STEP – IRS rule on undervalued transfers of family businesses would “harm legacy planning”

Interesting  Article courtesy of STEP:

A public hearing was held last week on the Internal Revenue Service’s (IRS) regulation which would prevent business owners undervaluing their assets for estate and gift tax purposes.

 

At the hearing, stakeholders – including estate lawyers – urged the IRS to scrap the proposed new rule.

 

Regulations under s2704

 

The regulation, issued under s2704 of the Internal Revenue Code, introduces a new class of “disregarded restrictions” in the transfer of an interest in a family business. These restrictions “will be ignored if, after the transfer, the restriction will lapse or may be removed – without regard to certain interests held by nonfamily members – by the transferor or the transferor’s family”.

 

Typical restrictions could: limit the recipient’s ability to liquidate the interest; or limit the liquidation proceeds to an amount that is less than a minimum value; or defer the payment of the liquidation proceeds; or allow the liquidation proceeds to be paid in something other than cash or property (such as a promissory note).

 

The government proposed the new rules arguing that it has become common for certain taxpayers or their estates owning closely held businesses or other entities and their advisors to use these “aggressive tax planning tactics” to artificially lower the taxable value of their transferred assets.

 

Opposition to regulation

 

The main arguments put forward against the rules state that they would curb valuation discounts – which are legitimately used in succession planning – and mean increased estate taxes on the deaths of owners of family businesses.

 

The rules are furthermore drafted to apply to operating businesses (not just family limited partnerships holding securities) and Dennis Belcher TEP of McGuireWoods reportedly testified that the regulations should not apply to entities with an operating business.

 

A spokesperson from the US Treasure confirmed that the aim of the rules is not to do away with valuation discounts altogether.

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