Valuation Discount Regulations under Review

The valuation and estate planning community breathes a collective sigh of relief that the Proposed Regulations under 2704 regarding use of certain discounts in valuing family-owned business interests were one of the areas identified in IRS Notice 2017-38 as imposing undue financial burdens on taxpayers and/or adding “undue complexity” to federal tax laws. Valuation professionals had made these assertions in Fall 2016 in response to the August 2016 issuance of the proposed regulations. In fact, certain commenters had opined that the regulations as proposed also exceeded the IRS’s Grant of Authority from Congress under IRC Section 2704, a view apparently not shared by Treasury.

The four areas addressed in the Proposed Regulations were as follows:

  1. Rules for what constitutes control of an LLC or other entity or arrangement that is not a corporation, partnership, or limited partnership are defined.
  2. So-called “deathbed” transfers are limited, and there is clarification of what occurs if a transfer results in the creation of an assignee interest.
  3. The definition of “applicable restriction” under Reg. Section 25.2704-02 is amended to eliminate the tie-in to local law.
  4. A new section is added to address restrictions on the liquidation of an individual interest in an entity and the effect of insubstantial interests held by persons who are not family members.

I expect that Treasury will roll back the elimination of the use of minority discounts in the valuation of family-owned business interests on the basis that it imposes undue financial burdens on taxpayers. The nature of the undue burden is the disparity of treatment between business owners who are family members versus those who are not. My expectation is not a guarantee, however. Family business owners are advised to do estate planning as soon as possible.

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