On Aug. 2, 2016, the Treasury Department and the Internal Revenue Service released proposed regulations under Internal Revenue Code (Code) section 2704 (the “Proposed Regulations”). The Proposed Regulations, if finalized in their proposed form, would eliminate most valuation discounts on redemptions and transfers of family business interests among family members when a single family “controls” the business both before and after the transfer.
Set forth below are summaries of the following:
- What Code section 2704 covers under current law.
- Some examples where the proposed, much-expanded coverage of Code section 2704 under the Proposed Regulations may be unenforceable.
- The process for comment, hearing and review before the Proposed Regulations are finalized and become effective.
- What family business owners should consider (from an estate planning perspective), given the scope of restrictions in the Proposed Regulations.
1. Scope of Code Section 2704 Under Current Law
Congress enacted “Chapter 14” (sections 2701 through 2704) of the Code back in 1990, to curb perceived abuses in the discounted valuation of property transfers between family members. In general terms, Code section 2704 addressed “certain lapsing rights and restrictions” affecting control of family businesses and/or rights to liquidate interests in family businesses. Continue Reading