IRS and Treasury Department to Withdraw Proposed Tax Regulations Curbing Valuation Discounts

In a positive development for closely-held business owners and their families, the Treasury Department recently recommended the complete withdrawal of its proposed tax regulations that would have severely limited the application of valuation discounts to transfers of partial interests in family businesses and other assets for gift, estate, and generation-skipping transfer tax purposes.

Back in August 2016, the Treasury issued proposed tax regulations under Section 2704 of the Internal Revenue Code. These proposed regulations sought to eliminate purported abuses of applying valuation discounts to partial interests in family businesses, and other assets, based upon a perceived lack of marketability and/or entity control. The application of valuation discounts is a common practice among estate planning attorneys and valuation specialists, and often results in business owners being able to transfer interests in their business at a lower tax cost than they would normally realize if the full, undiscounted value were used. The implementation of these proposed regulations would have greatly increased the overall value of many family business owners’ estates, resulting in more gift tax and/or estate tax being assessed.

Fortunately, on October 4, 2017, the Treasury and the IRS announced that they are recommending the complete withdrawal of the proposed Section 2704 regulations, stating that they “now believe that the proposed regulations’ approach to the problem of artificial valuation discounts is unworkable.” The official withdrawal of the proposed regulations is expected to be published shortly. This is great news to family business owners and their families, as they can now implement or continue important business succession techniques using discounted values in order to maximize the transfer of their businesses to future generations with minimized transfer taxation exposure.

A complete reading of the report from the Treasury recommending the withdrawal of the proposed regulations can be viewed here.

Matt Loftin counsels individuals, families, and businesses on a broad range of trust and estate matters, including business planning. He advises clients on tax-efficient wealth and property transfers made during lifetime and at death through the utilization of client-specific planning techniques, including charitable planning, business-succession planning, and special needs planning. In addition, Matt represents executors, trustees, and personal representatives in the administration of trusts and estates. Matt can be reached at mattloftin@dwt.com or directly at 425-646-6118.