Neil B. Mills-Mazer, an IRS engineer team manager, first published his article, “Valuing a Majority Fractional Interest and the Minority Premium Model,” in the November 2011 Business Valuation Update. Now comes one of the first published responses and criticisms of Mills-Mazer’s model.

“Does the ‘Minority Premium Model’ Hold Up?” ask authors John Ramsbacher and Annika Reinemann in the October Trusts and Estates (subscription required). Their article points out three potential problems with the IRS model:

• It develops an “arbitrary premium range,” without providing an adequate explanation or basis for support.
• It incorrectly assumes “that a majority owner is always willing to pay a premium to achieve a 100 percent interest in the asset.”
• It is “seriously flawed” in its legal application, because the model ignores or at least doesn’t properly apply the fair market value, willing buyer/willing seller standard.

“Admittedly, valuing fractional interests in real property is a challenging assignment,” the authors conclude, “because direct comparables are scarce. However, the valuation community must be careful not to look, out of desperation, to a simplistic approach that doesn’t take into account all the variables.”