DLOM: Under Daubert attack by the IRS

The discount for lack of marketability (DLOM) is “still the most important discount in valuation,” according to Judge David Laro, U.S. Tax Court, who opened the 2nd Annual University of San Diego School of Law, Business Valuation and Tax Conference last Friday.  Like the GPS in your car, however, there are multiple routes to get to the same destination—and some of these may be more challenging and possibly more prone to mistaken assumptions or applications; or may even suffer from fundamental flaws that render them unreliable. In fact, “the [Tax Court] judges and IRS want you to appreciate that some of the DLOM techniques used to ‘get there’ may or may not be acceptable under the Daubert standard,” Laro said. (Note: As always, his opinions are his own, not those of the federal judiciary or the IRS).

Moreover, the same judges and IRS examiners know that “some in the BV profession have a vested, proprietary interest in some of the methods used,” the Judge added, with typically candor. “But what we in the courts want to know: Are there measurable, discernable, quantifiable differences among the DLOM techniques? We need to know that.” It’s a persistent question that BV practitioners want answered, too—and during his closing remarks, Laro also announced that he would be starting a trial this week, a case in which the IRS has challenged the taxpayer’s expert valuation, including the DLOM methods and conclusions, under Daubert. Stay tuned…