It’s been 16 years since the enactment of Revenue Ruling 93-12, which created the boom in family limited partnerships and limited liability companies for estate and gift taxation. As a result, attorneys have had plenty of time to refine operating agreements for these entities that reflect the state of the art concerning valuation discounts for lack of control and lack of marketability.
When valuing limited partnership and non-managing membership interests, most of us use checklists to assess factors that contribute to the magnitude of these discounts. Whether you use benchmarking or the Quantitative Marketability Discount Model to appraise discounts for lack of marketability, for example, you have to base your appraisal on case-specific facts and circumstances. (The Mandelbaum doctrine requires this.)
Every once in awhile, I am asked to value an interest an entity that is governed by a pre-1993 operating agreement and / or one that is incomplete in certain valuation respects. This is where a checklist becomes invaluable! It highlights what might be missing, for example:
1. In the valuation provisions, a clear reference to fair market value less applicable discounts.
2. A clear prohibition on withdrawal of capital.
3. A clear explanation of distribution rules (i.e. discretionary, taxes only) and frequency.
4. Transfer restrictions.
5. Right of first refusal.
Taking the second point as an example, a partnership that permits partners to withdraw their capital at will is really just like a joint bank account. I would have a very hard time justifying any sort of discount for such an entity.
When I come across situations like this, I point them out to the attorney and suggest that they amend the agreement before I do my valuation.