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May 14, 2009

Standard Valuation Concepts for Discounts Considered “Valuation Games” by the Obama Administration

Category: Business

Every standard valuation text book and every valuation case decided by the courts recognizes that the fair market value of an asset reflects the price that would be paid by a ready, willing and able buyer to a ready, willing and able seller, with both in possession of the material facts and under no constraints as to the transaction. Just about as universal is recognition of the concept that the “fair market value” of a fractional interest may appropriately be discounted to reflect the fact it is less attractive to a buyer than the whole. These discounts for “minority,” “illiquidity,” or “lack of marketability” are standard, generally accepted, and approved at some reasonable level by the IRS and all courts ruling in tax cases. Perhaps more significantly, all valuation data and studies confirm that in freely trading markets minority interests, non voting interests, or interests that will be difficult to market command a lesser price. Thus the facts confirm the principle that such discounts from full value are valid.

The Obama administration, however, considers these generally accepted and legitimate valuation concepts an abuse when families and small businesses use them.

The Treasury on May 11 released the General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals (The “Greenbook”) to "provide details of plans to cut taxes for small businesses and middle class families and close unfair corporate tax loopholes." The administration’s proposal is to target "valuation games played by those facing estate and gift taxes that allow them to undervalue transferred property." The “games” are the application of these standard valuation concepts to minority and illiquid interests transferred among family members. Under the as yet not detailed administration proposal these discounts will be denied in transfers within families. Greenbook at 119-122. The effective date is the date of enactment (except that restrictions in place before October 8, 1990, grandfathered under present Chapter 14 valuation rules will remain grandfathered under these new rules).

The significance of this is twofold. First, if you object to denying families and small businesses the benefit of the same valuation principles that apply to all assets now is the time to contact Congress. Second, if you are considering any sort of significant asset transfer within a family that could involve a value discount the sooner you accomplish it the better.

Bryan M. Dench, Esq.
May 13, 2009