Tax & Estate Planning
- Is the valuation report a "qualified appraisal"?
- What about discounts for lack of control and lack of marketability?
- What level of discounts is appropriate for the subject interest?
- Will the valuation report be defensible with the IRS?
As qualified appraisers, Insight Valuations performs qualified appraisals in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP) as required by the IRS.
While Insight Valuations does not provide tax planning services or opine as to what percentage interest(s) should be gifted or transferred, we take the percentage stake of the subject interest into consideration when developing quantitative and qualitative support for the applicable discounts for lack of control and lack of marketability. This support is developed through reviews of pre-IPO studies, tax court rulings (such as Mandelbaum v. Commissioner), and performing quantitative analyses of publicly-traded funds and other public and private transactions where such discounts may be present.
The long and short of it is we do not go into a discount study with a preconceived idea of exactly what level of discounts will be applied. We consider the restrictions and limitations on control and transferability as described in the organizational documents and as they relate to the subject interest, and we review and perform quantitative analyses of market data and transactions to see what indicated levels of discounting the market actually supports.
We also consider more practical matters and perspectives. For example, someone holding a non-controlling interest may not affect control or influence upon the management of the company. This would call for a material discount for lack of control. However, this may be tempered if key decision makers are also interest holders with the incentive and control to maintain high levels of operational and financial efficiency, which would also benefit the minority interest holder. As another example, the holder of the subject interest may be severely restricted from selling their interest to an outside investor, which would warrant a discount for lack of marketability. However, other "inside" investors may be compelled to make an offer to purchase it if the subject investor receives a bona fide offer from an outsider to buy the subject interest. This would tend to decrease the applicable discount for lack of marketability.
Business valuation is a balance of art and science. Selecting discounts - which is inherently a subjective exercise - within the context of historical quantitative discount study data is no different. Through our credentialed education and experience, Insight Valuations provides qualified appraisals that include detailed support for the selected discounts for lack of control and lack of marketability that hold up under IRS scrutiny.
