Implications of Minority Interest and Stock Restrictions In Valuing Closely-Held Shares

Abstract

The federal estate and gift taxes levy on the gratuitous transfer of wealth by both testamentary and lifetime disposition. The amount of the tax depends on the value placed on the property transferred by the decedent or donor. When the property transferred consists of shares of stock in a closely held corporation, there often exists no ready market to help in valuation. As a result, the value of the shares used to compute the federal estate or gift tax must be determined first by appraising the value of the enterprise, and then by allocating some portion of that value to the shares in question. Occasionally, the value placed on these shares will differ from the proportionate value of the enterprise represented by them. This article deals with two instances of such variation in value from the proportionate interest of the shares in the closely held enterprise. One concerns the minority position of the recipient relative to other stockholders. The other concerns shares which are not freely transferable. Since both of these factors limit the shareholder\u27s ability to realize fully on the value of the shares, a discount is frequently applied to such stock when computing gift and estate taxes