At the recent Partnership Profiles’ “Appraising Family Limited Partnerships” course in Dallas, a participant asked the speakers to comment on the IRS’s Discount for Lack of Marketability Job Aid for IRS Professionals. In the Aid, the IRS indicates both minority and marketability discounts are already reflected in the Partnership Profiles data, and therefore appraisers shouldn’t add a marketability discount.
IRS distortions: Speaker Spencer Jefferies (Partnership Profiles) responded that some appraisers add small marketability discounts because the partnerships covered in his study were traded in the secondary market. “There is a lot of misinformation in the Job Aid and Mike Gregory is addressing the concerns in the Discounts for Lack of Marketability and the IRS,” said presenter Bruce Johnson (Munroe, Park & Johnson). Gregory was with the IRS for 28 years and put together the DLOM Job Aid back in 2009. Now a private consultant and mediator, BVWire contacted him for his comments.
Gregory provides several pages of commentary on Partnership Profiles in his book. “By discounting the value of a limited partnership interest or the value of a minority interest in an operation company, the effective rate of return for the interest increases. Practitioners often make the error of applying a fixed discount for lack of marketability without any regard to the resulting rate of return,” he writes. “I would add that this approach works well for market data when market data is appropriate for the valuation,” he says. Partnership Profiles now has over 340 real estate limited partnerships, for example.
In addition, the fourth edition of Partnership Profiles’ "Comprehensive Guide for the Valuation of Family Limited Partnerships" addresses the concerns raised in the 2009 Job Aid and presents commentary indicating that applying the appropriate discount for a specific interest should be based on the impact that the discount has on the rate of return.
Look for an article on often-overlooked steps when valuing FLPs in a future issue of Business Valuation Update.
Please let us know
if you have any comments about this article or enhancements you would like to see.