Blockage Rule Law and Legal Definition

Blockage rule is a principle of tax law that a large block of stock shares may be valued at less than the total value of the individual shares because such a large block may be difficult to sell at full price. For the blockage rule to apply, the block of stock being valued must be so large in relationship to the market that it could not be disposed of within a reasonable time without depressing that market. The blockage effect cannot simply be assumed from the size of the block being valued, but rather must appear from expert evidence on all aspects of the market.

The following is a case law on the blockage rule:

The blockage rule provides that, when securities are being valued, the size of holding and not simply the quoted price per share is a relevant consideration. This principle requires recognition of the market fact that a block of shares may be so large in relation to the usual trading volume or to the number of shares outstanding that it would necessarily go at a discount. [Rushton v. Commissioner, 498 F.2d 88 (5th Cir. 1974)]