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determine the internal rate of return of a particular investor.”
Respondent cites Estate of Proctor v. Commissioner, T.C. Memo.
1994-208, for the proposition that “investment” analysis does not
equate to fair market value analysis.
In Estate of Proctor, we held that in determining the fair
market value of a ranch subject to a lifetime lease option, a
“conventional lease analysis method” was preferable to an
“investment differential method”,15 because the latter method
“attempts to measure ‘investment value’ rather than market value.
Investment value is more subjective because it is predicated on
the investment preferences of the individual investor.” Id. We
did not hold, however, as a matter of law that income
capitalization under the conventional lease analysis method must
be done on a pretax basis, or that particular factors that are
relevant for investment purposes are irrelevant in determining
fair market value. Rather, we determined the applicable discount
rate based on our conclusion that it was “a better reflection of
risks associated with investing in ranch property, and is a more
accurate estimate of the rate of return investors expect to earn
when investing in ranch property.” Id.
15 We defined the “investment differential method” as a
“method of valuation frequently used by appraisers to compare one
potential investment to the whole spectrum of other investment
opportunities available to a client.” Estate of Proctor v.
Commissioner, T.C. Memo. 1994-208.
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