Grant v. Grant, 2016 Tenn. App. LEXIS 327 (May 12, 2016)
So much for clarity. A recent Tennessee appeals court decision hinged on the issue of whether a marketability discount was appropriate in the valuation of the husband’s interests in three real estate development partnerships. In reviewing the trial court’s analysis, the appeals court suggested that the lower court misunderstood the principle behind DLOM but ultimately upheld the lower court’s findings. The resulting decision leaves valuators in a pickle as to when to apply the discount and at what rate.
The trial court adopted the valuations the wife’s expert proposed. It particularly objected to the DLOMs the husband’s expert applied in his valuations, finding the rates too high or altogether inappropriate. The key question underlying the trial court's ruling was whether the husband intended to sell his shares in the businesses. The court found that in regard to one partnership the husband “might be compelled to sell some portion of his assets [in this partnership] to accomplish the property divisions ordered by the Court.” Consequently, it reduced the proposed 18% DLOM to a “slight discount for marketability,” without stating for the record what “slight” meant.
As for the other two partnerships, the trial court declined to apply a DLOM because the husband had no intention of selling these interests.
The husband appealed the valuations claiming the trial court erred in its DLOM rulings.
The appeals court observed that valuation experts typically use a marketability discount to reflect that there is no ready market for an interest or that provisions in a partnership agreement restrict a partner’s ability to liquidate his or her interest. “Generally, applicability of the use of a lack of marketability discount depends on the characteristics of the ownership interest being valued, not whether the owner of the interest actually intends to sell the interest,” the appeals court observed.
But this analysis did not stop the appeals court from deferring to the trial court’s findings.
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