On August 4, 2016, the IRS issued proposed regulations that would greatly reduce estate and gift tax valuation discounts that estate planners have used for years to reduce the value of family-owned businesses for estate and gift tax purposes. In particular, the proposed regulations further interpret Section 2704, which generally deals with voting or liquidation rights of minority owners that generally reduce the value of a minority owner’s interest in the company.
Under the proposed regulations, appraisers would be forced to ignore the fact that that under state law, minority owners cannot demand the liquidation of the company and so any discounts related to this illiquidity could not be applied.
While they are only proposed regulations, it is a clear indication that the IRS is taking dramatic steps to reign in what they view as aggressive discounting. Many tax attorneys (myself included) believed that when the IRS did proposed regulations that they would only attack discounts applied to holding companies, but that family-owned operating businesses would be left alone. Unfortunately, that does not appear to be the case.
The soonest the regulations can actually be finalized and adopted is December 1, 2016, after the required notice and comment period. While I believe it is unlikely that these regulations will be finalized on December 1, there is always a chance that the IRS could adopt them at that time. Thus, family business owners who have seriously considered making discounted gifts to their children should consider making gifts prior to December 1.