The IRS never liked those valuation discounts

David Repp Iowa Banking Law Iowa Tax Law Iowa Trusts & Estates Law

Posted on 08/25/2016 at 10:11 AM by David Repp

Everyone who has ever inherited shares of stock in a family corporation knows that they will be in it for the long run unless the majority decides to liquidate.  That was the case of Jack Baur who inherited 26 percent of the stock of Baur Farms, Inc. from his father in 1989.  Jack did not receive any dividends on his stock and his request to be bought out was denied for many years. Even after getting the Iowa Supreme Court involved in 2013, Jack still has not received anything for his Baur Farms, Inc. stock.   Jack’s situation illustrates the problem with owning stock in a corporation that he cannot control. Jack may have to resort to putting his stock on Ebay and selling it at a 40 or 50 percent discount.  

The IRS has little empathy for Jack. Even though Jack will have to severely discount the value of his stock to find a buyer, the IRS says in its newly issued proposed regulations that the value of stock for gift and estate tax purposes remains undiscounted.  In Jack’s case, that could mean an extra million dollars of estate or gift tax. 

The IRS never liked valuation discounts. Prior to 1993, every taxpayer discount taken on a gift or devise of a noncontrolling partnership interest or stock of a corporation resulted in a trip to the Tax Court. But after losing a long string of cases, the IRS threw in the towel and acknowledged that a discount should be recognized on partnership interests and stock owned by family members. That is about to change.

On August 2, 2016, the IRS issued new proposed regulations that essentially eliminate all valuation discounts on gifted or devised partnership interests, limited liability company membership interests and stock in corporations owned by family members. The new regulations will affect the estate plan for single individuals with more than $5,450,000 of assets or married couples with more than $10,900,000 of assets. For example, mom and dad own a farm corporation with $15,000,000 of farmland. They gift a 25 percent block of shares to each of their two children. The new proposed regulations will require mom and dad to value the gifted shares at $7,500,000 even though the children may be in the same situation as Jack Baur.  Without the discount, mom or dad or the children will have over a million dollars of estate or gift tax to pay. 

The proposed regulations will likely not take effect until early next year if the regulations become final.  A public hearing on the proposed regulations will occur on December 1, 2016, and a lot of dissension is expected. Until the regulations are finalized, there is a limited and valuable opportunity to perform estate and gift tax planning using entities.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.


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