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Treasury Issues Broad Proposed Section 2704 Regulations

If adopted, they would curb minority discounts.

After months of anticipation, the Treasury has issued proposed regulations under Internal Revenue Code Section 2704. They appear to be very far-reaching and, if adopted in their current form, may be challenged in light of the section’s legislative history.

A hearing has been scheduled about the proposed regulations on Dec. 1. The Treasury has stated that the final regulations won’t be effective until at least 30 days after they become final. Hence, they may be effective for lifetime and deathtime transfers soon after the close of this year. Because of their potential impact, taxpayers may want to consider taking action before year-end if they hold interests in entities which essentially are closely held by the family.

The details provided in the proposed regulations are significant and deserve careful study. 

By way of background, IRC Section 2704 was enacted effective Oct. 9, 1990. The section has two broad aspects. Section 2704(a) essentially causes a taxable event to occur when liquidation or voting rights lapse. Section 2704(b) essentially provides that in valuing property for estate and gift tax purposes, certain restrictions on the ability of an entity to liquidate are disregarded. These provisions apply only in effect to closely held (family) entities.

Section 2704(b) grants the Treasury the authority to issue regulations to cause certain other restrictions that reduce valuation to be disregarded. And that’s what the proposed regulations are intended to do. 

Although the details are significant, the bottom line is that the proposed regulations would appear to eliminate almost all minority (lack of control) discounts for closely held entity interests, including active businesses owned by a family. To accomplish that, restrictions under the governing documents and even those under state law would be disregarded for valuation purposes. 

Trusts & Estates will cover the proposed regulations in more detail in subsequent articles.



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