Valuation discounts under threat

Gavel to Gavel appears in The Journal Record. This column was originally published in The Journal Record on Jan. 15, 2016.


Robert O. O’Bannon is a Director who represents business clients in a variety of transactional matters with an emphasis on taxation and wealth planning issues for both businesses and individuals.

Robert O. O’Bannon is a Director who represents business clients in a variety of transactional matters with an emphasis on taxation and wealth planning issues for both businesses and individuals.

By Phillips Murrah Director Robert O. O’Bannon

The current economic downturn in the oil and gas industry, combined with the low-interest-rate environment and the availability of valuation discounting techniques, creates a number of unique opportunities for tax planning, which include gifting or sale of equity interests in a family business to children or trusts created for their benefit.

However, recently proposed regulations by the U.S. Department of the Treasury to Section 2704 seek to eliminate most forms of valuation discounting for intra-family transfers of businesses. The proposed rules will likely take effect in 2017. Fortunately, the new rules would apply only to transfers that occur after the effective date.

The following are some proposed rules that would affect valuation discounts.

3-year lookback
Proposed Treasury rules would restrict changes in ownership intended to trigger a minority ownership discount, which occurs when a fractional ownership interest is worth less than its proportional share of the enterprise business. New rules would impose a three-year lookback to determine whether a minority valuation discount should apply, which is intended to limit “deathbed transfers” used to create a minority interest.

Restrictions required by law
If state law restricts the ability of a family-owned entity to liquidate, but allows partnership agreements to override the restriction, it will not be considered as “required to be imposed” and cannot be used to reduce the value of an interest for transfer tax purposes. Additionally, if state law restrictions cannot be removed by the family-controlled entity, but state law restrictions are specific to family-controlled entities, it will also be ignored.

Disregarded restrictions
Proposed regulations will create a new classification of restriction that is to be ignored in valuing interest in a family-controlled entity. Valuation discounts will be disregarded that include provisions that restrict the right of each interest holder in a family-controlled entity, whether a family member or not, to liquidate or redeem the interest in cash or other property payable within six months of liquidation or redemption.

These proposed rules are complex, and high-net-worth families who wish to seek valuation discounts may want to consider quick action in light of impending changes to tax law.

Robert O. O’Bannon is a director at Phillips Murrah law firm who represents clients in a variety of matters with an emphasis on taxation and wealth transfer planning issues for businesses and individuals.