We express our appreciation to Henry Wise, now retired. He has been considered one of the leading authorities on fractional interest valuations in the nation for decades and we have quoted (with his permission), and utilized his research and logic liberally. Also we thank John Allen Chalk, an extraordinary attorney, in Ft.Worth, Texas, who handles cases for sophisticated investors of big and small entities.
The owner of a fractional interest generally has no (or only a limited) ability to liquidate the underlying asset in order to get total control of his pro-rata share, and faces a disorganized and limited marketplace should he or she attempt to sell the fractional interest to a third party. These problems of limited control and no organized market place are very similar for a closely held corporation, a limited liability company,(LLC), a family limited partnership (FLP), a limited liability limited partnership (LLLP), or for a tenant-in-common.
NOTE A FEW COURT CASES:
1. Marketability discount set by Connecticut Court at 35% for minority interest holder in a closely-held Connecticut corporation. Devivo v. Devivo, 30 Conn.L.Rptr.52, 2001 WL 5777072 (Conn. Super.Ct. f2001).
2. Marketability discount set by Connecticut Court at 35% for closely held corporation that was sold under a fraud allegation. In re Colonial Realty Co., 226 B.R. 513,(Bankr. D. Conn. 1998).
3. Alaska Supreme Court affirmed a marketability discount for value of a close corporation stock of 15%. Money v. Money, 852 P.2d 1158 (Alaska1993).See10 A.L.R.6th693, “use of Marketability Discount in Valuing Closely Held Corporation or Its Stock,” by Stephen A. Hess. American Law Reports ALR6th.
4. Other discounts include control premiums and minority discounts.See2 Am. Jur. Proof of Facts 2d 1,“Valuation of Stock of Closely Held Corporations,” by James L. Rigelhaupt, Jr..
The reasons for discounting are simple. If you own a closely held company, are a minority interest investor, whether it is large or small, and your company is not traded on a public stock exchange, when liquidity, or "quick sale" buyers are often not readily available, then you may qualify for a discount of your asset value. In a recent case, a man had a heart attack. He had been putting off having his assets appraised, for purposes of it being a closely held business. He calculated that he could save his estate over $1,000,000 if it were valued lower under the law. When he contacted our office, we let him know that we had been doing minority interest, and closely held corporations/family limited partnerships, and other entities since 1989. Not a single case has been thrown out by the IRS. Using a model, our research highlighted 12 legal precedents, where judges have ruled that the IRS would accept discounts of values from 22% to 36%, all based upon the logic, the quality of the argument and the presence (or lack of) a qualified valuation/appraisal document. In this case, we found ample evidence for concluding that this man's company could be discounted 34%, consistent with the law and other legal rulings. The client told us that it would save over $1,000,000 for his wife and children at his death. If you are one of the hundreds of thousands of owners of shares in a small business, a family owned company, a family partnership, or another kind of minority, non control investment, the potential for tax savings are great. You also can set a new basis of value, to contribute assets into a trust or to another entity. These are complex tax planning issues, that should be discussed and reviewed by your CPA, as well as your attorney. We can recommend experienced CPA's as well as good attorneys on these matters. For information on the valuation, call us, and we are pleased to share our knowledge with you. Ben Boothe, President BBAR Inc. www.benboothe.com 800-583 6655 ext 101 email@example.com