On Oct. 2, the Treasury Department announced that it is withdrawing the proposed regulations under Code Section 2704 (introduced in August 2016) that would have adversely affected taxpayers’ ability to use valuation discounts in transferring closely held business interests to family members and trusts for their benefit.
As stated in the Treasury notice, the goal of the proposed regulations was to counteract changes in state statutes and case law developments that have eroded Section 2704’s applicability and facilitated the use of family-controlled entities to generate “artificial” valuation discounts, such as for lack of control and marketability, and thereby depress the value of property for gift and estate tax purposes.
The valuation requirements of the proposed regulations were unclear, and their effect on traditional valuation discounts was uncertain. In particular, it was not feasible or logical to value an entity interest as if no restrictions on withdrawal or liquidation existed in either the entity’s governing documents or state law, which is what the proposed regulations required. The proposed regulations also would have produced unrealistic, possibly overstated valuations. For example, the lack of a market for interests in family-owned and operated businesses is a business reality that should continue to be taken into account when determining fair market value.
After reviewing comments from experts and practitioners, Treasury and the IRS now believe that the proposed regulations’ approach to the problem of artificial valuation discounts is unworkable and unduly burdensome on taxpayers and the IRS, and plan to withdraw them in the near future. If you need assistance in effective tax planning for transfers of closely held business interests, please contact Wayne Zell at 703-218-2177 or email at firstname.lastname@example.org.