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On August 4, 2016, the Treasury Department and the Internal Revenue Service released new proposed regulations that would eliminate a long-standing tax-planning strategy for reducing estate and gift taxes.[i] The proposed regulations limit the use of valuation discounts of gifted interests in corporations and partnerships for estate, gift, and generation skipping transfer tax (GST) purposes. The proposed rules would affect certain transfers of interests between related parties in corporations and partnerships and aim to prevent what the IRS sees as the undervaluation of transferred interests.
Mark Mazur, Assistant Secretary for Tax Policy at the Treasury Department, released a blog post Tuesday claiming the regulatory proposal would close a “tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposes.”[ii]
For years, tax planners have been able to leverage gifts by obtaining discounts for lack of control and lack of marketability. Under the new regulations, taxpayers would be precluded from obtaining discounts for lack of marketability or control on transfers of interest in family businesses and family controlled entities for estate, gift, and generation skipping tax planning.[iii]
Mazur claimed the tax strategy targeted by the proposed regulations was aggressive. “Treasury’s action will significantly reduce the ability of these taxpayers and their estates to use such techniques solely for the purpose of lowering their estate and gift taxes” in the future.
Prior to these regulations, it was widely accepted that the valuation of minority interests would take into consideration the lack of marketability of minority interests and the lack of control to lower values. Under current rules, in most cases the relationship between the two parties was not usually relevant in the valuation of the interest being transferred. Since at least 1993, the current rules valued the interests in generally the same manner as a transfer to unrelated parties. The new proposed regulations propose that the relationship between the parties should have an impact on valuation and would be a significant departure from current valuation practices.
The proposed regulations were published on August 4, 2016. The proposed regulations will then be subject to a 90-day public comment period and will not take effect until the Treasury considers all the comments it receives, and then it will take 30 days after the regulations are finalized for them to take effect. Therefore, unless there is a further delay, the anticipated effective date 120 days from August 4th is December 2, 2016.
While there are no guarantees, there still may be a short window of opportunity to plan, provided that you act now.
If you have been thinking about transfers of interests in your family controlled entity to members of your family, it is recommended that you take action immediately if you want to take advantage of valuation discounts, before the new Regulations are published and take effect.
[i] Department of the Treasury, Proposed Regulations under Section 2704 of the Internal Revenue Code, available at: http://s3.amazonaws.com/public-inspection.federalregister.gov/2016-18370.pdf.
[ii] Cohn, Michael, Treasury Proposes to End Strategy for Estate and Gift Taxes, August 3, 2016, available at: http://www.accountingtoday.com/news/tax-practice/treasury-proposes-to-end-strategy-for-estate-and-gift-taxes-78856-1.html.
[iii] Akerman LLP – Jonathan E. Gopman, Jeffrey M. Gad, Michael A. Sneeringer, Vitauts M. Gulbis and Jeffrey A. Kern, Proposed Treasury Regulations Cause for Concern Among Family Controlled Businesses, June 6, 2016, available at: http://www.akerman.com/documents/res.asp?id=2629.
Disclaimer. This article is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. The receipt of this article does not create an attorney-client relationship with Dawda Mann.