H.R. Bill 436 would severely curtail (but not eliminate) valuation discounts for minority interests. It may pass soon: assume it does.
Besides reducing demand for our services, it will raise a host of issues. Discounts are real (routinely observed and quantified via numerous long-term market studies) and also logical (consistent with finance theory). Since the limitations on their use are not absolute, there will be confusion.
First, will the law permit discounts in a specific situation? In my opinion, this is a legal / tax, not an appraisal, call. Appraisers need instruction on this. (“Tell me what to do, and what you tell me will appear in my report”.) The same situation arose in the mid 1990’s when Revenue Ruling 93-12 struck down the attribution principle that previously limited discounts for family owned entities. This spurred creation of FLP’s, many owning marketable securities and other passive investments, for which minority interests were now discountable. A common challenge was whether these entities had legitimate business purposes. (Reducing taxes is not a legitimate business purpose.) At first, appraisers worried about this, but gradually the burden of proof shifted (appropriately, in my opinion) to clients and their legal / tax advisors.
Second, many believe that fair market value (the tax standard) and fair value (the financial reporting standard) are the same. Fair market value will now have discount limitations. Fair value is based on “typical market participants”. Typical market participants know about discounts and factor them into their transactions! This is going to be an auditor call, not an appraiser call. (“Tell me what to do…”)
Third, will the change in federal fair market value to limit discounts affect how state courts determine fair value (here, the standard applicable to dissenting shareholder matters)? This could be another legal brouhaha. (“Tell me…”)
Fourth, what about the interpretation of existing and the establishment of new buy-sell agreements? THIS brouhaha will involve not only attorneys but also the parties. You know the drill.
So, we don’t really have to WORRY about these issues, but we need to be well aware of them, what the alternative treatments are, who is responsible for resolving them, and the drill.