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A Cautionary Tale of Erroneous Appraisal

January 8, 2014

NEBBI Medical EquipmentHere at NEBB Institute, you may have noticed that we hammer away at the notion of making sure you use a certified appraiser for your appraisals. We speak of the dire consequences of using a non-certified appraiser, but perhaps a real-world example of what can happen is a much more effective red flag.

A hospital in Mountain City, Tennessee, filed for bankruptcy, and hospital management started formulating immediate plans to attempt to reopen the hospital as quickly as possible. The hospital’s interim administrator planned to auction off all its equipment, with a goal of raising $37,000. Dan Herman and his wife Barbara approached the bankruptcy court and offered to buy all the equipment for $40,000. The offer was accepted, and shortly after, they donated the equipment back to the hospital. Their accountant suggested that they have the hospital equipment appraised so that they could take a charitable deduction for the gift.

One non-certified appraiser estimated the fair market value of the equipment to be $1,037,348. A second non-certified appraiser estimated the resale value of the equipment at $1,002,380.

The Hermans claimed a charitable contribution deduction on their taxes in the amount of $509,932 using the average of the two appraisals. They later discovered that the higher appraisal had been wrong and that the lower appraisal reflected the correct market value of the hospital equipment.

On audit, the IRS imposed the “gross valuation misstatement” penalty in the amount of $23,218.80.

And what can we learn from this? Neither appraiser was certified, but one got lucky and the other didn’t. Either way, the Hermans were hit hardest, all because they didn’t have an appraisal report that stood up to scrutiny.

Don’t take chances! If you need an appraisal, hire a CMEA.

The NEBB Institute endorses and strives to observe the highest standards of professional ethics to preserve the public trust inherent in the professional appraisal practice. The Institute provides initial and monthly comprehensive education, ongoing support, and a dynamic international network, and certifies professionals in the art of machinery/equipment appraisal and brokerage.

By: NEBB Institute

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