The value of a gifted interest in a closely held business is based on its ‘fair market value’. Fair market value is defined by the IRS’s Revenue Ruling 59-60 as ‘the price a willing, knowledgeable buyer would pay a willing, knowledgeable seller when neither is under compulsion to buy or sell.’
Appraisals are accurate and relevant at a specific point in time. The effective date for a charitable contribution is the date the interest was gifted. Business valuations should only reflect information available up to the effective date. Events that occurred after the effective date should not be taken into consideration in the appraisal.
As mentioned earlier, gifts of closely held stock are generally minority interests (less than 50 percent of the company’s stock). When valuing these interests, the final value will generally be less than the pro rata share of a 100% interest in the company. The reason for this is that minority shares have an inherent lack of control and a lack of marketability applied to them. The appraiser will determine the amount of the discount to apply to the subject interest. The discount amount depends upon the degree of control and marketability of the gifted interest.
The two discounts most commonly applied are a discount for lack of marketability (DLOM) and discount for lack of control (DLOC). [Note: these are defined in detail below.] The size of the discounts varies, depending on the individual characteristics of the gifted interest and the method of valuation used.
The following table displays various valuation methods and the appropriate corresponding discounts.
