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Simple English definitions for legal terms
blockage rule
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A quick definition of blockage rule:
Blockage Rule: The blockage rule is a tax principle that states that a large group of stock shares may be worth less than the total value of individual shares because it may be hard to sell all of them at once for their full price. This means that if someone owns a lot of shares in a company, they may not be able to sell them all at once without lowering the price, which can affect the overall value of the shares.
A more thorough explanation:
The blockage rule is a principle in taxation that states that a large block of stock shares may be valued at less than the total value of the individual shares. This is because such a large block may be difficult to sell at full price.
For example, let's say that an individual owns 10% of a company's stock, which is worth $1 million in total. However, if that individual were to try to sell all of their shares at once, they may have difficulty finding a buyer willing to pay the full $1 million. Therefore, the blockage rule allows for the value of the shares to be adjusted to reflect the difficulty in selling such a large block.
The blockage rule is important in determining the fair market value of large blocks of stock for tax purposes. It recognizes that the value of a large block of stock may be different from the value of the same number of individual shares, due to the difficulty in finding a buyer for such a large block.