How to Determine a DLOM for the IRS
Historical perspective and current recommendations
The Internal Revenue Service published Discount for Lack of Marketability: Job Aid for IRS Professionals (Job Aid) in August of 2013.¬† Now, two new books provide¬† advice on how to prepare a DLOM and which methods valuators ¬†should consider and why.¬† These will help any business valuation practice, whether working on a DLOM for the IRS or any other purpose.
The Internal Revenue Service published ¬†Discount for Lack of Marketability: Job Aid for IRS Professionals (IRS Job Aid) in September 2009, almost a month after I retired from the IRS. This IRS Job Aid is downloadable and is available at the IRS‚Äô website here.¬† Note, however, that this document was not prepared for people outside the government. Rather, it was prepared for IRS employees; I know this because I championed the document when I was employed at the IRS. The IRS Job Aid offers¬†¬† insight as to what the IRS then deemed persuasive and important as of its unofficial publication date,, including the 33 factors the IRS considered (and presumably still does consider) when evaluating a Discount for Lack of¬† Marketability (DLOM), what a typical Information Document Request (IDR) on the topic might include, and an evaluation of 18 DLOM methods employed by analysts. These 18 DLOM evaluations include commentary on each of the methods: their respective strengths, weaknesses, key parameters, prevalence in practice, and what the federal courts have had to say about most of the more common methods.¬†
The IRS Job Aid also offers commentary on how IRS reviewers and valuators approach this issue. In addition, the IRS Job Aid suggests typical report language. All of this is helpful background information. It is, however, in no way complete because at the IRS, we were prohibited from contacting the modelers themselves, since IRS counsel thought that contacting some DLOM modelers and not others could be perceived as favoritism. The reality was that 180 engineers/business valuers at the IRS were asked what methods they saw on audit and should be included in the IRS Job Aid. This information-gathering process resulted in the identification of 18 methods analyzed in the IRS Job Aid and two other methods discussed in the appendix. Other methods were certainly out there, but since they were not commonly used, they were not deemed as pertinent for analysis in 2009.
There is an interesting story about behind the discrepancy between the IRS‚Äô Job Aid unofficial publication date (September 25, 2009‚ÄĒthe date on the cover page) and its official publication date (August 22, 2011‚ÄĒthe date it was actually released to the public). The IRS Job Aid was actually completed September 25, 2009. However, IRS executive management elected not to have it reviewed by counsel or released to the public. That would have taken about nine months, and new executive leadership moved the organization in another direction. In August of 2011, a former IRS appraiser took the document with him and released it on his own initiative to the Internet. The released document did not have the statement ‚ÄúFor Internal Use Only‚ÄĚ stamped on it, so the former employee decided it would be okay to release it. Normally, any document released by the federal government does not indicate who championed the issue, who was the project manager, or who worked on it, but this particular document included all of that information. This became a huge embarrassment to the IRS.
I recall being contacted sometime before a DLOM webinar and ¬†asked if I knew who had released the document. I did not know; the name of the person who released the document was subsequently discovered, which is another story.¬†¬†¬† This DLOM webinar was scheduled for August 23, 2011. When the IRS became aware of the webinar, the IRS Job Aid was rushed through the approval processes in less than two weeks and was released on August 22, 2011 at 4:01 p.m. eastern time, the day before the webinar, just in time to be available for the web event.¬†
This official IRS Job Aid¬† does not identity any of the key players who were associated with the document, just like any other government publication. Readers ¬†are¬† welcome to obtain a copy and read it if they ¬†have not done so. However, since the IRS Job Aid was not written for outside professionals, but for IRS employees, I would like to bring two books to your attention that I believe are more helpful than the IRS Job Aid in determining a Discount for Lack of Marketability (DLOM) for the IRS.¬†
One book worth consulting is John Stockdale Sr.‚Äôs BVR‚Äôs Guide to Discounts for Lack of Marketability, Fifth edition (2 volumes), found here.¬† This two-volume book is a great reference. It provides¬† technical information on the various methods (including others not mentioned in the Job Aid) and how to apply these various methods (no Excel¬ģ‚Äôs included!). Despite the latter, ¬†those unfamiliar with these various methods or how to use them, Stockdale‚Äôs book is a great resource.
Another¬† solid reference to use ¬†in developing a DLOM for the IRS is ¬†my most recent book entitled Discount for Lack of Marketability and the IRS.¬† As mentioned earlier, I left the IRS a little more than two years ago and for the first two years after leaving had constraints on what I could do or say. ¬†Earlier in 2013, I began contacting the modelers whose methods were reviewed by the IRS in the IRS Job Aid and asked them to critique what the IRS had to say about their method and to also provide me with updated comments regarding their method. This included critiquing the IRS commentary, which is¬† now four years old, and providing new reflections on their method. Despite the short passage of time, many parts of the IRS Job Aid are now dated, and many of the modelers have updated their methods and addressed critiques from the IRS. Having received and included these comments in this new book, I also offer my own insights having reviewed DLOMs for business appraisers in the private sector. ¬†¬†In the book, I make ¬†summary recommendations for¬† consideration on the development of a DLOM for the IRS reporting purposes. I also comment on additional information and data sources, such as Pluris and FMV Opinions.
Michael Gregory is an Accredited Senior Appraiser with the American Society of Appraisers (ASA), a Certified Valuation Analyst (CVA) , and is a qualified mediator with the Minnesota Supreme Court.¬† Mr. Gregory can be reached by e-mail at email@example.com, and also by telephone at (651) 633-5311.