Proposed Regulations May Limit Valuation Discounts for Family-Owned Entities

August 21, 2015

Individuals who wish to make gifts or other transfers of interests in family-owned/controlled entities, such as closely-held businesses, limited partnerships, or limited liability companies should consider making such transfers before the IRS enacts proposed regulations that may severely limit or eliminate discounts ordinarily available in valuing these family-owned entities. 

Section 2704(b) of the Internal Revenue Code provides that the IRS may promulgate regulations that cause certain restrictions to be disregarded in determining the value of the transfer of any interest in a family-owned entity to a member of the transferor’s family. At the American Bar Association Section of Taxation meeting in May, Cathy Hughes, from the US Treasury Office of Tax Policy, stated that proposed regulations under Section 2704(b) could be issued as early as September and could be effective to the date of enactment of the new regulations. There is speculation that the proposed regulations may limit minority interest and lack-of-marketability discounts when valuing family-owned entities, although commentators have suggested that these regulations are likely to target family entities holding primarily passive investments, not actual operating companies, but the actual content of the new regulations or when they may be effective is unknown. 

Since the new proposed regulations may reduce or eliminate the valuation discounts currently available to individuals gifting or transferring interests in family-owned entities to other family members, individuals who are considering transfers of these types of interests should consult their regular Dechert Private Client contact as soon as possible to discuss these transfers.

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