Fair Market Value is a complex determination of value framed by the U.S. Federal government for tax liability assessment, be it estate tax, gift tax, or income tax. The good book when it comes to FMV is the U.S. government's tax regulation Sec. 20.2031-1(b). Many estate attorneys and appraisers can recite by heart the first part of this regulation: The Fair Market Value is price at which the property would change hands between a willing buyer and willing seller, neither under any compulsion to buy or sell... While this is certainly the right chapter, it is not the only verse, and it behooves us to look at the regulation in full. Failure to consider the totality of the FMV definition may lead to inaccurate valuations.

The regulation also states FMV is not to be determined by a forced sale price. So, while the U.S. government may consider the sales price reached for liquidated estate assets the most probative evidence of its FMV, the relevant regulation specifically recognizes an owner's right not to sell, due to the benefits attendant to retained ownership. Fair Market Value therefore can describe the value of property unsold. Without the actual sale price of subject property indicating FMV, appraisers typically rely on the Market Comparison Approach to arrive at values.

This appraisal method entails determining the FMV of an object by relating it to past retail sales results of items of similar qualities. Similar qualities for property may include: maker, size, age, materials, and subject matter. This method is problematic however when it comes to appraising hand-made antiques and fine art, due to the unique nature of such property. Determining appropriately diagnostic comparables for such unique objects is inherently subjective. Other factors such as provenance (ownership history) and vendor status, e.g. high-end gallery, are equally unscientific, yet may also impact value.

The sale of chosen comparables must also have occurred in a relevant marketplace, that is, where such property is generally obtained by the public in the retail market. The regulations cite a theoretical example of a used car having the FMV equal to what a used car with comparable qualities could cost the general public if purchased from a used car dealer (the typical market for such items). It is critical to note here that FMV is not determined by the amount that might be obtained from the sale of such a car, but rather from how much it would cost to purchase a comparable one.

Determining the appropriate marketplace for a piece of property occurs on a case by case basis, as no one marketplace necessarily qualifies a priori. Retail market transactions, which involve the ultimate consumer, occur at dealerships, stores, and auction houses. However, wholesale transactions may occur at all of these venues as well. Both layers of the marketplace may operate simultaneously, depending on the nature of the property, and the status of the buyer. What a jewelry dealer pays for a diamond from a jewel importer, could not be taken for the FMV of the same stone after it has been retailed to the general public. Or, to use an example one court chose, the FMV of a head of cattle sold at a cattle auction could not be used as the FMV of a cow's worth of steaks at the supermarket.

Finally, the market comparison approach is predicated upon sales of comparables with a reasonable length of time prior to the appraisal's effective date. Anticipation of future value is generally dismissed as unreliable and unknowable. FMV is only meaningful when tied to the effective date of the appraisal, as the market can fluctuate significantly due to changes in supply and demand, fad and fashion.

The determination of FMV is a complex process, best suited to auction house specialists and professional appraisers, who are actively in tune with the current marketplace. Even then experts can differ widely; ten appraisers looking at the same item might come up with ten different opinions of value, and arguably, all of them could be correct and defensible. There is no irrefutable right answer for Fair Market Value, but there are some recognized processes and standards that can be followed in striving to determine it.

The Appraisal Foundation, a not-for-profit organization authorized by Congress, was created in 1987 to support the appraisal profession by creating method standards and codes of ethics. These are published in the Uniform Standards of Professional Appraisal Practice (USPAP). Appraisal organizations, such as the American Society of Appraisers and the Appraises Association of America, require adhering to USPAP standards as a requirement for membership.

Following the complete FMV definition prescribed by the Treasury Department, and adhering to USPAP keeps the problematic process of FMV determination manageable.