Fair market value

Fair market value (FMV) is an estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. An estimate of fair market value may be founded either on precedent or extrapolation. Fair market value differs from the intrinsic value that an individual may place on the same asset based on their own preferences and circumstances.

Since market transactions are often not observable for assets such as privately held businesses and most personal and real property, FMV must be estimated. An estimate of fair market value is usually subjective due to the circumstances of place, time, the existence of comparable precedents, and the evaluation principles of each involved person. Opinions on value are always based upon subjective interpretation of available information at the time of assessment. This is in contrast to an imposed value, in which a legal authority (law, tax regulation, court, etc.) sets an absolute value upon a product or a service.

An eminent domain taking, in lieu of a property sale, would not be considered a fair market transaction since one of the parties (in this case, the seller) was under undue pressure to enter into the transaction. Other examples of sales that would not meet the test of fair market value include a liquidation sale, deed in lieu of foreclosure, distressed sale, and similar types of transactions.

National definitions

United States

In United States tax law, the definition of fair market value is found in the United States Supreme Court decision in the Cartwright case:

The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. United States v. Cartwright, 411 U. S. 546, 93 S. Ct. 1713, 1716-17, 36 L. Ed. 2d 528, 73-1 U.S. Tax Cas. (CCH) ¶ 12,926 (1973) (quoting from U.S. Treasury regulations relating to Federal estate taxes, at 26 C.F.R. sec. 20.2031-1(b)).[1]

The term fair market value is used throughout the Internal Revenue Code among other federal statutory laws in the USA including Bankruptcy, many state laws, and several regulatory bodies.[2] In litigation in many jurisdictions in the United States, the fair market value is determined at a hearing. In certain jurisdictions, the courts are required to hold fair market hearings, even if the borrowers or the loans guarantors waived their rights to such a hearing in the loan documents.[3]

Canada

Fair market value is not explicitly defined in the Income Tax Act. That said, Mr. Justice Cattanach in Henderson Estate, Bank of New York v. M.N.R., (1973) C.T.C. 636 at p. 644 articulates the concept as follows:

The statute does not define the expression "fair market value", but the expression has been defined in many different ways depending generally on the subject matter which the person seeking to define it had in mind. I do not think it necessary to attempt an exact definition of the expression as used in the statute other than to say that the words must be construed in accordance with the common understanding of them. That common understanding I take to mean the highest price an asset might reasonably be expected to bring if sold by the owner in the normal method applicable to the asset in question in the ordinary course of business in a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm's length and under no compulsion to buy or sell. I would add that the foregoing understanding as I have expressed it in a general way includes what I conceive to be the essential element which is an open and unrestricted market in which the price is hammered out between willing and informed buyers and sellers on the anvil of supply and demand. These definitions are equally applicable to "fair market value" and "market value" and it is doubtful if the word "fair" adds anything to the words "market value."

In concert with this decision, the Canada Revenue Agency (CRA) lists the following working definition in its on-line dictionary:

Fair market value generally means the highest price, expressed in dollars, that a property would bring in an open and unrestricted market between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other.[4]

As the definition indicates, the Canadian and American concepts of fair market value are very similar. One obvious difference is that the Canadian working definition refers to "the highest price" whereas the American definition merely mentions "the price." It is debatable whether or not the presence of the word "highest" distinguishes the Canadian from the American definition.

See also

References

  1. ^ United States v. Cartwright, 411 U.S. 546, 551 (1973) ("The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.").
  2. ^ to wit, Internal Revenue Service Notice 2005-43
  3. ^ Jenkins Jr., W. Scott; Alissa A. Brice; Ryley Carlock & Applewhite, PC (20 April 2014). "The Arizona Court of Appeals Holds the Right to a Fair Market Value Hearing Cannot be Waived in a Deficiency Action". The National Law Review. Retrieved 5 May 2014.
  4. ^ "Fair Market Value" Archived 2014-08-06 at the Wayback Machine Canada Revenue Agency Dictionary. Retrieved 20 May 2014.
Appraiser

An appraiser (from Latin appretiare, "to value"), is one who determines the fair market value of property, real or personal. In England the business of an appraiser is usually combined with that of an auctioneer, while the word itself has a similar meaning to that of "valuer."

Blockage discount

Blockage discount is an art-business-related and legal term of art for referring to the money discount assigned to a group of artworks by a single artist when that group of works is to be released to market as a group rather than individually. A blockage discount adjusts the fair market value of the works downward because of the risks of depreciation when a large volume of art is released into the market all at once.

Bullion

Bullion is gold, silver, or other precious metals in the form of bars or ingots. Typically, bullion is used for trade on a market. The word "bullion" comes from the old French word bouillon, which meant "boiling", and was the term for the activity of a melting house.The value of bullion is typically determined by the value of its precious metals content, which is defined by its purity and mass. To assess the purity of gold bullion, the centuries-old technique of fire assay is still employed, together with modern spectroscopic instrumentation, to accurately determine its quality to ensure the owner receives fair market value for it. It is also weighed extremely accurately.

Retailers may sometimes market ingots and bars of base metals, such as copper, nickel and aluminium, as "bullion", but this is not a widely accepted definition.

Commissioner v. Tufts

Commissioner v. Tufts, 461 U.S. 300 (1983), was a unanimous decision by the United States Supreme Court, which held that when a taxpayer sells or disposes of property encumbered by a nonrecourse obligation exceeding the fair market value of the property sold, the Commissioner of Internal Revenue may require him to include in the “amount realized” the outstanding amount of the obligation; the fair market value of the property is irrelevant to this calculation.

Debtor in possession

A debtor in possession in United States bankruptcy law is a person or corporation who has filed a bankruptcy petition, but remains in possession of property upon which a creditor has a lien or similar security interest. A corporation which continues to operate its business under Chapter 11 bankruptcy proceedings is a debtor in possession.

Under certain circumstances, the debtor in possession may be able to keep the property by paying the creditor the fair market value, as opposed to the contract price. For example, where the property is a personal vehicle which has depreciated in value since the time of the purchase, and which the debtor needs to find or continue employment to pay off his debts, the debtor may pay the creditor for the fair market value of the car to keep it.

EV/EBITDA

Enterprise value/EBITDA (more commonly referred to by the acronym EV/EBITDA) is a popular valuation multiple used in the finance industry to measure the value of a company. It is the most widely used valuation multiple based on enterprise value and is often used in conjunction with, or as an alternative to, the P/E ratio (Price/Earnings ratio) to determine the fair market value of a company.

An advantage of this multiple is that it is capital structure-neutral, and, therefore, this multiple can be used to directly compare companies with different levels of debt.The EV/EBITDA multiple requires prudent use for companies with low profit margins (i.e., for an EBITDA estimate to be reasonably accurate, the company under evaluation must have legitimate profitability).

Often, an industry average EV/EBITDA multiple is calculated on a sample of listed companies to use for comparison to the company of interest (i.e., as a benchmark). An example of such an index is one that provides an average EV/EBITDA multiple on a wide sample of transactions on private companies in the Eurozone.The reciprocate multiple EBITDA/EV is used as a measure of cash return on investment.

Goodwill (accounting)

Goodwill in accounting is an intangible asset that arises when a buyer acquires an existing business. Goodwill represents assets that are not separately identifiable. Goodwill does not include identifiable assets that are capable of being separated or divided from the entity and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, identifiable asset, or liability regardless of whether the entity intends to do so. Goodwill also does not include contractual or other legal rights regardless of whether those are transferable or separable from the entity or other rights and obligations. Examples of identifiable assets that are not goodwill include a company’s brand name, customer relationships, artistic intangible assets, and any patents or proprietary technology. The goodwill amounts to the excess of the "purchase consideration" (the money paid to purchase the asset or business) over the total value of the assets and liabilities. It is classified as an intangible asset on the balance sheet, since it can neither be seen nor touched. Under US GAAP and IFRS, goodwill is never amortized. Instead, management is responsible for valuing goodwill every year and to determine if an impairment is required. If the fair market value goes below historical cost (what goodwill was purchased for), an impairment must be recorded to bring it down to its fair market value. However, an increase in the fair market value would not be accounted for in the financial statements. Private companies in the United States, however, may elect to amortize goodwill over a period of ten years or less under an accounting alternative from the Private Company Council of the FASB.

Home equity

Home equity is the market value of a homeowner's unencumbered interest in their real property, that is, the difference between the home's fair market value and the outstanding balance of all liens on the property. The property's equity increases as the debtor makes payments against the mortgage balance, or as the property value appreciates. In economics, home equity is sometimes called real property value.

Home equity is not liquid. Home equity management refers to the process of using equity extraction via loans, at favorable, and often tax-favored, interest rates, to invest otherwise illiquid equity in a target that offers higher returns.

Homeowners acquire equity in their home from two sources. They purchase equity with their down payment and the principal portion of any payments they make against their mortgage. They also benefit from a gain in equity when the value of the property increases. Investors typically look to purchase properties that will grow in value, causing the equity in the property to increase, thus providing a return on their investment when the property is sold.

Home equity may serve as collateral for a home equity loan or home equity line of credit (HELOC). Many home equity plans set a fixed period during which the homeowner can borrow money, such as ten years. At the end of this “draw period,” the borrower may be allowed to renew the credit line. If the plan does not allow renewals, the borrower will not be able to borrow additional money once the period has ended. Some plans may call for payment in full of any outstanding balance at the end of the period. Others may allow repayment over a fixed period, for example, ten years.

Impaired asset

According to U.S. accounting rules (US GAAP), the value of an asset is impaired when the sum of estimated future cash flow from that asset is less than the book value of the asset. At this point an impairment loss should be recognized, which is done by taking the difference between the fair market value and the book value and recording this amount as the loss. This basically records the asset as if it were being acquired brand new at its fair market value, recording this as its new book value. This is a common occurrence for goodwill where a company will purchase another company for more than the value of the net assets of the target company. Under US GAAP, goodwill is tested annually for impairment.

Incentive stock option

Incentive stock options (ISOs), are a type of employee stock option that can be granted only to employees and confer a U.S. tax benefit. ISOs are also sometimes referred to as incentive share options or Qualified Stock Options by IRS

.

The tax benefit is that on exercise the individual does not have to pay ordinary income tax (nor employment taxes) on the difference between the exercise price and the fair market value of the shares issued (however, the holder may have to pay U.S. alternative minimum tax instead). Instead, if the shares are held for 1 year from the date of exercise and 2 years from the date of grant, then the profit (if any) made on sale of the shares is taxed as long-term capital gain. Long-term capital gain is taxed in the U.S. at lower rates than ordinary income.

Although ISOs have more favorable tax treatment than non-ISOs (a.k.a. non-statutory stock option (NSO) or non-qualified stock option (NQO or NQSO)), they also require the holder to take on more risk by having to hold onto the stock for a longer period of time if the holder is to receive optimal tax treatment. However, even if the holder disposes of the stock within a year, it is possible that there will still be marginal tax deferral value (as compared to NQOs) if the holding period, though less than a year, straddles the ending of the taxpayer's taxable reporting period.

Note further that an employer generally does not claim a corporate income tax deduction (which would be in an amount equal to the amount of income recognized by the employee) upon the exercise of its employee's ISO, unless the employee does not meet the holding-period requirements. But see Coughlan, Section 174 R&E Deduction Upon Statutory Stock Option Exercise, 58 Tax Law. 435 (2005). With NQSOs, on the other hand, the employer is always eligible to claim a deduction upon its employee's exercise of the NQSO.

Additionally, there are several other restrictions which have to be met (by the employer or employee) in order to qualify the compensatory stock option as an ISO. For a stock option to qualify as ISO and thus receive special tax treatment under Section 421(a) of the Internal Revenue Code (the "Code"), it must meet the requirements of Section 422 of the Code when granted and at all times beginning from the grant until its exercise. The requirements include:

The option may be granted only to an employee (grants to non-employee directors or independent contractors are not permitted), who must exercise the option while he/she is an employee or no later than three (3) months after termination of employment (unless the option holder is disabled, in which case this three-month period is extended to one year. In case of death the option can be exercised by the legal heirs of the deceased until the expiration date).

The option must be granted under a written plan document specifying the total number of shares that may be issued and the employees who are eligible to receive the options. The plan must be approved by the stockholders within 12 months before or after plan adoption.

Each option must be granted under an ISO agreement, which must be written and must list the restrictions placed on exercising the ISO. Each option must set forth an offer to sell the stock at the option price and the period of time during which the option will remain open.

The option must be granted within 10 years of the earlier of adoption or shareholder approval, and the option must be exercisable only within 10 years of grant.

The option exercise price must equal or exceed the fair market value of the underlying stock at the time of grant.

The employee must not, at the time of grant, own stock representing more than 10% of voting power of all stock outstanding, unless the option exercise price is at least 110% of the fair market value and the option expires no later than five (5) years from the time of the grant.

The ISO agreement must specifically state that ISO cannot be transferred by the option holder other than by will or by the laws of descent and that the option cannot be exercised by anyone other than the option holder.

The aggregate fair market value (determined as of the grant date) of stock bought by exercising ISOs that are exercisable for the first time cannot exceed $100,000 in a calendar year. To the extent it does, Code section 422(d) provides that such options are treated as non-qualified stock options.

James S. McDonnell Foundation

The James S. McDonnell Foundation was founded in 1950 by aerospace pioneer James S. McDonnell. It was established to "improve the quality of life," and does so by contributing to the generation of new knowledge through its support of research and scholarship. Originally called the McDonnell Foundation, the organization was renamed the James S. McDonnell Foundation in 1984 in honor of its founder. The foundation is based in Saint Louis, Missouri.The Foundation is a member of the Brain Tumor Funders' Collaborative, a partnership among eight private philanthropic and advocacy organizations designed to bridge the “translational gap” that prevents promising laboratory science from yielding new medical treatments. Fair market value of Foundation assets were around $609 million in 2007. Susan M. Fitzpatrick was named President beginning 2015.

Just compensation

Just compensation is required to be paid by the Fifth Amendment to the U.S. Constitution (and counterpart state constitutions) when private property is taken (or in some states, taken or damaged). Usually, the government (condemnor) files an eminent domain action to take private property for "public use.", but when it fails to do so and pay for the taking, the owner may seek compensation in an action called "inverse condemnation." For reasons of expedience, courts have been generally using fair market value as the measure of just compensation, reasoning that this is the amount that a willing seller would accept in a voluntary sales transaction, and therefore it should also be payable in an involuntary one. However, the U.S. Supreme Court has repeatedly acknowledged that "fair market value" as defined by it falls short of what sellers would demand and receive in voluntary transactions.Market value is the prevailing, but not exclusive measure of Just Compensation. Fair Market Value is defined by appraisers as the most probable price, in terms of cash that would be paid by a willing buyer to a willing seller, each being fully informed of the property's good and bad features, with the property being exposed on the market for an adequate time to attract offers. But in eminent domain cases value is defined as the highest price obtainable in the open market. That value may not be influenced by factors that affect the market because of the imminence of the eminent domain taking. In other words, the property must be valued as if the project for which it is being taken did not exist — this is known as the "project influence" doctrine.

Since fair market value involves a future, hypothetical transaction (the property's sale has not yet taken place at the time of valuation) fair market value is shown by the opinion of expert appraisers, or the property's owner(s).

A fundamental attribute of property that determines its Market Value is its highest and best use, which is its most profitable legal use. This need not be the property's current use, nor the use(s) for which the property is currently zoned, if it is established that there is a probability of zone change. Highest and best use is often the subject of contentious litigation. Condemning Authorities commonly argue for Highest and Best Uses that are far less intensive than what a private property owner's appraiser has in mind. This is often the real battleground in eminent domain valuation cases.

In unusual cases measures of compensation other than fair market value can be employed; United States v. Pewee Coal Co., 341 U.S. 114 (1951) (increased operational loss of a coal company during its temporary seizure by the government deemed to be the measure of compensation).

In eminent domain cases, the standard is often not the most probable price, but the highest price obtainable in a voluntary sale transaction involving the subject property. Since the condemnation deprives the owner of the opportunity to take his or her time to obtain top dollar in the market, the law provides it by defining fair market value as the highest price the property would bring in the open market.

Market value does not include incidental losses (e.g., cost of moving, loss of business goodwill, etc.), but some of these losses are made compensable in part by statutes, such as the federal Uniform Relocation Assistance Act (Code of Federal Regulations 49) and its state counterparts. The judicial denial of compensation for business losses inflicted when a business conducted on the taken land is destroyed by the taking, has been the subject of much controversy and severe criticism by legal commentators. Nonetheless, only one state (Alaska) allows their recovery in all cases and so do a few others upon a showing that it is impossible for the affected business to relocate. Some states allow recovery of business losses by statute.

Likewise, the property owner's attorneys' and appraisers' fees are not included in just compensation. In some states they are recoverable by statute when the owner recovers compensation that exceeds the Condemning Authority's offer or evidence by a specific amount. In California and New York an award of such fees is discretionary with the court when this occurs.

When payment of just compensation is delayed, the owner is also entitled to receive interest on the amount of the late payment.

An important but largely ignored aspect of just compensation in eminent domain is that where the condemnor takes the owner's entire parcel of land, it does not actually pay anything (except for transactional costs) because it only exchanges one asset (money) for another asset of equal value (land at its fair market value). So at the end of the transaction—assuming a fair valuation process—both sides are theoretically as well off as they were before. Their balance sheets are unchanged. The British use more accurate terminology and call eminent domain "Compulsory Purchase" which is economically accurate, if not entirely grammatical (it is the sale not the purchase that is compulsory).

Liquidation value

Liquidation value is the likely price of an asset when it is allowed insufficient time to sell on the open market, thereby reducing its exposure to potential buyers. Liquidation value is typically lower than fair market value. Unlike cash or securities, certain illiquid assets, like real estate, often require a period of several months in order to obtain their fair market value in a sale, and will generally sell for a significantly lower price if a sale is forced to occur in a shorter time period. Liquidation value may be either the result of a forced liquidation or an orderly liquidation. Either value assumes that the sale is consummated by a seller who is compelled to sell and assumes an exposure period which is less than market normal.

The most common definition used by real estate appraisers is as followsThe most probable price that a specified interest in real property is

likely to bring under all of the following conditions:

Consummation of a sale will occur within a severely limited future marketing period specified by the client.

The actual market conditions currently prevailing are those to which the appraised property interest is subject.

The buyer is acting prudently and knowledgeably.

The seller is under extreme compulsion to sell.

The buyer is typically motivated.

The buyer is acting in what he or she considers his or her best interest.

A limited marketing effort and time will be allowed for the completion of a sale.

Payment will be made in cash in U.S. dollars or in terms of financial arrangements comparable thereto.

The price represents the normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.Note that this definition differs from the most commonly used definitions of market value or fair market value.

Luisana Lopilato

Luisana Loreley Lopilato (Spanish pronunciation: [lwiˈsana lopiˈlato]; born 18 May 1987) is an Argentine actress and model. She has appeared in the television series Chiquititas, Rebelde Way, Alma Pirata, Casados con Hijos and Atracción x4.

Market value

Market value or OMV (Open Market Valuation) is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and may or may not differ in some circumstances.

Rental value

Rental value is the fair market value of property while rented out in a lease. More generally, it may be the consideration paid under the lease for the right to occupy, or the royalties or return received by a lessor (landlord) under a license to real property. In the science and art of appraisal, it is the amount that would be paid for rental of similar real property in the same condition and in the same area.Determining Rental RatesDeciding on a rental rate doesn’t just mean figuring out the highest possible price you could list your rental for. Increasing the rental rate to the top of the market, can also increase the number of calls or issues a tenant may complain about during the term of the lease.

e.g. If you’re paying top dollar for something, you expect an exceptional experience. If you pay a below market rent, you are likely to not complain about smaller issues since you’re paying less.

Pricing your rental should be a strategy in order to maximize your net income. The longer you own the property, the easier this becomes.

Stepped-up basis

Under Internal Revenue Code § 1014(a), when a person (the beneficiary) receives an asset from a giver (the benefactor) after the benefactor dies, the asset often receives a stepped-up basis, which is its market value at the time the benefactor dies. A stepped-up basis is often much higher than the before-death cost basis, which is primarily the benefactor's purchase price for the asset. Because taxable capital-gain income is the selling price minus the basis, a high stepped-up basis can greatly reduce the beneficiary's taxable capital-gain income when the beneficiary sells the inherited asset.

Unsecured debt

In finance, unsecured debt refers to any type of debt or general obligation that is not protected by a guarantor, or collateralized by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation or failure to meet the terms for repayment. That differs from secured debt such as a mortgage, which is backed by a piece of real estate.

In the event of the bankruptcy of the borrower, the unsecured creditors have a general claim on the assets of the borrower after the specific pledged assets have been assigned to the secured creditors. The unsecured creditors usually realize a smaller proportion of their claims than the secured creditors.

In some legal systems, unsecured creditors who are also indebted to the insolvent debtor are able (and, in some jurisdictions, required) to set off the debts, which actually puts the unsecured creditor with a matured liability to the debtor in a pre-preferential position.

Under risk-based pricing, creditors tend to demand extremely-high interest rates as a condition of extending unsecured debt. The maximum loss on a properly-collateralized loan is the difference between the fair market value of the collateral and the outstanding debt. Thus, in the context of secured lending, the use of collateral reduces the size of the "bet" taken by the creditor on the debtor's creditworthiness. Without collateral, the creditor stands to lose the entire sum outstanding at the point of default and must boost the interest rate to price in that risk. If high interest rates are considered usurious, unsecured loans would otherwise not be made at all.

Unsecured loans are often sought out if additional capital is required although existing (but not necessarily all) assets have been pledged to secure prior debt. Secured lenders more often than not include language in the loan agreement that prevents debtor from assuming additional secured loans or pledging any assets to a creditor.

Warren Jones Co. v. Commissioner

Warren Jones Company v. Commissioner of Internal Revenue, 524 F.2d 788 (9th Cir. 1975) was a taxation decision by the United States Court of Appeals for the Ninth Circuit.

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