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September 20, 2016

Proposed Regulations Under Internal Revenue Code Section 2704

Please read important disclosures HERE.

In August 2016, the IRS issued long-awaited proposed regulations to Internal Revenue Code Section 2704 which are designed to eliminate certain discounts that are currently used and recognized under the law when valuing transfers in family owned or closely held businesses.

The proposed regulations address the valuation of interests in corporations and partnerships for estate, gift, and generation-skipping transfer tax purposes and the treatment of lapsing rights and restrictions on liquidation in determining the value of the transferred interests.

The IRS believes that the current regulations under Sec. 2704 have been made ineffective by changes in state laws, court decisions, and various estate planning techniques that avoid the application of Sec. 2704(b), under which certain liquidation restrictions are disregarded. In the words of Mark Mazur, assistant secretary for tax policy at the Treasury Department, the regulations will “close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift purposes”.

The proposed regulations are subject to comment and a public hearing will be held on December 1, 2016. After the hearing, the proposed regulations may be further revised or may be published as final. It is likely that there will be significant comments to the regulations since many believe that portions of the proposed regulations exceed the IRS authority. The effective date of the regulations will be 30 days after the regulations are published as final.

If you have an interest in moving forward with a transfer of an interest in a family owned entity, you may wish to contact your attorney to discuss the current state of affairs and take advantage of the limited time remaining before the regulations are finalized and discount planning may be curtailed.

Filed under: Firm Updates

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