The Thesis of Value

An appraised value is the assessment of all current and future benefits of possession compressed into a single dollar figure. As such, value is continually fluid, changing as the future is effected by the vagaries of time that can be either financially ascending or, for that matter, descending. The result is that an opinion of value can only be stated as of a specific date and within a specific marketplace. In addition, as this present valuation consists of future values it cannot be established without ane awareness of who is now and who is it assumed will be the owner…….. and this must be coupled with knowledge of the underlying purpose of the appraisal.

Value cannot be established in the ether. What is the purpose of the valuation? Value is established based upon date, place, potential ownership and/or potential user.
Who is looking at the value of my diamond ring?

  • A pawn shop?
  • An heir?
  • An accountant?
  • My executor?

The recipient of the document may clearly define the format that the appraisal is to take. Different users demand different and specific approaches to value. Consider:

  • To estimate the cost of replacement
  • To set a price for immediate sale of the item
  • To set a price to auction the item
  • To set the donation value
  • To establish the amount of gift, estate or income taxes
  • To value a partial loss
  • To value the item as collateral for a loan

Each of these different uses individually or in combination creates a separate and specific thesis per item that establishes that item’s suitable format, all of which create different levels of value.
Within this context the next issue to address is highest and best use which is defined as that condition which creates the highest value as a net return. And, again, the highest and best use can often be effected by how the property is used, when it is used and with and by whom it is used.
What is the definition of fair market value (FMV)?
One measure of fair market value is defined as the proposition of exchange under identifiable conditions.

  1. The amount of consideration at which the item would be exchanged
  2. Between a willing buyer and a willing seller
  3. Neither being under compulsion
  4. Each having full knowledge of all relevant facts
  5. And with equity to both

More specifically, fair market value can be described as the application of the game theory principal, known as the Nash Equilibrium, (John Nash, Nobel Laureate – It’s a Beautiful Mind). The Nash Equilibrium in essence states that there is an optimal decision, an equilibrium position, between competing parties in any game, in which each party, anticipating their opponent’s changing and competing decisions note that they can no longer improve their position by changing. In other words, the optimal outcome of a game is one where no player has the incentive to deviate from his or her chosen strategy after considering their opponent’s remaining choices.

Often the clarity is coerced by a special need or purpose. The more special, the narrower is the ability to find available comparable data. Intangible assets and intellectual property are often found to have their highest value when they are kept as part of the business reason for which they were created.

Another measure of fair market value can be stated as: the present value of the future economic benefits of ownership. Ownership of a Da Vinci may have the ability to create values in an ancillary format that far exceeds the value of the painting alone. The Mona Lisa, on display at the Louvre draws with no time limits enormous crowd revenues and donor relationships that may well exceed the normal measureable willing buyer/ willing seller value of Da Vinci’s masterpiece.

Exchange Conditions

There are times when a valuation must recognize that there are unwilling buyers and/or sellers where no market exists or when there is a state of coercion present ending in liquidation. There may exist a situation wherein the property is going to be used for a purpose that is different from the original purpose. An image that fails as a piece of fine art may become the emblem for a major corporate entity. At this juncture the appraisal concerns itself not with a properties failure but may seek to value its improved prospect as an investment.

FMV Applications:

The process of orderly liquidation is less exceptional then it’s counterpart, forced liquidation. The orderly process allows for reasonable time to find the proper market, timing or geographics (Aboriginal art doesn’t sell well in the United States). Following that reasoning, specific business circumstances may be required in order to find a viable market that could undertake a particular brand of intellectual property.

Forced liquidation implies speed which forfeits price or value.

The auction historically has mirrored forced liquidation in that the speed of the sale and the risk of missing the right buyer was integral but, now, the major auction houses (Sotheby’s, Christie’s, Heritage, etc.) are making the specific effort to consign items through private placement channels (over 30% of the major auction house volume) often achieving the reality of the sought after “best possible” buyer and the least chance of a ”bought in” sale.

One recognized exception to the general standard is when there is no market, then, how do you appraise illegal assets for the purpose of estate taxes and/or donations?

Some people have tangible items in their estate that, at this point in time cannot be legally sold, creating a problem………….. There is a fair market value (FMV) that creates a tax liability, and yet, no easy or legal way to sell the asset in order to pay the tax.

Collectible items with a real FMV but no legal marketable venue can still be converted into immediate cash, prior to death, through the tax savings generated when contributed to an agreeable non-profit, willing in the sense that selling prohibitions tied to animal conservancy will occasionally change as the “herd” flourishes opening the door for future monetization.

The IRS has shown that it will still establish an appraised value by considering the illicit but real market. When donating an item that the IRS maintains has a very real FMV but is not a legal commodity, the fair market value of the particular item of property can not to be determined by a forced sale price. “Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most sold to the public”(1). The FMV then exists even if, as noted in PLR 9152005, the market is an illegal one. There is a “fair market” present and the donor will still receive the relatable tax advantage. Thus, the donation of these items by the donor, prior to death, will reduce the estate through disposing of items that would have to be included on the estate tax return and which would then have left the heirs without the ability to sell the collectibles in order to pay the tax.

In the Sonnebend case, the estate appraisers valued an iconic Rauchenberg, with an “attached” rare stuffed bald eagle at zero (covered by the eagle protection act). The IRS and the Art Advisory Council took a very different view of the “painting” and valued the piece at 65 million dollars and demanded payment of a 29.2 million dollar estate tax and an 11.7 million dollar penalty and fine. Even though there is no legal market for this painting there “may be” an extralegal avenue and the true intrinsic value of the art “must” be considered due to its stunning and stellar quality. Had the painting been donated prior to the owners death (they were aware of the problems) the proposed FMV would have meant a deduction (with its inherent advantages) and the estate would not have been burdened with the problem.

True, there aren’t many Rauchenberg’s with illegal “attachments” but there are many collectors of ivory, Indian artifacts, etc., that could be facing similar tests. The resolution to the Sonnebend dilemma was having the painting donated to the MOMA in New York with no fine but no donation deduction.

There are instances where the departure from the comparative market approach to the income approach is based upon commercial yield:

As an example: if an item for appraisal has a commercial value (i.e., documentary film rental, display value of iconic image) a fair market value may be established based on earnings. Consider: assuming an annual income of $15,000 dollars in stock footage lease revenue for a year on 3 million feet of film. That works out to .005 cent per foot per year or $5 per 10,000 feet. Using a typical investment return (in normal times) of 5% you could derive the value at 20 times earnings, or in this case $100 per 10,000 feet or a total value of the film archive of $150,000. These numbers adjust based on content, rarity, intellectual property values and other social and cultural substance. This as a conceptual foundation, combined with comparable data for the type and quality of property being examined, has recognizable merit. This method is almost never applicable in the area of fine art.

  1. Revenue Section 20.2031-1(b)

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