Do the new Sec. 2704 regs redefine fair market value?

BVWireIssue #167-4
August 24, 2016

The IRS is attempting to eliminate DLOM and DLOC for the vast majority of family-controlled entities for estate, gift, and generation-skipping transfer (GST) tax purposes (prior coverage here). To do this, its proposed IRC Section 2704 regs would treat the lapse of voting or liquidation rights as an additional transfer and disregard certain restrictions on liquidation in determining the fair market value of a transferred interest.

Different perspectives: “In my opinion, this is a legislative attempt to redefine the fundamental premise of fair market value.” says Ronald Seigneur (Seigneur Gustafson LLP), in an article in the September 2016 issue of Business Valuation Update, “Experts Size Up Controversial IRS Estate Valuation Regs” (subscription required). Michelle Gallagher (Gallagher Valuation & Forensics PLC) agrees. “They are changing the definition of fair market value,” she says, pointing to the Federal Gift Tax Regulations (Treas. Reg. Sec. 25.2512-1), which define fair market value as:

[T]he price at which property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.

It seems that the proposed regs carve certain types of transfers completely out of the FMV definition, she observes. These transfers include those made within three years of death, between family members, and resulting in the lapse of liquidation rights. Gallagher and Seigneur are on the AICPA task force studying the regs in order to prepare and submit formal comments to the IRS by the due date of November 1.

“The IRS is not proposing changing the definition of fair market value,” says Bryce Erickson (Mercer Capital). “However, when applying fair market value under the constructs as contemplated in the proposed 2704 changes, there would be a smaller (or perhaps no) value delineation for minority interests as compared to enterprise value of an entity.” This would support the IRS’s goal of preventing taxpayers from “undervaluing” transferred interests among family members, Erickson points out. “This, of course, runs in stark contrast to the marketplace, of which fair market value is supposed to be a reflection,” he says. “The marketplace’s long track record on this is abundantly clear—it differentiates for minority interests as compared to the value of entire enterprises.” He sees the proposed regulations as essentially circumventing the levels of value for family members as defined in a “controlled entity.”

There will be a public hearing December 1 at the IRS. BVWire will be in Washington to cover this hearing.

Extra: Curtis Kimball (Willamette Management Associates) will conduct a BVR webinar on September 29: The IRS’ Proposed Section 2704 Regulations: The Impact on and the Future of Estate and Gift Valuation.
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