Oct 1, 2010 12:00 PM

Why the 12.5 percent DLOM cap in Holman shouldn't be used in the future

By John J. Stockdale

In the case of Holman v. Commissioner,¹ the U.S. Court of Appeals for the Eighth Circuit upheld a Tax Court decision² that a discount for lack of marketability (DLOM) of 12.5 percent was appropriate for a private investment company holding only Dell common stock. I believe that the evidence presented to the court to support this theory is inaccurate and that the evidence may have been incomplete. The court based the DLOM amount on a natural limit or a cap. An expert had analyzed various restricted stock studies that showed that the DLOM prior to 1990 was 12 percent higher than discounts between 1990 and 1997. Based on this finding and other factors, the expert came up with a 12.5 percent discount. However, a detailed look at the restricted stock studies before 1990 and during the period from 1990 to 1997 doesn't support this 12 percent difference and it should have no place in future determinations of the DLOM.

Thomas Holman was an employee of Dell Computer Corp. from 1988 to 2001 and accumulated substantial holdings of Dell stock through stock options and purchases of stock. In 1999, Holman and his wife Kim formed the Holman Limited Partnership (HLP). The holdings of HLP consisted solely of Dell common stock. The Holmans made a series of gifts of minority interests in HLP for the benefit of their children in 1999, 2000 and 2001. They filed gift tax returns based on values using a combined DLOM of 49.25 percent.

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