Tax Planning Alert: Time May Be Running Out on Valuation Discounts

10.16.2015

For owners of closely-held business entities and investments, estate planning strategies involving the use of valuation discounts for gift and estate tax purposes are quite common.  As these planning strategies have become more widely used, valuation discounts have faced increased scrutiny from the Internal Revenue Service (IRS).  Now, it appears that the U.S. Department of the Treasury (Treasury Department) may finally take action to “restrict or eliminate” the use of valuation discounts with regards to family-held entities.

Originally enacted in 1990, Sections 2701-2704 of the Internal Revenue Code[1] (the Code) were intended to limit the use of valuation discounts on transfers of interests in family controlled entities where those interests are transferred to other family members via gift or at death.  These Code Sections, and specifically Section 2704(b)(1)-(3) which disregards certain transfer restrictions on ownership interests in family-held companies when valuing those ownership interests for gift and estate tax purposes, have resulted in much litigation between the IRS and taxpayers regarding the proper application of valuation discounts for gift and estate tax purposes.

IRS challenges to valuation discounts under Section 2704(b) have met with limited success due to judicial decisions and state statutes that have limited the application of Section 2704(b).  Dissatisfied with the existing statutory landscape, the Treasury Department now seems poised to address Section 2704(b) by issuing new Regulations pursuant to Section 2704(b)(4) which are expected to “restrict or eliminate” valuation discounts for transfers of family owned entities for gift and estate tax purposes.

It is expected that new Treasury Regulations expanding the application of Section 2704(b) could be forthcoming at any time, perhaps before the end of 2015.  It is also expected that such regulations could impair the use of valuation discounts for gift and estate tax purposes, and thus the window for applying valuation discounts on family transfers may be closing.

Please contact a member of our Estate Planning, Trust and Wealth Management Group if you would like to discuss planning opportunities.

[1] All references to particular Sections herein shall refer to the referenced Section of the Internal Revenue Code of 1986, as amended.