Fair Market Value

“The only place the word fair appears in the Internal Revenue Code,” Al intoned, is “immediately before the phrase market value.”

Al has since retired, but I’ll never forget his words. He was responding to some complaint I voiced about an audit result. I’ve quoted him several times to grumpy clients and made every one of them smile and alter perspective.

We’re required, in the retirement plan recordkeeping world, to report assets each year at fair market value. That’s easy with stocks and bonds and mutual funds, but it isn’t so neat with limited partnerships and other investments that aren’t readily traded.

The folks who wrote the Internal Revenue Code also gave us a nice way to assess market value: it’s the price at which a reasonably sophisticated seller, under no compulsion to sell, would part with the item to a reasonably sophisticated buyer, under no compulsion to buy.

Sweet, huh? I think if you put two people and the asset in a room together, it will take about 30 seconds for them to agree on fair market value.

Aristotle said man is a political animal. I think he got part of the truth. I say man is a commercial animal. We invented the marketplace; we created written language for it; we are made for it.

Linguists argue that we have evolved with a predisposition for language, and it’s not hard to get how that has helped us survive. It’s equally not hard to see how being born with innate commercial sense is a survival advantage too.

There are several senses besides the famous five. Like sense of balance and sense of place. I submit we have a valuation sense: a sense of fairness, if you please.

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