Gift and Estate Taxes Valuation Discount Proposed Regulations

8/29/2016

Sept. 7, 2016


The IRS has issued proposed regulations that are intended to disallow or significantly curtail many valuation discounts. These discounts are one of the most effective methods used by dealers in estate planning. The proposed rules would apply to the valuation of gifts to family members and the value of any dealership or related business owned at death if the entity is controlled by members of the same family.

The proposed rules would apply when family members own either more than 50 percent of the voting rights or 50 percent of the equity of the entity. Attribution rules apply for stock or partnership interests held inside other corporations, partnerships, or trusts. Under the proposed rules, members of the same family include:

  • The donor of a gift (or decedent at death)
  • The donor’s spouse
  • Ancestors and lineal descendants of either the donor or spouse
  • The brothers and sisters of the donor
  • Any spouse of an ancestor, lineal descendant, brother, or sister

Under the proposed rules, certain provisions of a partnership agreement or corporate buy-sell agreement that limit the rights of an entity’s owner would be disregarded and ignored when determining the value of the entity. Another type of provision that would be ignored under the proposed regulations is one that limits the value of an entity to an amount less than what the IRS calls the “minimum value.” The minimum value is the net equity of the entity (fair market value of the assets minus liabilities) multiplied by the percentage ownership. Therefore, these new regulations have the effect of disallowing discounts for lack of control (“minority discount”) or lack of marketability with respect to an ownership interest.

The proposed regulations also contain a provision that would increase the value of a decedent’s estate if, within three years prior to death, the decedent engaged in a transaction that had the effect of changing the decedent’s ownership from a majority control to a minority ownership position.

If adopted, the proposed rules will apply to transfers and lapses of voting or liquidation rights that occur after the rules are finalized. An IRS hearing on the regulations is scheduled for Dec. 1, 2016, which means the effective date is likely to be sometime in early 2017. Therefore, dealers who are considering making gifts of family owned dealerships or related business entities that would be eligible for valuation discounts should consider acting quickly to make those transfers prior to the regulations being finalized.