A sale between a corporation and its subsidiary at book value is:
Correct Answer
C) Not arm's length — the price reflects the relationship
Why this is correct: An arm's length transaction is between unrelated parties, each acting in their own self-interest. A sale between a corporation and its subsidiary is a related-party transaction. Using book value (an accounting figure) further detaches the price from market value. Why the other choices are wrong: Confirmation by the corporation does not make it arm's length. It is among the least reliable comparables. There is no standard discount for such transfers. Exam tip: If the parties are related, the sale is presumed not arm's length unless proven otherwise.
Why This Is the Correct Answer
The transaction is not arm's length, and the price reflects the corporate relationship rather than market negotiation. Related parties do not bargain against one another, so no price discovery occurred. Book value adds a second, independent defect by substituting an accounting convention for a market measure. Together these make the transfer unusable as primary evidence, though the appraiser should still document what she learned during verification.
Why the Other Options Are Wrong
Option A: Usable if the corporation confirms the price
Confirmation tells the appraiser the recorded number is accurate; it says nothing about whether the number reflects market behavior. Verification is meant to reveal how a price was formed, and here it reveals that the price was set internally rather than negotiated. A confirmed non-market price is still a non-market price.
Option B: The most reliable comparable available
This transfer is among the least reliable comparables available, not the most, because it lacks both market exposure and adversarial negotiation. Reliability in the sales comparison approach tracks how a price was formed, and an internally assigned figure sits at the bottom of that hierarchy. The most reliable comparable would be an arm's length sale of a similar property exposed to the market.
Option D: Adjustable by applying a standard corporate transfer discount
No standard corporate transfer discount exists, and inventing a percentage would substitute a rule of thumb for market evidence. Even if such transfers were systematically off market, the size of the gap would vary with the tax and accounting motives driving each one. The absence of a measurable, supportable adjustment is precisely why exclusion is the answer.
Same Pocket, No Bargain
If the money moves from one pocket to another inside the same coat, nobody bargained. Parent and subsidiary, spouse and spouse, trust and beneficiary, partner and partnership: same pocket, no price discovery.
How to use: When a stem names both parties and they turn out to be related by ownership, family, or control, answer that the sale is not arm's length. Reject options offering a standard discount or resting on confirmation of the figure.
Exam Tip
Book value, assessed value, and insured value are all non-market measures that show up as distractors. None of them is evidence of what a property would bring in an open market.
Common Mistakes to Avoid
- -Using a recorded transfer without checking whether the parties were related
- -Treating book, assessed, or insured value as evidence of market value
- -Applying an invented percentage discount rather than excluding an unmeasurable distortion
Concept Deep Dive
Analysis
Market value assumes an arm's length transaction: buyer and seller each acting in their own self-interest, neither under duress, and the property exposed to the open market for a reasonable time. A transfer between a parent corporation and its subsidiary fails that assumption at the structural level, because both sides of the transaction answer to the same ultimate ownership and there is no adversarial bargaining to discover a price. Using book value compounds the problem, since book value is an accounting figure equal to original cost less accumulated depreciation for financial reporting purposes, and it drifts further from market value with every year the asset is held. Such transfers are typically driven by tax planning, internal reorganization, debt allocation, or financial statement presentation rather than by any view of what the property is worth. The appraiser's response is verification followed by exclusion, because the distortion is neither measurable nor curable through a conditions of sale adjustment.
Background Knowledge
You need the elements of the market value definition, especially arm's length dealing and reasonable market exposure, and the obligation to verify the terms and conditions of each comparable. You should also understand book value as an accounting concept and how it differs from market value, and know the conditions of sale adjustment and when a distortion is too large or too unmeasurable to adjust.
Real-World Application
An appraiser researching industrial sales finds a large recorded transfer between two entities sharing the same registered agent. Verification shows it was an intercompany reorganization priced at depreciated book value. She excludes it from the grid, explains the exclusion in her market discussion, and relies on third-party sales instead.
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