Answering the question, “what is fair market value,” depends on the circumstances. For most purposes, the fair market value of the property is the price at which such 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. (26 C.F.R. § 25.2512-1 Valuation of property; in general).
Gift Taxation
26 U.S.C. § 2512 provides: (a) If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift, and (b) Where property is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. 26 C.F.R. § 25.2512-1 provides: “The value of the property is the price at which such 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. The value of a particular item of property is not the price that a forced sale of the property would produce.” It goes on to say: “The value of a particular item of property is not the price that a forced sale of the property would produce. Nor is the fair market value of an item of property the sale price in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate. Thus, in the case of an item of property made the subject of a gift, which is generally obtained by the public in the retail market, the fair market value of such an item of property is the price at which the item or a comparable item would be sold at retail. For example, the value of an automobile (an article generally obtained by the public in the retail market) which is the subject of a gift, is the price for which an automobile of the same or approximately the same description, make, model, age, condition, etc., could be purchased by a member of the general public and not the price for which the particular automobile of the donor would be purchased by a dealer in used automobiles. Examples of items of property which are generally sold to the public at retail may be found in § 25.2512-6. The value is generally to be determined by ascertaining as a basis the fair market value at the time of the gift of each unit of the property. For example, in the case of shares of stocks or bonds, such unit of property is generally a share or a bond. Property shall not be returned at the value at which it is assessed for local tax purposes unless that value represents the fair market value thereof on the date of the gift. All relevant facts and elements of value as of the time of the gift shall be considered. Where the subject of a gift is an interest in a business, the value of items of property in the inventory of the business generally should be reflected in the value of the business. For valuation of interests in businesses, see 25.2512-3. See § 25.2512-2 and §§ 25.2512-4 through 25.2512-6 for further information concerning the valuation of other particular kinds of property. See § 25.2702-6 for an adjustment to the total amount of an individual’s taxable gifts where the individual’s current taxable gifts include the transfer of certain interests in trust that were previously valued under the provisions of section 2702.”A substantially similar defition of fair market value for estate tax purposes appears at 26 C.F.R. § 20.2031-1(b).
Sweet Heart Deals
26 CFR § 25.2512-8 provides that [t]ransfers reached by the gift tax are not confined to those only which, being without a valuable consideration, accord with the common law concept of gifts, but embrace as well sales, exchanges, and other dispositions of property for a consideration to the extent that the value of the property transferred by the donor exceeds the value in money or money’s worth of the consideration given therefor. However, a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm’s length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money’s worth. A consideration not reducible to a value in money or money’s worth, as love and affection, promise of marriage, etc., is to be wholly disregarded, and the entire value of the property transferred constitutes the amount of the gift. Similarly, a relinquishment or promised relinquishment of dower or curtesy, or of a statutory estate created in lieu of dower or curtesy, or of other marital rights in the spouse’s property or estate, shall not be considered to any extent a consideration “in money or money’s worth.”
Estate Taxation
In Connelly v. U.S., 20 F. 4th 412 (8th Cir. 2023) (Petition for a writ of certiorari filed) two brothers jointly owned a closely held business. The corporation owned life insurance policies ($3.5 million) on each brother’s life so it could redeem shares if one brother died. Michael died, the policy on his life was redeemed and the corporation redeemed his shares for $3,000,000. Michael’s estate argued that his shares were worth the amount paid to redeem his shares. The IRS, on the other hand, argued that the life insurance policy should be counted in determining the value of the redeemed shares. Despite contrary rulings in other circuits, the Eighth Circuit agreed with the IRS (hence the reason for the petition for writ of certiorari).
First, the Court held that the value of shares is “determined without regard to any option, agreement, or other right to acquire … the property at a price less than the fair market value” or to “any other restriction on the right to sell or use such property. 26 U.S.C. § 2703(a).” Thus, the stock redemption agreement was not controlling in setting a price for the shares. Subsection (b) of Section 2703 provides that, to affect valuation, the agreement “must (1) be a bona fide business arrangement, (2) not be a device to transfer property to members of the decedent’s family for less than full and adequate consideration, and (3) have terms that are comparable to other similar arrangements entered into in arm’s length transactions.” The Court held that because there was no fixed or determinable price for determining the value of Michael’s shares, the agreement did not satisfy Subsection (b). In support, the Court cited Est. of Blount v. Comm’r, 428 F.3d 1338, 1342 (11th Cir. 2005); Est. of True v. Comm’r, 390 F.3d 1210, 1218 (10th Cir. 2004); Est. of Gloeckner v. Comm’r, 152 F.3d 208, 213 (2d Cir. 1998); and St. Louis Cnty. Bank v. United States, 674 F.2d 1207, 1210 (8th Cir. 1982). The Court also noted that the stock redemption agreement wasn’t actually used to set the redemption price; “the $3 million price came not from the mechanisms in the stock-purchase agreement but rather from Thomas and Michael Connelly, Jr.’s ‘amicable agreement’ resolving outstanding estate-administration matters.”
After discarding the stock redemption agreement as a basis for determining value, the Court cited IRS regulations, finding “the value of property in the gross estate is 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. 26 C.F.R. § 20.2031-1(b); see also United States v. Cartwright, 411 U.S. 546, 551, 93 S.Ct. 1713, 36 L.Ed.2d 528 (1973).” The Court then went on to find that a willing buyer and willing seller would have taken the life insurance proceeds into account in setting the redeption price. This was a departure from Estate of Bount, which held that the redeption was a liability offsetting the life insurance proceeds. In support, the Court noted several factors: (1) the valuation must be done as of the time of Michael’s death, which means the corporation was entitled to the life insurance proceeds at the time of redeption; and (2) the windfall to the surviving brother, Thomas, if the life insurance proceeds are ignored; if the life insurance proceeds are not considered, then overnight, Thomas’s shares would have quadrupled in value.
See Connelly v. United States, U.S., No. 23-146 (6/6/2024).
Bankruptcy
Under the Bankruptcy code, a trustee may void transfers made within 2 years prior to the filing of a bankruptcy petition unless the debtor received reasonably equivalent value. 11 U.S.C. § 548(a)(B). In Bfp v. Resolution Trust Corp., 511 U.S. 531 (1994), Justice Scalia, writing for the Court, concluded that a consideration received from non-collusive real estate mortgage foreclosure sale conforming to applicable state law is “reasonably equivalent value” for property under Bankruptcy Code. The issue arose due to a split among the federal courts of appeal regarding whether Section 548 allowed a bankruptcy court to set aside a foreclosure sale.
“The market value of . . . a piece of property is the price which it might be expected to bring if offered for sale in a fair market; not the price which might be obtained on a sale at public auction or a sale forced by the necessities of the owner, but such a price as would be fixed by negotiation and mutual agreement, after ample time to find a purchaser, as between a vendor who is willing (but not compelled) to sell and a purchaser who desires to buy but is not compelled to take the particular . . . piece of property.” Black’s Law Dictionary 971 (6th ed. 1990). In short, “fair market value” presumes market conditions that, by definition, simply do not obtain in the context of a forced sale. … An appraiser’s reconstruction of “fair market value” could show what similar property would be worth if it did not have to be sold within the time and manner strictures of state-prescribed foreclosure. But property that must be sold within those strictures is simply worth less. No one would pay as much to own such property as he would pay to own real estate that could be sold at leisure and pursuant to normal marketing techniques. And it is no more realistic to ignore that characteristic of the property (the fact that state foreclosure law permits the mortgagee to sell it at forced sale) than it is to ignore other price-affecting characteristics (such as the fact that state zoning law permits the owner of the neighboring lot to open a gas station).
The modern law of fraudulent transfers had its origin in the Statute of 13 Elizabeth, which invalidated “covinous and fraudulent” transfers designed “to delay, hinder or defraud creditors and others.” 13 Eliz., ch. 5 (1570). English courts soon developed the doctrine of “badges of fraud”: proof by a creditor of certain objective facts (for example, a transfer to a close relative, a secret transfer, a transfer of title without transfer of possession, or grossly inadequate consideration) would raise a rebuttable presumption of actual fraudulent intent. See Twyne’s Case, 3 Coke Rep. 80b, 76 Eng. Rep. 809 (K. B. 1601); O. Bump, Fraudulent Conveyances: A Treatise upon Conveyances Made by Debtors to Defraud Creditors 31-60 (3d ed. 1882). Every American bankruptcy law has incorporated a fraudulent transfer provision; the 1898 Act specifically adopted the language of the Statute of 13 Elizabeth. Bankruptcy Act of July 1, 1898, ch. 541, § 67(e), 30 Stat. 564-565.
Nonetheless, the Court declined to overturn 400 years of jurisprudence regarding foreclosure law, finding that it could create havoc in the real estate market and doubt regarding real estate titles. In a dual federal-state system of government, local government is better suited to determine local foreclosure rules. “We deem, as the law has always deemed, that a fair and proper price, or a “reasonably equivalent value,” for foreclosed property, is the price in fact received at the foreclosure sale, so long as all the requirements of the State’s foreclosure law have been complied with.”
Fraudulent Transfers
O.C.G.A. § 18-2-74 provides: (a) A transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1) With actual intent to hinder, delay, or defraud any creditor of the debtor; or
(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
(A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(B) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.
(b) In determining actual intent under paragraph (1) of subsection (a) of this Code section, consideration may be given, among other factors, to whether:
(1) The transfer or obligation was to an insider;
(2) The debtor retained possession or control of the property transferred after the transfer;
(3) The transfer or obligation was disclosed or concealed;
(4) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(5) The transfer was of substantially all the debtor’s assets;
(6) The debtor absconded;
(7) The debtor removed or concealed assets;
(8) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(9) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) The transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
Resources: Introduction to Modern United States Voidable Transactions Law
Medicaid
Property transferred within the look-back period for less than fair market value is subject to a transfer penalty. For eligibility purposes, Section 2303 of the Georgia ABD Medicaid Manual uses the term “Current Market Value” (CMV) and defines it as the going price for which a resources can reasonably be expected to sell on the open market in the particular geographic area. “Equity value” is the Current Market Value less (i) the amount of principal owed, (ii) any prepayment penalty, and (iii) any other debts such as liens or other loans. For purposes of determining whether a transfer of resources penalty applies, Section 2342-2 states “Fair market value (FMV) is an estimate of the value of an asset, if sold at the prevailing price at the time it was actually transferred. Value is based on criteria you use in appraising the value of assets for the purpose of determining Medicaid eligibility. For an asset to be considered transferred for FMV, the compensation received for the asset must be in a tangible form with intrinsic value. A transfer penalty applies if an applicant away or sells an asset for less than CMV. A penalty applied in the context of a sale would be applied to the uncompensated value, which is defined as “[t]he difference between the FMV of the asset at the time of the transfer and compensation received for the resource.”
In the absences of an actual sale, establishing value is a subjective process. In Georgia, the Medicaid agency presumes CMV is the tax assessed value. Georgia ABD Manual Section 2303-1. Unless the tax assessor lists the fair market value, since most property is assessed at 40%, caseworkers are instructed to multiply the assessed value by 2.5. A Medicaid applicant who disagrees with the tax assessor’s valuation may rebut that value by submitting two estimates from knowledgeable sources, such as a realtor. Caseworkers are instructed to use the average of the two estimates as the CMV.
Sometimes property cannot be easily sold. Section 2304 of the Georgia ABD Manual recognizes that certain non-liquid resources that would normally be counted may be totally or partially excluded if specific conditions are met. Caseworkers are instructed to exclude personal or real property for any month in which the Medicaid applicant is making a bona fide effort to sell the property. See also POMS SI 01130.140 and SI 01150.205 (Regarding reasonable efforts to sell).
Evidence of a bona fide effort to sell includes any of the following:
- listing the property with a realtor
- a for sale sign on the property
- advertisement in a newspaper
- has not refused a reasonable offer (2/3 of CMV).
If the real property for which a bona fide effort to sell is being made is non-homeplace, require the A/R to sign a statement that s/he has tried to sell, is trying to sell, or will try to sell the property within the next 30 days. Require the A/R to market the resource at current market value (CMV).
Verify/document that the A/R has not refused a reasonable offer on the property (2/3 of the CMV). Verify/Document the A/R’s past and continuous efforts to sell the property at the following
intervals:
- prior to approval of the application
- 9 months after approval
- every three months thereafter.
NOTE: The A/R has 30 days to put the property on the market after signing a statement of intent to do so.
