Dreaded IRS estate valuation discount regs released

A few weeks ago, BVWire gave a heads-up that the Treasury would soon release long-awaited proposed IRC Section 2704 regulations designed to curb estate valuation discounts. Well, they’re here, folks—and they’ve generated some very strong reactions.

The IRS wants to eliminate the technique of putting valuable property into entities such as family-owned partnerships or corporations just to reduce the value in the property to avoid estate and gift tax. To do this, the proposed regs (available here) address the treatment of some lapsing rights and restrictions on liquidation in determining the value of transferred interests in corporations and partnerships. Liquidation restrictions would be disregarded for valuation purposes. Bottom line: It appears that the proposed regulations eliminate almost all minority discounts for closely held entity interests, including operating businesses owned by a family.

Frontal assault: “I view it as a full frontal assault on economic reality,” says Donald DeGrazia (Gold Gerstein Group LLC). “They are changing the definition of fair market value,” says Michelle Gallagher (Gallagher Valuation & Forensics PLC). She says the regs seem to carve out certain types of transfers from the definition of FMV under the federal gift tax regulations (Treas. Reg. Sec. 25.2512-1). “This is indeed a very significant issue for business appraisers,” adds Ronald Seigneur (Seigneur Gustafson LLP), a veteran valuation practitioner.

“The recently released IRC Section 2704 family limited partnership (FLP) discounts proposed regulations include much of what appraisers had been dreading for the past year,” Carol Carden (PYA PC) tells BVWire. Carden is chair of the AICPA FVS executive committee. The AICPA as well as the ASA and NACVA have formed task forces to study the regs and prepare comments. Seigneur and Gallagher are on the AICPA task force representing the valuation community.

“This is going to be a major problem for all family-owned businesses,” attorney Richard Dees (McDermott Will and Emery) told the Wall Street Journal. “This all boils down to the question of whether a family business should be valued as if it’s owned by one person.” Last year, Dees sent a 29-page letter to the government critiquing the proposal as beyond the scope of its powers.

What to do: Read the proposed regs—comments are due to the IRS by November 2, and then there will be a public hearing on Dec. 1, 2016. The new rules would not be effective until 30 days after a final version is published. Of course, the proposed regs could change—or they might never go into effect.

More details and expert insights are in BVWire and also the September issue of Business Valuation Update.