Press Room: Tax Release

May 27, 2015

Valuation Discounts on Transfers of Closely Held Entities May Be Reduced

In two separate statements earlier this month, a Treasury official indicated that proposed regulations might be released within the next six months that could result in the increase to the value of family controlled entities (e.g., family limited partnership interests) for gift and estate tax purposes. Rules in the Internal Revenue Code allow IRS to disregard certain legally binding restrictions on the right to liquidate an interest in property. These restrictions usually provide significant discounts to an entity’s value. Disregarding the restrictions causes an artificial increase to the property’s value for gift and estate tax purposes and possibly higher taxes on the transfer of the entity to other family members.

A number of states reacted to the rules in the Internal Revenue Code by amending their laws pertaining to partnerships and other closely held entities. The amendments to the state statutes limited IRS’ ability to disregard the restrictions on liquidating these entities. It now appears that IRS may issue new regulations that could create a new set of restrictions to be disregarded in valuing an interest in a family controlled entity transferred to other family members.

The Takeaway

 

If regulations are issued, they undoubtedly will be detrimental to taxpayers. Valuation discounts likely would be reduced on intra-family transfers of interests in family controlled entities. However, we believe that any transfers made prior to the release of the regulations will likely not be subject to new rules that the regulations may contain. Thus, we encourage taxpayers who are considering such transactions to accelerate any planned transfers. If Andersen Tax can assist you, please contact a member of your engagement team.