An evaluation of economic assertions for estimating the magnitude of court-determined minority interest discounts in estate and gift taxation

This study examines the magnitude of court determined minority interest discounts in estate and gift tax cases using ordinary least squares regression analysis to test a model developed based on economic theory or assertions. This study hypothesizes that the interaction of voting rights with the degree of control enjoyed by the controlling block of equity holders in a closely held business will be positively correlated with the magnitude of the court determined minority interest discount in estate and gift tax cases. This study further hypothesizes that the closely held business's reputation for paying dividends as a percentage of dividend capacity and stewardship reputation for increasing the net book value of assets as a percentage of revenues are negatively correlated with the magnitude of the court determined minority interest discount in estate and gift tax cases. Control variables to account for asset specificity were incorporated in the model for exploratory purposes.; A review of 162 published Tax Court and other court opinions revealed that the published opinions often lack complete financial statement and ownership information. Consequently, this study's results are based on small sample statistical tests. The study's results suggest that the interaction of voting rights with the degree of control are positively correlated with the magnitude of the court determined minority interest discount in the estate and gift tax cases sampled. Additionally, the study found that the correlation between the reputation variables did not remain constant over the 3-year time-period as measured from the valuation date. Finally, the study found that control variables for firm type that proxy for the firm's asset specificity were found to explain variation in the magnitude of court determined minority interest discounts for the estate and gift tax cases sampled.; The resulting measurement for the degree of control as modified for its interaction with voting rights represents a contribution to the literature. The resulting multivariate model may have practical value for tax litigants when evaluating whether to pursue litigation or settle their dispute at the administrative appeals level.