The focus of this abbreviated commentary is on the DLOM for federal tax purposes. After completing a controlling valuation on an entity,conventional appraisal theory and standards would recommend applying a Discount for Lack of Control (DLOC) and a Discount for Lack of Marketability (DLOM) to a minority interest as presented below.
DLOMs and the IRS
The Discount for Lack of Marketability (DLOM) is the most common adjustment by IRS agents and business valuers to estate and gift tax valuations. As such it is potentially an area of conflict with the IRS. However, you can take steps to minimize the probability of an audit and there are steps you can take if audited by the IRS. This is one of several technical topics that Michael Gregory speaks on frequently to appraisers, accountants, attorneys, estate planning councils, CPA societies, MBA programs and others. He also critiques appraisals to minimize the probability of an audit and helps parties involved with IRS audits of business valuation reports.
When Mike headed up business valuation for the IRS for 11 years, he saw the need for consistency on this issue. He proposed and formed a team to conduct research across the IRS engineering and valuation program resulting in a job aid for IRS employees. This DLOM Job Aid was later made public in 2011. Many of the elements in this job aid are still relevant, but other elements are out of date.
Upon leaving the IRS Mike wrote a book critiquing and updating elements of the DLOM Job Aid with his book Discount for Lack of Marketability and the IRS in 2013. Five years later Mike combined five of his books with Business Valuations and the IRS: Five Books in One in 2018 to include an update on DLOM’s as one of the five books inside this new text. This is the most comprehensive book ever written on the topic. It includes 852 pages with 180 practical pointers and 38 examples to help the reader to address all the major areas typically reviewed by the IRS. The link for the book is to Amazon.com but note under new titles there is a significant discount for “new” books directly from the original publisher that is currently available.
To help Mike’s readers, Mike took that section of the book that addresses DLOM’s and wrote a crib notes version with about 1/3 of the information and over 20 links for those looking for only a cursory review and some of the key links. You may download the complimentary DLOM eBook and see three other complimentary eBooks that may help you too.
The IRS identified 32 areas to consider when developing a DLOM for federal tax purposes in the Job Aid. It is recommended anyone developing a DLOM consider which of these areas may be applicable when developing a DLOM. The IRS also identified over 20 models to consider and presented pros and cons of the various methods. This information can be very helpful with reconciling various methods selected by a business valuer. This information is available in the DLOM Job Aid. However, much of the DLOM Job Aid is now dated. Newer methods have also been developed. That is why you should consider the DLOM Job Aid but also reference the more current text and current research on this topic.
Mike speaks on this topic and other technical topics associated with reasonable compensation, expert witnesses, writing reports and other topics related to the IRS. If you would like to discuss this topic, Mike speaking to your organization, Mike reading and critiquing your report to avoid an IRS audit, or any other area of interest, please reach out to Mike at firstname.lastname@example.org or call Mike on his direct line at 651-633-5311.