Relief from the Now Infamous Section 2704 Proposed Regulations May be on its Way
By Beckett C. Horner, J.D., LL.M. in Taxation
Last Year, the Internal Revenue Service issued proposed regulations aiming to re-define its interpretation of Internal Revenue Code Section 2704, which deals with valuation discounts in valuing interests in Corporations and Partnerships for Estate, Gift, or Generation-Skipping Transfer tax purposes. More specifically, the IRS’ aim was to exclude any discounts attributable to lapsing rights or restrictions on liquidations in determining the value of the interests in Corporations or Partnerships (such as Family Limited Partnerships or LLCs). As was expected, the response and the comments received by the IRS were largely negative, especially from practitioners advocating on behalf of clients with significant closely held family businesses.
Despite the strong opposition, the IRS moved forward with its implementation of the Proposed Regulations on December 1, 2016, and practitioners have been adjusting to this new normal ever since. If you take a position on a return that is contrary to these proposed regulations, the Code requires “adequate disclosure” on the return. At this point, it seems most practitioners are forging ahead under current law and providing the IRS with adequate disclosure of any reporting position contrary to the proposed regulations.
As part of his campaign promise to deregulate Washington, President Trump signed Executive Order Number 13789 asking the U.S. Treasury to reduce the Tax Regulatory Burden. As a result of this executive order, the Treasury has issued a report requesting guidance and commentary as to whether the regulations identified in the report should be rescinded or modified. As you would expect, the Proposed Section 2704 Regulations were among those identified in the Treasury’s report as needing commentary.
This brings to the table the possibility that the Proposed Regulations under Section 2704 could be rescinded or heavily modified. Some commentators believe a concession for valuations applied to actual family businesses is needed (to differentiate between active businesses and business entities established as investment vehicles for wealthy families). Of course, all of this is may be overshadowed by possible tax reform in Washington this fall, the likes of which may or may not retain Section 2704.
As always, we will keep a close eye on the progress of the Proposed Regulations under Section 2704. If you have any questions regarding the applicability of the proposed regulations to your situation, or if you have other questions pertaining to your estate plan, business plan, probate administration, or real estate, please do not hesitate to contact me: firstname.lastname@example.org; (772) 234-5500.