Southard Financial
Transaction Advisory

IRS Hears Testimony Against Changes in Section 2704 Regulations


Southard Financial wants to keep you up to date on the debate.

As we explained in September, the IRS recently proposed sweeping new changes in Section 2704, which covers the treatment of valuation discounts. These discounts are a powerful estate-planning technique that high-net-worth families have traditionally used to protect assets that are transferred as gifts or bequests to heirs. The public comment period, which ended on November 2, was followed by public hearing before a panel of representatives from the Department of the Treasury and the IRS in Washington, D.C. on December 2.

Following are highlights from that hearing, as reported by Peter H. Agrapides, MBA, CVA, on behalf of the National Association of Certified Valuators and Analysts (NACVA).

Industry experts and business professionals spoke up — most in opposition to the changes.

A total of 37 speakers addressed a four-member Treasury/IRS panel led by Catherine Hughes, Attorney-Advisor in the Treasury’s Office of Tax Policy.

Speakers included Agrapides, two other NACVA members, and representatives from a variety of industry organizations, such as Americans for Tax Fairness, the American Business Defense Council, the American College of Trust and Estate Council (ACTEC), the American Institute for CPAs (AICPA), the Family Business Coalition, and the S Corporation Association. Also present were several professional advisors or lobbyists and two business owners.

Per Agrapides, most speakers asked for a complete withdrawal of the proposed changes to Section 2704, arguing that there were “simply too many problems with the proposed regulations, as currently drafted, to warrant amending section-by-section amendments.”

Several speakers discussed the potentially negative impact of an increased estate tax burden on family-owned businesses and small businesses, which employ a significant percentage of the U.S. population.

Some speakers addressed the problem of basis-inconsistency that will be created if different valuation standards apply for transfer taxes (gift, estate and generation-skipping transfer taxes) and income tax.

Two speakers noted that the proposed regulations run contrary to long-standing legal precedent.

One speaker, representing Americans For Tax Fairness, asked the Treasury Department and IRS to move forward with the proposed changes as written, arguing that the changes would close a tax loophole that benefits only the ultra-wealthy.

The IRS discussed few specifics.

According to Agrapides, the only member of the Treasury/IRS panel who spoke was Catherine Hughes, who made it clear that the new Section 2704 regulations, if finalized, will not include two troublesome features that worried industry experts — the deemed put right and a retroactive three-year “look back period.”

Hughes also “made a point to note that it was not the intention of Treasury/IRS to eliminate the application of discounts for lack of control, and that, if the regulations are revised or put into final form, they would be much more clear on the discount for lack of control applicability issue.”

Where does this leave us?

Noting that “those in opposition to the proposed regulations spoke with one voice,” Agrapides concluded that the concerns expressed by the speakers were validated by the Treasury/IRS panel and that the panel addressed the most egregious features of the proposed regulations.

With the public hearing complete, valuation experts and family-owned businesses have now entered what Agrapides calls “a holding pattern, eagerly anticipating the Treasury and IRS’s next move.”

As always, Southard Financial is here to help.

All of us at Southard Financial take heart in the strong, unified show of industry opposition to the proposed changes at the December hearing, and in the fact that the IRS had received over 9,000 written comments during the three-month comment period that had ended in November.

In the meantime, our focus remains on providing the insight and information that you need protect the wealth you and your family have worked so hard to create.

For assistance understanding how 2704 rules and proposed changes may affect you, call us at (901) 761-7500 or use the form on our contact page.


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Explore this topic further:

Read Agrapides’ report in full.

Review our earlier post about the proposed Section 7204 changes.

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