May 18, 2022

Volume XII, Number 138

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Proposed IRS Regulations Would Limit Family Entity Valuation Discounts

On Aug. 2, 2016, the IRS released proposed regulations for Section 2704 of the Internal Revenue Code, which would disallow the application of most valuation discounts to transfers of interests in family-controlled entities for transfer tax purposes. The proposed regulations and restrictions on such valuation discounts could become effective as early as December 2016.

Historically, gifts of closely held business interests to family members (or Trusts for the benefit of family members) allowed transferors to leverage their Gift and Estate Tax exemptions through discount planning. This is largely because taxpayers valuing fractional interests in closely held businesses were entitled to various discounts including those for lack of marketability and lack of control.

Section 2704 of the Code was enacted in 1990 to impose restrictions on the use of valuation discounts applied to intra-family transfers. However, court decisions and state statutes passed after the enactment of Section 2704 have limited the application of such restrictions.

The new proposed regulations attempt to curb perceived abuses of intra-family transfers by further restricting the use of valuation discounts for such transfers. The proposed regulations would apply to any entity, however organized (e.g., corporations, partnerships, LLCs, etc.), and would apply to passive entities as well as entities operating active businesses.

Copyright © 2022 Godfrey & Kahn S.C.National Law Review, Volume VI, Number 231
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About this Author

Jennifer A. Hannon, Godfrey Kahn Law Firm, fiduciary income taxation lawyer
Member

Jennifer A. Hannon is a member of the Estate Planning Group.  Jennifer’s practice focuses on fiduciary income taxation, estate and gift taxation, probate and trust administration, and the drafting of wills, trusts, marital agreements and related estate planning documents.

Jennifer advises individuals, businesses, private foundations and other charitable organizations on transfer tax issues and asset protection strategies through the use of split-interest trusts, irrevocable generation-skipping trusts, and other unique estate planning and...

608-257-3911
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