Treasury Eases Burden on Family Owned Businesses - A Global Tax Blog Article from KLR

Global Tax Blog

Treasury Eases Burden on Family Owned Businesses

posted Oct 19, 2017 by Karen S. Rice, CPA in the Global Tax Blog

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Are you part of a family-owned business? The Treasury Department recently announced that it will pull several tax regulations including the proposed Section 2704 rules that aim to limit valuation discounts for estate, gift and generation-skipping transfer tax purposes.  A press release set forth by the Treasury, said the regulations would have had hurtful consequences on family-owned and operated businesses by limiting minority and marketability valuation discounts and making it not only difficult but costly for a family to transfer their businesses to the next generation.

Section 2704

Congress enacted Section 2704(b) of the Internal Revenue Code in 2016 in an effort to limit the valuation discounts for gift and estate tax purposes for family owned businesses.

Section 2704(b) provides that:

  • When an interest in a family-owned corporation/partnership is transferred within a family, if a restriction limits the ability of the partnership/corporation to liquidate and that restriction can be removed by the family, the restriction is disregarded in valuing the transferred interest (for estate and gift tax purposes), therefore, eliminating any control advantages over a minority interest.   

These proposed regulations would have created an additional category of restrictions that also would be disregarded in assessing the fair market value of an interest.

Concerns

The proposed regulations were set forth in August 2016 and the public was able to submit comments until December 2016.  In the Spring of 2017, there were lengthy debates and hearings with the IRS, and the AICPA was instrumental in getting the IRS to postpone the regulations because of the opposition and questions they raised.  All parties expressed concern that:

  • The proposed regulations would eliminate or restrict common discounts, such as minority discounts and discounts for lack of marketability, which would result in increased valuations and transfer tax liability, and thus— a financial burden.
  • The proposed regs. would make it difficult and costly for a family to transfer their business to the next generation
  • The proposed regulations were unclear and could not be meaningfully applied.

The withdrawal of these regulations is a HUGE win for family–owned businesses and the valuation world.

If you would like to learn more about the Treasury’s decision or how a valuation of an ownership interest can play a role in your estate planning, please contact us.