Published by Semler Appraisals & Estate Liquidations
A Professional Service for the Valuation of Personal Property
Fall, 2002 Vol. 4, No. 3
Hypothetically Speaking … Fair Market Value
The U.S. federal government originally defined Fair Market Value (FMV) for use in determining tax liabilities, including gift tax, estate tax, and deductions for non-cash charitable contributions.
This FMV is the only value used by the Internal Revenue Service when pertaining to gift tax, estate tax, income tax (including charitable donation deductions), casualty loss, and bankruptcy.
FMV is a hypothetical concept implying that neither the buyer nor seller has an advantage, that an ongoing marketplace exists in which buyers and sellers interact with frequency, and in which research can be conducted to uncover past sales of comparable properties in order to establish value.
FMV is hypothetical because it assumes the enjoyment of retained benefits will continue. The owner could sell and enjoy the proceeds, or could keep the property and enjoy its use. Ultimately the FMV reported to the IRS will depend on whether the property is sold or kept. Let’s look at some examples:
- Property sold, not kept—The contents of an estate that are sold during the closing of an estate are taxed at the amount netted by the estate. The IRS considers the sale price of property as good and sufficient proof of FMV. The “hypothetical-ness” is removed. The netted amount is the FMV that is reported to the IRS.
- Property kept, not sold—The contents kept by an heir of the estate are taxed on what a buyer would pay, not on the amount it might have netted if (hypothetically) sold. This concept is hypothetical in the sense that the unsold estate property is valued as though its rights of ownership to the estate continues.
FMV is a measure of the amount that would be obtained through a buyer in a transaction, not the amount that would be retained by the seller. Here’s another example. There is a widget in Uncle Fred’s estate. No one in the family wants it and it goes to auction where it is sold with a hammer price of $20,000.00. When the insurance, shipping, photography fees, and selling commission are subtracted out, the amount retained by the estate (selling price less sales commissions and other expenses) is $15,000.00. Since the widget sold, the amount that gets reported to the IRS is $15,000.00.
Same widget, but in this scenario cousin Freda, one of the heirs, inherits the widget and wants to keep it. A similar widget sold recently at auction for a hammer price of $20,000.00 (note that the hammer price is the same as that used above). A buyer’s premium of 10% was also collected from the buyer, for a total of $22,000.00. The FMV reported is $22,000.00. This interpretation comes from Internal Revenue Regulation Section 1.170A-1(c)(2) which defines FMV as “The price at which property would change hands between an willing buyer and a willing seller …” The widget would not change hands at the auction unless the buyer paid the buyer’s premium in addition to the hammer price.
In summary, FMV represents the amount of money that would be obtained from a buyer rather than retained by a seller in hypothetical situations when the property is not sold. The concept of Fair Market Value applies to income tax and estate and gift tax cases.
And Speaking of Art
If you’ve ever been confused by terminology in the world of art, keep this list of definitions handy.
Authorship by or ascribed to … — This is the highest level of authenticity indicated. A work by the artist.
Attributed to … — Probably a work by the artist, but less certainty as to authorship is expressed.
Studio of … — A work by an unknown hand in the studio of the artist that may or may not have been executed under the artist’s direction.
Circle of … — A work by an as yet unidentified but distinct hand closely associated with the named artist, but not necessarily his/her pupil.
Style of … or follower of … — A work by an artist in the named artist’s style, contemporary or nearly contemporary, but not necessarily his/her pupil.
Manner of … — A work in the style of the artist and of a later date.
After … — A copy of a known work of the artist.
Signed, dated, inscribed — The signature, date, or inscription are by the hand of the artist.
Bears a signature, bears a date, bears an inscription — A signature, date, or inscription has been added by another’s hand.
- Appraisals for probate/estate tax; equitable distribution among heirs; insurance coverage and claims; non-cash charitable contribution; distribution in marital dissolution; bankruptcy.
- Estate Liquidations by auction or tag sale.
- Litigation Support
- Lorrie Semler is a Certified Member of the International Society of Appraisers, specializing in Antiques & Residential Contents.
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