People often use the word "value" as if it could have only a single meaning. In a recent meeting, an attorney asked his client about inventory purchases it had made: "How much of the inventory’s value did you pay for the inventory?" The response was "The amount we paid was 12 percent on the dollar of the value normally paid by those in our business for that type of inventory." Although this exchange related to an ad valorem tax¹ appraisal, it could just as easily have occurred in a bankruptcy case. The first reference to "value" was in reality a reference to the catalog price that was typically used as a reference guideline for those types of purchases. The use of the catalog price as the equivalent of "value" is simply a way of stating what is normally paid in that marketplace at that particular level of trade. At a hearing, an attorney’s use of the word "value" might convey this meaning or not. The use of the word value without further definition is likely to create confusion during a hearing, as well as in other settings, such as plan or contract negotiations.

Most judicial-type hearings on valuation issues provide case studies in the use of words taken out of context, provided with improper definitions or used in a dictionary sense but mistakenly equated with a word of art. A particularly important example of a phrase having multiple meaning is "liquidation value." In ad valorem tax cases, the word liquidation is a death knell if imposed as an indication of value. Tax assessors refer to this term all the time when defending against the concept of fair market value. The appraiser, if following a tax code that uses terms such as "market value" or "fair market value," must consider a willing buyer and a willing seller. A willing buyer means that there will be an exchange of ownership. However, market value is viewed as being different than "liquidation value" even though the very exchange of title can be seen as liquidation by the seller. The question can be asked how else can there be a buyer and a seller without an assumed exchange of title. In bankruptcy cases, the "liquidation value" includes a forced sale with a compelled seller, rather than a willing one.

To liquidate, as the dictionary defines it, is "to pay off or settle; to wind up the affairs of; liquidate a business; to convert [assets] into cash; to put an end to; abolish or kill." When one liquidates or sells, it can be a company, a group of items or a single item. One can liquidate at fair market value or at an auction. A liquidation sale might involve someone that is forced to sell (a compelled seller) or one that wishes to sell for a price that equates to fair market value (a non-compelled seller). "Liquidation value" as a word of art, implies a compelled sale value, if not directly defined as it is by the American Society of Appraisers (ASA). (Its definitions were discussed in "Definitions Explained," ABI Journal, April 1993).

The Internal Revenue Code (IRC) refers to liquidation within its requirements for the allocation of a purchase price. The intent there is that an allocation of assets for depreciation should never be lower than the order-ly liquidation value of the assets. However, orderly liquidation is not a defined term in the Tax Code and is used therefore in its common English meaning, i.e. orderly (to do something in a non-chaotic fashion) and liquidation (to sell, or "liquidate," over a period of time). The Tax Code also indicates that if the earnings of the company cannot support the values assigned, the value must be reduced to a point at which the earnings would support the values. (It should be obvious that a company should be closed down and liquidated if the earnings do not support a "value" for the company that exceeds what its individual assets would bring if sold in the marketplace.)

The only courts that generally use the term liquidation value with a definition that includes a compelled seller are U.S. bankruptcy courts. All other courts recognize fair market value unless a contract such as a lease or other legal instrument indicates another value to be used. For example, in the preceding paragraph, the IRC is utilizing a concept which the ASA Machinery & Technical Specialties (MTS) Committee defines as fair market value-removal. The company is not compelled to sell but rather should liquidate its assets as the return would be greater than continuing to operate. This is not a compelled seller but rather a seller making a good economic decision. The value of that sale in the marketplace would be fair market value rather than a value more associated with a compelled seller.

The variations in understanding of the meanings of what are terms of art to professionals in a field can pose difficulties for the professional in explaining or defending positions to decision-makers who are not well versed in the technical meanings of the various definitions. It can be to the advantage of an advocate to use a word that may be used correctly as ordinary English but that confuses the hearer with its use as a term of art. If use of a term is handled that way, one might question the advocate’s ethics. If so used by an appraisal professional, one might even see it as a potential violation of the Uniform Standards of Professional Appraisal Practice (USPAP)² that relates to something which can be seen as "misleading." A recommended source for information regarding the USPAP standards formulated by The Appraisal Foundation is the following: Appraisal Standards Board of The Appraisal Foundation, 1029 Vermont Ave. NW, Suite 900, Washington, DC 20005; telephone (202) 347-7722 or fax (202) 347-7727.

It is becoming common practice to meet USPAP standards even when it is not mandated by statute, regulation or common practice. An appraisal that indicates that it meets USPAP standards could be challenged if, in fact, it does not meet those standards. Thus, this publication would be valuable to have when dealing with value issues in litigation. One is faced with the dilemma of the difference between what may be unethical, but not unlawful. It is somewhat akin to the confusion between the words "unprofessional" and "unethical;" it is possible to be a pro-fessional who can be unethical or alternately to be ethical, but unprofessional.

The English language is full of words that can create semantical dilemmas or allow wrong impressions by the way they are used. Words may give the wrong impression by their makeup. An example of such a word is "jackrabbit." It would seem that this animal is just a type of rabbit. It has long ears and hops and looks like a rabbit. In addition, the name of the animal has the word "rabbit" in it. The fact is that a jackrabbit is not a rabbit but a "hare." Rabbits are born without fur, whereas hares are born with it. To most people, this distinction is of no importance, but if a technical issue arose in a court case in which the difference was significant, it would be essential to dispel the classification confusion that arises from the name itself.

In most cases, term confusion is the result of ignorance. If you tell someone he or she is ignorant, does he consider that you have insulted him by using a word that can be viewed as synonymous with stupidity, or, alternatively, does he assume you were simply indicating he was uneducated in a particular subject? Most people know that ignorance and stupidity are not the same but for some reason become equally incensed by the use of either word. Once an individual was asked the following question: "Can you explain the differences among a mountain lion, a cougar and a puma? The individual responded, "I know they are all cats, but I don’t know the exact differences, possibly their sizes are not the same." This answer reflects the individual’s ignorance but says nothing about whether the person is stupid. In fact, there is no difference between the three because they are the same animal called by a different name.

The appraiser must always worry about interpretation, perception and qualification. Very seldom does the appraiser ask the question, what makes "fair market value" fair? While some may disagree, the term is primarily considered to be the same as "market value" and many times synonymous with "value." The word "fair" originally was intended to indicate that the opinion of value is reasonable to both a willing buyer and a willing seller. It may be better stated to say that the "fair" value opinion expressed by the appraiser is one that could be recommended equally well to a buyer or to a seller. Some might then conclude that fair market value in a forced sale situation would be the same as a liquidation value as typically understood and defined. The reason for that conclusion would be the compelled seller. However, that sequence of thought soon becomes confusing. For that reason, appraisers have developed and used words of art that are defined with their reports. It might be better to say that liquidation value is a value that is "fair" (as defined in a dictionary) to use in light of prevailing conditions. This formulation takes into account that the market dictates the value through prices that are paid. If there are no sales of an item, fair market value is an opinion of an anticipated price made by a knowledgeable appraiser who measures the market reactions. If all are in agreement with fair market value as typically defined, there can still be a disagreement as other normal and typical qualifications are added to the opinion. These additional qualifications are usually spelled out in the scope and function of an appraisal report. The ASA has come up with three value concepts that remain subject to differences of opinion: fair market value-removal, fair market value-installed and fair market value in continued use.

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It would be wise for all appraisers to be careful in the use of value conclusions so that they are not taken out of context by advocates seeking to mislead...

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Many documents indicate fair market value without defining the concept. This is found many times in ad valorem tax codes or commercial leases. The point is that a value, regardless of the concept, is either for an item as installed or without consideration of installation. On measuring individual items of equipment, the market approach, if appropriate, considers the sales between two parties. Very seldom can one provide a comparable in which the sale of a piece of equipment is to remain where it is. Naturally there are exceptions to this, but the point is that most comparable sales for machinery and equipment subsume the expense of the movement of a piece of equipment from one place to another. There are opinions that if "fair market value" does not contain any definition or additional qualification, it denotes the amount that could be obtained for that piece in the marketplace. If the intent is to indicate something other than the item to be embodied in a value opinion, that additional element should be defined or made a part of the concept term. It is for this reason that the ASA’s MTS Committee produced the suggested definitions; yet, in all likelihood, instead of alleviating the confusion, they may have added to it. Advocates, although their intentions are good, make reference to these terms as if they are all the terms an appraiser can use and as if other terms are inappropriate even if they carry the same definition.

It must be understood that the ASA definitions are merely suggestions and are not required. Nonetheless, most interpretations or definitions can utilize one of the terms suggested by the MTS Committee. There was a case in which an appraiser used the term "fair market value-removal" as part of the appraisal report. However, the legal document under consideration simply used the words "market value." As a result, the court refused to consider the appraisal on the grounds that it did not comply with the required terminology. Whether that was in fact true may be argued since the legal document could be viewed as stating with imprecision what was stated with greater precision in the appraisal report. However, this case does offer an example for both appraiser and attorney of the need to coordinate on the use of terms.

To determine a value, there must be an interpretation of the term. It is that interpretation that leads to the greatest problem when there is advocacy involved, such as for a higher or lower value in the fixing of ad valorem taxes or for the requirement for the statement of asset values in applying for a loan. Everyone recognizes the various strategies. It is no secret as to what is really occurring in value advocacy situation, except possibly for jurors who have never addressed value issues before. Perhaps appraisers need to become better educators of those affected by their reports. It would be wise for all appraisers to be careful in the use of value conclusions so that they are not taken out of context by advocates seeking to mislead those unfamiliar with technical value terminology.

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Footnotes

¹Also see "Tax Savings," ABI Journal, July/August 1996. [Return to Text]

²Also see "Standards in Valuation," ABI Journal, April 1997. [Return to Text]