News & Events

Is it Time to Transfer Your Business Interests?

Consider Proposed changes to IRS § 2704

-by Kenji Greenberg, CPA/ABV, CVA

In August 2016, the IRS issued proposed regulations under section 2704 of the Internal Revenue Code that could have significant changes in the valuation of business interests for gift, estate, and generation-skipping transfer (GST) tax purposes.

Transfer your buinsess interestsThe main focus of the proposed regulations is the treatment of certain lapsing voting or liquidation rights and restrictions to prevent under valuing of transferred interests. These proposed regulations seek to considerably reduce the ability to apply valuation discounts to intra-family transfers of interests in entities which could thereby increase certain tax burdens.

The IRS has been concerned that taxpayers are currently able to structure transfers of interests in a family-owned entity so that the transferees would not individually have the power to liquidate or control the entity. Thus, the transferor’s right to control or liquidate the entity would not pass to any of the transferees individually. Because the transferees do not have voting control or the right to liquidate the entity, the values of the transferred interests are reduced by a lack of control (minority interest) discount which would in turn lower the tax liability on the transfer of the interest.

The proposed regulations aim to deny these reductions for transfers occurring within three years before the transferor’s death if the entity is controlled by the transferor and members of the transferor’s family immediately before and after the lapse of voting or liquidation rights. The proposed regulations would also impact family-controlled entities that are subject to redemption or liquidation restrictions by disregarding specified restrictions in valuing an interest for gift or estate tax purposes when that interest is transferred to a family member.

The proposed regulations under section 2704 are currently delayed following President Trump’s executive order requiring federal agencies to eliminate two rules for every new rule in an attempt to fulfill his campaign promise to cut back on federal regulation. However, If President Trump’s campaign promise to repeal the estate tax come to fruition, it could ultimately make the proposed changes to section 2704 unnecessary.

Clients who are contemplating transferring minority interests in family-controlled entities should contact their professional advisors to determine the best course of action for their situation in light of the proposed section 2704 regulations and the potential for the repeal of the estate tax. A Sansiveri professional can be reached at 401-331-0500.