During the recent BVR teleconference, Will Frazier (Howard Frazier Barker Elliott) and John Porter (Baker Botts) discussed the use of tiered discounts when valuing a partnership interest or a fractional interest. Frazier identified four components that “really do make a difference” in a tiered entity valuation:
- Asset class: expected returns at each level
- Financial risk: leverage, profitability, specific company risk
- Governance risk: type of interest, control term of entity life, liquidity
- Distributions: full or partial payout, not payout, asynchronous
Frazier and Porter discussed in detail Astleford v. Commissioner (T.C. Memo 2008-128) because the Tax Court in the case accepted a substantial tiered discount where a taxpayer holds a minority interest in an entity that holds a minority interest in another entity. However, Porter warned “there is no black box or fixed formula about how to apply these types of tiered discounts. I think that the courts are looking at in the analysis is whether or not the overall valuation is reasonable because, after all, what the value of an interest is a question of fact.”
The December 9, 2008 BVR abstract of the case is available on the free download page here (scroll down to find the free file). Purchase the teleconference transcript here. John, of course, is also one of the co-chairs of the BVR/Georgetown Tax and Valuation conference in November.
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