Introduction

PURPOSE

From a practical point of view, the appraisal process can be viewed as no more than answering a question: “What is the value?” Before this question can be answered, however, a definition of value is required. Defining the term value begins with identifying the standard of value, that is, the type of value being sought. Each standard of value contains numerous assumptions that represent the underpinnings of the type of value being utilized in a specific engagement.

Even when a standard of value is specified, there is no guarantee that all would agree on the underlying assumptions of that standard. As James C. Bonbright wrote in his pioneering book, Valuation of Property:

When one reads the conventional value definitions critically, one finds, in the first place, that they themselves contain serious ambiguities, and in the second place, that they invoke concepts of value acceptable only for certain purposes and quite unacceptable for other purposes.1

It has been our observation that Bonbright's 1937 quote still applies today. This book is an attempt to address some of the ambiguities inherent in the application of common standards of value. It has been written by valuation practitioners who deal with these issues on a daily basis. Since we are not attorneys, the book is not written to provide legal advice but rather to discuss the interaction between valuation theory and its judicial and regulatory application.

In this book, we address the standard of value as applied in four distinct contexts: estate and gift taxation, shareholder dissent and oppression, divorce, and financial reporting. We have written this book for judges, lawyers, CPAs and appraisers, in the hopes of fostering a better understanding of the theory and application of the standard of value in the judicial and regulatory areas in which they are applied. We hope to provide a framework of appraisal theory as to the standards of value and the underlying premises of value generally applied in these four contexts.2 With this analysis, we discuss the resulting methodologies and applications that flow from these standards.

This book is not designed to explain specific valuation techniques and methodologies. For instance, we address the applicability of shareholder-level discounts for lack of control and marketability, but we do not discuss how to calculate them. Our hope is that this book will help practitioners understand some of the intricacies of performing services in these venues so they will ask appropriate questions and seek relevant guidance. We also hope that the book will help appraisal users to understand why the practitioners are asking such questions. Finally, we hope this book will contribute to a continuing dialogue on these issues.

Our chapter on fair value in financial reporting addresses aspects of valuation and auditing under the pronouncements of the Financial Accounting Standards Board (FASB), the Securities and Exchange Commission (SEC), and the Public Company Accounting Oversight Board (PCAOB). Valuations for estate and gift tax, shareholder dissent and oppression, and divorce matters are presented within their respective judicial frameworks, whether the federal courts for estate and gift tax cases or the state courts for shareholder dissent and oppression cases and the family law courts for the valuation and distribution of property upon divorce.

The breadth of our research deals with standards of value as they relate to judicial and regulatory matters, and we have found that valuation literature, legal scholarship, economics, and case law are all evolving. We have attempted to look at the development of these concepts as they have emerged over time as well as how they differ among the states.

Generally, the judicial decisions appear to endorse certain valuation methodologies that are designed to address the specific fact pattern of a case. It is our observation that in many cases, the courts seem to look at valuation from the perspective of equity to the parties rather than adhering strictly to any one specific standard of value and properly following valuation theory, especially in the context of family law.

In preparing this book, we have utilized a variety of resources in the fields of appraisal and law. In order to find state-specific language and case law applicable to our analysis, we have reviewed the annotated statutes of the 50 states and the District of Columbia in shareholder dissent and oppression and in property distribution in divorce. We have also reviewed law journals to seek legal perspective and identify the most important precedent-setting cases. In addition, we have reviewed articles in various publications to identify the major issues for the valuation professional. Finally, and most important, we have reviewed the cases themselves for perspective on the reasoning behind appraisal-related decisions.

As stated previously, we are not lawyers, and therefore in our review of case law, statutes, and varying legal analysis we are approaching the issues from a valuation professional's perspective. We look to present the language used in the application of law and financial standards pertaining to business valuations and the specific assumptions that most practitioners make when that language is used.

We are not providing an opinion in any chapter as to the appropriate treatment of the standard of value. Our analysis represents a survey of how the standard of value is being treated across the United States in varying contexts. For instance, in divorce, we have attempted to discern how each state addresses the standard of value as it applies to businesses and business interests. We offer no opinion as to what is the correct standard. Instead, we survey and report the standards of value we see being applied in the different states.

Every Appraisal Is Unique

In preparing an appraisal on a judicial matter, whether for a valuation for a federal jurisdiction in an estate or gift tax matter or for a state court matter pertaining to stockholders or divorcing spouses, the practitioner must be sensitive to the facts and circumstances of the case at hand. The practitioner must realize that the interpretation of the standard of value previously used in court cases may not apply across all cases. The specific fact pattern of a reported case might distinguish it from the case at hand.

The practitioner must also be aware that in prior case law, the terminology used and the ultimate outcome of the valuation may not be in sync. Additionally, jurisdictional differences may exist, and the way a certain standard of value is used in one jurisdiction may differ from its use in other state and federal jurisdictions.3

Fair Value versus Fair Market Value

The two most widely used standards of value are fair market value and fair value. Before we discuss the definitions of these terms in valuation and law, we can look at their application on a purely linguistic level.

In plain language, fair value is a much broader concept than fair market value. Webster's thesaurus gives these synonyms for the word fair: just, forthright, impartial, plain, upright, candid, sincere, straightforward, honest, lawful, clean, legitimate, honorable, temperate, reasonable, civil, uncorrupted, equitable, fair-minded.4 Without the market modifier, fair value can be seen as a broad concept of a “value” that is “fair.” Accordingly, the term fair gives a court wide latitude in reaching a judgment. The fair value of an asset could be its market value, its intrinsic value, or an investment value. Similarly, it could be a value in exchange, or a value to the holder; it could represent a liquidation value or a going-concern value.

The term fair market value is more limiting, by its use of the word market. Whether market applies to fair (as in fair market) or value (as in market value), we are limited to finding the value an asset would have in exchange, that is, on a market in the context of a real or hypothetical sale. Fair market value is the cornerstone for all other judicial concepts of value. Following a brief overview of common standards and premises of value in Chapter 1, we move first to a discussion of fair market value, as it sets the benchmark from which other standards of value are viewed.

Later, when we apply definitions set forth by the Internal Revenue Service (IRS), or the American Bar Association (ABA), or the FASB, or any other professional or regulatory body providing guidance, we arrive at a set of assumptions that determine the scope of the valuation. As we will see, fair value is indeed subject to wider interpretation from a judicial perspective than fair market value. Fair market value is well-defined and established in legal, tax, and accounting settings, and fair value is defined in terms of financial reporting. However, there is no universal definition of fair value in the context of dissent and oppression cases. Perhaps the most relevant definition was laid out in the landmark 1950 shareholder dissent case, Tri-Continental Corp. v. Battye,5 where the court expressed the basic concept of fair value under the dissent statute as being “that the stockholder is entitled to be paid for that which has been taken from him, viz., his proportionate interest in a going concern.”6

Interestingly, the definition of fair value in Black's Law Dictionary says “See fair market value.” Under the definition of fair market value, there is an example of a bankruptcy case.7 In that case, the term fair value is used, as opposed to fair market value, as if the terms were interchangeable. This circular referencing makes the concepts of fair value and fair market value difficult to separate in a broad legal context; however, as we show through a review of case law, statutes, and commentary, the two concepts are regularly viewed as different.

We will explain how fair value differs from fair market value in its application in shareholder dissent and oppression. In divorce matters, we will look at a continuum over which businesses are valued and see how, under certain circumstances in certain jurisdictions, fair value is closely related to fair market value and, under others, it is not.

Historical Perspective

Today, the term fair market value is used often in the statutory context. For example, New Jersey's statutes use the term in 125 different sections of the code, from library material (§ 2A:43A-1) to farmland (§ 4:1C-31) to hazardous substances (§ 58:10-23.11b). The term fair value is much less pervasive. Today, it is used mainly for financial reporting, shareholder oppression and dissent, and sometimes divorce matters. The historical development of fair market value, fair value, and the standard of value in divorce are briefly summarized next.

1800 to 1850

In searching case law, we begin to see references to standards of value in the early nineteenth century; however, the standards of value are not necessarily defined as such. One of the earliest references to fair market value is in a tariff case from 1832.8 The term was set forth without further definition.

1850 to 1900

In the late nineteenth century, the emergence of the railroads allowed an expansion of commerce to a national scale and aided the development of national, multishareholder corporations. As tax law developed and business organizations progressed, there came a need for judicial and legislative involvement in corporate law. Majority rule emerged in corporations when the courts recognized the operational necessity of abandoning unanimous consent for corporate decisions. The courts began to look for a manner by which to value property for taxation and to find equitable solutions to the disagreements of shareholders that naturally grew out of this evolution.

The earliest references to fair value were found in cases involving contractual agreements between individuals regarding the ownership of stock, property, or other assets.9 Like fair market value, the concept of fair value that emerged from these events remained undefined.

1900 to 1950

At the beginning of the twentieth century, the courts, the states, and other regulatory and advisory organizations began dealing more commonly with litigation involving business valuations. In the 1920s, the Commissioners for Uniform State Laws began developing a model code for businesses, but the Model Business Corporation Act of the ABA gained popularity and began to influence state legislatures in the codification of dissenters' rights in their statutes. In 1933, the Illinois Business Corporation Act became the model statute for shareholder oppression, and in the early 1940s, California instituted a statutory buyout provision where a corporation could elect to buyout a shareholder who claimed to be oppressed, rather than going through dissolution litigation. In 1950, the landmark case Tri-Continental Corp. v. Battye introduced the concept that fair value should compensate a shareholder for that which had been taken.

In the 1920s, the definition of fair market value began to emerge through various case decisions. The concepts of willing buyer, willing seller, known and knowable, and the effect of compulsion on fair market value were discussed and established as elements to consider in determining fair market value. The first discount was applied for lack of control of a corporation at the behest of the IRS in Cravens v. Welch,10 a California Tax Court case. A shareholder was looking to deduct taxable losses on the minority shares of a corporation, and while the shareholder desired to set a higher initial value of his shares, the IRS looked to lessen that value by applying a discount. Later, the application of the minority discount (though benefiting the IRS in this case) would be applied commonly in estate and gift tax matters to the benefit of the shareholder.

1950 to 1980

Businesses began to change in the latter half of the twentieth century. The most valuable assets of a business were often no longer tangible assets, such as real property and equipment, but were intangible assets, such as patents, trademarks, trade names, and goodwill. Because of this, valuation theory itself had to evolve to cope with new sorts of assets, which required complex valuations. The need for judicial valuations grew because of the disputes that arose over the value of intangible assets.

In family law, equitable distribution and the concept of community property emerged in the 1970s and, along with the emergence of intangible value, created a new need for business valuations in the judicial context of divorce. In estate and gift tax matters, the definition of fair market value was codified and explained in Treasury Regulations as well as by IRS Revenue Rulings.

In stockholder matters, the states more broadly adopted dissent and oppression statutes. By the 1970s, the states widely implemented the fair value buyout provision in dissolution statutes. Previously, the resolution to shareholder oppression was generally achieved by dissolving the existing corporation. Because of the availability of the fair value buyout, oppressed shareholders were now better able to recover their investment upon filing suit as oppressed shareholders.

1980 to the Present

Despite codification, in the past three decades, the Tax Court continues to deal with fair market value issues, including shareholder-level discounts, trapped in capital gains, and subsequent events. The family courts have struggled with the treatment of goodwill, the application of shareholder-level discounts, and the weight accorded buy–sell agreements.

Some of the most significant developments have occurred in shareholder oppression and dissent in the past 30 years. The courts had previously been hesitant to dissolve a company unless extremely harsh conduct was recognized, but with the institution of the fair value buyout in many states, the courts in those states became more inclined to allow the minority shareholder to be compensated with a payment for the value of his or her stock. In the late 1970s, tests for oppression emerged in the form of cases establishing that a shareholder may be awarded his or her fair value if there is a breach of fiduciary duty, unfair or unreasonably burdensome conduct by the majority, or a breach of the minority shareholder's reasonable expectations. In 1983, the Delaware decision Weinberger v. UOP, Inc.11 established the notion that customary and current valuation techniques may be used in determining fair value in shareholder dissent cases instead of the rigid guidelines previously applied. Several iterations of the Revised Model Business Corporation Act (RMBCA) published by the ABA and the Principles of Corporate Governance set forth by the American Law Institute (ALI) set suggested guidelines for determining fair value in these situations, and the states increasingly adopted these guidelines over this time period.

CHAPTER PREVIEW

Chapter 1: Common Standards and Premises of Value

Chapter 1 gives a general overview of the concepts of value, cost, and price. We introduce the standards of value generally, their application, and their basic underlying assumptions. In addition, we introduce the premises of value that underlie the assumptions of the standards of value.

Chapter 2: Fair Market Value in Estate and Gift Tax

Chapter 2 deals with fair market value in estate and gift tax valuations. In this chapter, we discuss the history and development of fair market value as well as its definition. We deconstruct the definition of fair market value in detail and discuss the implications of the definition on valuation in federal estate and gift tax matters.

In the federal tax arena, fair market value is an established standard with a generally uniform interpretation. The most common definition of fair market value comes from the estate and gift tax definition in Treasury Regulation 20.2031-1:

The fair market value 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.12

By this definition, assets are valued using a premise of value in exchange13 under the fair market value standard. While there are many issues that must be decided in each case under the fair market value standard, practitioners can generally rely on the assumption that the property to be valued is that which the shareholder or the shareholder's estate holds, whether it is a minority or a majority share of a given asset. We surveyed court cases dealing with fair market value, focusing on those concerned with what constitutes a marketplace, shareholder-level discounts, and the effect of events subsequent to the valuation date.

Through case law, IRS rulings, and valuation literature there is an established body of law and theory that frames the issues dealt with on an ongoing basis by the federal Tax Court. We review a sample of the major federal Tax Court cases to provide clarity on the legal framework applicable to business appraisal. We also explain the elements of fair market value so that later we can show the characteristics that distinguish other valuation standards, such as fair value, from this well-known benchmark.

Chapter 3: Fair Value in Shareholder Dissent and Oppression

Chapter 3 discusses fair value in dissenting and oppressed shareholder matters. Because modern corporations function under a system of majority rule, minority shareholders are vulnerable to exclusion or abuse by those with a controlling interest. As a special protection, minority shareholders are granted limited rights in dissent and oppression statutes as a check against majority rule. However, there remains ambiguity in the statutory language, which lends itself to varying interpretations of exactly what the shareholder will receive as compensation in those cases.

Shareholders are generally entitled to the fair value of their shares when they dissent from particular actions defined by statute or petition for the dissolution of a corporation because of the alleged abuse at the hands of majority shareholders. Some have argued that the term fair value is used in statutes to distinguish it from fair market value and the assumptions one would make when determining fair market value. In its theory and application, fair value is a broader standard.

In this chapter, we summarize the history and development of both shareholder dissent and oppression as well as the development of fair value as a standard of value in these matters. We look at the guidance provided by law associations and landmark cases in each state in an attempt to classify them in terms of their interpretation of various elements of fair value.

Although dissent and oppression are addressed under separate statutes, cases in both areas reference each other in their common use of the term fair value. Most states define the term only in their dissent statutes. The model corporate business statutes set forth by the ABA's RMBCA and the ALI's Principles of Corporate Governance also provide guidance as to procedural requirements of both oppression and dissent, as well as in setting guidelines for the determination of fair value.

One major issue addressed in the determination of fair value in these matters is the application of shareholder-level discounts. The trend over the past 25 years, as guided by the ABA and the ALI and precedential case law, has generally been, in the absence of special circumstances, to not apply these discounts. Many courts (and much of the modern commentary and scholarship) direct that the minority shareholder's value be determined as a pro rata share of the equity value of a corporation, without the application of shareholder-level discounts for lack of control and lack of marketability.

Depending on state law and the facts and circumstances of a case, discounts may or may not be applied.

As discussed in Chapter 3, the ABA and the ALI definitions of fair value have suggested clarification with regard to the application of shareholder-level discounts. In 1999, the ABA followed the 1992 ALI in recommending that discounts not be applied. The state legislatures and courts have established their own definitions, with or without reference to these suggested guidelines. However, we have seen statutes and case law moving toward the 1992 ALI and 1999 ABA definitions described previously.

Chapter 3 presents an extensive review of statutes, case law, and commentary on fair value analyses performed pursuant to dissent and oppression cases to achieve a better understanding of the rights of minority shareholders and the valuation process that leads to the ultimate determination of what that shareholder will receive. The chapter includes a chart showing how the market exception (which limits appraisals for publicly traded companies) is applied in various states, and a chart summarizing court cases regarding discounts.

We have also created a chart on the dissent and oppression standards of value in the 50 states and the District of Columbia, which is in Appendix B. In this chart, each state's statutory standard of value is listed, with any definition of that term, the valuation date, the availability of oppression as a trigger for dissolution, whether an election to buy out in lieu of dissolution is permitted by statute, and recent precedential case law governing the application of discounts. Using this chart, we have grouped the states through an evaluation of case law in order to establish common themes among states that treat fair value similarly.

Chapter 4: Standards of Value for Partnership and Limited Liability Company Buyouts

Chapter 4 is a new chapter. This chapter addresses the buyout of the partner in a partnership (including limited liability partnerships (LLPs)) and limited partnerships as well as for members of limited liability companies (LLCs). It grows out of our research into the buyout of a dissenting or oppressed minority corporate shareholder presented in Chapter 3. These are different entities from corporations and, as such, we have put them into a separate chapter.

Corporate stockholders do not have the right to be bought out of their ownership interest unless the court finds that the minority is dissenting from a specified action by the majority or that the minority shareholder is being oppressed by the majority shareholders.

In partnerships, limited partnerships, and limited liability corporations, there is often a buyout provision that provides for the purchase of the stock of a disassociating or deceased owner without the need for a finding of dissent or oppression.

The National Conference of Commissioners on Uniform State Laws (NCCUSL) has established model laws for each of these types of entities. Most states have used some of these model laws as the basis for their own statutes. For instance, § 701, “Purchase of disassociated partner's interest,” in the Revised Uniform Partnership Act (RUPA) bides to the purchase of a disassociated partner's interest in the following manner:

While this does not include the term fair value, comments to the section describe the definition in which minority discounts are not taken, but marketability discounts are considered. The standard of value set forth in many of the limited partnership and LLC statutes is described as fair value.

This chapter also presents the emerging body of case law for each of these entities, which typically follows the standard of value that is used in dissent and oppression matters for corporations.

Chapter 5: Standards of Value in Divorce

Chapter 5 addresses the premises and standards of value used when valuing a business in divorce. In this chapter, we review the history and development of the concepts of marital and separate property as well as the manner in which the concepts of equitable distribution and community property have developed. We then clarify the standards of value that the states apply consciously or by implication through the decisions of their courts.

In matrimonial valuations, there is no one consistent business valuation trend across the nation. States, and even different jurisdictions within the states, treat various issues such as goodwill, shareholder-level discounts, and buy–sell agreements very differently. In reviewing these issues, we have found that there is a continuum over which the standards of value fall, ranging from the most stringent interpretation of the value in exchange to the broadest view of the value of property to its owner (holder). Based on their treatment of goodwill, shareholder-level discounts, and the weight accorded buy–sell agreements, we have attempted to classify states as to where they fall on that continuum.

Other than as a matter of public policy and legislative intent, we find no consistent pattern as to why the states diverge in their application of standard of value. The bodies of law in the 50 states and the District of Columbia have developed independently, and these laws are continually evolving. Recently, some states have had cases of first impression dealing with the standards by which businesses are valued, and in these cases the courts have performed an analysis of nationwide case law to guide their decisions. There does not, however, appear to be an overwhelming demand in divorce to centralize the standards of value across the states as the ABA and the ALI have done in dissent and oppression matters.

Through our survey of precedential case law, annotated statutes, as well as legal and valuation publications, we have attempted to group states based on their treatment of goodwill, shareholder-level discounts, and the weight accorded buy–sell agreements in order to understand the standard of value generally applied in each state. We have grouped states according to the premise of value and the standards of value either stated in their statutes or stated or implied in their case law. With this analysis, we hope to provide appraisers and appraisal users with some insight as to the standard of value used in a particular jurisdiction.

The basic elements of this continuum involve two general premises of value:14 value in exchange and value to the holder; and three standards of value: fair market value, fair value, and investment value. We use these two premises and three standards of value to create a chart that groups the precedential cases of each state as follows:

Basically, we analyze each state's position on this continuum through its treatment of goodwill, shareholder-level discounts, and the weight afforded buy–sell agreements.

Chapter 6: Fair Value in Financial Reporting

Chapter 6 addresses fair value in financial accounting. In this chapter, we discuss the current standards for the reporting of assets and liabilities for corporations as established by the FASB. Further, we discuss the history and development of the concept of fair value in financial reporting and how changes in the nature of businesses led to the publication of FASB's Accounting Standards Codification (ASC) 820 Fair Value Measurements (formerly SFAS 157).

As we looked at the ALI and ABA guidelines for fair value in oppression and dissent, we look at the guidelines laid out by the pronouncements of the FASB and regulations from the SEC to better define and understand fair value in the financial reporting context.

Within this analysis, we address the hierarchy of fair value techniques and the preference for using established market prices over present value measurements in determining fair value. We discuss the mechanisms in the ASC/SFAS guidelines governing the treatment of intangible assets, including goodwill. We also compare fair value in financial reporting to fair value in shareholder dissent and oppression, investment value, and fair market value. We arrive at the emerging trends in financial accounting, including expansion of fair value measurement guidelines, consistency in the application of valuation techniques, and new practices in the auditing of fair value measurements.

HOW STANDARD OF VALUE CAN AFFECT THE ULTIMATE CONCLUSION OF VALUE

The standard of value underlies the theoretical and practical applications of valuation and defines for the appraiser the type of value being sought.15 In some circumstances, the applicable standard of value is fairly clear. In tax cases, fair market value is applied in accordance with the definition set forth in the Treasury Regulations and the guidance of IRS Revenue Rulings and Tax Court cases. There may still be controversies, such as the size of discounts allowed or the inclusion of events subsequent to the valuation date, but essentially the definition stands and provides relatively unambiguous guidance in a valuation assignment.

In other applications, however, the standard of value is not necessarily as clear. While the statutory application of fair value is nearly ubiquitous among the 50 states and the District of Columbia in dissenters' rights and oppression cases, the term is rarely meaningfully defined by those statutes. Over the past century, the courts, law associations, and state legislatures have weighed in on the appropriate definition of fair value to clarify its application.

Even less clear, in divorce, the standard of value is rarely explicitly established by case law and even less frequently by statute. For most states, we have to sort through various elements of a business's value and valuation issues such as the application of discounts in order to determine how a given state's courts determine the applicable standard.

The value of a business is the present worth of the future benefits of ownership, at a given point in time.16 However, values can change for the same asset as premises and standards of value change. As will be discussed in this book, the application of a particular standard of value has a substantial effect on the valuation conclusion.

To better illustrate this concept, we will demonstrate through a hypothetical example how value could be viewed using different standards as applied to different purposes. We will use, as an example, an accounting practice owned in equal share by three accountants.

For the estate tax valuation upon the death of one of the owners, the business interest in this closely held entity would be valued using fair market value. Accordingly, the one-third interest would be valued in exchange. Since the one-third interest lacks control and marketability, shareholder-level discounts would be considered.

Alternatively, should two of the shareholders oppress the third, the wronged party could allege oppression and the remaining shareholders could choose to exercise their buyout option rather than risk an expensive and drawn-out court proceeding that could result in a judicially mandated dissolution and possibly even the awarding of damages to the wronged shareholder. Under the fair value buyout remedy in his or her state's dissolution statute, the shareholder could be paid the fair value of his or her interest. In this case, the majority of states (as prescribed by the guidelines set by the ABA and the ALI) would value the company as a whole—the enterprise—and take a pro rata share of that value based on percentage ownership. Generally, no shareholder-level discounts would be applied, as the courts attempt to compensate the shareholder for that which had been taken from him or her.

Upon divorce, a whole range of values could arise based on the differing premises and standards of value. Depending on the statutes and case law in a given state, the value might be determined at fair market value, fair value, or investment value. Accordingly, for divorce purposes, shareholder-level discounts might be considered, considerable weight may be accorded buy–sell agreements, or none of these considerations may apply.

While the concept of fair value for financial reporting purposes has been around for a long time, it has recently received a great deal of visibility. It should not be confused with fair value for dissent and oppression matters, nor is it the same as fair market value. As the standard used in valuations for financial reporting purposes on a company's financial statements, fair value strives to reflect the value of a company's assets on its balance sheet on an economic basis, rather than the traditional cost basis. Based on a hierarchical system of valuation, the values expressed are the company's assets and liabilities that would exchange hands in an orderly transaction between market participants. While seemingly straightforward, fair value in this context has myriad nuances that the practitioner will need to address.

As can be seen, each of these situations could result in significantly different dollar amounts for the same ownership interest. This example illustrates the importance of understanding the premises and standards of value in a particular venue and for a particular purpose, and it is our hope that this book will contribute to continuing professional dialogue surrounding these issues.

1 James C. Bonbright, Valuation of Property (Charlottesville, VA: Michie, 1937), at 11.

2 Premises of value represent the general concepts of property under which the standards of value fall. As we will explain, the premises of value can be as important as the standard of value.

3 David Laro and Shannon P. Pratt, Business Valuation and Federal Taxes (Hoboken, NJ: John Wiley & Sons, 2011), at 5.

4Webster's New World Dictionary and Thesaurus (New York: Simon & Schuster Macmillan, 1996), at 222.

5 74 A.2d 71.

6Id. , at 3.

7 Bryan A. Garner, Black's Law Dictionary, 8th ed. (St. Paul, MN: Thompson West, 2004), at 1587.

8United States v. Fourteen Packages of Pins, 1832 U.S. Dist. LEXIS 5.

9Montgomery v. Rose, Court of Virginia, Special Court of Appeals 1855 Va. LEXIS 65; 1 Patton & H. (5 January 1855); The United States Rolling Stock Company v. The Atlantic and Great Western Railroad Company, Court of Ohio, 34 Ohio St. 450 (December 1878).

10 10 F. Supp. 94 (D.C. Cal. 1935).

11 457 A.2d 701 (Del. 1983).

12Gift Tax Regulation 25.2512-1 defines the term similarly.

13 As used within this book, value in exchange presumes some sort of hypothetical transaction where the ownership interest in a business or business interest is exchanged for cash or a cash equivalent.

14 General premises, to be distinguished from operational premises like liquidation value and value as a going concern. This will be discussed in further detail in Chapter 1.

15 Shannon P. Pratt and Alina Niculita, Valuing a Business: The Analysis and Appraisal of Closely Held Companies, 5th ed. (New York: McGraw-Hill, 2008), at 41.

16Id., at 56.