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2. Determination of the Minority Interest Discount
Each expert witness determined a minority interest discount
or discount for lack of control by reference to general equity
closed-end funds. In a closed-end fund, the assets are brought
together for professional management, and the shareholders have
no control over the underlying assets. The owner of an interest
does not have the ability to sell the underlying assets. The
closed-end funds typically trade at a discount relative to their
share of the NAV, and as the shares enjoy a high degree of
marketability, the discounts must be attributable to some extent
to a minority shareholder’s lack of control over the investment
fund. Peracchio v. Commissioner, T.C. Memo. 2003-280.
Therefore, it is appropriate to compare the ownership of a
partnership interest in KLLP to the ownership of a closed-end
fund and apply an appropriate discount for lack of control.
Both experts divided the comparable closed-end funds into
quartiles by price to NAV ratios. The first quartile represents
the funds that are in high demand and therefore trade at premiums
or low discounts. The fourth quartile represents the funds that
are in low demand and trade at higher discounts.
a. The Estate’s Expert
In computing the minority discount, ATI determined that KLLP
would be most comparable to the closed-end funds in the fourth
quartile with price to NAV discounts of 21.8 percent to 25.5
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Last modified: May 25, 2011