Private Business Counsel

The IRS has never been a fan of valuation discounts.  These discounts allow the owner of a closely-held business to transfer an interest in the business to family members and others and, for gift and estate tax purposes, take a discount which reduces the value of the transfer.  The courts have generally allowed valuation discounts although from time to time have reduced the amount of the discounts.

In August of 2016 the IRS promulgated the so called “2704 Regulations” which, many commentators believe, would have eliminated or reduced the discounts and to a large extent done away with some powerful estate planning techniques.  The regulations generated a lot of discussion among estates practitioners who made their thoughts on the subject known to the IRS.  The regulations did not become effective during the administration of President Obama.  When President Trump came into office it became more and more likely the regulations would never come into effect.

In April of this year President Trump issued an Executive Order which directed the Secretary of the Treasury to identify those tax regulations issued after 2015 which:

1. Impose undue financial burdens on taxpayers;
2. Add “undue complexity” to federal tax laws;
3. Exceed the IRS’s statutory authority.

As predicted, in compliance with this Executive Order, in a report issued October 2, 2017 the Department of the Treasury withdrew the 2704 Regulations.  The law regarding valuation discounts therefore remains in effect.

As part of his tax plan, President Trump seeks to eliminate the federal estate and generation skipping tax (but not the gift tax).  So if that part of the President’s plan is enacted presumably wealthy taxpayers will be less inclined to make gifts of interests in family businesses to their children and other family members so the withdraw of the 2704 Regulations will have had minimal impact.

Of course, whether and how the President’s tax plan will make its way through Congress is anyone’s guess, so for the time being we continue to encourage our clients who may be subject to federal estate tax to consider availing themselves of the benefits of valuation discounts.