IRS Proposes End to Business Valuation Discounts in Estate, Gift, Generation Skipping Taxes Matters

The IRS recently issued proposed regulations to limit the use of discounting in business valuations for estate, gift, and generation skipping transfer tax purposes.  The valuation of interests in corporations and partnerships are provided in Sec. 2704.    The regulations, Reg-163113-02 will “close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift purposes.”

The proposed regulations would amend:

  • Regs. Sec. 25.2701-2 to address control of a limited liability company or related entities.
  • Regs. Sec. 25-2704-1 to address certain deathbed transfers.

The result will be to eliminate most marketability and control discounts even though these are proven components of properly applied fair market value.  They include both active businesses and passive business interests.  The regulations if implemented, could increase estate taxes in many cased significantly.

For more information:

Federal Register, Background, Proposed Regs, Comments:   https://www.federalregister.gov/documents/2016/08/04/2016-18370/estate-gift-and-generation-skipping-transfer-taxes-restrictions-on-liquidation-of-an-interest

Wall Street Journal Article:  http://www.wsj.com/articles/a-stealth-death-tax-increase-1473115618

These changes are expected to go into effect 30 days after the date the regulations are published as final which could be as early as year end 2016.