Recently, the IRS began pushing back on discounts used within estate and gift valuations, specifically the discount for lack of control (DLOC) and the discount for lack of marketability (DLOM), calling for lower discounts to be applied. Valuation discounts have always been critical in estate and gift valuations because they measure the restrictions on the ownership interest being valued. These discounts also can be used as a planning tool to help lower overall estate and gift taxes. As a result, the IRS reviews these discounts carefully and can push back on them. The DLOC is typically applied when the non-controlling interest is being valued and the DLOM is applied to account for the limited liquidity of the ownership interest.
The recent IRS pushback is a strong reminder of the importance of a well-supported, professional business valuation that provides sufficient qualitative and quantitative data to support the discounts being used.
If you would like to discuss this recent IRS trend or take advantage of the current discount rules, please contact Jeff Faust, CVA, Director of Valuation Services at firstname.lastname@example.org or 408-377-8700 x232.