- 27 -
rate on three-year and five-year Treasury notes on November 13,
1998, the business day before the date of donation.14 Then we
add risk premiums to that to create an implied rate of return for
buyers of comparable properties. As explained by the AICPA:
The discount rate is the rate of return
that Investors require as a condition of
purchasing the type and class of property
being appraised. The rate may vary,
depending on economic and other conditions,
but generally should be based on market
rates, reflecting the rate of return demanded
by buyers of comparable properties. In
addition, the following factors should be
considered in determining the discount rate:
• Recovery of the investment over its
estimated economic life
• A safety factor to recognize
additional risk, management
burden, and lack of the buyer’s
liquidity
• An investment factor to recognize the
property’s quality of income, its
marketability, and tax advantages
AICPA Audit and Accounting Guide, “Guide For the Use of Real
Estate Appraisal Information”, sec. 3.27 (May 1, 1997).
13(...continued)
of interest that would be earned on ‘the best and safest
investments’”) (citation omitted); Sauers v. Alaska Barge &
Transp. Inc., 600 F.2d 238, 246 n.15 (9th Cir. 1979); Estate of
Adams v. Commissioner, T.C. Memo. 2002-80.
14 Federal Reserve Statistical Release, H.15 - Historical
Data, http://www.federalreserve.gov/releases/h15/data.htm. We
use the average of the three-year and five-year notes because the
total length of the hypothetical royalty stream is approximately
eight years, with the average royalty payment coming at
approximately year four.
Page: Previous 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Next
Last modified: November 10, 2007