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Discounts May be Eliminated for Fractional Interest Gifts: New Regulations from IRS

  • By: Alan E. Sohn
  • Published: December 31, 2015

Over the past several years, particularly under the Obama administration, the subject of eliminating discounts for gifts of limited liability company and limited partnership interests to family members has been widely discussed.

While these discounts are well-justified by reason of the limited marketability and lack of control inherent in such fractional interests, the IRS has viewed such discounts as tax “loopholes.” Notwithstanding, up until now these discounts have been largely upheld in the courts, where they are backed up by professional independent valuations and where the evidence shows that the transactions have been honored in practice by the donors and donees.

The IRS has now indicated that it will be issuing regulations restricting or eliminating such fractional interests discounts. The new regulations may thereby place in jeopardy this valuable planning device. The proposed regulations could be announced as early as September of this year.

Therefore, persons who have been considering or would like to consider making transfers involving fractional interests in FLPs and LLCs should bring those considerations to the front burner and take action now before the opportunity is either taken away or becomes subject to even greater scrutiny. The question may then become–Do the regulation make more sense than the discounts. In my view, they would not if they arbitrarily eliminate well-documented and supported gifts of fractional interests.

Historically, where there has been a change in the law of taxation, prior transactions that comply with then existing law are “grandfathered” and not otherwise disturbed. Therefore, now may be the time to take action.

Alan E. Sohn

Alan E. Sohn received his Juris Doctorate from the College of Law of the
University of Illinois. Mr. Sohn has been a partner in both large and
smaller law firms and for the past 21 years has been in private practice.