Valuation Discounts to Family-Controlled Entities in Peril Under Proposed IRS Regulations

by Varnum LLP

On August 4, the Internal Revenue Service finally issued much anticipated proposed regulations under Section 2704 of the Internal Revenue Code, which regulations are intended to significantly limit taxpayers' ability to apply valuation discounts to family controlled entities. If finalized, the effect of the regulations will be profound on valuation discount planning. 

In 1990, Congress enacted Section 2704 as part of an agenda to close loopholes in gift and estate laws. Section 2704 addresses three distinct issues: (i) lapses of voting and liquidation rights in family controlled entities; (ii) restrictions on liquidation which are disregarded for valuation purposes; and (iii) the authority of the Treasury to issue additional regulations to address other restrictions which will be disregarded for valuation purposes. However, in practice, section 2704 has not had the IRS's intended effect, as valuation experts continue to apply various discounts – and courts continue to uphold such discounts assuming proper planning - based on the types of restrictions included in the governing documents of an entity.

However, Section 2704(b)(4) authorizes the Treasury to issue additional regulations to address other restrictions which will be disregarded for valuation purposes when an interest in a family controlled entity is transferred if the "restriction has the effect of reducing the value of the transferred interest for purpose of this subtitle but does not ultimately reduce the value of such interest to the transferee." The proposed regulations issued on August 4 are the IRS's most recent action to limit what it perceives to be abusive conduct. In brief, the proposed regulations:

  1. Define the types of entities covered by the regulations including, but not limited to, business arrangements, corporations, and partnerships.
  2. Establish a bright line rule to provide that any lapse of liquidation or voting rights occurring as a result of a transfer within three years of death be treated as an additional transfer subject to transfer tax. The effect of this would be the elimination of death bed transfers to realize minority interest discounts.
  3. Create a new class of "disregarded restrictions" which will be ignored for purpose of valuing an interest in a family controlled entity if the restrictions will lapse after a transfer or if the individual transferor or the transferor's family may remove or override the restriction. These disregarded restrictions include anything that: (i) limits the owner's ability to liquidate the interest, (ii) defers payment of the proceeds from liquidation for more than six months, (iii) allows payment of liquidation proceeds in any manner other than cash, property or certain notes, and (iv) limits the liquidation proceeds to amount less than the fair market value.
  4. Disregard liquidation restrictions which are not mandated by state or federal law in determining the fair market value of a transferred interest.
  5. Eliminate discounts based on a transferee's status as an assignee and not as a full owner of the entity.
  6. Broaden the definition of family control for purpose of determining what non-family members may participate in the removal of a disregarded restriction.

If finalized, the proposed regulations will reduce and potentially eliminate discounts currently available and widely utilized in business succession and estate planning for gift and estate tax valuation purposes. A public hearing is scheduled on December 1, 2016 in Washington, DC, to discuss the proposed regulations. Although it is unknown when the proposed regulations will be finalized, transfers made prior to finalization will not be subject to the vast majority of the regulations. Therefore, time is of the essence if you intend to benefit from currently available discounts for a transfer of a non-controlling interest in a family controlled entity.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Varnum LLP | Attorney Advertising

Written by:

Varnum LLP

Varnum LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.