Could a closely held corporation use a minority-interest discount when valuing its stock for Florida intangible tax paid for shareholders?

Plain-English summary

Florida allowed the corporation to consider a minority-interest discount when valuing its closely held stock for intangible tax.

The Florida corporation had 27 shareholders, only five with voting rights, and no shareholder owned a majority interest. An independent professional appraisal annually determined the stock's freely traded fair market value for estate and gift tax purposes. The corporation asked whether it could reduce that appraised value to reflect a shareholder's lack of control.

The Department said yes. A minority block can be worth less because its owner cannot control bylaws, liquidation, director appointments, salaries, or dividends. Although the cited Florida provisions did not expressly name a minority discount, they required fair-market-value methods and consideration of factors including the size of the block being valued.

What this means for you

• A minority-interest discount was a permissible valuation factor, not an automatic fixed percentage.
• The ruling concerned stock that was not regularly traded and was valued under closely held stock methods.
• The corporation could use the factor when paying Florida intangible tax on behalf of its shareholders.

Common questions

Q: Did Florida approve a minority-interest discount? A: Yes. The Department treated minority status as a factor normally considered in fair-market-value analysis.

Q: Did the ruling specify the amount of the discount? A: No. It authorized consideration of the factor but did not set a percentage.

Q: Can another corporation rely on this TAA? A: Not automatically. The advisement binds the Department only for the facts and circumstances described in this request.

Citations and references

• Fla. Stat. § 199.103(4) — valuation of shares not regularly traded
• Fla. Admin. Code r. 12C-2.001(3) — definition of just value
• Fla. Admin. Code r. 12C-2.010(1)(c) — valuation methods and factors for closely held stock
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96C2-079

Original ruling text

Sep 11, 1996

Re: Technical Assistance Advisement No. 96(C)2-079 Intangible Tax - Valuation of Closely Held Stock Section 199.103(4), F.S. XXX (the "Taxpayer")

Dear

Your letter requesting a Technical Assistance Advisement has been received by this office. This response to your request constitutes a Technical Assistance Advisement under Chapter 12-11, Florida Administrative Code, and is issued to you under the authority of s. 213.22, Florida Statutes.

STATEMENT OF FACTS

The Taxpayer is a closely held Florida corporation. There are twenty seven shareholders, five of whom have voting rights. No one shareholder, however, owns a majority interest in the Taxpayer. For estate and gift tax purposes, an independent professional appraisal is performed annually to determine the freely traded fair market value of the Taxpayer's stock.

ISSUE

Based on the facts as stated above, you have requested a ruling on whether the Taxpayer may apply a minority interest discount to the appraised freely traded fair market value of its stock for purposes of paying the Florida intangible tax on behalf of its shareholders.

PROVISIONS OF LAW

Section 199.103, F.S., requires that all shares of stock be valued at their just value as of January 1 of each tax year. Shares of stock that are regularly listed on an exchange or traded over-the-counter are to be taxed at the closing market value on the last business day of the previous calendar year.

Shares of stock not regularly traded on an exchange or traded over-the-counter are to be valued based upon those factors customarily considered in determining fair market value.

Rule 12C-2.001(3), F.A.C., defines "Just Value" to be the price that a stock would bring if offered for sale by a person who desires to sell but is not compelled to sell, and bought by one willing to buy but not compelled to buy, with both seeking to maximize their gains and neither being in a position to take advantage of the other. Rule 12C-2.010(1)(c), F.A.C., provides that shares of stock in corporations which are closely held and are not regularly traded over the counter, having no actual sales within a reasonable period of time, shall be valued using generally accepted valuation methods applied to the following valuation approaches:

1. Capitalization of earnings or dividends;
2. Weighted average of factors;
3. Adjusted book value;
4. In addition, consideration shall be given to the
   influence of the following factors on the marketability of the shares being valued: a. The nature of the business; b. The history of the enterprise; c. The economic outlook in general; d. The economic condition and outlook for the industry; e. The book value of the stock; f. The adjusted book value of the stock; g. The financial condition of the business; h. The earning capacity of the business; i. The dividend paying capacity - whether or not the company has paid a dividend; j. The company's value of goodwill or other intangible value; k. The sales of the stock; l. The size of the block to be valued; and m. The market price of stocks of corporations in the same or similar line of business.

ANALYSIS

A minority interest discount represents a reduction in value below a shareholder's pro rata interest in the full fair market value of the corporation. In other words, the normal full fair market value of the shares is reduced by the amount that a willing buyer would pay for a minority interest in the corporation. Shares of a controlling interest in a corporation are inherently more valuable since they provide the shareholder with the power to change the corporate bylaws, to force a corporate liquidation, to appoint oneself as director, to establish salary levels, and to authorize the payment of dividends. Conversely, a minority shareholder would be unable to exert this decision making power over the corporation, and therefore, a knowledgeable and well informed buyer would consider such shares to be less valuable based on the inability to control the corporation's activities. Even though a minority interest discount is not explicitly provided for under the above cited provisions of law, it is, however, a factor which the federal courts customarily take into account when determining the fair market value of closely held stock.

CONCLUSION

Since a minority interest is a factor which is normally considered in determining the fair market value of closely held stock, it is therefore permissible under s. 199.103(4), F.S., for the Taxpayer to take this factor into account for purposes of paying the Florida intangible tax on behalf of its shareholders.

This response constitutes a Technical Assistance Advisement under section 213.22, F.S., which is binding on the Department only under the facts and circumstances described in the request for this advice as specified in section 213.22, F.S. Our response is predicated on those facts and the specific situation summarized above. You are advised that subsequent statutory or administrative rule changes or judicial interpretations of the statutes or rules upon which this advice is based may subject similar future transactions to a different treatment than expressed in this response.

You are further advised that this response and your request are public records under Chapter 119, F.S., which are subject to disclosure to the public under the conditions of section 213.22, F.S. Your name, address, and any other details which might lead to identification of the taxpayer must be deleted by the Department before disclosure. In an effort to protect the confidentiality of such information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or the response.

Sincerely,

George D. Turner
Senior Tax Specialist
Tax Policy & Dispute Resolution

GDT