Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Discount for lack of control and majority interests

Can you, and should you, apply a discount for lack of control when valuing a majority interest? Well, with almost everything valuation related, it depends. A recent tax court case (Estate of Warne v. Commissioner) allowed a small discount for lack of control discount for majority interests in several Limited Liability Companies (LLCs).

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At the time of death of Miriam Warne, the Warne Family Trust (Family Trust) owned a majority interest in five LLCs, each holding real property, primarily land subject to ground leases. The operating agreements of each of the LLCs provided for significant power to the majority interest holder including the ability to appoint and remove managers and the ability to unilaterally dissolve the LLCs. It is unclear what the majority interest holder did not fully control, but the estate’s valuation expert applied lack of control discounts between 5% and 8%..

The expert for the commissioner also applied discounts for lack of control but used only a 2% discount. In its decision, the tax court noted “when a majority interest holder exerts control similar to that which the Family Trust can exercise in the LLCs, we have held that no discounts for lack of control applies. Because the parties agree to a discount for lack of control, we will find one; however, given the control retained by the Family Trust, the discount should be slight.” The tax court ultimately arrived at a 4% lack of control discount.

Another recent case (Grieve v. Commissioner) also allowed for lack of control discounts for a holder of a majority interest. In the Grieve case, while the interest held 99.8% of the membership, the interest was a Class B interest with no voting power – clearly a reason for a lack of control discount.

When should a lack of control discount be applied to a majority interest? The determination is going to be made after a review and understanding of the operating or other governing agreement. Does the majority interest holder really have control or substantial control of the entity? Can they remove and replace the manager? How many provisions in the governing agreement require a unanimous vote of all the members? Many considerations should be taken before applying a lack of control discount to a majority interest but in some cases it will be appropriate.

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Melissa E. Loughlin-Sines, CPA, CFE, CFA, CFF, ABV