillier had been in hiding and avoiding police during 2008, according to the Scottsdale Police Department arrest report.

Huillier has been charged with three counts of fraud schemes and five counts of felony theft. He was taken to the Maricopa County Jail where he was held on $100,000 bond.

Scottsdale police said its departmental fraud unit had been investigating Huillier for nearly a year for allegedly defrauding approximately 70 victims out of their cash and property. According to police, Huillier used his antiques appraisal business, Gaige & Company, as a guise to deceive his victims as he took their property on consignment and failed to pay them. They also charge that he persuaded victims to invest large sums of money on the ruse that they were making estate investments.”

DISCLAIMER: Innocent Until Proven Guilty

Pritchard and Juno Indicted

Article in the Maine Antique Digest May 20012 by Clayton Pennington

“On March 15, a 13-count indictment was handed up in the United States District Court in Pennsylvania charging well-known militaria dealers Russ Pritchard III and George Juno with six counts of mail fraud, three counts of wire fraud, three counts of a false statement ancillary to a court proceeding, and one count of tampering with a witness.

Pritchard and Juno owned American Ordnance Preservation Association, Ltd. (AOPA), a now-defunct Bryn Mawr, Pennsylvania, business engaged in the valuation, appraisal, purchase, and sale of military-related artifacts.

For four years, Pritchard and Juno appeared frequently on the PBS television series Antiques Roadshow as appraisers of military artifacts.

The indictment charges that in order to enhance their reputation as experts in appraisals and attract business, Pritchard and Juno staged phony appraisal sessions on the show.”

False Claims Act

Filing a false claim with the government can get you in a lot of hot water . . . (jail time, fines, etc).

E.g., military damage claims To be criminally liable you must act knowingly

So how do you avoid legal liability as an appraiser??

DON’T LIE, CHEAT OR STEAL!

Avoiding Criminal Liability is Easy . . .

1. Seek expert assistance/Refer jobs2. Justified Reasoning, Justified Reasoning, Justified Reasoning . . . 3. Do not be too afraid! You must act knowingly, i.e., you know or there is gross negligence.

Avoiding IRS Penalties . . .

1. The usual things (Use due diligence, don’t take things outside your expertise, use specialists, don’t cheat, etc).

2. Always have a contract (it makes sure that you get paid, but it also provides a record of the understanding you have reached with the client).

3. Slow down! Slow Down! SLOW DOWN!4. Obtain Errors & Omissions Insurance (if you take items in your

possession or have a store front you need additional insurance)5. Know and follow USPAP and ISA’s Ethics Rules (every 6 months

or so take some time and read them)

Avoiding Civil Liability

THANK YOU!!

Kirsten Rabe Smolensky, JD, ISA AM

Kirsten.smolensky@gmail.com

602-996-1299