Stumped on How to Figure Discounts? The IRS Can Help.

Stumped on How to Figure Discounts?  The IRS Can Help. 

The Engineering/Valuation Program DLOM Team at the IRS has posted a job aid on the IRS site.

The 112-page guide reviews definitions of marketability and discusses factors that influence it.  The aid illuminates the distinctions between minority and controlling interests.  It offers sample initial information document requests (IDRs).

A large section of the document reviews various methods of factoring DLOM.  These include benchmark approaches (restricted stock studies, pre-IPO studies, cost of flotation, and Mandelbaum factors),  securities-based approaches (LEAPs, the Longstaff Study, the Chaffee Study, Bid-Ask Spread Method), analytical approaches (Wruck; Hertzel and Smith; Bajaj, Denis, Ferris and Sarin; and Abbott), as well as alternate methods (QMDM and NICE).

The document includes a disclaimer:

This job aid is meant to provide information to IRS Valuation Analysts when

considering the Discount for Lack of Marketability (DLOM).  Always read Section

E, Evaluation and Recommendations, in conjunction with Section D, Summary of

Approaches to DLOM.  It reviews selected past and existing practices and

attempts to provide insight into the strengths and weaknesses of these practices.

It is a guide that is not all encompassing and should not be cited, or relied upon,

as legal, or any other, precedent. Any opinions expressed are those of the job aid

developers not the position of the IRS. The Valuation Analyst must have a clear

understanding of the facts and circumstances of each interest to be valued, use

professional judgment in choosing a DLOM just as is done for all other parts of a

valuation, and apply a reasonableness test.  In other words, the Analyst must get

behind the data used to support a DLOM choice rather than simply using

summary statistics and resulting conclusions developed by somebody else.

 

The job aid is not an IRS position, and does not make any bright line selections

or exclusions as to what approach  to DLOM  is best in any given set of

circumstances—that is up to the Valuation Analyst’s professional judgment.

Download the entire aid here.