While the IRS identifies many valuation concepts to consider in preparing valuation reports, they less frequently specifically require methods to be used or how they should be applied. One such exception is Revenue Ruling 77-287. This Revenue Ruling outlines applying restricted stock transactions to determine marketability discounts and identifies the most important attributes to determining the discount’s magnitude.
Based on a SEC Study
The Revenue Ruling was based on financial metrics of a study performed by the Securities and Exchange Commission analyzing 1960s restricted stock transactions, which interestingly preceded current rules for determining restrictions under their Rule 144. Some criteria enunciated in the Revenue Ruling still provide a reasonable basis, whereas others do not.
Do the reports that you receive from your valuation experts identify and explain this important Revenue Ruling? Have your experts analyzed the data based on the criteria outlined in the Revenue Ruling?
Subject Expert
Martin Greene CPA\ABV, ASA, is an expert in determining marketability discounts. He has co-authored an article on how valuation experts should evaluate restricted stocks to comply with this Revenue Ruling. His article, published by Business Valuation Resources, is a treatise on marketability discounts.
Reviews
The authors of the Stout Restricted Stock Study™ (formerly FMV Restricted Stock Study™) have praised Mr. Greene’s work, and Willamette Management Associates, formerly owned by Shannon Pratt, quoted this work and included these findings with the most prestigious studies of the last 40 years. Furthermore, a recent panel of valuation experts in a national webinar on marketability offered by Business Valuation Resources identified and applied steps from this article.
