On August 4, 2016, the U.S. Treasury Department issues proposed regulations of IRC §2704 (“Proposed Regs”). In 1990, Chapter 14 of the Internal Revenue Code (IRC), which §2704 is a part, was enacted to reduce what the IRS believed to be abuses in valuations of certain closely-held (family controlled) businesses, especially involving transfers to family members. In particular the government sought to reduce the use of valuation “freeze” techniques and the use of valuation discounts such as for lack of marketability and lack of control over the transfer of minority shares. These discounts are used to determine the true economic value of business interests that have restrictions or limited control over the business entity as a whole. The Proposed Regs, if enacted, would expand the applicability of IRC §2704 to apply to all business entities, regardless of its form and will significantly limit such discounts with respect to transfers of interests in family-controlled or closely-held businesses. They also will affect transfers to non-family members (typically to charitable organizations). In short, they will hamper the ability of business owners to transfer business interests, especially to the next generation of family owners!
If you are in the process of restructuring your business, transferring (gifting) business interests to family members or selling your business, it is critical to speak to your tax professional and valuation advisors: estate planning and business attorneys, business valuation advisors and your accountant. These Proposed Regs will become effective thirty days after they are published as final regulations, which will occur after public hearings have been conducted. The public hearing on the Proposed Regs is scheduled for December 1, 2016.