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IRS Proposes Significant Restrictions to Estate Tax Discounting Rules

On Aug. 4, the Internal Revenue Service (IRS) issued a notice of proposed rulemaking (NPRM) restricting the discounting of shareholder stock in family-owned operations for the purpose determining federal estate tax liability. Under current law, married couples are allowed $10.9 million in a lifetime exclusion for federal estate and gift taxes. Assets above the threshold are taxed at a 40 percent federal rate.

Traditionally, the IRS and the courts, for purposes of the federal estate and gift taxes, have permitted the valuation of privately-owned business interests to include a “lack of control” and “lack of marketability” discount because some stakes are worth less since they are harder to sell or represent a minority interest. The proposed rule, which applies to corporations, partnerships and limited-liability companies, disregards any restrictions on liquidation or redemption an heir uses to claim a valuation discount if that restriction either lapses after the transfer or the heir or heir’s family has the ability to remove the restriction after transfer. The IRS is also seeking to eliminate the lack of control discount to assignees.

The agency is accepting comments on its proposal until Nov. 2 and will host a public hearing in Washington, D.C., on Dec. 1.



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