IRS New Attacks on Valuation Discounts
The IRS issued proposed regulations on August 2, 2016 that may eliminate some or almost all of the discounts that family farms can take via the transfer of land or operations.
Under current rules, a farmer can transfer units in an entity (such as a corporation, partnership, or LLC) and the value of these units are discounted to reflect various discounts as follows:
- Lack of Marketability – This discount reflects the fact that an owner of a privately held business cannot easily sell their interest. If you own Google, you can sell it easily today. If you own 5% of a farm operation, there are not too many buyers lined up to buy your stock. Usually this discount is in the 10-25% range.
- Minority Discount – This discount is due to having less than 50% ownership in the company and no control. This discount usually ranges slightly less than the lack of marketability discount.
- Non-voting Discount – If the entity has both voting and non-voting stock/units, a discount of a few percentage points is usually warranted.
The Proposed Regulations would essentially eliminate the discount for minority discount if the “family” remains in control. A family includes ancestors and descendants, brother-sisters and any spouses. If this family retains at least 50% (notice that is does not have to be more than 50%), then it is very likely that no minority discount will be allowed.
Additionally, if these transfers qualify for a minority discount, but the transfer occurred within three years of death, a “phantom asset” equal to the minority discount taken would be included in the estate.
The Proposed Regulations are very complex and we don’t know all of the answers yet; however, any transfers made before December 2, 2016 (at least until then) should fall under the old rules. Therefore, if you have a taxable estate and want to make larger gifts, it may make sense to do it now.
You should discuss this with a qualified tax advisor.