How is a gift of a share in a family business valued for gift tax?
At fair market value on the date of the gift (IRC § 2512): the net amount a willing purchaser would pay a willing seller for the interest, neither under compulsion and both knowing the relevant facts (Treas. Reg. § 25.2512-3). Value above the annual exclusion — $19,000 per recipient for 2026 (Rev. Proc. 2025-32) and $20,000 for 2027 (Rev. Proc. 2026-35) — is reported on Form 709 and counts against the lifetime exemption.
The exclusion is available only if the interest is a present interest, which a restricted business interest can fail to be.
Valuation factors
The regulations do not give a formula. For a partnership or proprietorship interest, § 25.2512-3 calls for a fair appraisal of all the assets, tangible and intangible, including goodwill, together with the demonstrated earning capacity of the business. For shares with no sale or bid prices, Treas. Reg. § 25.2512-2(f) points to the company’s net worth, prospective earning power, and dividend-paying capacity, among other relevant factors.
The IRS’s long-standing statement of the approach is Rev. Rul. 59-60, 1959-1 C.B. 237, which IRS valuation reference material describes as fundamental guidance for closely held entities and reproduces in an appendix to one of its valuation job aids. The job aid is staff reference material and says it is not an official IRS position; the ruling it reproduces is. The ruling lists eight factors that are fundamental but not all-inclusive:
- The nature of the business and its history from inception.
- The general economic outlook and the condition and outlook of the specific industry.
- The book value of the stock and the financial condition of the business.
- The earning capacity of the company.
- The dividend-paying capacity.
- Whether the enterprise has goodwill or other intangible value.
- Sales of the stock and the size of the block being valued.
- The market price of actively traded stocks of corporations in the same or a similar line of business.
How these fit into a wider ownership plan is covered in the business succession hub.
Discounts for lack of control and lack of marketability
Two features of a small stake in a private business can lower its value below a pro rata share of the whole. A non-controlling interest cannot direct distributions, management, or a sale. An interest with no public market cannot readily be turned into cash. The regulations recognize both ideas: § 25.2512-2(f) lists the degree of control represented by the block being valued as a factor, and the disclosure regulation refers to discounts for “blockage, minority or fractional interests, and lack of marketability” (Treas. Reg. § 301.6501(c)-1(f)(2)(iv)).
No regulation sets a percentage. Section 25.2512-2(f) says the weight given to any factor depends on the facts of each case, and the size of a discount is a matter of evidence for the particular interest. The IRS publishes reference material for its own valuation staff on the valuation of assets page, including a job aid on the marketability discount that states it is not an official IRS position.
Special valuation rules: sections 2701, 2703, and 2704
Three Code sections override ordinary valuation, chiefly for transfers within a family. Each can increase the value of a gift above what an appraisal that ignored it would show.
| Section | What it does | Stated limits |
|---|---|---|
| § 2701 | When an interest in a corporation or partnership is transferred to a family member and the transferor or an applicable family member (a spouse or an ancestor) keeps certain rights in a retained interest, those rights are valued at zero unless they are rights to qualified payments. | Does not apply where market quotations are readily available, or where the retained interest is of the same class as the transferred interest. |
| § 2703 | Value is determined without regard to an option or agreement to buy or use the property below fair market value, or a restriction on the right to sell or use it. | An arrangement is respected if it is a bona fide business arrangement, is not a device to pass property to family for less than full consideration, and has terms comparable to arm’s-length deals. |
| § 2704 | In a family-controlled entity, a lapse of a voting or liquidation right is treated as a transfer, and certain restrictions on liquidation are disregarded in valuing an interest transferred to a family member. | Commercially reasonable restrictions from financing with an unrelated party, and restrictions imposed by federal or state law, are not disregarded. |
Source: IRC § 2701(a), § 2703, and § 2704(a)–(b). Summaries are simplified; each section has defined terms and further exceptions.
The present-interest problem for restricted interests
The annual exclusion covers only gifts of a present interest (IRC § 2503(b)), meaning an unrestricted right to the immediate use, possession, or enjoyment of property or its income (Treas. Reg. § 25.2503-3(b)). An outright transfer of an ownership interest does not automatically meet that test.
In Hackl v. Commissioner, 118 T.C. 279 (2002), aff’d, 335 F.3d 664 (7th Cir. 2003), parents gave their children and grandchildren units in a limited liability company that held timberland. The company was expected to make no distributions for years, and distributions were in the manager’s discretion. The Tax Court held that the gifts did not qualify for the exclusion, reasoning that a present interest must confer a substantial present economic benefit from the property itself or from its income.
Price v. Commissioner, T.C. Memo. 2010-2, reached the same result for gifts of limited partnership interests to adult children: the donors had not shown that the interests carried an unrestricted and noncontingent right to immediately use, possess, or enjoy the property or its income.
The consequence is arithmetic. In a hypothetical 2026 gift of an interest valued at $200,000, a present interest produces a taxable gift of $181,000 after the $19,000 exclusion; a future interest produces a taxable gift of the full $200,000. A gift of a future interest also requires Form 709 whatever its size. The exclusion itself is explained on the annual-exclusion page, and trust-based ways of creating a present interest on the Crummey powers page.
Adequate disclosure and the statute of limitations
The IRS ordinarily has three years from filing to assess tax (IRC § 6501(a)). For a gift that is not adequately disclosed on a gift-tax return, the tax may be assessed at any time (§ 6501(c)(9)). For a hard-to-value business interest, a return that meets the disclosure standard is what starts the three-year period running.
Under Treas. Reg. § 301.6501(c)-1(f)(2), adequate disclosure requires:
- A description of the property and any consideration received.
- The identity of, and relationship between, the donor and each recipient.
- A detailed description of the valuation method, including the financial data used, any restrictions considered, and each discount claimed.
- For an entity valued on its net assets, the value of 100 percent of the entity before discounts, the pro rata portion transferred, and the value reported.
- A statement of any position contrary to a regulation or revenue ruling.
An appraisal meeting § 301.6501(c)-1(f)(3) can replace the detailed valuation description. The appraiser must be qualified for the type of property and cannot be the donor, the recipient, a family member of either, or their employee. For a business interest, the appraisal must include the financial data in enough detail that another person could replicate the process and reach the appraised value.
Separately, the Form 709 instructions ask for balance sheets, particularly the one nearest the date of the gift, and statements of net earnings and dividends for each of the five preceding years for close-corporation stock, unless a qualifying appraisal is attached. The return itself is covered on the Form 709 page.
Basis and S corporation stock
The recipient of a gifted business interest takes the donor’s basis (IRC § 1015(a)), so gain that built up while the donor owned it is taxed when the recipient sells. Property received from a decedent instead takes a date-of-death basis; see step-up in basis and gifting versus inheriting.
Before giving S corporation stock, check who is receiving it. An S corporation cannot have more than 100 shareholders, a nonresident alien shareholder, or a shareholder that is not an individual other than an estate and certain trusts and organizations (IRC § 1361(b)(1)).
Sources
Methodology & sources
Primary sources are cited in place: IRC § 1015, § 1361, § 2503, § 2512, § 2701, § 2703, § 2704, and § 6501 (U.S. House Office of the Law Revision Counsel); Treas. Reg. § 25.2503-3, § 25.2512-2, § 25.2512-3, and § 301.6501(c)-1(f) (eCFR); the IRS Instructions for Form 709; and Rev. Rul. 59-60, 1959-1 C.B. 237, as reproduced by the IRS. Hackl v. Commissioner, 118 T.C. 279 (2002), and Price v. Commissioner, T.C. Memo. 2010-2, are cited by reporter without a link. The $19,000 annual exclusion is the 2026 amount from Rev. Proc. 2025-32 and the $20,000 figure is the 2027 amount from Rev. Proc. 2026-35. This page states no typical discount percentage because no primary source sets one. See our editorial standards.
This information is educational and is not legal or tax advice. Valuing and transferring a business interest depends on the entity, its governing documents, and your facts; use this to understand the rules and work through any transfer with a qualified appraiser and tax professional.
Last verified November 13, 2026.