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Thursday, August 04, 2016

IRS Issues Long-Awaiting Section 2704 Proposed Regulations

In case you haven’t heard, these proposed regulations were issued on August 2. The particular focus is to substantially reduce valuation discounts for transfer tax purposes on minority interests, nonvoting, and limited control interests that are transferred to family members. Some of the restrictions will only apply if a transfer is made within 3 years of death – others will apply more broadly. The definition of “control” is expanded to catch more circumstances within its net. The use of non-family owners of interests in entities to avoid Section 2704 will be made more difficult.

The regulations are only in proposed form. With hearings set for early December, they should not be finalized until at least 30 days after that (if ever). Parts of them are subject to legal attack, as Treasury appears to be writing the law contrary to the statutory language (such as disregarding restrictions on liquidation that are not more onerous than otherwise applicable state law).

Surely, there will be a lot of real and digital ink spilled over these proposed regulations in the coming days.

Prop Reg § 25.2701-2, Prop Reg § 25.2701-8, Prop Reg § 25.2704-1 , Prop Reg § 25.2704-2, Prop Reg § 25.2704-3, Prop Reg § 25.2704-4

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