It seems to have been a while since we have had a really good "idea" discussion. I would like to through some things out on the board for thoughts.

Trunk Formula Method - We have been told many times not to use TFM in certain cases, IRS, Forest Fire, etc. WHY. I know the IRS says they do not accept it. What is their reasoning. Can their reasoning be corrected or educated.

Tree Appraisals - I know Lew is working on a book about court cases. Why is it we do not hear about the ones that got away. I have yet to meet the arborist who has been on the winning side every time. I think we can learn more from losing than winning.

SULE - Could this idea be incorporated into Tree Appraisals. I have always wondered how someone could purchase a property with a sixty year old tree, "owned" it for two or three months, and then receive full appraised value. Perhaps he should only benefit from future value. This is what happens when you loose an arm. You don't get credit for what you did, only what you could have done.

Just a few thoughts, and please, don't tell me that's the way is is.

Thanks, Bill

Reply to post by Bill Cassel, on March 25, 1999 at 10:10:23:

Hi Bill.

RE: TFM. The IRS regs specifically define the loss as the diminution in total property value comparing value immediately before and after the loss. The cases and rulings have specifaclly disallowed both formula and hypothetical methods. If I can dig up the references I'll e-mail you. IRS regs have less to do with reason than with maximizing tax revenue and minimizing deductions. The other issue currently is the limit on deductibility vis a vis income. As far as I've heard IRS has been unresponsive to good faith efforts to see TFM recognized. As far as Forest Fires go, I'd guess the issue is that unless the trees are really landscape plants the value would not approach replacement as extrapoltated through TFM unless severely depreciated through the Location factor, so why bother. Timber value or some other reforestation 'cure' might be more appropriate. The more you move from commodity to other function (landscape, passive recreation, erosion control, etc.) the more TFM might be justified, assuming reasonable depreciation is employed.

RE: losing case. I agree. It's really not about winning, it's about facts. Sometimes very good appraisals (technically and reasonably) lose because of bad court decisions, poorly prepared counsel etc.

RE: Steve Day has suggested this too. Whether it's SULE specifically or life expectancy generally this concept is really at the heart of value. Value is indeed the 'present worth of future [remaining] benefits.' (Still searching for the orginal source Kevin.) If a tree is 60 years old and ready to fall down or spral into decline it should not be that valuable. If a tree is 60 years old and has a remaining useful life of 150 years, then it's just a baby. The material or significant portion of remaing life will depend on the discout rate employed to arrive at present worth, but at a rate of say 5% even 20 years is pretty significant. I'll run those numbers if I get a chance.

Reply to post by Scott Cullen, on March 25, 1999 at 10:10:23:

The following is in part based on the draft 9th edition with further research and citation added. Some of the formatting and tabbing may not come through here, but the substance may be helpful.

Methods of Valuation.

Unacceptable Methods. The IRS does not accept the Trunk Formula Method, any formula or any “hypothetical” appraisal as evidence of a casualty loss (Hammer 1995; Revenue Ruling 68-29).

Acceptable Methods - Nonbusiness (Residential) Property.

1. Real Estate Appraisal. Generally the decrease in FMV is made by competent appraisal of the property immediately before and after the casualty. The appraiser must be legally competent to appraise the entire real estate. A plant appraiser who is not qualified to appraise the real estate may not undertake this appraisal alone. A qualified real estate appraiser may require the assistance of a plant appraiser to document the cause and nature of the loss and to relate the plants to the value of the property.

2. Cost of Repair or Restoration. “The cost of restoring landscaping to its original condition after a casualty may indicate the decrease in FMV. [These costs include:]
1) removing destroyed or damaged trees and shrubs, minus any salvage....
2) pruning and other measures taken to preserve damaged trees and shrubs, and
3) replanting necessary to restore the property to it’s approximate value before the casualty.”
(IRS 1998, 4)

“The cost of repairs to the property damaged is acceptable as evidence of the loss of value if the taxpayer shows that:
a) the repairs are necessary to restore the property to its condition immediately before the casualty,
b) the amount spent for such repairs is not excessive,
c) the repairs do not care for more than the damage suffered, and
d) the value of the property after the repairs does not as a result of the repairs exceed the value of the property immediately before the casualty.”
(IRS 1998, 4; 26CFR1.165-7(a)(2)(ii) )

Thus, if the taxpayer has actually incurred repair costs, the receipts or other documentation may provide evidence of the loss. In this case there may be no need for an appraisal to establish the decrease in value of the plants (Cullen 1996). The plant appraiser may still, however, be able to document the cause of loss.

Before the present regulations were adopted in 1960, case law allowed the amount of a casualty loss deduction to be established by the cost of restoration, based on the testimony of a qualified plant appraiser. (Winters vs. U.S. 58-1, USTC 9205 (1958); W.F. Harmon, 13 T.C. 373 (1949)) Under current regulations, however, such testimony is only "acceptable evidence." Thus, if the deduction is challenged, "before" and "after" real estate appraisals may become essential to the court's decision. (C.A. Smithgall, 81-1, USTC 9121 (1981); C.C. Cantrell, 37 T.C.M. 1022 1978; David J. McKean, 42 T.C.M. 1709 (1981))
[I have retained the paragraph from draft but have NOT checked the case citations]

The plant appraiser must recognize that if a Replacement Cost, Cost of Repair or Cost of Cure appraisal is undertaken, the result must not be “excessive” and that a qualified real estate appraisal may be required to document that.

Acceptable Methods - Business Property. Since the amount of loss on business property is established by reference to the damaged property alone, apart from the real estate, Replacement Cost, Cost of Repair and Cost of Cure Methods should be acceptable.

Cullen, Scott, 1996. Case Capsule (Casualty Losses). Arboricultural Consultant. 29(1):4.

Hammer, Lisa, 1995. Case Capsule #1 (Casualty Losses). Arboricultural Consultant. 28(6):6.

IRS, 1998. Publication 547, Casualties, Disasters and Thefts (Business and Nonbusiness) Rev. Feb, 1998. Washington, DC: Department of the Treasury, Internal Revenue Service. 13pp.

Reply to post by Bill Cassel, on March 25, 1999 at 10:10:23:

Hi bill, how's it going?
Of course Scott responded in his usual professional and astute manner.
As to TF and IRS. CTLA has discussed this problem and are convinced that we cannot change them unless we take a test case to court. I think this may vbe a good idea, but expensive....and, we could lose. I use cost of cure and repair pretty often. Of course there are few IRS appraisals anymore.
As to my book. It is not ABOUT court cases, but a reference of numerous cases...some won and some lost. You are right. I learn more from my lost ones than my winners. Sometimes, though, the lawyers are pretty inept. (bite your tongue, Lew)
Scott has not sold me on future value, as it surmises that the tree has good maintenance, good weather, and good luck. I am not comfortable giving a value on something in the future, only at the time of my appraisal.
Oh, oh, Lew, you started something, again.
Verytreelylew

Reply to post by lewbloch, on March 25, 1999 at 10:10:23:

Present worth of future benefits, Lew. Regardless of how you think of it, that's what you are doing every time you appraise a tree. If you want to buy Mrs. Bloch a fur coat, but the seller tells you it must only hang in the storage bin, and she can't wear it, will it have any value to you? Only as an investment in the future sale. The real value to you is the use and wearing of it. Future benefits anticipated.

With trees, we do something similar. The condition factor looks at longevity- a diseased tree will be rated quite a bit lower than a healthy one. It won't last as long, so it gets a lower value. What we call it doesn't matter. It is still the future benefits we are addressing.

Reply to post by lewbloch, on March 25, 1999 at 10:10:23:

Hi Lew.

As Russ points out the key is future BENEFITS. It is the reasonable anticipation of these that create value today, or present value, or present worth.

It is also possible and within professional practice to estimate future value. It would be based on reasonable assumptions about the benefits anticipated in the future of that future point. E.G. Mr. Bloch, what would the value of this urban forest be in 20 years if we implement a sound management plan as compared to doing nothing?

Reply to post by Scott, on March 25, 1999 at 18:03:54:

Greetings Scott and Russ,

I have heard favorable reviews concerning your performance at the Newport Academy this year. Congratulations. As luck would have it, I was in Newport at the same time on business, sorry I missed you. Then again, it was probably for the best, as I would have been a disruptive element in class and ended up in reform school.

Questions for today,

Scott - you have used the term "worth" in a context synonymous with "value", yet you have quoted the definition of value as "the present worth of future benefits". Worth and value can not have the same meaning or the definition is useless. I am still awaiting further clarification as to the meaning of the term "worth".

Scott and Russ - If worth can exist in the present (per the definition given) why are benefits restricted to the future? Is there such a thing as a present benefit? If so, do present benefits have value? Or are we really talking about the future worth of future benefits?

While it may seem like semantics, definitions are critical if we are trying to achieve any real insight.

Hey! Grab a fire extinguisher! I can smell Scott's keyboard smokin' from here!

Reply to post by Scott, on March 25, 1999 at 18:03:54:

It is not my intentions to change your collective minds on this, but when i make an appraisal, it is based on the value at the time of my inspection, or at the time just before a casualty. It has nothing to do with future benefits. OK, condition has a minor effect if I am using TF or RCM methods.
AND, although I agree it is possible to SPECULATE on how much a tree (or trees) or worth 20 years from now, it sure is a crap shoot.
Very, very treely,
Lew

Reply to post by Kevin - H, on March 26, 1999 at 06:53:48:

Kevin,

1. RE: "present worth of future benefits." I have searched for the exigesis of the definition but have not had the time do do it thoroughly. Was at Yale today and almost went to search the Irving Fisher collection, must have had some intuitive sense that your question was coming.

I'll take a stab at explaining, based on my own understanding:

a) assume that value comes from or is created or provided by benefits. They can be any benefits the analysis calls for - market price, commodity, environmental, etc. etc. Rank the preferences any way you want.

b) assume that a monetary value can be estimated or assigned to these benefits for each period in the analysis.

c) assume that the estimated or assigned values are adjusted by inflation or increase or decrease in performance etc. for each of the future periods.

d) In a one period analysis the sum of the value of the benefits considered = appraised value.

e) in a mutiple period analysis (typically a period is a year) the time value of money must be considered. A $ received ten years from now is worth less than a $ received today.

f) consider "present worth" to be the mathematical result of the discounting of values from all periods to the present.

g) therefore appraised value is the mathematical result of discounting the value of benefits from all future periods to the present.

h) the value of the benefits in each period are dependent on the defition of value or ranking of preferences and may be indicated by various approaches, none necessarily perfect. Value is not a physical characteristic and is not directly measurable.

2 RE: present vs. future. You posed this question before and I answered it before, but I can't find it in the threads! Anyway. Even the present has duration. If you say philosophically that the present has no duration that it is so fleeting that nothing is experiencable, including benefits, function, value. (Heraclitus wasn't it?) In this sort of analysis we consider the present to be one period, typically a year. Something has value because of what it is anticipated to provide in the future. A single m&m isn't as valuable as an all day sucker. Yes a present benefit has value, but remember the present is one period of some duration. The future benefits in future periods by definition provide future value. We most typically estimate value today so we must mathematically adjust those future values to "present worth." But even those future values (what will the urban forest be worth to the community 50 years from now?) are based on the benefits anticipated from that future point forward.

Reply to post by lewbloch, on March 26, 1999 at 06:53:48:

Lew, the value at the time of your inspection has everything to do with the anticipated future benefits of the tree. If the tree is vigorous, structurally sound and likely to last for 50 years it is worth more than a tree in decline or likely to fail structurally within 5 years. Why? The longer the tree lasts the more benefits it will deliver. That's very different from estimating what value will be 50 years from now. But both are acceptable analyses.

Reply to post by Scott, on March 26, 1999 at 16:56:00:

Aha! Found the old thread and I did a better job of articulating the present-future issue there:

http://tree-tech.com/board/?topic=topic1&msg=362

Reply to post by lewbloch, on March 26, 1999 at 06:53:48:

Hi Lew,

I've been looking at the earlier threads. Take a look at #327 11/22/98 and #362 12/03/98. They may clear up this question.

Scott

Reply to post by lewbloch, on March 26, 1999 at 06:53:48:

Even if a tree is being "appraised" as lumber, the value is related to its future use. An appraisal must be done "here-and-now" because few of us can foresee the future. A tree is worth whatever it is worth only because the owner anticipates getting something (shade, furniture, catalpa sphinxes for fishing) down the road.

Reply to post by Scott, on March 26, 1999 at 19:31:22:

Scott,

I re-read the old post and the crux of the matter lies in how you define the "present". From your comments, I believe we are in agreement that as sentient organisms our sensory experience of the universe (what we might call the "present") does have a measurable duration. If you wish to redefine the "future" so as to include this period of direct sensory perception than I would agree that "future benefits" is acceptable. As an example, I place an extremely high value on the current breath I am taking. My body will react violently if I am deprived of oxygen during what most would consider the "present". This is an example of why I would modify "the present worth of future benefits" to the "present worth of present and future benefits". However, given the probable disruption of the space time continuum in the vicinity of heavy gravitational fields, and the resulting impact on causality, I will need to give this further consideration. Did you discuss the impact of special relativity at the Academy? I know, IT WAS NOT IN THE ASSIGNMENT!

Temporal definitions aside, what about the "worth" question? Worth and value can not be synonymous if the adopted definition is to have any real meaning.

Reply to post by Kevin - H, on March 26, 1999 at 20:34:55:

worth

(wûrth),
—prep.
1. good or important enough to justify (what is specified): advice worth taking; a place worth visiting.
2. having a value of, or equal in value to, as in money: This vase is worth 12 dollars.
3. having property to the value or amount of: They are worth millions.

—n.
1. excellence of character or quality as commanding esteem: women of worth.
2. usefulness or importance, as to the world, to a person, or for a purpose: Your worth to the world is inestimable.
3. value, as in money.
4. a quantity of something of a specified value: ten cents' worth of candy.
5. wealth; riches; property or possessions: net worth.
6. for all one is worth, Informal.to the utmost: He ran for all he was worth.

Kevin, I think the second noun definition fits best, within the appraisal context- a usefullness or importance. This is the non-monetary aspect. Value, OTH, is the economic equivalent; the amount of money that corresponds to the item in question.

The point is not to argue over definitions, but to agree on them, or at least accept them in maxim, so a discussion can ensue. Any dictionary definition of value and worth applies each to the other, making this a perplexing distinction.

The next breathe you draw is of extremely high importance to you, but so is the one after that, and the one you will draw next Tuesday, and next November 17 at 13:54:31. Is that one of less value (excuse me- less worth), because it is in the future?

Within the context of appraisal, by this (proposed) definition, then value will derive from worth.

Reply to post by Kevin - H, on March 26, 1999 at 20:34:55:

Kevin,

I understand your concern about simply equating worth and value, each defining the other. It does not add much meaning.

If you go back and read the post again I think you'll see I did try to answer. I have not been able to locate Prof. Irving Fisher's own explanation of what he meant by worth in this generally accepted definition. My own current understanding (given all the assumptions in my earlier response) is that 'present worth' is a mathematical expression, the sum of values in future periods, each discounted to the date of analysis ('present') to reflect the time value of money.

The value of the benefits in each period is a monetary equivilant. Traditionally this value is indicated (i.e. the equivilance estimated) by one or more of three approaches: replacement cost, market price or income/benefit.

I suspect your real concern is with equivilance and how it is estimated. You've suggested that these approaches are merely "instrumental preference ranking" and are flawed. I've suggested that the wider range of values you seem to be advocating are merely a wider range of preferences, perhaps re-ranked.

If that is the case, your mission - you seem to have accepted it - is to have society accept different preferences. If on the other hand your objection is more fundamentally that monetary eqivilance is flawed or impossible your mission is much more difficult...to have socities abandon an economic or moentary decision making model.

In the mean time appraisal attempts to serve the current societal need for monetary equivilants as a guide to decision making.

Reply to post by Kevin - H, on March 26, 1999 at 20:34:55:

Kevin,

I think that it's simpler to consider 'present' to be a dividing line between past and future. The past has already been experienced, it's gone, water over the dam. The benefits were already experienced, the value is gone, the function is gone. The future has yet to be experienced. The benefits or function anticipated in the future create value.

If for the purpose af analysis or conceptualization we choose to give a duration to the present (the length of your breath, a day, a year, whatever the analysis calls for) then we are indeed including measurable present benefits in the analysis with future ones. But 'present worth' (the mathematical expression) is calculated at a point, all time after that point (including the present if you choose to assign it a duration) is 'future.'

For the purpose of the math, 'present period' is the period in which 'present worth' = periodic value or benefit and the discount rate = 0.

These are established and accepted analytical conventions. It is certainly worthwhile developing a meaningful understanding of what they represent. I don't see a need for altering the conventions, they seem adequately descriptive and precise.

Reply to post by Russ Carlson, on March 28, 1999 at 16:20:20:

Russ,

The breath I take this moment is of greater value to me because all future breaths are predicated upon its success. This is similar to, but not exactly like, the future discounting which occurs in economic modeling

Reply to post by Kevin - H, on March 28, 1999 at 21:29:40:

You can get into a more complex level of modeling and discounting. The most straightforward model simply discounts for the time value of money. You can increase the discount rate for risk. Indeed, there is a chance of failure in the current period the benefits in future periods are less likely to be experienced and are discounted more heavily. If the early periods are quite certain but later periods become more risky, then the discount rate will gradually increase for later periods.

Reply to post by Scott, on March 31, 1999 at 23:23:26:

You are correct sir!