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Proposed Treasury Regulations Would Limit Valuation Discounts

August 16, 2016

Timothy Barry, CPA

A tax planning strategy utilized in reducing gift and estate tax has been taking advantage of valuation discounts for family transfers of closely held businesses.  However, this strategy may soon evaporate with the recent issuance of regulations limiting valuation discounts. 

On August 2, 2016, the IRS issued proposed regulations (Chapter 14, Special Valuation Rules, §2701-2704), containing provisions that negatively impact a family’s ability to transfer property (e.g., closely held business interests) to other family members at a discounted value. The issuance of regulations limiting valuation discounts has been hinted at for a while as discounting was perceived as abusive.   

Prior to the issuance of the new proposed regulations, individuals have been able to claim discounts on the valuation of intervivos family transfers. Typically, transfers among family members are of minority interests in closely held businesses, with limited liquidity rights, limited voting rights, and limited transferability rights; thus such limitations providing a discount in the value of the interests transferred. These discounts often range from 20% to 40%, depending on the facts and circumstances, and often result in significant reductions in the value of interests transferred among family members creating significant gift and estate tax savings.

The new proposed regulations will impair valuation discounting in typical family transfer planning.

A window of opportunity may exist to complete any contemplated discounted transfer before the regulations are finalized and the new rules take effect.  If you are considering making an intra-family transfer of an interest in a closely held entity (such as a corporation, limited liability company, or partnership) to mitigate your gift and estate taxes, please contact us as soon as possible to discuss how the regulations may impact you.

As there are further developments to report, we will subsequently issue updates through this newsletter.

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Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.


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