The problem I (and I'm sure many other readers) am having with this is understanding enough of the different issues and methods make the decisions on what technique to apply in a given case. This section has covered a lot of issues, and Scott and others have presented a wealth of information on the techniques and their applications. Deciding the apporpriate method, and in some cases, how to apply it, are basic to the understanding of the process.

What words of wisdom are ther for those trying to sort this all out? We have come far enough in the various threads here to know we can't just pluck a number from TFM and plug it into every report. Some more 'instruction' on when to use various methods, or how to choose,may be in order.

Reply to post by Russ Carlson, on September 19, 1999 at 12:04:12:

It's not a one size fits all, rubber stamp kind of decision -or shouldn't be. And there are a lot of issues to consider and they interact. But it's really quite a logical and workable process.

As we've learned in developing the ASCA Academy curriculum it all starts with defining the assignment. The threshold issue in appraisal assignments is understanding what appriasals - opinions of value - are. They are aids to decision makers. The purpose and use of the appraisal follow quickly. The purpose usually being to answer the question asked. That helps us define value - we should be grasping by now that the definition of value changes from case to case. If it's market value, maybe we need a real estate appriaser. If it's replcaement cost maybe TFM, RCM. CoC will apply. Then what do we have to work with? Replaceable size plants... RCM comes to the fore. Beyond replaceable size? We have to look to TFM or CoC or both. What assumptions are built into the assignment? Full size replacement? TFM -hypothetical as it is - may be best. Cure acceptable to both parties, maybe CoC. But understand that CoC may be understating "full" value of 1:1 size replacement and making implicit depreciation adjustments.

Who are the benficiaries? One or many. Public or private?

What's the USE of the appraisal. Settle a claim as in Pat Buckley's recent Arboricultural Consultant article? Or guide an urban forest manager in setting maintenance budgets? Or guide voters in authorizing a budget. Or guide a developer in tree protection/preservation?

What budget do you have from the client? Even given unlimited budget is the potential return worth it to the client. There are both ethical and pragmatic issues involved (some addressed in Arboricultural Consultant SPP articles a few years ago).

And at the other end of the process an estimate from any one method may not be THE answer. It is one indication given particular assumptions. Perhaps a number of methods/approaches are in order. The reconciliation to the final "fact" of value to be made by the parties, the court or if delegated by the appraiser.

OK, does that get the discussion started?

Reply to post by Scott Cullen, on September 19, 1999 at 12:04:12:

And one more... which methods are within your range of competence? Not that that's the one you should apply... of course it has to be approriate given all other issues. But you can't apply the ones you aren't qualified to do.

Reply to post by Scott Cullen, on September 19, 1999 at 12:04:12:

I think I left out a big issue: what will law or regulation allow? E.G.: 9th Edition will be very clear that IRS DOES NOT accept TFM... value of real estate before and after loss is needed; some jurisdictions' statute or case law accept or reject particular methods; Steve Day tells me he now knows by experience which judges in the Denver area courts admit which methods based purely on judicial discretion or preference.

Reply to post by Scott, on September 19, 1999 at 12:38:52:

Scott,

Do you have statements or articles as to "why" the IRS does not accept TFM ?

Do they accept CofC?

Steve

Reply to post by Stephen Wiley, on September 20, 1999 at 10:34:55:

"Because we say so..." is the first answer that comes to mind.

The tax code deals specifically with the issue. Only Fair Market Value can be used, except that in the case of certain types of damage, cleanup and repair costs, ond restoration of landscapes might be used to determine the reduction in FMV. Read Publication 547, Casualties, Disaasters and Thefts.

You can get many of the IRS publications at
http://www.irs.ustreas.gov/basic/forms_pubs/pubs.html

Reply to post by Russ Carlson, on September 20, 1999 at 20:52:47:

Russ pretty much has it. IRS's mission is to collect the most tax and that's fostered by disallowing the most deductions. TFM has been considered "hypothetical" and that's part of their position. In part it may be due to an insufficeint ability of CTLA and appraisers to explain what TFM is, but IRS does what it wants in any case.

Following is from my notes on the 9th Edition draft I was asked to review. NOTE that some of the text is from CTLA's draft and some is inserted by me. This may or may not be the final text published and endorsed by CTLA in the 9th Ed.

On CoC, the "Hammer" references are to a "Case Capsule" by Lisa Hammer a few years ago in Arboricultural Consultant and follow ups by then Editor John Duke (who happens to be a CPA) and by me. I think you'll see in the following text that CoC may or MAY NOT be acceptable.

"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.


Reference Sources.

This sub-chapter has generally relied on IRS Publication 547, Casualties, Disasters and Thefts (Business and Non-business) (IRS 1998) and Section 165 of the IRS regulations (26CFR1.165). Other sources are cited as well.

The current revision of Publication 547 is available directly from the IRS (at field offices, by mail or on-line at http://www.ustreas.irs.gov ) and is available in reproducible form at many public libraries.

The current IRS regulations are part of the Code of Federal Regulations which is available at many public libraries and on-line at . Annotated, current IRS regulations are available at many public libraries in the CCH Federal Tax Guide."

Reply to post by Scott , on September 20, 1999 at 21:46:15:

Russ and Scott,

Thanks for the response, however, the question "Why" is one which Scott partialy eluded to in his response:

>"In part it may be due to an insufficeint ability of CTLA and appraisers to explain what TFM is, but IRS does what it wants in any case."

I know that the IRS does pretty much as it desires ( much like the wind can pass through branches of a tree, yet the branches do create some resistance, thus enabling us to hear it), after all tax assumptions are also "hypothetical".

Maybe an approach similar to disaster relief aid (being experienced now on your side of the country), might hold clues to the acceptance of TFM appraisals. After all storm damage analysis, is often ball park appraisals that the IRS is forced to accept.

Of course, I could be wrong.

But further discussion and a unified response may cause a resisting noise to be heard.

Sincerely, Steve

Reply to post by Stephen Wiley, on September 21, 1999 at 09:30:22:

My understanding is that CTLA has pursued this to the IRS and the effort has been unavailing.

Lisa Hammer's experience involved a loss sustained during one of the delared disaster hurricanes in FL. Many TFM appraisals are submitted for tree casualty losses and the deduction is obtained, but it is because the returns are not scrutinized. Under scrutiny the Regs, and rulings taken together are celar. TFM is not acceptable.

The Code and Regs are clear, the casualty loss for residential property = the difference in fair market value of the entire property immediately before and immediately after the casualty. This is typically determined by competent real estate appraisal. Rather than allowing greater latitude in disaster situations, the code and regs mandate that any reduction in value relating to overall market depreciation on account of the disaster is NOT deductible.

If you want the current "official" position on seeking releif CTLA is your best source. In the absence of adminstartive releif I suppose someone could take it through tax court or the federal courts but that's a big bucks process and any individual loss might not justify it.