The Fair Market Value Standard’s Competitive Hypothetical Market Structure: Substantive Implications for Appraisal Practice

Abstract

A substantive distinction between the Fair Market Value Standard’s (FMVS) Hypothetical Marketplace and the real-world marketplace, for inactively-traded assets, must exist, else the court could calculate real-world market value instead of the more onerous abstract, hypothetical Fair Market Value (FMV). The appraisal community has exhibited, for years, a reluctance to acknowledge that substantive distinction, yet who can legitimately address/analyze/litigate the fact of FMV without, first, objectively clarifying the distinct nature of the Hypothetical Marketplace? There is an absolute “necessity of a fairly precise definition of value as a prerequisite to the intelligent discussion of evidence” of value (Bonbright 1937). It is of fundamental relevance to all appraisals performed under the FMVS, and, contrary to prevalent appraisal practice and legal precedent, that substantive distinction has been with us — in Revenue Ruling 59-60 — since 1959. Though FMV determinations continue to be unbounded, in practice, by a well-defined market structure, we readily ascertain — through straightforward application of Microeconomics — the Hypothetical Marketplace is competitive. Competitive market price, generated therein, equals FMV (per share). FMV cannot be divorced from the underlying competitive market structure that establishes it.