Marketability – IRS Guidance

In business valuation the Uniform Standards of Professional Appraisal Practice (USPAP) Standard 9 (v) states in part, “In developing an appraisal of an interest in a business enterprise or intangible asset, an appraiser must identify the extent to which the interest is marketable and or liquid.

Subsequently, over several decades, the business appraisal industry conducted dozens of studies and came up with dozens of methods indicating discount rates ranging from 10% to 70% (search Mandelbaum DLOM case). This wide percentage range, when applied to a $1m valuation results in an irrational choice of discounts  between $100,000 and $700,000. 

To combat this silliness, in 2009, the IRS issued a one-hundred sixteen-page Job Aid for IRS Valuation Professionals in which they state, “ Report reviewers frequently see the use of DLOM studies inappropriately. What follows is the sample report language to use when these situations are encountered:”

     a) Use of Pre-IPO studies to support DLOM   

     b) Use of simple average or median from Restricted Stock Studies

     c) Use of analytical study results without getting behind the data

     d) Use of study results not supported by market data

     e) Reliance solely on court decisions

Notably, for those of us who know how to value a company, the use of a DLOM of any size to an estate tax return is widely known to be an automatic IRS audit flag. 

As such, Gillmore Accounting Practice, P.L. uses the defensible and transparent direct-cost approach to calculating discounts for liquidity and lack of marketability.