Valuation Discounts and Family-Owned Businesses

Tax Alert | Alfred Pruskowski | Oct 18, 2016

After nearly 27 years the IRS has finally gotten around to proposing closure to a number of the §2704 “loopholes” that have benefitted many family-owned businesses.  Should the changes be enacted, as proposed, the family-controlled corporation, partnership, LLC and other forms of family-owned businesses will be directly affected.

Here’s the reason why. The proposed regulations clearly favor disregarding certain key elements of the valuation process that support DLOC and DLOM discounts applied to interests in most forms of family-owned businesses.  In their present form the proposed regulations

  • All but eliminate both lapsing voting and liquidation rights if the transfer of interest takes place within 3 years of the transferor’s death.
  • The new rules propose to apply to any restriction that limits the ability of an entity to liquidate.
  • Create a new class of restriction called a “disregarded restriction” which is designed to be ignored in valuing any family-owned interest and includes any provision that limits or permits the limitation of the interest holder to compel liquidation or redemption.
  • Contain new rules that are designed to determine when a non family member’s holdings should be ignored to determine family control. Other rules relating to family control and attribution of family ownership are also clarified and broadened in an attempt to limit the level of discounts that an appraiser could reasonably justify, all other factors being equal.

The public hearing on these proposed revisions is scheduled for December 1, 2016.  Barring substantial opposition, these changes could become effective by early 2017.

In order to avail themselves of the existing provisions we are recommending that our clients consider having a qualified valuation of their family-owned businesses no later than December 31, 2016.  For further information on this topic, or to arrange for your clients business valuation, contact me directly at

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Fernando R. Lopez

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