Potential Change in Tax Valuation Discounts

An important element in estate and tax planning for family-owned businesses is the use of valuation discounts. Under the fair market value standard, discounts for lack of control and lack of marketability are often applied to non-controlling or “minority” interests. These discounts can be significant, ranging from 10% to as much as 50% of the pro rata share of enterprise value, depending on the facts of each situation. Although it has been rumored before, it appears the opportunity to use these valuation discounts for certain family-owned businesses may be coming to an end.

The Internal Revenue Service (IRS) has challenged such valuation discounts in different ways on many occasions. In 2010 through 2012, this included proposals in the Treasury Department’s “Greenbook” to modify Internal Revenue Code Section 2704 to limit the application of valuation discounts.

A recent Bank of America Tax Alert stated that:

“There has been recent speculation that regulations may be imminent and might prevent minority interest and lack of marketability discounts for certain family owned entities. On May 10, 2015, Cathy Hughes, from the Treasury’s Office of Tax Policy, spoke at the ABA Tax Section Meeting. She commented on various proposed regulations and anticipated regulations and projects. In particular, she indicated that proposed Section 2704 regulations might be released by mid-September.”

There have been indications that such a rule change could be effective retroactive to the date of its issuance.

A valuation practitioner’s forum in which we participate has been discussing this issue. While we have talked about “what-ifs,” it’s hard to come up with anything concrete since we don’t know exactly what will happen or when. It’s possible that valuation discounts will be disregarded on transfers of non-controlling interests in holding companies such as family real estate partnerships or family-owned businesses in general. For additional insights, read the recent blog post published by the National Association of Certified Valuators and Analysts (NACVA).

Now is the Time to Act

If you are planning to gift or transfer ownership to a family member in the near future, now is the time to call us and discuss your options. While we cannot predict how the IRS will ultimately decide on the use of these discounts, we can talk about your options now and determine a plan to potentially reduce your tax liability before it may be too late.

Brian Alwine, CPA, ABV, ASA
Director, Valuation Services
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574.289.4011, x223
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