Under the fair market value standard governing federal tax-related valuations, premiums and discounts for (lack of) control and marketability for fractional interests are permitted by Revenue Rulings 93-12 and 77-287. There are instances (such as tiered discounts) in which their permissibility is arguable, but otherwise their legitimacy is indisputable. There are differences of opinion as to their magnitudes and the methods for quantifying them, but those are not the point of this post.
When the standard of value is NOT fair market value, however, the permissibility of premiums and discounts becomes an issue. In dissenting shareholder matters (involving fair value), state laws govern. In financial reporting matters (involving fair value in a different context), generally accepted accounting principles govern.
What about investment value, the standard applicable to actual transactions among unrelated parties? Hey, it’s a free market! Unrelated parties are free to buy and sell at any price they negotiate. Stated simply, the parties decide whether discounts /premiums apply and how large they should be. I have no opinion about whether they should apply or not. My only suggestion to the parties is that they document whatever they decide and apply the same criteria to future transactions in their buy-sell agreement. If, for example, Mr. Allen (who owns 100% of his company) sells a 10% interest to Mr. Brown and they agree that a combined 25% discount for lack of control and marketability is applicable, then they should so indicate. Moreover, it seems (at least to me) that if Mr. Brown wants to be bought out at a later date, this should also be at a (25%) discount for reasons of fairness. (Otherwise Mr. Brown gets a free value increase when the discount on repurchase is ignored.)