Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Valuation Discounting Techniques: Terms Gone Awry
Wendy C. Gerzog*
*Professor, University of Baltimore, School of Law
A discussion of valuation for transfer tax purposes almost always begins with the estate tax regulation defining fair market value as “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.” Then, the scholar, litigant, or court describes equivalent values in money or money’s worth. Most of the time, this definition has been a perfectly good one, but the definition as applied has gotten out of control.
Thus, just as a regulation creates a rule, it should also create exceptions to that rule when the terms of the definition are not used in their normal sense. Specifically, when the seller is defined as someone who is seeking the lowest price for her product, fair market value needs a different definition to deal with the distortion created from the misuse of that term. Otherwise, we are in the land of Orwellian anti-logic where $100,000 in cash becomes the equivalent of $60,000.Regulations in the income tax loss context can serve as a model for exceptions to a general rule. There are two Regulations that deny losses for intentional destruction of property values. They can serve as models for Treasury to refine the fair market value definition to conform to a more realistic and public policy supported meaning of value when terms in the general definition are twisted, muddled, and misapplied.