Heritage Auctions

Marketability and minority are two types of appraisal discounts routinely applied when determining the fair market value of unlisted stocks or privately held small businesses. The basis of the marketability discount is the subject property's lack of liquidity due to the absence of a recognized market, as well as the potential costs necessary to prepare a public, third-party sale. A minority discount reflects the fact that the lack of majority control over subject property reduces its desirability, thus depressing its value. When an argument for a minority discount is made, one for marketability usually will be as well. Some tax courts have even lumped them together, when asked to determine the appropriate size of a discount.

Estate appraisals of fine art collections may also benefit from these appraisal principals. Under certain conditions, an estate holding a fractional interest in fine art or antiques, could successfully apply these discounts. As auction houses do not typically offer "fractions" of paintings, a lack of a "public" market is clear. However, should other heirs be willing to buy out the interest privately, non-discounted FMV would be the appropriate basis to determine a sale price.

A recent case in California, Robert Grove Stone et al. v. U.S. No. 306-cv-00259 (10 Aug. 2007) dealt with a marketability discount for an estate that owned 50% of 19 paintings valued at $5 million. From the estate's half, $2.5 million, the attorney argued for a discount of 44%. Although the court ultimately agreed on only a 5% discount, the reason for the reduction in discount was not due to the court's skepticism about the validity of such a discount, but rather that the attorney simply failed to explain, justify and support his argument for the specific discount he requested. Had more care been taken finding an appropriate appraisal expert to persuasively argue the point, the discount allowed could certainly have been higher.

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