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Proposed Treasury Regulation Aims to Limit Wealth Transfer Valuation Discounting


8/4/16

Synopsis
 
Current law permits favorable valuation discounts from full enterprise value for factors such as lack of control and lack of marketability when valuing certain assets transferred by gift or at death. Discounting strategies allow transferors to harvest significant wealth transfer tax savings by leveraging valuation methodologies which are well grounded in finance and economic theory, making it hard for the IRS to successfully challenge these strategies.
 
Issue
 
A newly proposed regulation indicates the IRS is attempting to limit certain aggressive techniques that extend and expand the more traditional components of discounting certain business interests.  
 
Stemming the Tide of Perceived Abuses
 
On August 2, 2016, Treasury issued a draft form of proposed regulations under IRC Section 2704, expected to be effective by early December 2016, in response to creative valuation discounting that have stymied taxing authorities who have long lamented that these strategies are abusive. 
 
Specifically, the proposed regulation serves to:

  1. Clarify that the form of a business entity other than a corporation or partnership would be defined under local law regardless of how it is classified for federal tax purposes.
  2. Define “control of an entity” for certain legal entities, such as LLCs, and limit discounts based on state law restrictions
  3. Limit discounting for deathbed transfers
  4. Prevent the usage of straw owners (e.g., charities) with minimal ownership interest in order to create the appearance of lack of control
     

In short, the proposed regulations are intended to close certain "loopholes" which have historically provided opportunities for aggressive discounting in the valuations of closely held businesses and investment entity ownership interests. 
 
What Does CohnReznick Think?
The proposed provisions appear only to affect a few of the factors considered when valuing closely held business interests.  At this initial stage, the proposed regulations promulgated by Treasury appear to leave intact many of the favorable positions currently available for wealth transfer planning. 
 
Nonetheless, the government has made it clear that it intends to proceed to do whatever it can to limit the applicability of discounting for intra-family wealth transfers in the future, particularly for closely held businesses and investment entities.  While valuation discounts are not going away any time soon, discounting is likely to become much more severely limited.
 
It is important that you review your plans and consult with us now to see if we can help you take advantage of favorable discounting opportunities while these important wealth transfer strategies are still available. These very limiting regulations are scheduled to be effective for transfers starting in early December, 2016.

 
Contact
 
For additional information, please contact Ira Herman, Partner, at ira.herman@cohnreznick.com or 973-618-6245, or Steven Dane, Partner, at steven.dane@cohnreznick.com or 959-200-7103.


Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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