Advisers Urge Caution in Light of Valuation Discount Rules

For over 50 years, Bloomberg Tax’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...

By Allyson Versprille

Aug. 3 — Practitioners are warning clients to tread carefully when pursuing certain estate and gift tax strategies, while welcoming the IRS's inclusion of a wide window of opportunity to adjust plans in newly issued guidance.

The Internal Revenue Service proposed rules (REG-163113-02) issued Aug. 2 are meant to curb valuation discounts that reduce the overall value of assets in family-owned businesses—and thus the estate and gift tax liability—at death due to lack of marketability or control. The IRS did this by choosing to disregard certain restrictions on the ability to transfer or liquidate interests that would typically enable the use of such discounts.

Steven Lavner, managing director in the National Wealth Strategies Group of U.S. Trust, said he was glad to see that the IRS delayed the effective date of the rules until after the final regulations were published. This sentiment was shared by several attorneys, including Dennis Belcher, a partner at McGuireWoods LLP (149 DTR G-4, 8/3/16).

“One of the things people worried about was that new proposed regulations that would come out would be effective retroactively or immediately,” Lavner said. The effective date that the IRS and Treasury Department proposed will give clients an opportunity to set up transactions that might later be restricted, he said.

However, Lavner warned that if clients act now and “do something specifically negated or prohibited by the new proposed regulations,” they are sure to attract IRS attention. The agency has been scrutinizing family limited partnerships and LLCs for years now, and “their radar is up,” he said.

‘10 Other Ways.'

Even if the transaction has a good chance of standing up to scrutiny because it was established before the effective date, “you know this is something the Service doesn’t like and they may look for 10 other ways to figure out why they should disallow it,” Lavner said.

Cliff Gelber, a partner at Gerson, Preston, Klein, Lips, Eisenberg & Gelber PA, expressed similar concerns. He said many practitioners are now trying to get their clients to focus and set up transactions before the final rules are issued “because at some point in time eventually there’s going to be a reduction in the capacity to use some of these techniques.”

But there is “some concern that if the IRS is looking at certain, specific pieces in this strategy as a target and you still get it done before the enacting date, but you are specifically honing in on something that you know is going away,” the agency might still come after the taxpayer, he said.

“It probably is OK, but I certainly would not want to have to defend a client where you’ve taken advantage of something that you know is going away,” he said.

For these reasons, newly devised strategies that involve using valuation discounts to reduce asset values, may be more traditional or standard, as opposed to clearly taking advantage of techniques that the IRS is trying to curtail, Gelber said.

Other Weapons

Lavner noted that tax code Section 2704 isn't the only one the IRS is using to curb valuation discounts. In fact, the agency has used it less because it includes exceptions—the same ones the new rules are attempting to narrow, he said.

“There have been a number of sections the agency has had a lot more success using,” Lavner said.

Specifically, “they’ve used Section 2036 with tremendous success,” he said. That section says if a person makes a transfer with a retained interest, the assets are still includible in the estate.

Additionally, “if someone puts assets into a family limited partnership, and they are the general partner, and they’re controlling the interest, the IRS has successfully argued in many cases that the discount will ultimately be disallowed,” Lavner said.

So it isn't Section 2704 or nothing, he said. “The Service is looking to bolster one of their weapons, but it doesn’t mean that they haven't had success with” others, he said. But “this will give them more ammunition,” it will limit discounts and “you’ll be able to do less assuming this is actually passed as is.”

To contact the reporter on this story: Allyson Versprille in Washington at

To contact the editor responsible for this story: Cheryl Saenz at

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Daily Tax Report