Is the IRS using a ‘kitchen sink’ strategy for Sec. 2704 regs?

BVWireIssue #169-1
October 5, 2016

One of the surprises in the proposed Section 2704 regulations designed to curb estate valuation discounts is that they apply not only to family entities holding marketable securities, but to family operating businesses as well. This was not expected. But maybe we should not have been surprised?

Overshooting: “Is it possible that the IRS is asking for too much so that it can scale back and get what it wanted in the first place?” asked Gil Matthews (Sutter Securities Inc.). Matthews posed this question to a panel at the recent ASA Advanced Business Valuation Conference in Boca Raton. Of course, no one knows what the IRS really had in mind, but this is possible. It’s well known that the IRS has been targeting abuses of valuation discounts by family entities that hold marketable securities, and it could have easily left operating businesses out of the proposal. Anticipating the pushback (evidenced by the IRS setting a public hearing date right off the bat), the agency could be asking for more than it wanted with the idea of “compromising” and, for example, taking active businesses out of the mix.

Regardless of what the IRS has in mind, speakers urged attendees to submit comments to the IRS before the November 2 deadline. John Russell, the ASA’s director of government relations, pointed out that there is a simple web form to use for this. “The only way to derail this train is with a very loud set of comments,” Russell says. “But it’s also important to reach out to your small business clients who will be most affected by these regs and get them involved. They may have relationships with members of Congress that they can leverage to help fight these regs.”

Congress reacts: During a recent BVR webinar, Curtis Kimball (Willamette Management Associates) and  Z. Christopher Mercer (Mercer Capital) gave a thorough analysis of the valuation impact of the regs. They told the audience that there is support in Congress to quash the proposed regs. In the House, Republicans have introduced two bills, H.R. 6042 and H.R. 6100, to nullify the proposed regs. The latter bill, the Protect Family Farms and Businesses Act, prevents any federal funds from being used to finalize, implement, or administer the regs. In the Senate, members of the Senate Finance Committee are among those who have sent a letter to Treasury Secretary Jacob Lew requesting that the proposed regs be withdrawn.

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