Chapter 3 Financial Statements Cash Flow And Taxes Test Bank Avoid Overpaying Taxes & Fees – Promissory Note Valuation

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Avoid Overpaying Taxes & Fees – Promissory Note Valuation

The fair market value of a promissory note is less than its purchase price

Attention investors

The fair market value (FMV) of most promissory notes and mortgage notes is the lower of their outstanding amounts, their costs, or their face values. I have evaluated and invested in them for the past 35 years and regularly find that most bondholders overpay the taxes and fees associated with IRAs, estates, trusts and estates. The dollar amount of overvaluation is large; FMV can be 20% to 40% less than the outstanding amount or face amount. Overpaying federal and state taxes and administrative fees on the inflated value of bill investments year after year costs serious money. Ignorant and unsuspecting investors are throwing money away.

What causes overpayments?

Misunderstanding the definition of “value” as used by the Internal Revenue Service (IRS) results in an overpayment. A typical investor uses their “dollar cost” as their value, not the FMV used by the IRS. The Internal Revenue Service (IRS) does not use “dollar cost” as a “value” amount for most tax matters; The IRS uses “FMV” funds for tax purposes. The taxpayer uses a definition that the IRS does not.

IRS Value (FMV)

The definition used by the IRS is: FMV is the price at which the property would sell on the open market. It is a price agreed upon between a willing buyer and a willing seller, both of whom must act and both of whom are well aware of the relevant facts. (IRS Publication 561)

How to avoid overpaying taxes and fees

Now that the cause of the overpayment is clear, the next question is how can we avoid overpaying taxes and fees? The goal is to comply with IRS regulations and value investment assets at fair market value, not dollar cost. A “Qualified Appraisal” must be prepared by a “Qualified Appraiser” to satisfy IRS regulations.

A qualified appraisal by a qualified appraiser

An appraisal report prepared, signed, and dated by a qualified appraiser (defined later) in accordance with accepted appraisal standards that meets the requirements of Section 1.17A-13(c)(3) of Regulations and Notice 2006-96, 2006-46 IRB902 (available at http://www.irs.gov/irb/2006-46_IRB/ar13.html ).

Summary

Dollar cost or book value overstates fair market value. Funds in many investment and trust accounts are overvalued for tax and administrative fee purposes. There is no single rule or formula for determining the fair market value of an asset. in accordance with law and IRS regulations, a qualified appraisal by a qualified appraiser is required.

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