January 2009 | Issue 32
Congressman Earl Pomeroy has introduced a bill (H. R. 436; “Certain Estate Tax Relief Act of 2000“) which, among other things, seeks to impose new valuation rules for transfers of certain kinds of assets. The main thrust of the bill, which was introduced January 9, 2009, is to fix the federal estate tax exemption at $3,500,000, and set the tax rate for estates exceeding that amount at 45%. The bill also seeks to repeal the new carryover basis rules.
The Discount Situation Now
Under current law, when an individual transfers a partnership interest, by gift or at death, the interest is valued at fair market value. Since such interests can have limited marketability, and often do not confer control of the partnership to their holder, business appraisers will apply valuation discounts to the value of the assets held by the partnership. For example, if a taxpayer transfers a 10% interest in a partnership that owns non-business property worth $1 million, the 10% interest would be valued not at $100,000, but at some lesser discounted value.
The New Proposal
If H. R. 436 becomes law, appraisers would no longer be allowed to apply valuation discounts to “non-business” assets held by partnerships. The value would be determined as if the transferor had transferred the assets directly to the transferee. In the example above, the interest would be valued at $100,000.
The Return of Family Attribution
An additional provision of the new bill seeks to eliminate minority discounts in valuations of companies where the transferee does not control the entity, but the transferee’s family does. In other words, a father who owns 100% of a company would no longer be able to avail himself of a minority discount by giving, say, a one third interest to a child
If passed, the provisions of this bill would apply to transfers taking place after the date of enactment. This suggests that there might still be some time left to take advantage of the valuation discounts that are still available.