Estate of Lewis A. Bailey, Deceased, Frances Jeanette Foster, Executrix - Page 26

                                       - 26 -                                         
               Valuation Discount                                                     
               As reported on the estate tax return, the value of                     
          decedent’s 50 shares of C&L Bailey stock reflected a total 50-              
          percent discount.  In the notice of deficiency, respondent                  
          applied the same 50-percent total discount in valuing the stock.            
          In this proceeding, however, the parties’ seeming harmony on this           
          score has modulated to a discord of contending experts.  Although           
          the parties and their experts agree that a 20-percent minority              
          discount is appropriate and that some additional marketability              
          discount is appropriate, they disagree about the amount of the              
          marketability discount.  Petitioner contends it should be 40                
          percent (thus suggesting a combined valuation discount of 52                
          percent, after taking into account the agreed 20-percent minority           
          discount).10  Respondent, on the other hand, contends that the              
          marketability discount should be only 27.44 percent (thus                   
          suggesting a combined valuation discount of 41.95 percent).                 

               10 On brief, without explanation or discussion, petitioner             
          treats the agreed-upon 20-percent minority discount and the                 
          asserted 40-percent marketability discount as being additive,               
          resulting in a claimed combined discount of 60 percent (20                  
          percent + 40 percent), rather than multiplicative, which would              
          result in a combined discount of 52 percent (20 percent +                   
          (40 x (1-.20) percent).  Although the result reached herein does            
          not depend upon the distinction, we note that as a general                  
          proposition the application of a minority discount and discount             
          for marketability is multiplicative rather than additive.  See              
          Trugman, Understanding Business Valuation:  A Practical Guide to            
          Valuing Small to Medium-Sized Businesses 286 (1998).                        

Page:  Previous  16  17  18  19  20  21  22  23  24  25  26  27  28  29  30  31  32  33  34  35  Next

Last modified: May 25, 2011