Appraiser News
ASA offers assistance for opposition on IRS Section 2704 regulations
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Appraiser News
Wednesday, October 26, 2016
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The Treasury Department released proposed regulations under Section 2704 of the Internal Revenue Code. These proposed regulations, released through the American Society of Appraisers (ASA), would make significant changes to the manner in which minority interests in family-controlled entities are valued for estate, gift and generation-skipping transfer tax purposes. If allowed to go into effect as written, these rules would impose a de facto 25-50 percent tax increase on each transfer, and severely hamper many of these businesses.
By way of individuals asking for resources to help communicate opposition to the proposed IRS Section 2704 regulations, particularly to their elected officials in Congress, the ASA has developed two documents to help convey this message in a clear and concise manner, according to the release. One document is a letter template that raises the most critical points against the proposed regulations in a way that is readily accessible to members of Congress and their staffs. To access the letter template, click here.
ASA has also produced a series of talking points to be used when speaking with members of Congress or their staffs; these talking points help to provide a clear message from the perspective of the valuation community. They are:
- The proposed regulations unfairly increase the values of fractional interests in family controlled businesses and holding companies for estate and gift tax purposes. The result is a “stealth” tax increase of 25-50 percent (or more) in taxes. The root cause of the tax increase is the IRS’ institution of the discredited notion of “family attribution.”
- IRS replaces fair market value with a new and unknown definition of value – counter its own standard. Revenue Rulings 59-60 has long been clear on the issue of what standard of value is to be applied: The price at which a hypothetical willing buyer and seller at arm’s length would agree to buy/sell an interest for. Based upon the realities of the marketplace, the fair market value of a minority interest is not worth as much as that interest’s pro-rata shares of the whole entity. This is because such interests do not enjoy control or marketability. These required valuation adjustments are referred to as “discounts.” The IRS now proposes the use of a new valuation theory for taxing intra-family estate and gift transfers, with the seller and buyer allowed to be known parties. Because of the lack of clarity in the proposed regulations, valuation discounts will either be reduced substantially or disregarded altogether. This renders useless all accumulated prior knowledge built up by decades of Tax Court precedent, appraisal education and experience and academic research.
- The IRS’s return of “family attribution” has been rejected by the Supreme Court and the IRS itself. In Estate of Bright, the Supreme Court dismissed the IRS’s position that families will always work in concert and always agree on business and financial matters. Subsequent Revenue Ruling 93-12 makes clear that discounts for lack of control cannot be denied simply because the interests are passed from one family member to another.
- The rule treats intra-family transfers differently than those involving non-family third parties. The proposed rule applies only to transfers from one family member to another; meanwhile, non-family third parties can still claim the same discounts on similar estate or gift transfers. IRS does not provide any reasoning as to why this disparate treatment exists.
- The proposal would override limitations placed on interests in the business – including those imposed by state law. The IRS proposes – by regulatory fiat – to overturn both existing private party contractual agreements and various state laws by ignoring the market ability restrictions placed on interests when valuing them for taxation purposes.
- The impacts to family-owned businesses will be significant. At a minimum, these businesses will delay capital investments or hiring as the available cash will go toward paying an increased tax bill. Worse, these businesses may take on more debt simply to pay the IRS. Finally, business owners may decide to sell or liquidate the business rather than continue on as a family owned going concern. The last outcome is highly destructive, especially for small businesses.
- Support the Protect Family Farms and Business Act! The House bill proposed by Rep. Warren Davidson (R-Ohio) is H.R. 6100. The Senate bill proposed by Sen. Marco Rubio (R-Florida) is S-3436.
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