There’s something very patriotic about operating a successful business or maintaining family unity by keeping real property assets and marketable securities in an LLC/LP or a trust.
Tax and legal advisors caution their clients: “pigs get fat and hogs get slaughtered”. This is true when Uncle Sam (IRS) wants your tax dollars. Owners amassing wealth would like to minimize this liability through a legitimate discount for lack of control and discount for lack of marketability. There may be additional applicable discounts as well.
If one holds a controlling block of shares or a sufficient number to swing a vote, they can often influence management decisions. Most investors will pay a premium for these rights. Conversely, absent this control the inverse is true.
A noncontrolling or “minority” interest is often discounted below its pro rata value. So, if equity is $1 million and a 10% block is held, the $100,000 is reduced for this impairment.
A discount for lack of marketability (“DLOM”) reflects many factors including a limited pool of buyers; uncertainty and risk of the period (duration) before a sale occurs (if ever); and difficulty and costs associated with creating liquidity (converting ownership interests; especially, noncontrolling ones, into cash).
There are circumstances where no discounts apply. Regardless, an IRS and Court qualified appraiser must perform a report meeting rigorous standards to substantiate the existence and levels of the discounts appropriate to the circumstances. This requires a thorough understanding of court case precedence, law and financial theory.
We keep the IRS and other professionals “honest” by empirically supporting adjustments to equity held. Call us to discuss how we can help.