Authored by John Walker and Chris D. Treharne, ASA, MCBA, BVAL of Gibraltar Business Appraisals, Inc., a member firm of FCG Issue 12:5
Suzanne J. Pierre, Petitioner, v. Commissioner of Internal Revenue, Respondent
T.C. Memo. 2010-106 Docket No. 753-07, May 13, 2010
Footnote 10 of the court’s ruling may be an indication of progress regarding appraisers’ ability to properly inform the court regarding SEC Rule 144A restricted stock studies and their impact on the selection of a discount for lack of marketability (“DLOM”).
Even though the Pierre court accepted the Respondent’s 30 percent DLOM, some previous Tax Court rulings have relied on the Management Planning Inc. April 1997 restricted stock study’s 13 percent average discount as an appropriate DLOM benchmark because it was the most recent study (note: a more current study was published in 2009, after the Pierre trial date). The Pierre court’s failure to default to the 13 percent average may be an indication that experts are successfully communicating important limitations associated with the April 1997 study.
More specifically, closely-held minority interests typically have more onerous trading restrictions and longer holding periods than the restricted stocks included in the April 1997 study. Furthermore, these characteristics often are more burdensome than the ones associated with the restricted stocks analyzed in the Institutional Investors Study cited in Rev. Rul. 77-287 § 4.02, which reported discounts much larger than the April 1997 study.
Based on the preceding, appraisers who successfully communicate the differences between the often cited restricted stock studies and the subject closely-held business interest may be successful in convincing the court that the most recent SEC Rule 144A restricted stock studies do not adequately reflect the economic impact of transfer limitations associated with closely-held ownership interests.