Treasury Department Issues Highly Anticipated Proposals Limiting Valuation Discounts

By Jean McDevitt Bullens August 4, 2016

On August 2, 2016, the U.S. Department of the Treasury released proposed regulations under Code Sections 2701 and 2704.  The proposals would reduce the availability of certain discounts used in valuing assets for wealth transfer tax purposes.  The intra-family transfer of closely held business interests are for estate, gift, and generation-skipping transfer (GST) tax purposes often valued by the taxpayer at an amount lower than full fair market value.

One reason for justifying such a lower value is, typically, based on certain limitations in the transferability of the interest and/or the ownership of an interest that cannot by itself exercise control over the decision making of the entire entity (a minority interest).  Assets within the applicable business may consist of an operating business, real estate, marketable securities, or cash.

One of the proposed regulations would clarify and broaden application of the valuation and control rules to all business entity structures whereas currently the regulations address specifically just corporations, partnerships, and limited partnerships.  The proposal clarifies application to any arrangement be it domestic or foreign or how the entity is classified for federal tax purposes (such as limited liability companies (LLCs)).

A second proposed regulation addresses a new class of restrictions designated as “disregarded restrictions.”  For a family-controlled entity, any restriction on an owner’s right to liquidate the interest will be disregarded if the restriction may lapse at any time after the transfer or if the transferor or any family member may remove or override the restriction.  A disregarded restriction includes one that: (1) limits the ability of the holder of the interest to liquidate the interest; (2) limits the liquidation proceeds to an amount that is less than a minimum value as further defined in the proposed regulations; (3) defers the payment of the liquidation proceeds for more than six months; or (4) permits the payment of the liquidation proceeds in any manner other than in cash or other property, other than certain notes.

These proposed regulations are subject to a 90 day public comment period from the date published in the Federal Register (anticipated to be August 4, 2016).  Following the comment period, the regulations would be finalized; portions of the regulations would be effective immediately upon publishing in the Federal Register while others would be effective 30 days after.

For any taxpayer who has a pending intra-family transfer intended to take advantage of valuation discounts, we strongly recommend that you immediately discuss the impact of these proposals with your tax advisor.  Additional commentary may be published on this site as the full impact of the fifty page proposal is further examined. Full text of the proposed regulations may be found here.

If you have any questions regarding these new rules, please call Jean McDevitt or your BNN advisor at 1.800.244.7444.