The discount stems from the idea
that the value of a business decreases
when it does not have the ability to
be sold and converted quickly into
cash. Some common factors affecting
marketability are: attractiveness of
the business and industry, prospects
for a sale or public offering, and
management. The adjustment for lack
of marketability is often the largest
adjustment and can range from 30%
to 40%, depending upon the facts
and circumstances.
non-controlling interests, a minority
interest lacks sufficient voting
power to control the operation of
the business.
desirable to a potential purchaser.
Accordingly, the fair market value
of such interest should reflect the
limitations of power over the entity
and the inability to sell the interest
on the open market. Typical discounts
run from 20% to 40%, although
greater discounts may be available
depending on the circumstances.
3. Loss of Key Person. The loss of
a key person, particularly the owner
of a business, can have a negative
effect on the value of the business. In
many situations, the owner is the face
of the business, and the decrease in
value of the business interest reflects
that the business will not function at
an equivalent level without the key
person. In determining whether to
apply a loss of key person discount,
factors to be considered include
whether the claimed individual
was actually responsible for the
company's profit levels and whether
the individual can be adequately
replaced.
Been Applied
the decedent owned 21 of the 127
outstanding shares of stock in First Folks
Corporation ("First Folks"), a closely-
stock were restricted by a limitation
that provided that the shares were not
to be transferred by sale, pledge, gift or
otherwise to any person other than to
the issue of T. John Folks, Jr., or to First
Folks. In the event of an unauthorized
transfer, the attempted transfer would be
a nullity.
the co-executors of the estate filed
the estate tax return which reported
the decedent's ownership interest in
First Folks with a 50% discount, using
discounts for minority interest and lack
of marketability based in part on the
severe restrictions on the shares.
trial that a 35% discount for lack of
marketability was appropriate under the
circumstances.
weight in its decision to the transfer
limitation of the stock.
involved the valuation of a business
interest which used a loss of key person
discount because the success of the
business was highly dependent upon
specialized marketing techniques of
the decedent.
person discount was not applicable in
this situation as there was insurance
on the decedent's life.
a loss of key person discount as (1) the
insurance proceeds were not a business
asset, (2) the decedent was a large part of
the business's success, and (3) an equal
replacement was not readily available.
run closely held corporation.
transferred 0.88% of her interest to
her children.
decedent's ownership interest as 49.65%
of the corporation, employing a discount
for minority interest because at the time
of her death the decedent owned less
than 50% of the outstanding stock.
not benefit from such a discount.
minority interest discount, reasoning
that the decedent's gift a mere eighteen
days prior to her death was for the sole
purpose of limiting estate tax and that
the decedent continued to exercise
control despite owning only 49.65% of
stock after the transfer.
decreasing the value of a closely held
business under the proper circum-
stances. Tax Court history illustrates that
valuation discounts are generally upheld
in circumstances that have a legitimate
business purpose, rather than purely
an estate planning strategy to transfer
wealth to the next generation. As long as
valuation discounts are permitted under
the tax regulations, practitioners should
consider them when a client wishes to
transfer an interest in a closely held
business as a gift or when a closely
held business interest is included in
a decedent's estate.
3 Treas. Reg. § 20.2031-1(b)
4 Rev. Rul. 59-60; See also, Estate of Andrews v. Com-
Commissioner, 92 T.C. 312 (1989)
Public Accountants, American Society of Appraisers,
Canadian Institute of Chartered Business Valuators,
National Association of Certified Valuation Analysts,
and The Institute of Business Appraisers.
Analysis, Vol. 1, Issue 1 Art. 7 (2006).
Close Corporation, 54 Duke L. J. 293, 310 (2004).
9 Estate of Folks v. Commissioner, 43 TCM (CCH) 427,
11 Id. at *9 and *26.
12 Id. at *26.
13 Id. at *32
14 Estate of Feldman v. Commissioner, 56 T.C.M. (CCH)
16 Id. at *35
17 Estate of Murphy v. Commissioner, 60 TCM (CCH) 645,
19 Id.
20 Id.
21 Id.