CHAPTER 2

Fair Market Value in Estate and Gift Tax

INTRODUCTION

In this chapter, we review the history and development of fair market value and address the elements comprising this standard of value, which is cited more frequently than any other standard of value. In fact, one court remarked:

Disputes over valuation fill our dockets, and for good reason. We approximate that 243 sections of the Code require fair market value estimates in order to assess tax liability, and that 15 million tax returns are filed each year on which taxpayers report an event involving a valuation-related issue.1

Fair market value is a theoretical construct commonly used in judicial valuations. It is the most widely utilized standard of value, as it applies to all federal and many state tax matters, including estate taxes, gift taxes, income taxes, and ad valorem taxes, as well as in certain states for marital dissolution cases and in a few states for shareholder oppression and dissent. In this chapter, our focus is on fair market value as it applies in federal estate, income, and gift tax matters because of the well-developed body of rulings, regulations, expert opinion, and case law regarding each element of this standard of value for those purposes. More specifically, we look at various court rulings that have addressed the theoretical underpinnings of fair market value.

In later chapters of this book, we discuss other standards of value that arise in judicial valuations. These standards, particularly ...

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