Valuation of closely held stock.

• Author: Phelps, Mary Brooke

In Manbelbaum, TC Memo 1995-255, three brothers owned all of the shares of a closely held company in the retail industry. The brothers were equal shareholders until they transferred shares o stock to their children. The stock was always completely owned within these three branches of the family.

All shareholders were actively involved in the business. Each shareholder's voting shares would become nonvoting if they were transferred to persons other than the board of directors. Board of directors and officers of the company were restricted to family members. Furthermore, the company had the right of first refusal if a shareholder wanted to transfer stock out of the family group.

Gift tax returns were filed by the three brothers on the transfer of shares of stock to their children and grantor trusts. In order to determine the gift tax on the transfer, the donors' accountant reduced the appraised value of the stock by marketability discounts ranging from 70% to 75%. The IRS's expert found the appropriate marketability discount to be 30% and the Service assessed penalties under former Sec. 6660 and Sec. 6662(a) and (g) for substantial valuation understatements.

The Tax Court agreed with the IRS'S expert, and found 30% to be an appropriate marketability discount factor. Several factors influenced the court's decision. The company's strong financial status (based on such factors as its financial statements, management, dividend policy, history, position in the industry and...