United States

Proposed regulations under section 2704 to be released soon


At the Fiduciary Income Tax session of the American Bar Association Section of Taxation meeting in Washington on May 7, Melissa Liquerman, branch 4 chief, IRS Office of Associate Chief Council (Pass-through and Special Industries), said the long anticipated regulations regarding section 2704 should be released “very, very shortly.” At the American Bar Association Real Property session in Boston on May 12, Ms. Liquerman stated the regulations will be released this spring. She further commented that she and other Treasury and IRS officials have put a lot of “time and thought” into these regulations and that the regulations are a “good product.” Section 2704(b) provides that, “The Secretary may, by regulation, 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.” These regulations purportedly will address valuation of lapsing rights and liquidation restrictions for intra-family transfers of interests in closely held businesses.

There has been speculation for almost a year regarding the content of the new section 2704(b) regulations and attorneys have written letters urging the Treasury to abandon the effort. These letters have argued that any new regulations would be invalid absent new legislation. It is uncertain whether these regulations will limit valuation discounts for all family-controlled entities or if operating entities will be exempt and holding companies (those funded with hedge funds, marketable securities and other portfolio-type investments) will be covered under the new regulations. From the beginning of this regulatory saga, the question of whether the regulations are given immediate effect and the potential avoidance of a notice and comment period, has concerned tax advisors. This should create a sense of urgency amongst advisors and taxpayers alike. Taxpayers using family partnerships to achieve valuation discounts may want to draft their transfer documents now and perform the valuations at a later date then, hope to be grandfathered under the new regulations. Transfers made using so-called Wandry provisions (gifts made pursuant to a defined value clause) should be considered for transfers made now to hedge against the valuation risk that an actual appraisal would produce a higher value when later completed. This is especially useful for those taxpayers who are close to their lifetime exclusions. The IRS does not agree with the Wandry decision.

These regulations will be part of the 15 priority areas in the 2015-2016 priority guidance plan. To date, regulations have been issued on basis consistency, expatriate transfer tax and uniform basis of charitable remainder trusts.


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