IRS Valuation Discounts

At the American Bar Association meeting in May 2015, Cathy Hughes, Estate and Gift Tax Attorney of the US Department of Treasury’s Office of Tax Policy, commented that proposed amendments to Section 2704 (the IRS code that deals with valuation discounts) could be out by mid-September 2015.  While the IRS has yet to publish these amendments, they could be aimed at reducing and/or eliminating valuation discounts for lack of control and lack of marketability currently available to taxpayers gifting interests in family limited partnerships, closely-held companies, and other wealth transfer vehicles.

The IRS has tried for many years to limit these discounts through the Tax Court but has not won many victories and has been forced to attempt to go the legislative route to limit discounts.  President Obama’s 2013 budget (see page 79) included a proposal to restrict or eliminate valuation discounts on transfers of interests in family-controlled entities.  The IRS has not yet followed up on its plans to limit these discounts, creating uncertainty in the Estate Planning community.

Given the uncertainty around the future availability of valuation discounts, anyone with a potentially taxable estate should consult an estate planning attorney before the window passes.  According to IRS research, the larger the estate, the more likely the presence of a FLP.

IRS Valuation Discounts
Profile of 2004 Estate Tax Decedents

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