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Proposed regulations would limit valuation discounts for gift, estate taxes

September 9, 2016
By Marv Hills and Joe Magyar, Crowe Horwath LLP
The IRS has issued proposed regulations that are intended to disallow or significantly curtail many valuation discounts. These discounts are one of the most effective methods used by dealers in estate planning. 
The proposed rules would apply to the valuation of gifts to family members and the value of any dealership or related business owned at death if the entity is controlled by members of the same family. The proposed rules would apply when family members own either more than 50 percent of the voting rights or 50 percent of the equity of the entity. Attribution rules apply for stock or partnership interests held inside other corporations, partnerships, or trusts. 
Under the proposed rules, members of the same family include: 
• the donor of a gift (or decedent at death); 
• the donor’s spouse; 
• ancestors and lineal descendants of either the donor or spouse; 
• the brothers and sisters of the donor; and 
• any spouse of an ancestor, lineal descendant, brother, or sister. 
Under the proposed rules, certain provisions that limit the rights of an entity’s owner would be disregarded and ignored when determining the value of the entity. Another type of provision that would be ignored under the proposed regulations is one that limits the value of an entity to an amount less than what the IRS calls the "minimum value." The "minimum value" is the net equity of the entity (fair market value of the assets minus liabilities) multiplied by the percentage ownership. These provisions have the effect of disallowing discounts for lack of control ("minority discount") or lack of marketability with respect to an ownership interest. 
The proposed regulations also contain a provision that would increase the value of a decedent’s estate if, within three years prior to death, the decedent engaged in a transaction that had the effect of changing the decedent’s ownership from a majority control to a minority ownership position. 
If adopted, the proposed rules will take effect after they are finalized. An IRS hearing on the proposed regulations is scheduled for Dec. 1, 2016, which means the effective date is likely to be sometime in 2017. Therefore, taxpayers who are considering making gifts of family owned dealership or related business entities that would be eligible for valuation discounts should consider acting quickly to make those transfers prior to the regulations being finalized. 
The authors are CPAs and partners at Crowe Horwath.