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Whether in the form of the holding of publicly traded securities or other asset classes (art, real estate, personal property), significant blocks of these assets may upset the balance in their respective markets, leading to an inability to transact all in a day or reasonable time period. Blockage discounts are discussed primarily for stock holdings, whereas an absorption discount is typically applied to real estate, art and personal property. Join experts Ed Pratesi and Dan Pannese as they cover the history and the IRS’s position on these adjustments as well as present criteria to consider in the determination of blockage or absorption discounts. Court cases are cited highlighting the decision making process, as well as case studies to make sure you have practical guidance for your next assignment.
Program Agenda
What is a blockage discount?
Blockage discount — an amount or percentage deducted from the current market price of a publicly traded stock to reflect the decrease in the per share value of a block of stock that is of a size
Publicly traded stocks
Real estate
Art
Books, manuscripts, and animal trophies
Blockage vs. absorption
Does it apply to closely-held companies?
IRS history of blockage discounts
History of blockage discounts
So what is a reasonable time?
What is fair market value?
The definition provides for both a willing seller and a willing buyer…..
Factors influencing discount
Number of shares in the block compared to total O/s shares
Number of shares in block compared to daily/weekly/monthly trading volume
Volatility of the stock price
Impact on price based on increased volume
Factors influencing discount
Methods of determining discounts
Percentage approach
Comparable sale
Secondary market offering
Company redemption
Private placement
Dribble-out
Two approaches:
Hedging by use of put options
DCF analysis
Learning Objectives
Understand the definitions and differences between blockage and absorption discounts
Summarize legal cases involving both types of discounts
Explain the methods used to determine adjustments to value
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