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All in the family.

Ed. note: The material discussed provides general information Before you take any action in this area, the appropriate code sections, regulations, cases and rulings should be examined.

An issue that often arises for closely held companies is determining the company's stock value. Because the stock is not normally actively traded, the dollar value attributable to each share is not easily ascertainable.

This problem is compounded for shareholders with minority interests in such corporations. Because company control usually rests with the individual(s) owning a majority of its stock, minority shareholders may in reality have less of an interest than their number of shares would indicate. Taxpayers have been able to discount the overall value of their shares to reflect this situation when determining the value of a minority interest in stock in a closely held corporation.


The key element used to determine whether a minority discount is appropriate is whether the shareholders enjoy the variety of rights associated with control. These rights include

* Electing directors and appointing management.

* Determining management compensation.

* Setting corporate policy and changing the course of business.

* Acquiring or liquidating assets.

* Selecting people with whom to do business.

* Making acquisitions.

* Liquidating, dissolving, selling out or recapitalizing the company.

* Selling or acquiring treasury stock.

* Registering the company's stock for public offering.

* Declaring and paying dividends.

* Changing the articles of incorporation or corporate bylaws.

Because a minority interest holder may lack the power to effect these results, such an interest also may be more difficult to sell; this, too, might justify a lower value.


Even when a discount in value for the transfer of a minority stock interest has been allowed, the Internal Revenue Service has opposed such discounts for gifts of stock in a family corporation from one family member to another. In the service's view, control of the corporation is held by the family as a group, not as individual members.

Often involved is an express agreement (or informal desire) for the company to remain in family hands. If such agreement exists, the stock of individual family members may be attributed to one another or to the family as a whole.

Note: If there is evidence of family discord (hostility, disagreement, dissension or any other factor indicating the family would not act together in running the company), a reduction in the value of the minotity interest may be allowed.

Tax avoidance. Despite the service's view toward family corporations, minority discounts have been allowed in valuing a deceased family member's stock for estate tax purposes. However, if the minority interest appears to be the result of a transfer made simply to avoid taxes, the discount will not be allowed. For example, if a majority shareholder transfers to another family member just enough stock to convert that majority interest into a minority one, the validity of the transfer may be called into question.

Valid business purpose. As long as there is a valid business purpose for the transfer of stock (for example, compensation for services rendered), the effects of such transactions should be respected.

Transfers outside the family. If the majority shareholder wants to transfer a nominal amount of stock, attribution could be avoided by transferring such stock to "friendly" outsiders, such as employees, charities or others not related to the majority shareholder.

Timing of transfers. The timing of such transfers also may play a critical role. If the stock of a majority shareholder is transferred shortly before his or her death, the transfer may be questioned. If such a transfer is part of some larger or more regular gift-giving plan, the validity of the transfer might not be an issue.

For a discussion of the developments in this and other areas, see "Significant Recent Developments in Estate Planning (part 1)," by Byrle Abbin, David Carlson and Ross Nager, in the September 1991 issue of The Tax Adviser.

-Nicholas J. Fiore, editor

The Tax Adviser
COPYRIGHT 1991 American Institute of CPA's
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Article Details
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Title Annotation:close corporation stock value
Author:Fiore, Nicholas J.
Publication:Journal of Accountancy
Date:Sep 1, 1991
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