By Randall A. Denha, Esq.*
Remember all that time and energy you put into figuring out what the proposed regulations under Section 2704 were all about? Well, you’re going to want to try to find a way to get that back. The proposed regulations, the purpose of which was to limit the amount of discounts individuals take when gifting or selling interest in family owned entities, are going to be withdrawn.
The proposed regulations were finally issued almost a year later on August 4, 2016. Following the issuance of the proposed regulations, many planners urged clients to consider gifting or selling interests in family entities prior to the proposed regulations being finalized in order to take advantage of discounts while they were still available.
On October 2, 2017, the Treasury Department and the IRS announced that the proposed regulations will be withdrawn in their entirety. The proposed regulations, targeted at curtailing artificial valuation discounts, could have reduced (or even eliminated) discounts (primarily, lack of control and lack of marketability discounts) historically used when valuing gifts or other transfers of family-owned businesses.
Among other factors cited by Treasury, the proposed regulations are being withdrawn because compliance with the regulations would have been unduly burdensome on taxpayers and could have affected valuation discounts even where discount factors were not created artificially as a value-depressing device.
The withdrawal of the proposed regulations means that family business owners who transfer ownership of part of their business to younger family members will still be able to make transfers at values that take into account appropriate valuation discounts. For example, a transfer of a 10 percent interest in a family business from parents to children does not represent a controlling interest in the business. The 10 percent interest is also not readily marketable and cannot be sold quickly like publicly traded stocks and other marketable securities. Therefore, discounts for “lack of control” and “lack of marketability” may still be applied to arrive at the value (for gift or estate tax purposes) of a minority, closely held business interest whenever the interest is transferred.
*Randall A. Denha, j.d,, ll.m., principal and founder of the law firm of Denha & Associates, PLLC with offices in Birmingham, MI and West Bloomfield, MI. Mr. Denha continues to be recognized as a “Super Lawyer” by Michigan Super Lawyers in the areas of Trusts and Estates Law; a “Top Lawyer” by D Business Magazine in the areas of Estate Planning and Tax Law; a Five Star Wealth Planning Professional; Michigan Top Lawyer; Lawyer of Distinction; Best Lawyers; and a New York Times Top Attorney in Michigan. Mr. Denha can be reached at 248-265-4100 or by email at firstname.lastname@example.org