Business Valuation Discounts--Changes to IRC 2704 Regulations

October 19, 2016

In Arkansas and all around the country, if your estate is taxable, discounts can reduce the size of the estate and thus reduce or eliminate taxes.  The IRS has proposed regulations to eliminate many of the discounts available for family owned businesses.  Before the regulations are finalized, business owners have an opportunity to use the discounts; but they need to act quickly.

Discounts on the value of a business are currently available for lack of marketability and for lack of control.  Discounts are premised on the theory that an unrelated buyer would not pay full value if there is no one to whom he can sell the interest (no market, no available buyer), if the restrictions on the sale are so onerous that no one would want to buy the interest, and if the interest is so small that the buyer cannot control the business even after spending the money to buy the business.  The discounts can be 30% or more. 

If the proposed regulations are finalized, dividing ownership among immediate family members will be ignored.  Mom’s, dad’s, and daughters’ interests will be added together to determine if there is a minority interest.  Giving small interests in the business to nonfamily members so that interests will be more difficult to sell will no longer be sufficient to permit discounts for lack of marketability.  Many commonly imposed restrictions on the sale of stock will not be restrictive enough to justify a discount. 

A public hearing is currently scheduled for December 1, 2016.  With the comment period and the 30-day wait period after the regulations are finalized, the regulations are not anticipated to become effective until 2017 at the earliest.  People interested in using business discounts to reduce the value of their estates should meet with their tax advisors and attorneys in order to make transfers by the end of the year.

           Karen Baim Reagler is an estate planning attorney practicing in Hot Springs and Hot Springs Village, Arkansas.  

 

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