September 22, 2016

IRS Proposes Valuation Discount Regulations: Implications for Family-Controlled Businesses

IRS issues new proposed rules aimed at eliminating valuation discounts for transfers of interests in family-controlled entities. Clients considering making transfers of interests in such entities should act soon.

In August, the Treasury Department and the IRS issued Proposed Regulations under Internal Revenue Code § 2704 that are intended to eliminate most valuation discounts for minority interests and lack of control that are typically used by taxpayers in connection with transfers of interests in family-controlled corporations, partnerships, limited liability companies and other business entities. In addition to prohibiting such discounts for estate and gift tax purposes in most circumstances, the proposed regulations also include a new three-year look back period which would change the valuation method for gifts made within three years of the transferor’s death, potentially including even transfers made prior to the effective date of the regulations.

The proposed regulations must go through a 90-day public comment period, followed by a public hearing, before they can be issued in final form. Most aspects of the final regulations would not take effect until 30 days after issuance. The regulations in the current proposed form raise a number of questions and concerns and are likely to generate substantial public comment. However, it is possible that the regulations may be issued in final form as early as December 1, 2016.

If you own an interest in a family business entity, we urge you to contact us to discuss how the new rules may affect your family, your estate plan and shareholder, partnership or other similar agreements you may have in place. If you are considering transferring any part or all of your interest in such an entity, you may wish to consider doing so before the end of 2016.