In September and December of last year, we posted blog articles discussing the Treasury Department’s issuance of proposed regulations under Section 2704 of the Internal Revenue Code (sometimes referred to as the 2704 proposed regulations) that could have significantly impacted the valuation of interests in family-owned businesses for estate and gift tax purposes.

On October 2, 2017, the Treasury Department and the IRS announced that the proposed regulations will be withdrawn in their entirety. The proposed regulations, targeted at curtailing artificial valuation discounts, could have reduced (or even eliminated) discounts (primarily, lack of control and lack of marketability discounts) historically used when valuing gifts or other transfers of family-owned businesses.

Among other factors cited by Treasury, the proposed regulations are being withdrawn because compliance with the regulations would have been unduly burdensome on taxpayers and could have affected valuation discounts even where discount factors were not created artificially as a value-depressing device.

The withdrawal of the proposed regulations means that family business owners who transfer ownership of part of their business to younger family members will still be able to make transfers at values that take into account appropriate valuation discounts. For example, a transfer of a 10 percent interest in a family business from parents to children does not represent a controlling interest in the business. The 10 percent interest is also not readily marketable and cannot be sold quickly like publicly traded stocks and other marketable securities. Therefore, discounts for “lack of control” and “lack of marketability” may still be applied to arrive at the value (for gift or estate tax purposes) of a minority, closely held business interest whenever the interest is transferred.