Update on IRS Proposed 2704 Regs

By Jeff Faust, Director of Valuation Services
ASL Business Valuation Services

Late last year, we wrote a few times about the looming regulations affecting valuation discounts under the IRS Proposed Section 2704 Regulations.

The comment period ended on November 1st and the public hearing in Washington D.C. was held on December 1st to a capacity crowd. Here are some quick highlights from the hearing that were published by BV Wire:

  • A common issue speakers brought up was the so-called “implied put right” that exists in the proposed regs. This is the ability of each member of the entity to force the company to buy back his or her interest for cash equal to a minimum value within six months of exercising the right. No such right exists in the real world, speakers told the panel, and it should be removed from the regs. “It is not our intention for the regs to contain a put right,” said Charlotte Chyr, IRS Special Counsel. This appeared to put this matter to rest and short-circuited some comments by subsequent speakers.
  • Another recurring theme was the “three-year rule,” which would nullify discounts taken for certain transfers that occurred within three years of the transferor’s death. Speakers were concerned that the rule would apply to transfers that occurred prior to the regs being finalized. As written, the regs are unclear on this point.  The three-year lookback rule “will not be retroactive,” Chyr told the audience. It would only affect transfers made after the date the final regs are published.

Will the Regs move forward?  What’s next?  The IRS stated at the end of the public hearing that they will “seriously consider” the comments made at the hearing—and the nearly 10,000 comments that people submitted on the IRS website. While most participants thought that it would be unlikely the IRS would finalize the proposed regs as written because of remarks officials made at the hearing, some thought that the regs would be tweaked and rushed through before the Trump administration moved in. This certainly contradicted what most thought, but in the end, the IRS did not issue final regs and it appears as though this topic has been dropped, at least for the next few years.

If a gifting strategy is beneficial for your estate or your client’s estate, we encourage you to act now. It’s always better to plan ahead and be proactive rather than reactive.

If you would like to discuss the proposed regulations or take advantage of the current discount rules, please contact Jeff Faust, CVA, Director of Valuation Services at jfaust@aslcpa.com / 408-377-8700 x232.