At the American Bar Association's Section of Taxation meeting in May of this year, an IRS attorney signaled that the IRS intends to release new proposed regulations under IRC §2704(b)(4) by mid-September. Those proposed regulations will likely include new restrictions on family entity strategies that would reduce or eliminate the use of valuation discounts. Valuation discounts are used to allow wealthy families to leverage gifts or sales of equity interests in family Limited Liability Companies or Family Limited Partnerships, shifting more wealth to other beneficiaries.
The IRS has often challenged valuation discounting strategies in court, generally with limited success. Courts have consistently found in favor of taxpayers whose entity valuations reflected discounts for lack of control and lack of marketability. Although discounts have been more generously given for entities that have underlying business operations, discounting has also been successful in family entities that hold securities and do not operate businesses.
From 2010 through 2013 the Obama federal budget Green Book included proposals to eliminate valuation discounts. These provisions were dropped in the President's proposals from 2014 to the present. However, some predict that this is not due to a philosophical shift, but plans to exercise regulatory powers under existing §2704.
There is further speculation that existing family entities would not be grandfathered under the proposed regulations. Only gift or sale transactions that are completed before the effective date of the proposed regulations would be grandfathered.
The window may be closing for wealthy families to take advantage of valuation discounting in family entities. Those who wish to shift significant value out of their estates and into the hands of others should do so now. For those who already have family entity strategies in place, they should consider accelerating their gift or sale programs before the opportunity to leverage those transactions through discounting is gone.