Update on Status of IRS Regulations on Valuation Discounts

In August 2016, the IRS issued Proposed Regulations under IRC Section 2704. These regulations are intended to curb the ability of taxpayers to claim valuation discounts in the transfer of interests in family-owned businesses for estate, gift, and generation-skipping transfer tax purposes.

Valuation professionals formed tax forces to examine the proposed regulations and respond. The result was that the IRS received many comments regarding the expected impact of the regulations. Three main areas of concern emerged from the response to the IRS, as follows:

  1. The proposals interfere with a valuation professional’s ability to evaluate the economic reality of a particular situation.
  2. Two classes of small business owners are created:  those who have family relationships and those who do not. Under the new regulations, these two classes of business owners are treated differently.
  3. The IRS exceeded its Grant of Authority under IRC Section 2704, and the resulting proposed regulations are unsupported by adequate agency fact-finding.

At a public meeting that was held on December 1, 2016, a Treasury representative stated that it is not the intent of the IRS to do away with valuation discounts in their entirety. It is anticipated that the proposed regulations will be reworded before final issuance (expected in 2017).