Proposed Regulations have Major Impact on Valuation Discounts

Person pointing to the text TAX. Valuations of intra family ownership transfers of closely-held businesses.


The Treasury Department and the Internal Revenue Service have recently published proposed regulations under Code Section 2704.  The proposed regulations focus on valuations of intra family ownership transfers of closely-held businesses.  If and when finalized, the new regulations will drastically change gift and estate planning techniques.

Tax planners have been relying on court decisions in determining transfer values of closely held business interests within families. Discounts for lack of control and/or lack of marketability are applied based on restrictions structured in governing documents. The combined discounts could reach 25% to 50% or even higher.

The proposed regulations specify several disregarded restrictions. Restrictions on individual voting rights are disregarded (i.e. assignee interest) if family members collectively have the control of the business and rights to liquidate the entity. If a non-family member is involved, such member must have held ownership for three years and at least 10% interest (20% if more than one non-family member) on date of transfer. Restrictions that are greater than default state laws are disregarded. 

The proposed regulations apply to partnerships, corporations, limited liability companies and any other business entities and agreements. If transferors die within three years after the proposed regulations become final and effective, the transfers may be subject to the new regulations as well.

Taxpayers who are considering transferring non-control family-owned business interests should proceed as soon as possible. The new rules of certain disregarded restrictions will not take effect until 30 days after the proposed regulations made final. A public hearing of the proposed regulations is scheduled for December 1, 2016. 

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