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Appraisers Demand Due Process in Valuation Penalty Cases

APR. 15, 2022

Brian Kirksey et al. v. United States

DATED APR. 15, 2022
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Brian Kirksey et al. v. United States

[Editor's Note:

View PDF version of document for exhibits.

]

BRIAN KIRKSEY AND KELLI L. CLARK,
PLAINTIFFS,
v.
UNITED STATES OF AMERICA,
DEFENDANT.

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION

COMPLAINT AND REQUEST FOR INJUNCTION

Plaintiffs, Brian Kirksey and Kelli L. Clark, by and through their attorney, Neal Nusholtz, complain of Defendant as follows:

Jurisdiction

1. This Court has jurisdiction under Article III Section 2 of the United States Constitution because this is a matter brought pursuant to the Fifth Amendment Due Process Clause.1

Venue

2. Plaintiff, Brian Kirksey, is a resident of Rochester Hills, Michigan. Plaintiffs are trained, competent appraisers who, during the relevant time period, were employees of Ethos Real Estate (“Ethos”) in Rochester, Michigan, as a director (Kelli L. Clark) and managing director (Brian Kirksey).

3. The Plaintiffs co-signed appraisals (“Plaintiffs' appraisals”) that were used to support charitable deductions of conservation easements2 on a 2016 tax return of a client of Ethos. The charitable deductions on that return were audited by the Internal Revenue Service (“the IRS”) (the “Underlying Tax Case”). The term “appraisal,” as used herein, refers to subjective expert opinions of valuations of property.

4. A substantial part of the events or omissions giving rise to the allegations in this complaint occurred in Oakland County, Michigan.

Cause of Action

5. Plaintiffs are trained appraisers who are competent to provide appraisals that can be used to support entries on tax returns. Brian Kirksey teaches courses in the rules for appraisals that are required under 26 CFR. §1.170A-17 for appraisers who practice before the Internal Revenue Service (“IRS”).

6. Two of Plaintiffs' appraisals for real property in Michigan and Ohio were used by clients of Ethos to support charitable deductions on tax returns for the 2016 tax year. Those charitable deductions were challenged by the IRS in the Underlying Tax Case.

7. The IRS has notified Plaintiffs that it intends to assess an overvaluation penalty against each of them under Internal Revenue Code Section (“IRC”) §6695A (“§6695A”) based upon Plaintiffs' appraisals supporting the charitable deductions in the Underlying Tax Case.3

8. Plaintiffs have timely protested the proposed penalty to the appeals division of the Internal Revenue Service.

9. Plaintiffs have cause to believe, based on communications made by third parties, that, regardless of the quality of their appraisals, the appeals officer's hands are tied by counsel for the IRS and the appeals officer will not be able concede the penalty even if the appeals officer believes assessment of the penalty is not justified. Plaintiffs had the same “tied hands” experience at the examination level.

a. The §6695A penalty is based upon whether or not an appraisal has satisfied the highly technical rules for appraisals that are eventually used to support entries on tax returns.

10. Plaintiffs' appraisals satisfy the pertinent rules for appraisals.

11. The proposed §6695A penalty is unjustified.

Irreparable Injury

12. If an erroneous §6695A penalty is assessed against an appraiser, it causes irreparable injury to the appraiser's ability to testify as an expert even if the penalty is later overturned in refund litigation.

a. Part of the job of an appraiser includes testifying in court proceedings in support of the valuations in their appraisals.

b. Plaintiffs' credibility is critical to their giving effective expert testimony.

c. A §6695A penalty is a black mark ordained by the United States Government that can be referenced in judicial proceedings to impugn an appraiser's testimony.

d. A §6695A penalty against an appraiser impairs the credibility of that appraiser's expert testimony.

e. Impairing the credibility of an appraiser will damage the appraiser's occupation even if assessment of the penalty is later reversed and abated.

f. An erroneously assessed penalty that is subsequently reversed will not be easily explained away by an appraiser when testifying in future cases.

13. Because of the damage from an erroneous §6695A on the occupation of an appraiser, due process requires that the penalty should not be assessed without a prior hearing.

Deprivation of Plaintiffs' Property Without Due Process

14. The §6695A penalty is assessed by the IRS without a prior hearing under Internal Revenue Code §6696(b).

15. The IRS procedure for assessing a §6695A penalties lacks safeguards to prevent unjustified penalty assessments.

a. The proposed §6695A penalties result from the report of an IRS appraiser (the “IRS appraisal report”).

b. An IRS appraiser's job is: (1) to write an appraisal report that can be used to support overvaluation penalty assessments against appraisers; and, (2) to testify in Tax Court in the underlying tax case in opposition to the appraiser against whom the IRS appraiser is attempting to impugn with the assertion of a §6695A penalty.

c. An IRS appraiser is motivated to assess a §6695A penalty against the Plaintiffs even if unjustified because, if the IRS appraiser testifies as an expert against the Plaintiffs, the IRS appraiser would prefer to testify in court against an appraiser whose credibility has been impaired by a §6695A overvaluation penalty assessed against that appraiser.

16. For examining agents, an IRS appraisal report serves as the basis for asserting a §6695A penalty against Plaintiffs.

a. An overvaluation penalty can be assessed based solely on an IRS appraisal even if the IRS appraisal report is the result of bias and even if its conclusions are, incorrect, unsubstantiated or unjustified.

b. An IRS appraisal report controls assessment of the §6695A penalty because IRS examining agents in charge of assessing the §6695A penalty are not trained to evaluate the application of technical rules in appraisals and will defer to conclusions in the IRS appraisal report when determining whether to assess a §6695A penalty against an appraiser.

(i) The official policy of the IRS is to withhold the IRS appraisal report from an appraiser during the penalty investigation.

(ii) During the IRS penalty investigation of Plaintiffs, the IRS denied Plaintiffs access to the IRS appraisal.

(iii) Plaintiffs eventually obtained a copy of the IRS appraisal that their client had gotten in the Underlying Tax Case.

(iv) The IRS appraisal report in this case was filled with incorrect, unjustified, unsubstantial and unexplained allegations against the Plaintiffs' appraisals.

(v) A lengthy list of substantial errors in the IRS appraisal was provided to the examining agent, who decided to propose §6695A penalties against Plaintiffs without ever responding to the list of errors in the IRS appraisal or otherwise defending any of the errors in the IRS appraisal.

(vi) The errors in the IRS appraisal report can only properly be addressed in a hearing.

c. An examination of Tax Court cases implies that IRS appraisals are not always reliable.4 IRS appraisers are not free from dishonesty or bias. See Est. of Jackson v. Comm'r of Internal Revenue, 121 T.C.M. (CCH) 1320 (T.C. 2021) where the Tax Court described an IRS appraiser as repeatedly lying to the Court. (“This was also a lie”).

A Hearing Prior to Assessment of the §6695A Penalty is Required Under the Fifth Amendment

17. The current IRS procedure for assessing §6695A penalties is basically unfair.

a. In comparison, under 31 USC §330(d), an appraiser can be sanctioned by the Treasury Department (including suspension or disbarment from practice before the Treasury Department and including barring an appraiser from testifying in Tax Court). Those penalties cannot occur without “notice and opportunity for a hearing to any appraiser.” (id). See also Treasury Department Circular No. 230; Regulations Governing Practice before the Internal Revenue Service. Title 31 Code of Federal Regulations, Subtitle A, Part 10, published (June 12, 2014) §§(c) §10.50 and §10.70.

b. The erroneous §6695A penalty can have the same effect as disbarment before the Treasury Department under 31 USC §330(d), but, the §6695A penalty can occur without a prior hearing to allow Plaintiffs to properly defend themselves.

c. The assessment of the §6695A penalty should only be made after a hearing where the IRS appraisal report can be fully explored and examined.

d. Damaging the Plaintiffs' careers without a prior hearing constitutes a Fifth Amendment deprivation of property without due process.

WHEREFORE, Plaintiffs pray that this Honorable Court enter an order enjoining the IRS from assessing a §6695A penalty against the Plaintiffs individually unless and until due process has been satisfied with a hearing wherein the errors and flaws of the IRS appraisal can be fully explored.

Certification and Closing

Under Federal Rule of Civil Procedure 11, by signing below, I certify to the best of my knowledge, information, and belief that this complaint: (1) is not being presented for an improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the costs of litigation; (2) is supported by existing law or by a nonfrivolous argument for extending, modifying or reversing existing law; (3) the factual contentions have evidentiary support or, if specifically so identified, will likely have evidentiary support after a reasonable opportunity for further investigation or discovery; and (4) the complaint otherwise complies with the requirements of Rule 11.

Dated: April 15, 2022

Respectfully Submitted,

Neal Nusholtz P30223
Attorney for Brian Kirksey and Kelli L. Clark
2855 Coolidge Hwy. Ste. 210
Troy, Michigan 48084
(248) 646-0123
Nusholtz@nnlaw.net

FOOTNOTES

1As a courtesy to IRS chief counsel, the nature of Plaintiffs' cause of action is more comprehensibly explained in Exhibit 1 Memorandum in Support of Complaint, which includes a factual narrative and a memorandum of law.

2Conservation easements are explained in Oakbrook Land Holdings, LLC v. Comm'r of Internal Revenue, No. 20-2117, 2022 WL 766050, at *1 (6th Cir. Mar. 14, 2022).

3The IRS is proposing to assert penalties against Brian Kirksey for both property appraisals and Kelli L. Clark for only one of the property appraisals.

4 

Court Rejection of IRS Appraisals in Estate and Gift Tax Cases where government benefits from higher numbers.

Case Name

IRS Appraiser Value at Trial

Value Assigned by Court

Estate of Thompson, T.C. Memo 2004-174, 2004 WL 1658404

$32,387,730

$13,525,240

Estate of Dunia, T.C. Memo 2004-123, 2004WL 1119603 (Tax Ct. 2004)

$16.3 million (reduced to $8.5 million at trial)

$5,463,666

Polack v. Comm'r, T.C. Memo 2002-145, 2002WL 128477 (Tax Ct. 2002)

$1,716,000 (reduced to $915,200 at trial)

$915,200

Estate of Mitchell, T.C. Memo 2002-98, 2002WL 531148 (Tax Ct. 2002)

$105 million

$41,532,600

Kohler v. Comm'r, T.C. Memo 2006-152, 2006 WL 2059210 (Tax Ct.2006)

$144.5 million

$47,009,625

Estate of Forbes, T.C. Memo 2001-72, 2001 WL 286907 (Tax Ct. 2001)

$2,990,942

$519,000 — affected by a legal issue.

Estate of Rodgers, T.C. Memo 1999-129, 1999 WL 225893 (Tax Ct. 1999)

$13,100,000 (amended to $7,700,000)

$4,316,920
Court Rejection of IRS Appraisals in Conservation Easement Cases where Government Benefits from Lower Numbers.

Case Name

IRS Appraiser Value at Trial

Value Assigned by Court

Pine Mountain Preserve — (2007 easement) T.C. Memo 2018-214 (2007 easement)

$449,000

$4,779,500

McGrady, T.C. Memo 2016-233

$290,000

$1,491,896

Palmer Ranch, T.C. Memo 2016-190

$6,975,000

$23,940,000 (on remand)

SWF Real Estate, T.C. Memo 2015-63

$4,040,000

$7,350,000

Schmidt, T.C. Memo 2014-159

$480,000

$1,152,445

Butler T.C. Memo 2015-63 (Four Easements)

$5,684,000

$6,548,100

Esgar, T.C. Memo 2012-35

$27,000

$149,051

Boltar, 136 T.C. 326 (2011)

$31,280

$42,400

Trout Ranch, T.C. Memo 2010-283

$0

$560,000

Kiva Dune, T.C. Memo 2009-145

$23,506,558

$28,656,004

END FOOTNOTES

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