8864. How can the fact that a business owner holds a minority or majority interest in an entity impact the use of a buy-sell agreement?Alexis Longrcline202015-07-21T14:58:00Z2015-07-21T14:58:00Z24392504Summit Business Media2052938148864. How can the fact that a business owner holds a minority or majority interest in an entity impact the use of a buy-sell agreement?Control premiums and minority discounts are especially important in the small business context where the business is owned by a small group of individuals who may also be significantly involved in the day-to-day operations of the business. Control and minority issues may be important in establishing the value of business interests that are subject to a buy-sell agreement.Normally, an interest in a business is valued in proportion to the entire value of the business. However, application of a premium that reflects one owner’s (or a group of owners’) ability to control business affairs, including the ability to withdraw business assets, has been recognized in many cases..On control premiums generally, see Estate of Bright v. United States, 658 F.2d 999 (1981); Estate of Desmond v. Comm., TC Memo 1999-76 (majority stock interest in an S corporation was subject to a control premium); Rakow v Comm., TC Memo. 1999-177 (controlling interest in corporation was subject to a control premium). In other cases, premium pricing has been found appropriate in a context where one owner functions as the “swing vote” within the business, in recognition of the substantial influence that the owner has over the business’ affairs..Estate of Winkler v. Comm., TC Memo. 1989-231 and Let. Rul. 9436005. A premium is not always available, however in the swing vote context, as it involves a fact-intensive analysis. For example, the Ninth Circuit did not allow a premium for swing vote status in the case of Simplot v. Commissioner, reversing the Tax Court’s determination of value that was based largely on scenarios constructed by the court to prove the value of the particular owner’s influence and control. The Ninth Circuit found that it was an error for the Tax Court to base value on fictional potential purchasers, rather than concrete facts..Estate of Simplot v. Comm., 249 F3d 1191 (2001), rev'g 112 TC 130 (1999).A valuation discount has often been applied in the context of minority ownership interests in order to reflect the lack of control that these owners may influence over business affairs..See, e.g., Knott v. Comm., TC Memo 1987-597; Estate of Berg v. Comm., TC Memo 1991-279; Moore v. Comm., TC Memo 1991-546 (minority interest in a general partnership). But see also Ahmanson Found. v. United States, 674 F.2d 761 (1981); Estate of Curry v. United States, 706 F.2d 1424 (1983); Citizens Bank & Trust Co. v. Comm., 839 F.2d 1249 (1988) (no discount for nonvoting interest if the same decedent held majority of voting interest). In certain cases, a minority discount is combined with a discount for lack of marketability that is generally found in the small business context..Estate of Hecksher v. Comm., 63 TC 485 (1975); Estate of Titus v. Comm., TC Memo 1989-466; Moore v. Comm., TC Memo 1991-546 (minority discount); Mandelbaum v. Comm., TC Memo 1995-255 (lack of marketability discount) and McCormick Estate v. Comm., TC Memo 1995-371 (minority discount and lack of marketability discount); Gross v. Comm., TC Memo 1999-254 (minority interest in S corporation was given a combined minority and lack of marketability discount). (It should be noted that the discount for lack of marketability is often available even for majority interests in a closely-held business.).Estate of Bennett v. Comm., TC Memo 1993-34; Estate of Andrews v. Comm., 79 TC 938 (1982). Minority discounts will generally be disallowed, however, in the context of larger companies, where securities are marketable and there are multiple business owners..Snyder v. Commissioner, 93 TC 529 (1989), Estate of Dougherty v. Commissioner, TC Memo 1990-274, Citizens Bank & Trust Co. v. Commissioner, 839 F.2d 1249 (1988).Planning Point: It becomes a client decision as to whether or not the valuation approach should account for any premiums or discounts associated with a minority or controlling interest in the business. For example, the agreement can be drafted to determine a value for the overall business, with this value to be multiplied by the percentage interest in the business being sold. This approach does not reflect any premium or discount. In the alternative, the valuation can be calculated to reflect the value of a specific percentage interest of the business (i.e. the fair market value of a 30 percent interest in the business). This approach will take into account discounts or premiums.