Business Valuation Discounts Under Fire From Proposed IRS Revisions to Reg Section 2704
Business valuation discounts are an important component of estate tax plans. The two primary discounts are discounts for a lack of control or a minority interest discount and discounts for lack of marketability. Initially the IRS stated that discounts were not available when valuing an interest in an entity that was controlled by family members. Revenue Ruling 93-12 changed that ruling in 1993. From that time forward discounts have become very popular in estate plans. Because of this increased use the IRS has tried to limit claimed abuses and loopholes.
In the past the IRS has tried to use section 2704 to disregard restrictions are disregarded in determining the value of the transferred business interest. The IRS has had little success using 2704 to date. Section 2704 states that the Secretary of the Treasury may provide in regulations new restrictions that are to be disregarded in determining the value to a family member if the restriction reduces the value for estate tax purpose but does not ultimately reduce the value of the interest to the transferee.
The proposed regulations to section 2704 severely restrict the ability to use discounts in cases of family ownership. It anticipates several work arounds such as having a small portion of ownership in non-family members and prohibits using discounts in those situations too. If you have an estate large enough that discounting of business interests would make a difference then you want to consider gifting quickly. The new regulations could go into effect before year-end 2016.
For more information use the links below.
PDF of Proposed Regulations
PDF of Richard Dees Letter