9034 / How can a majority or minority interest impact the value of a small business interest?

If a block of stock represents a controlling interest in a corporation, a “control premium” may add to the value of the stock. If, however, the shares constitute a minority ownership interest, a “minority discount” is often applied to the value. For example, in Martin v. Commissioner,¹ discounts were applied to shares of stock representing a minority interest in a holding company that, in turn, held minority interests in seven operating companies. In this case, lack of control over both the holding and operating companies, combined with a lack of marketability (see Q 9028), led the court to allow a combined 70 percent discount in valuing the interests.

A premium may also attach for swing vote attributes where one block of stock may exercise control by joining with another block of stock.² The IRS has valued stock included in the gross estate at a premium as a controlling interest, while applying a minority discount to the marital deduction portion which passed to the surviving spouse.³

However, the fact that an interest being valued is a minority interest does not always mean that a minority discount is available. Courts have held that, even though the interests at issue are minority interests, a minority discount is not appropriate if there is nothing lost through the minority ownership position. For example, in a case where the decedent owned minority interests in five partnerships, no discount was available because the partnership agreement required the partnerships to distribute cash flow annually based on a predetermined formula. Therefore, the majority partners would not be able to prevent or alter the partnership distributions and there was no risk that the minority owner would not receive an annual payout.⁴