Estate Tax: How to apply and defend a block discount claimed on public company stock.

Block Discounts

Recognizing discounted values for large blocks of publicly traded stock due to their illiquidity (block discounts) was legitimized for tax purposes on April 5, 1938 by the United States Circuit Court of Appeals, Fourth Circuit, in the case of Helvering, Commissioner of Internal Revenue, v. Safe Deposit & Trust Co. of Baltimore. Prior to this case, the IRS had attempted to prevent the practice with its enactment of Treasury Regulation 80. In an opinion authored by Justice Morris Ames Soper, the Court declared “the regulation shuts its eyes to reality when it commands that no heed be given to the size or quantity of the property invested.”

In the ten years following the Safe Deposit case in 1938 the IRS denied many block discount claims, which resulted in a flood of court cases. The IRS won more of these than it lost.

The key question is: what size of a block is large enough to warrant a discount, and how large is the discount?

Successful claims usually result in a discount ranging from 1 – 6%, depending on the strength of several key factors.

The primary factors considered by the courts are:

The percentage of total outstanding shares represented by the block,

The percentage (or multiple) of an average day’s trading volume represented by the block,

The market trend following the valuation date, and

The quality and credibility of the expert testimony offered.

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It is apparent in cases that the comparison to average daily trading volume is probably the most heavily weighted factor. In early cases (such as Kimberly, Shattuck, Jenkins, and Maytag) the multiples of block size/average daily trading volume was very high, ranging from 100 – 600x. In the Du Pont case of 1943, the discount was applied to a block of only 23x average daily trading volume, and in Bartol (1960) a discount was allowed for a block of 10x average daily trading volume.

The greater availability of transactional data, and the improving sophistication of valuation models and methods has proven advantageous to taxpayers.

In an estate tax return prepared by MRO, we claimed a 3% discount on a block which represented 1.1% of the outstanding shares of a publicly traded company, and represented approximately 2 – 3x the average daily trading volume. We defended this claim in audit with valuation reports prepared by FMV Opinions, Inc. and Management Planning, Inc. (contact info below). Ultimately, the IRS agreed to a 2.7% discount.

If a block of stock is large compared to the average daily trading volume, a discount is probably justified, however receiving that discount is not a foregone conclusion. In Gilford (1987) the taxpayer was denied a discount by a district court on a block representing more than 100x the average daily trading volume because they insufficiently documented the basis of their claim. We highly recommend contacting a firm that specializes in calculating valuation discounts on public securities.

Here is the contact information of the two companies we used:

FMV Opinions, Inc.

420 Lexington Ave., Suite 820

New York, NY 10170

Management Planning, Inc. (MPI)

101 Poor Farm Rd.

Princeton, NJ 08540


Brian Murray

Brian has been in public accounting since 1997. Prior to that he was in finance at Kimberly-Clark Corp., audit at M&I Bank Corp., and accounting manager at Browning-Ferris Ind. Brian’s areas of specialty are estate and trust tax and business valuation.

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