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Valuation Discounts Under Attack by the IRS

time-to-change

Southard Financial wants you to know what’s at stake.

On August 2, the IRS proposed sweeping new changes in the treatment of valuation discounts — discounts that are used to reduce burdensome estate and gift taxes by transferring valuable property into special entities such as family-owned partnerships or corporations.

If the proposed Section 2704 regulations go into effect as written, high-net-worth families will lose a powerful estate-planning technique that has been used for decades to protect assets that are transferred as gifts or bequests to heirs.

Higher estate taxes endanger the health (and wealth) of family-owned businesses.

The primary impact of the proposed regulations will be to limit use of “minority,” “lack of marketability,” and “lack of control” discounts related to closely-held businesses. Without these discounts, the value of interests that are transferred or owned at a business owner’s death could be increased by 30 to 50 percent or more.

This could have a significant impact on heirs, as Ashlea Ebeling of Forbes explains: “The proposed regulations would mean increased estate taxes on the death of owners of family businesses, possibly causing them to liquidate the business or sell big pieces to outsiders.”

Industry experts question the validity of the proposed changes.

The proposed regulations are being challenged by industry organizations including the American Institute of CPAs (AICPA), the American Society of Appraisers (ASA), and the National Association of Certified Valuators and Analysts (NACVA). These groups have formed special task forces to study the changes and submit comments during the public comment period that runs through November 2.

In questioning whether the proposals could be implemented as written, the National Law Review noted that “the legislative history of Section 2704(b) expressly provided” that regulations would not affect minority and other similar valuation discounts. The NLR went on to declare, “We anticipate a challenge to the validity of the proposed regulations if enacted as written because the impact of the proposed regulations is inconsistent with the legislative history.”

Similarly, the McGuireWoods law firm noted that the proposals would effectively expand the kinds of businesses affected: “Although section 2704, when it was enacted, referred only to corporations and partnerships, the proposed regulations would clarify that they also apply to limited liability companies and other entities and business arrangements, as well as corporations and partnerships.”

Now is the time to act.

The IRS is currently in the public comment period, which runs through November 2. A public hearing will be held on December 2, after which the proposals will be finalized.

If you are concerned about the potential impacts of the new regulations, you can make your voice heard at Regulations.gov.

Make your voice heard at Regulations.gov

If you have been contemplating tax-advantaged transfers of closely-held stock or interest in closely-held entities, we recommend you explore your options quickly so that you can make the necessary decisions before any regulatory changes are enacted.

Southard Financial is here to help.

Let us provide the insight and information you need to protect the wealth you and your family have worked so hard to create.
Call us at (901) 761-7500 or use the form on our contact page.

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To join in the public debate about the Section 2704 proposal, you can also comment on our Facebook page.

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For further reading:

Business Valuation Resources – https://sub.bvresources.com/BVWire/August2016Issue167-2.html

Forbes – http://www.forbes.com/sites/ashleaebeling/2016/08/03/treasury-to-close-estate-tax-loophole-family-businesses-cry-foul/#19d81070fd4f

McGuireWoods – https://www.mcguirewoods.com/Client-Resources/Alerts/2016/8/Proposed-Section-2704-Regulations-Impose-Major-Restrictions-Valuation-Discount-Planning.aspx

The National Law Review – http://www.natlawreview.com/article/irs-proposes-regulations-would-eliminate-most-valuation-discounts-transfers

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