IRS Takes Aim at Minority Discounts for Interests Gifted to Family Members

IRS3The IRS has signaled that pending regulations may restrict the application of minority discounts on interests in Limited Partnerships and LLCs when transfers are made to family members. Tax payers considering transferring closely held interests to family members (or trusts for the benefit of family members) and who may want to take advantage of potential valuation discounts may want to act sooner than later.

At the American Bar Association (ABA) Section of Taxation meeting on May 8th, 2015, Catherine Hughes, of the Office of Tax Policy in the U.S. Treasury Department, indicated that proposed regulations under section 2704(b)(4) could be released before the fall ABA Section of Taxation meeting, which is scheduled for September 17-19, 2015. Although Hughes implied that the regulations may be reminiscent of the Obama Administration’s budget proposal, it is not clear what the regulations will ultimately say. Both the Wall Street Journal (requires subscription) and Barron’s have opined that the proposed regulations would limit the use of lack of control (i.e. minority) and lack of marketability discounts for interests in family-owned entities, especially when the entity does not itself operate an active business – i.e. a typical family limited partnership or holding company LLC.

Although regulations are generally effective when finalized, there has been some indication that, instead, these regulations could be made effective as of the date the proposed regulations are released. It is believed that there would be no “grandfathering” of preexisting entities, but only grandfathering of previous transfers of interest in such entities. Given the information that is currently available and based on an expectation that the proposed regulations could be released sometime around Labor Day, there is still time for taxpayers to act. But time is of the essence because it could take weeks for taxpayers to make appropriate arrangements and effectuate any necessary transfers.

Corporate Valuations’ appraisers have extensive experience in the preparation of business valuations for tax-related purposes. With more than 30 years of experience working with attorneys, CPAs, financial planners, and other estate planning professionals, Corporate Valuations has developed a clear understanding of the rules and regulations impacting taxpayers and taxing authorities, particularly with respect to issues involving valuation of closely-held business interests. Our Principals are qualified appraisers under the Pension Protection Act of 2006, and also hold accreditation through the American Society of Appraisers.

Our company assists its clients through all phases of the valuation process, including audit and U.S. Tax Court proceedings. We work with the client’s attorneys, accountants and estate planning professionals toward resolution of the issues that may arise in this area of practice. Corporate Valuations has also worked directly for the taxing authorities on valuation matters.

Key Contact:

Blake J. Runckel, CFA, ASA