- 50 -
he then applied to the values before him. As we noted earlier,
discounts for marketability and minority interest are separate
and distinct, and this fact must be taken into account when such
discounts are applied in order to avoid distorting the valuation.
While expert reports and the courts sometimes apply combined
discount rates to determine the value of stock, this is a
questionable procedure to use if specific rates are determined
for each discount and then added together to reach the combined
rate. See Pratt, et al., Valuing a Business: The Analysis and
Appraisal of Closely Held Companies 314 (3d ed. 1996). In order
to ensure accuracy, the minority interest discount should be
applied first and then the marketability and liquidity discount
should be applied to this figure.35 Had this been done, the
discounts would have yielded a combined discount rate of 51.25
percent.36 Mr. Browning also applied a minority discount to the
values based on his market comparable analysis, although he
agreed at trial that traditional appraisers believe that the
market approach yields a valuation on a minority basis because
35The result is the same if the discounts are applied in the
reverse order. See Estate of Jung v. Commissioner, 101 T.C. 412,
434 n.7 (1993).
36For example, if a 25-percent minority discount is applied
to a stock value of $100, the resulting value is 100 times 75
percent, or $75. Application of a 35-percent marketability
discount to the new value of $75 results in $75 times 65 percent,
or a value after marketability and minority discounts of $48.75.
Thus, the combined discount rate is 51.25 percent, not 60
percent.
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