Tax Blog

2018 Proposed Valuation Regulations Withdrawn

Treasury has withdrawn proposed regulations under Section 2704, on Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer (GST) Taxes, which address the valuation, for wealth transfer tax purposes, of interests in family-controlled entities. The amendments were intended to end what were perceived to be schemes to erode the applicability of Code Sec. 2704 by the creation of artificial valuation discounts.

Arguments were made that the plan would have hurt family-owned and operated businesses by limiting valuation discounts, adding that the regulations would have made it difficult and costly for a family to transfer their businesses to the next generation. Which is an import portion for family-owned business operations looking to continue the work started and legacy within the family estate. In limited cases, Section 2704 disregarded restrictions on the ability to liquidate family-controlled entities when determining the fair market value of an interest for estate, gift and generation-skipping transfer tax purposes.

The proposed regulations were controversial. At a hearing held on December 1, 2016, commentators testified that the proposed regulations ran the risk of adversely affecting legitimately appraised interest valuations in corporations and partnerships for family-owned entities. In response to executive order 13789, April 21, 2017, the Treasury Department identified the proposed regulations as imposing undue financial burdens on taxpayers, adding undue complexity to the tax laws, or exceeding the statutory authority of the IRS. The withdrawal of the proposed regulations was expected.

What this means for the taxpayers is that the concerns of a regulation that went too far in many respects are now eliminated. Concerns of the rules could actually eliminate legitimate discounts and harm operating businesses were heard. In evaluating the original intent of the rules, which were aimed at eliminating entities established solely for the purpose of achieving discounts, it was found they missed this mark. In its analysis, the Treasury concluded that the proposed regulations’ approach to the problem of artificial valuation discounts was “unworkable.” Specifically, the regulations, as written, “would have compelled taxpayers to master lengthy and difficult rules on family control and the rights of interest holders.” As such, the burden of compliance would far outweigh the potential policy gains.

If you have additional questions feel free to contact the professionals at the Center at 618-997-3436 for assistance in planning your estate or understanding further what the withdraw of these regulations specifically mean for your business.

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The Center for Financial, Legal & Tax Planning, Inc.

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