Feb 1, 2007 12:00 PM

By Lance S. Hall, managing director, FMV Opinions, Inc., New York

The battle began in earnest more than 40 years ago: How do we determine discounts for lack of marketability (DLOM)? In the 1970s, valuation experts applied a “benchmark method.” The following decade, experts touted a “pre-IPO method.” By the latter half of the 1990s, the “quantitative marketability discount method” exploded onto the scene. And early in the millennium, the “restricted stock comparative analysis”¹ ascended as the courts' discount methodology of choice. Each method continues to boast loyal and vocal proponents. But beginning with the 2000 decision in Estate of Weinberg² and ending with last year's decision in Temple v. United States,³ the courts finally declared a winner: the restricted stock comparative analysis. One problem is, valuators will have difficulty gathering sufficient relevant data underlying the restricted stock studies to perform a meaningful comparative analysis. But also, this method takes more time and work than the others. Attorneys should be very certain that their appraisers use the restricted stock comparative analysis.

The DLOM debate began in earnest with a 1971 study by the Institutional Investor that provided rich detail on numerous restricted stock transactions.⁴ In the decades that followed, many valuation experts determined discounts based on the difference between the publicly traded price of a company and its privately placed restricted stock counterpart. Because the only difference between the publicly traded stock and the restricted stock was the degree of liquidity, valuators found that the courts supported their discounts for lack of marketability based on the restricted stock price percentage differential.

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Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

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