323 / How is a closely held business interest valued for federal estate tax purposes where there is no purchase agreement?
Valuation of closely held corporate stock requires a determination of fair market value. Estate tax regulations define this as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under compulsion to buy or sell and both having reasonable knowledge of the relevant facts.”1
Factors that should be considered when determining fair market value include the company’s net worth, prospective earnings and dividend paying capacity, goodwill, the economic outlook in the particular industry and its management, the degree of control of the business represented by the block of stock to be valued, and the value of securities of corporations engaged in the same or similar lines of business that are listed on a stock exchange.2
If a block of stock represents a controlling interest in a corporation, a control premium generally adds to the value of the stock. If, however, shares constitute a minority ownership interest, a minority discount often is used. A premium also may attach for swing vote attributes where one block of stock may exercise control by joining with another block of stock.3 One memorandum valued stock included in a gross estate at a premium as a controlling interest, while applying a minority discount to a marital deduction portion that passed to a surviving spouse.4