Page 44 - Business Valuation for Estates & Gift Taxes

 Each company had audited financial statements, a board of directors with independent members
and an audit committee, and management subject to review and direction by that board.

Several widely available commercial products have facilitated the analyses of restricted stock and pre-
IPO transactions. These tools generally provide the user with multiple search criteria, enabling the val-
uation analyst to drill down through multiple data fields to identify potentially relevant transactions or
characteristics.

The Mandelbaum Factors

Perhaps the most widely cited authoritative guidance for consideration of liquidity impairment is Judge
David Laro’s decision in the 1995 Tax Court case of Mandelbaum v. Commissioner. fn 5 While the deci-
sion does not distinguish between marketability and liquidity, it does lay out 10 factors (each subjective
to some degree) to analyze and quantify the degree to which a security should be discounted from its
theoretical fully liquid (and marketable) value. The court used restricted stock and pre-IPO studies as a
starting point and compared the subject company to the studies based on the following factors:

1. Private versus public sales of the stock

2. Financial statement analysis

3. Company’s dividend policy

4. Company’s nature, history, position in the industry, and economic outlook

5. Company’s management

6. Degree of control transferred with block of shares to be valued

7. Restrictions on transferability of stock

8. Holding period for the stock

9. Company’s redemption policy

10. Costs associated with affecting a public offering

Note that there is an inherent overlap, particularly in factors 1, 3, and 4, with core considerations in the
development of a discount rate. Valuation analysts should be aware that because of this overlap, there
exists the potential for double-counting an area of risk in developing an opinion of value.

While these factors are, to some degree, subjective, many were analyzed in the earlier studies to develop
the magnitude and direction of their influence on observed discounts. The Mandelbaum case analysis
laid out by Judge Laro is a synthesis of the conclusions of the earlier studies. The Mandelbaum case re-
mains a core analytic tool notwithstanding either its age or its lack of discrimination between marketa-
bility and liquidity.

fn 5
Mandelbaum v. Commissioner, T.C. Memo 1995 -255, June 12, 1995.

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