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IRS Rattles Its Saber to Restrict Family Partnership Planning. What Should You Do?

August 20, 2015 Business & Tax Blog Estate Tax

If you are, or someone that you know is, considering transferring an ownership interest in a family-controlled entity the best time may be now. Speculation abounds over the impact that potential new regulations may have on the valuation of a closely held business interest. For several years, the Treasury Department’s “Greenbook” contained a Revenue Proposal entitled, “Modify Rules on Valuation Discounts.” Based on recent comments made by IRS and Treasury officials, it is possible that new proposed regulations will be issued by the middle of next month. In some cases, the Treasury has made proposed regulations effective as soon as they are issued, which could occur in this case as long as the regulations are not otherwise modified when they are finalized. When issued, many practitioners believe that the proposed regulations will reduce the amount of the lack of control and lack of marketability discounts that appraisers apply when valuing family-controlled entities.

With the lack of clear guidance available, it is impossible to know how significant an impact the potential new regulations may have. The best guidance likely comes from last time the proposal was contained in the Greenbook, which read as follows:

This proposal would create an additional category of restrictions (“disregarded restrictions”) that would be ignored in valuing an interest in a family-controlled entity transferred to a member of the family if, after the transfer, the restriction will lapse or may be removed by the transferor and/or the transferor’s family. Specifically, the transferred interest would be valued by substituting for the disregarded restrictions certain assumptions to be specified in regulations. Disregarded restrictions would include limitations on a holder’s right to liquidate that holder’s interest that are more restrictive than a standard to be identified in regulations. A disregarded restriction also would include any limitation on a transferee’s ability to be admitted as a full partner or to hold an equity interest in the entity. For purposes of determining whether a restriction may be removed by member(s) of the family after the transfer, certain interests (to be identified in regulations) held by charities or others who are not family members of the transferor would be deemed to be held by the family. Regulatory authority would be granted, including the ability to create safe harbors to permit taxpayers to draft the governing documents of a family-controlled entity so as to avoid the application of section 2704 if certain standards are met. This proposal would make conforming clarifications with regard to the interaction of this proposal with the transfer tax marital and charitable deductions.

When additional guidance is provided, or the proposed regulations are released, we will provide an update discussing the potential impacts of the regulations.

Thomas J. McLaughlin