How can control affect the estate tax value of company shares?

Key takeaway

Control can affect the estate tax value of company shares because a controlling block may warrant a valuation premium, while minority status and marketability may also matter. Fair market value is measured at transfer as the price between hypothetical willing parties who are not compelled and are reasonably informed. These valuation principles apply to owners of closely held businesses and private investments.

How fair market value is measured

Fair market value is measured through a hypothetical transaction between willing parties. For gift and estate tax, the measurement occurs at transfer, with neither party compelled and both reasonably informed.

The standard describes a price between hypothetical parties, not a stated price for every company share. The facts of the interest and its ownership position can affect how unlisted stock is valued.

Control can support a premium in valuing a block of shares. Courts have recognized that a controlling block may warrant a valuation premium for transfer tax purposes.

Valuation of unlisted stock may account for control, minority status, or marketability. A block that carries control can be assessed differently from an interest with minority status, depending on the valuation factors considered.

Closely held interests and marketability

Marketability and control are described as factors supporting lower values for closely held interests than for comparable publicly traded interests. Those factors concern how an interest is valued in relation to publicly traded interests.

Closely held interests can have different marketability and control characteristics from comparable publicly traded interests. Those characteristics are among the factors described in valuations of closely held interests.

Appraisers and valuation judgments

Appraiser qualifications, experience, and independence are weighed by courts in closely held entity valuations. Court consideration includes the appraiser's qualifications, experience, and independence.

Discount factors for LLC and FLP interests are representative, not universal. A qualified appraiser is described as stating in writing what discounts apply to those interests.