Final Day! Everything Must Go Now! Fire Sale! No Reasonable Offers Refused! This sense of urgency is what characterizes Forced Liquidation Value. One of the most typically encountered definitions of value - Fair Market Value - assumes an orderly liquidation without a forced sale or sale under duress. Forced liquidation assumes a quick sale with limited marketing.
Internal Revenue Regulation Section 1.170A-1(c)(2) defines fair market value as: The price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. A Forced Liquidation Value adds time pressure - a compulsion to sell - and Treasury Regulations which define fair market value specify, “The fair market value of a particular item of property includible in the decedent’s gross estate is not to be determined by a forced sale. Nor is the fair market value of an item of property to be determined by the sale price of the item
in a market other than that in which such an item is most commonly sold to the public, taking into account the location of the item wherever appropriate.”
To understand Forced Liquidation Value, it helps to consider the other distinct type of liquidation value: Orderly Liquidation Value. An orderly value considers property selling within a reasonable timeline to allow for advertising and proper marketing to attract buyers who regularly purchase this type of item, typically given for three to six months.
As discussed, the key component in distinguishing Forced from Ordinary liquidation value is the timeline for the possible sale. Orderly liquidation assumes that a sale would take place within approximately three to six months and provides for adequate time to market property to retail collectors. Forced liquidation provides for a very short period of time for a seller to dispose of property quickly, typically resulting in lower prices closer to wholesale levels for business furniture, fixtures, and equipment.
Examples of a Forced Liquidation Value would be when a court orders a sale within a certain short timeframe, like a week or within 10 days. A result of this quick sale is that prices are typically lower than when the property has time to be marketed in a venue like a consignment shop or a well-advertised auction.
Let’s look at Forced Liquidation Value in practice with two examples:
Here, the determining factor is what kind of coins are included in the collection to be appraised? Are they rare coins by date and Mint mark that would need to be authenticated and graded by a third-party grading service to maximize value in the marketplace? Or are they common coins like South African 1-ounce Krugerrands where they all sell for around the same price regardless of the grade.
For rare coins, collectible items like antique guns, and other unique objects that need time to be marketed, a forced sale on a quick time frame could result in significantly lower prices. For common coins that trade at and near gold values, a forced sale may result in nearly the same amount as an orderly liquidation since the coins are common and are bought and sold at a standard percentage over and under the spot price of bullion per ounce.
Fine art - paintings, drawings, prints and sculpture - don’t enjoy the liquidity of coins. For high-end art, the primary sales venues may be specialized galleries that would take works on consignment and major auction houses that reach international audiences. For mid-tier art, the primary sales venue might be a consignment shop that reaches the decorator market. But let’s say that the court orders the sale of a pricey painting within a week: the options for selling are going to be limited as there’s not sufficient time to market the property.
The price realized at a local weekly auction that includes fine art might be significantly less than if the property was properly placed at the right auction where that type of art is most often sold. The cash price offered by a dealer for a painting or selling at the wholesale level might be considered a forced sale if there is not time to properly market it. The lack of time to sell property in its most attractive and lucrative market is the key point of a Forced Liquidation Sale.
Forced Liquidation Values can be used in multiple scenarios. Perhaps an appraiser is being asked to consider the sale of seized property sold to fulfil a taxpayer’s obligation to pay federal taxes? Or, perhaps it is a forced liquidation value for seizure of loan collateral in asset-based lending and other business valuations or an appraisal for a personal bankruptcy filing? Again, the time pressure on the seller to convert property to cash without allowing proper time to advertise it is indicative of a forced sale.
The Forced Liquidation is the result of a need to sell in a short timeframe. Often, no warranties are provided on the sales and the buyer is responsible for removal costs. These constraints result in a lower value than the fair market or ordinary liquidation values and it is typically used in scenarios like bankruptcy or foreclosure. The strict limitations on marketing can result in “fire sales” - the urgency providing lower values than if the liquidation could be planned thoughtfully to appeal to a broader pool of buyers.
