Challenge to new Section 2704 regulations is shaping up

The accounting, valuation, and legal professions currently are hard at work to defeat the Treasury Department's proposed Section 2704 regulations. The new regs, which came out on Aug. 4, 2016, would curtail, if not entirely eliminate, valuation discounts in family-controlled entities.

The opportunity to comment on the proposed changes is now. There also will be a public hearing on December 1.

In talks and blogs, opponents keep repeating a number of reasons why the regulations must not be finalized in their current form.

The regulations are an overreach by the Service is a common objection. Congress did not intend the Chapter 14 valuation rules to target minority and lack of marketability discounts. Rather, opponents say, Congress intended to curb the abuse of artificial restrictions with which to reduce the value of interests in family-controlled entities. 

Also, the proposed regulations ignore the real constraints that operate on owners of a fractional interest in a family-controlled entity, opponents contend. One way the new regulations do this is by creating a new class of restrictions, "disregarded restrictions," which appraisers must disregard in determining the fair market value of a noncontrolling interest in a family-owned business.

For more reactions to the regulations click here and here.