They’re at it again. The Treasury is taking a new look at an old tool that would effectively raise the taxable value of family partnerships and LLCs. The current speculation is that new regulations will be announced in early September, so now is the time to make good use of the time we have.
Internal Revenue Code Section 2704 was enacted some time ago to limit the use of valuation discounts in connection with the gifting of family-owned business interests. The Treasury’s concern was that business owners were imposing severe restrictions on the transferred interests that created large valuation discounts when compared to interests without these restrictions.
Section 2704(b) ignores certain “applicable restrictions” on liquidation that would normally justify a valuation discount in valuing closely held interests if those interests are transferred to other family members. Court decisions and state statutes have largely limited the applicability of this section by re-characterizing restrictions so that they no longer fall within the definition of an “applicable restriction.”
However, Section 2704(b)(4) leaves open the possibility that the Secretary may—by regulations—provide that other restrictions shall be disregarded in determining the value of the transfer of any interest in a corporation or partnership to a member of the transferor’s family if such restriction has the effect of reducing the value of the transferred interest.
The Obama Administration 2013 Budget proposed creating an additional category of restrictions called “disregarded restrictions” that would be ignored in valuing interests in family-owned entities transferred to a family member if, after the transfer, the restriction would lapse or might be removed by the transferor and/or the transferor’s family.
On May 10, 2015, Cathy Hughes of the U.S. Treasury’s Office of Tax Policy spoke at the ABA’s Tax Section Meeting. She commented on proposed Section 2704 regulations, which might have a dramatic impact on the valuation of interests in closely held limited partnerships and limited liability companies transferred to family members. She suggested that the 2704 regulations might be issued later this summer or fall, prior to the ABA Tax Section Meeting on September 17th.