Valuation discounts are a significant component of estate planning. The IRS has used various legal theories to challenge discounts, but with limited success. In the most recent effort to curtail valuation discounts for family control entities (both active operating businesses and passive asset businesses, the IRS has issued new proposed regulations under section 2704 of the code.

These proposed regulations will significantly limit the use of valuation discounts with regard to transfers of interest in family controlled entities to family members. The proposed regulations create a new class of disregarded restrictions that apply to family members without regard to state law. The proposed regulations allow the IRS to ignore restrictions on transfer or liquidation under the governing document for valuation purposes even if they are permissible under state law. The proposed regulations will assume that individuals receiving transferred interest are able to liquidate the interests at fair market value, which effectively will eliminate valuation discounts based on minority, lack of marketability or lack of control.

Strong challenges are anticipated to the validity of the proposed regulations if they are enacted in their current form as they run contrary to legislative history as the history to section 2704(b) expressly provided that 2704 would not affect minority and other similar valuation discounts.

The IRS has requested comments and a public hearing is scheduled for December 1, 2016. The proposed regulations will not take effect until they are published as final regulations. Therefore, we have a window of opportunity until at least December to make transfer using the current valuation discounts.

For more information contact Mike Dorman.