Rumor mills are buzzing over predictions that the IRS will issue new regulations in September imposing major limits on the ability to claim valuation discounts for minority interests in family-controlled entities. These changes are significant, and they could come at any time, but the prediction of September specifically is nothing but the purest speculation.
Valuation discounts work like this: imagine that A and B each own $100. They decide to create a corporation, and they each contribute $100 in return for half of the shares of stock. How much is A's stock worth? Probably less than $100, because A no longer has unilateral control over the money. Valuation experts would say that the stock value can be determined by looking at the value of the assets inside the corporation and applying a discount to reflect the lack of control.
Valuation discounts are terrific for taxpayers who want to make taxable gifts, because the discounts drive down the value of the taxable gift. The IRS, on the other hand, is usually less enthusiastic. For well over a decade, the IRS has been planning to introduce new regulations under section 2704 of the Internal Revenue Code limiting the ability to claim such discounts where the business owners are closely related.
Then, back in April, an IRS representative mentioned that the 2704 regulations is among the 5 or 6 projects that are nearing completion, and she predicted that some of those 5 or 6 projects would be completed before mid-September. She did not say that all of those projects would be finished by mid-September, and in fact, two of those projects have since been completed, so there is no way to predict when the regulations on valuation discounts will appear.
That has not stopped lots of people (including estate planning attorneys) from believing that the IRS has announced that these regulations would be issued in mid-September. Of course, the regulations might be issued in mid-September, or they might be issued two years from now. Nobody knows.
It can't hurt to be safe, and a number of clients are now moving forward with planned gifts to trusts before the end of August for just this reason. After all, even a broken clock is right some of the time.