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Tax Blog

Valuation Discounts and Donald Trump

It’s been a while since the IRS has published proposed regulations regarding valuation discounts. Valuation discounts are discounts that a business appraiser takes away from a value of subject business for various purposes. These discounts can be substantial and in many cases this has led to abuse in the business valuation profession. The valuation discounts are listed here.

  1. Minority interests (typically 15 – 50%),

  2. Marketability (also 15-50%) , and

  3. Key Person (wild card up to 25%)

Typically individuals buy into a tax professional’s plan of action which includes letting up a Limited Liability Company (LLC) and funding the LLC with personal assets and then discount the assets for estate tax purposes. This can legitimately be done, but in my experience the tax cases are evenly split in terms of IRS wins versus taxpayer wins. Individuals start with good intentions and open the LLC. Funding the LLC involves some risk that many get wrong. Operating the LLC, in most cases where the IRS wins, taxpayers have dropped the ball completely. In cases where the taxpayers win, specifically on valuation discount issues, is where the taxpayers did everything text and operated the company as a company and not a pocketbook.

The IRS seeks to change this and hand themselves the advantage in these cases. In part of their proposal, they propose greatly limiting valuation discounts for “operating businesses”, not just closely-held and family businesses. Their comment hearing was the most attended ever and included representation from companies such as White Castle, which is family owned. This proposed change would be very bad for most people involved where the estate tax is an issue.

The President-elect, at least in rhetoric, has laid out plans to limit or eliminate the Estate Tax. We will have to see where this goes once Donald Trump is sworn in as President.

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