Task forces mobilize over controversial IRS discount regs

BVWireIssue #167-2
August 10, 2016

A few weeks ago, BVWire gave you a heads-up that the Treasury would soon release long-awaited proposed IRC Section 2704 regulations designed to curb estate valuation discounts. Well, they’re here—and quick as a wink the AICPA, ASA, and NACVA are forming task forces to study the regs and submit comments.

The IRS wants to eliminate the technique of putting valuable property into entities such as family-owned partnerships or corporations just to reduce the value in the property to avoid estate and gift tax. To do this, the proposed regs (available here) address the treatment of some lapsing rights and restrictions on liquidation in determining the value of transferred interests in corporations and partnerships. Liquidation restrictions would be disregarded for valuation purposes. Bottom line: It appears that the proposed regulations eliminate almost all minority discounts for closely held entity interests, including operating businesses owned by a family.

Frontal assault: “I view it as a full frontal assault on economic reality,” says Donald DeGrazia (Gold Gerstein Group LLC). “They are changing the definition of fair market value,” says Michelle Gallagher (Gallagher Valuation & Forensics PLC). She says the regs seem to carve out certain types of transfers from the definition of FMV under the federal gift tax regulations (Treas. Reg. Sec. 25.2512-1). “This is indeed a very significant issue for business appraisers,” adds Ronald Seigneur (Seigneur Gustafson LLP), a veteran valuation practitioner who, along with Gallagher, is on the new AICPA task force.

“This is going to be a major problem for all family-owned businesses,” attorney Richard Dees (McDermott Will and Emery) told the Wall Street Journal. “This all boils down to the question of whether a family business should be valued as if it’s owned by one person.” Last year, Dees sent a 29-page letter to the government critiquing the proposal as beyond the scope of its powers.

The valuation professional organizations we spoke with are on top of this issue. “The recently released IRC Section 2704 family limited partnership (FLP) discounts proposed regulations include much of what appraisers had been dreading for the past year,” Carol Carden (PYA PC) tells BVWire. Carden is chair of the AICPA FVS executive committee. “The AICPA plans to draft and submit comments to the IRS prior to the December 1 hearing.” William Johnston (Empire Valuation Consultants LLC), chair of the BV committee of the American Society of Appraisers (ASA), says that the ASA is also forming a task force and preparing an action plan. “NACVA is convening a task force of board members, instructors, and members to address this issue as it has significant impact to the membership and profession at large,” says Brien K. Jones, NACVA’s chief operations officer and executive vice president. “I invite interested members to contact me if they are interested in supporting this initiative.”

What to do: Of course, the regs would have a big impact on family wealth planning. “If the proposal is adopted as contemplated, there will be a powerful incentive for families with businesses and investment holding entities to initiate or complete transfers before these regulations take effect,” says Bryce Erickson (Mercer Capital). The new rules are not effective until 30 days after the final regs are published. But, before that can happen, there is a 90-day comment period and then a public hearing on Dec. 1, 2016. Erickson points out that the proposed regs could change, or they might never go into effect. BVWire urges readers to read them and submit comments to the IRS, which are due by November 2.

More details and expert insights will be in future issues of BVWire and also Business Valuation Update.

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