What does fair market value apply to?

Fair market value is a critical concept in the context of valuation and plays a significant role in various financial and legal situations. In terms of gift and estate taxes, fair market value applies because it represents the price at which property would change hands between a willing buyer and a willing seller, both having reasonable knowledge of the relevant facts and neither being compelled to act. This definition is particularly important in determining the value of assets that are being transferred either as gifts or upon death, as the IRS mandates that gift and estate taxes are assessed based on fair market value.

When assets are transferred, it’s essential to establish their fair market value for tax purposes to ensure that the correct amount of tax is applied. This valuation is not only crucial for compliance with tax regulations but also affects the financial planning strategies of individuals and families as they manage wealth transition.

Other situations, such as corporate dissolutions, going private transactions, and dissenting stockholder actions, involve fair market value considerations but primarily focus on different aspects altogether. For example, while fair market value may apply in those contexts for determining equity interests or compensation, it is in the realm of gift and estate taxes that it serves as a fundamental benchmark for assessing tax liabilities directly linked to asset transfers.