Tax Secrets: We win; tax court clobbers IRS

Irv Blackman


Here’s the question: Can you guess what the most asked question is by this column’s readers?

Starting in the mid-1970s, we have been telling readers of this column and our clients to transfer their businesses to their kids during life. Waiting until you die to complete the transfer is an unnecessary and expensive waste of tax dollars. It was a tough fight mom, but now the IRS agrees. Here’s the story.

Starting early can make it easier to build wealth.

The issue concerns the value of your business for tax purposes. Suppose you have four kids (all work in your business: Success Co.). If you wait until you go to heaven, then leave Success Co. 25 percent to each of the kids, the IRS will value 100 percent of the business, focusing on the value of the total business (instead of the value of each one-quarter part being left to each of the four children). What’s the result? No discount for a minority interest. For example, a business with a fair market value (FMV) of $2 million, would be stuck with a $2 million value (no discount) for tax purposes, if you left 25 percent to each of your kids.

More:Tax Secrets: Learn the difference between an estate plan and a wealth transfer plan

Instead, suppose you transfer Success Co. to your four kids – 25 percent to each – during your life. This time, after years of fighting, the IRS finally agrees with us: The focus is on each one-quarter of the business transferred separately to each of your kids. How does the result differ? The shares transferred to each child are entitled to a minority discount. With minority discounts running in the 35 percent range, stop for a moment and figure out what a lifetime transfer of your business might save your family in taxes. (Tell your professional to see Technical Advice Memorandum 944001.) Using the above $2 million example (and a 35 percent discount) would make the same business worth only $1.3 million (a $700,000 discount) for tax purposes.

Are you thinking along these line? “Sure, I want to save taxes. But I’m not going to give up control of my business as long as I can draw a breath.” If so, you are perfectly normal and typical of the closely held family business owners who seek our advice.

Well, there is a simple strategy that always works and is the perfect answer to your save-taxes-but-want-to-keep-control dilemma. In a word, Recapitalize. The recapitalization is a tax-free maneuver. You wind up owning all of the voting stock (say 100 shares) and all of the nonvoting stock (say 10,000 shares). Now you can give each of your kids 2,500 shares of the nonvoting stock of Success Co. You get your minority discount. With your tiny 100 shares of voting stock, you also keep absolute control of your business for as long as you want; even for life. Using this recapitalization concept will put you in the tax-winner’s circle every time, whether you have one kid or a dozen. Neat!

Thinking of transferring your business to one or more of your kids and want to learn more about this fascinating tax-saving subject? Here are some choices: (a) Browse my website:; (b) call me (Irv) at 847-767-5296, or email me (