Status of Valuation Discount Regulations

In April 2015, an IRS official indicated that regulations were being developed that would impact the ability of a taxpayer to use discounts in the valuation of an interest in a family-owned business that is being transferred within the family group. Proposed regulations were expected in Fall 2015. As of December 31, 2015, those regulations have not been issued by the IRS.

Valuation professionals are unsure what to make of the nonappearance of the proposed regulations. It is possible that the IRS is still working on the project. On the other hand, practitioners have raised serious questions on two fronts: 1) does IRC Section 2704(b)(4) grant the IRS the authority to issue regulations of this type? and 2) might not such regulations be effectively sidestepped in the valuation process by building a risk factor that gives rise to a valuation discount into another aspect of the methodology, such as the cost of capital? Another result of regulating discounts in this manner is that it places a minority owner in a family owned business in a less-advantageous position than a minority investor in a similar non-family business. The fairness of such a result has been questioned.

A taxpayer who wishes to transfer an interest in a family-owned business that is legitimately subject to a discount is advised to act without delay. It seems likely that such regulations, once issued, will attract much attention. It would be better to avoid the uncertainty surrounding what will undoubtedly be a learning curve for all involved—practitioners as well as the IRS.