Tax court cases frequently inform on interesting subjects. For example, did you know one cubic yard of sand generally weighs 1-1/2 tons? That’s according to footnote four in 140 T.C. No. 15 (Chapman Glen Limited). In this case, the value of the sand, and other assets, are in dispute—which leads to another interesting subject: valuing assets.
Fair market value is a term often discussed in tax law, and generally defined as the price a willing buyer in possession of all relevant facts would pay a willing seller. Three approaches are typically used to determine the fair market value of property: (1) the market approach, (2) the income approach, and (3) the asset-based approach.
The market approach requires a comparison of the property with similar property sold in an arm’s-length transaction in the same timeframe. The property is valued by taking into account the sale prices of the similar property and the differences between that property and the property being valued.
The income approach values property by computing the present value of the estimated future cash flow of the property. The estimated cash flow equals the sum of the present value of the available cash flow and the present value of the property’s value at the end of its useful life.
The asset-based approach values property by determining the cost to reproduce it less depreciation or amortization.
Once you’ve found the value, it may be reduced by a “bulk discount”, which reflects the fact that the sale of a large block of property in the same general location over a reasonable period of time usually depresses the price for that property.
And one last bit of interesting trivia: Rip rap is the rock retaining wall that goes along the beach to dissipate the energy from the ocean to prevent cliff erosion.