Alert - New IRS Proposed Regulations to Potentially Eliminate Valuation Discounts

November 23, 2016
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           The IRS has proposed long anticipated new tax regulations that appear to eliminate most valuation discounts on transfers of family-owned entities to family members. Since valuation discounts substantially affect transfer taxes on business interests being transferred between family members, the proposed regulations, if approved, would have a substantial impact on transfers of interests in family-controlled entities.
VALUATION DISCOUNTS
       Valuation Discounts are commonly used in connection with the valuation of interests in closely held companies. Currently, the most common valuation discounts are for lack of control (minority interest discount) and lack of marketability. These discounts are used to lower the value of an interest in the company that is to be gifted and/or sold to children and/or other persons. These discounts allow a transferor to transfer a much larger interest in the company while reporting a lower value for transfer tax purposes.
WHAT THE REGULATIONS WILL CHANGE
           If approved, the regulations will severely impact the use of a discount for lack of control. Certain experts believe that regulations, as written, will effectively eliminate the discount in the context of intra-family transfers or gifting. The regulations will amend the Internal Revenue Code(The "Code") section that details the treatment of certain lapsing rights and restrictions of a corporation (including an S Corporation), partnership or Limited Liability Company. Also, the proposed regulations appear to impose a new three (3)-year lookback rule that will unwind certain transfers in a family-controlled entity within three (3) years of the transferor’s death. We note that the regulations at this time are only proposed and could change substantially before finalization.
IS IT TOO LATE TO ACT?
           No, it is not too late to act. The proposed regulations will not go into effect until finalized by the IRS. The IRS is accepting comments on the proposed regulations and will hold a public hearing on December 1, 2016. It is expected that the IRS will approve and finalize the regulations before year-end. Therefore, any transfers of non-controlling interests in family-controlled entities before the finalization of the regulations will be able to utilize current law and historical valuation discounts. However, since valuation discounts take time to complete, we would recommend that you act as soon as possible to put into effect any transfer plans that you may be considering. Should you have any questions, or would like to discuss available options in regard to any contemplated transfers, please contact us.
Authored by:
Ryan Lockhart, Esq.
T: (925) 944-9700
rlockhart@bpbsllp.com
CIRCULAR 230 DISCLOSURE – Pursuant to rules and regulations imposed by the Internal Revenue Service, any tax advice contained in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another person any transaction or matter addressed herein.
The summary which appears above is reprinted for information purposes only. It is not intended to be and should not be considered legal advice nor substitute for obtaining legal advice from competent, independent, legal counsel. If you would like to discuss these matters in more detail, please feel free to contact us so that we can provide the clarification and resources you need to make effective decisions