Last month, the Treasury Department and the IRS issued Proposed Regulations under Section 2704 of the Internal Revenue Code that are aimed at substantially restricting or eliminating valuation discounts in connection with intra-family transfers of interests in family-controlled entitles (corporations, partnerships, limited liability companies and other business entities). For owners of such interests, there may be a limited window of opportunity to utilize valuation discounts in wealth transfer planning before the law is changed.
Congress enacted Section 2704 in 1990 to curb perceived abuses by taxpayers related to provisions in partnership or LLC operating agreements that artificially restricted the ability of a partner or member to force a liquidation of a family-controlled entity. However, IRS challenges to valuation discounts under the existing framework of Section 2704 have garnered limited success. In response, the IRS issued the Proposed Regulations which, if enacted as currently written, will largely restrict or eliminate valuation discounts, significantly increasing the transfer tax cost of transferring such interests.
While the details of the Proposed Regulations are important, the bottom line is that their full impact is still unknown. A public hearing will be held on December 1, 2016, after which they may be further revised or may be published as final. We recommend that any client who holds an interest in a family-controlled corporation, partnership or other entity, consider whether he or she should make any transfers to family members, and that any client who is interested in moving forward with such a transfer act promptly.
We will continue to monitor the situation closely and would be happy to talk with you about the potential planning issues the Proposed Regulations may present for your situation.
For additional information, please contact us at 401.283.1234.