Internal Revenue Service and the Department of Treasury Withdraw Estate Valuation Regulations

by Monte L. Schatz

Historically, valuation discounts have been used as an estate planning tool to minimize estate, gift and generation-skipping taxation.  The ability to minimize taxation of ownership interests in closely held corporations, limited liability companies and partnerships has been critical in helping to assure the preservation and continuity of those businesses by legally avoiding tax obligations that would adversely affect the liquidity and cash flow of operating businesses.  The use of valuation discounts has been in a state of uncertainty for the past several months. Proposed regulations published by the Internal Revenue Service would have restricted valuation of discounts previously recognized under Internal Revenue Code § 2704.

The 2704 valuation discount provisions allow for statutorily recognized reductions in value resulting from the restrictions, illiquidity and reduced marketability of closely held business interests.  The 2704 discounts were particularly helpful for entities that were family owned businesses.  The proposed regulations published on August 4, 2016 would have provided for disregarding restrictions placed upon shareholders, partners or members for sale of their interest.  The practical result of disregarding those business entity restrictions would be elimination of any discount from the fair market value for those interests.  The entity would be taxed at fair market value thereby potentially increasing estate, gift or generation-skipping taxes for holders of those interests.

On April 21st, 2017 the President issued Executive Order 13789 instructing the Secretary of Treasury to review all significant tax regulations that:

i. impose an undue financial burden on U.S. taxpayers;

ii. add undue complexity to the Federal tax laws; or

iii. exceed the statutory authority of the IRS.

The Secretary of Treasury submitted a final report to the President on September 18, 2017 recommending a complete withdrawal of the proposed regulations that would have eliminated certain valuation discounts for closely held businesses.  The report has been filed as of October 17th and is set for Publication on October 20, 2017.

§ 2704 Valuation discounts have been preserved for taxpayers who own closely held businesses.   The continued recognition and reaffirmation by the Treasury Department and Internal Revenue Service of valuation discounts preserves a critical estate planning tool for legal professionals to assist minimizing taxation of their client’s estates and helping to preserve the continuity and preservation of taxpayer’s ownership interests.

SOURCES:  https://www.gpo.gov/fdsys/pkg/FR-2016-08-04/pdf/2016-18370.pdf
https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-22776.pdf

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