An Empirical Investigation Of The Minority Interest And Marketability Discounts In Valuation Of Closely Held Stock For Estate And Gift Tax Purposes

Ted D Englebrecht,Otto Martinson,Mary M Anderson

doi:10.19030/jabr.v22i1.1448

Abstract

The discounts for lack of marketability and minority interest are crucial in reducing the value of transferred interests of closely held companies for estate and gift tax purposes.&nbsp; Because the current highest marginal estate and gift tax rate is 49%, there is a strong inducement for CPAs, Attorneys, Investment Bankers, Financial Planners, and others who value these transfers to accurately gauge the judicially allowed discounts for lack of marketability and minority interests in the valuation of closely held stock.&nbsp; This study examines the relationship between Tax Court determined values for lack of marketability and minority discounts to closely held stock from the compromise percentages.&nbsp; Compromise percentage is defined as the mean of the percentage presented by the adversarial parties, the taxpayer, and the IRS, in a judicial action.&nbsp; Additionally, this relationship is examined across industry classifications.&nbsp; The period investigated covers January 1, 1973 through December 31, 2002.&nbsp; Both regular and memorandum decisions by the Tax Court are analyzed over this thirty-year span.&nbsp; Chi-square analysis is used to determine that the Tax Court determined values are not significantly different than the compromise percentages.&nbsp; Furthermore, this finding does not vary across industries.&nbsp; Regression and chi-squared results are augmented with descriptive statistics.

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