IRS Proposed 2704 Regulations Have Been Withdrawn

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

Earlier this year we wrote about the looming regulations affecting valuation discounts under the IRS Proposed Section 2704 Regulations. The proposed regulations would have curbed valuation discounts, resulting in increased estate taxes on the deaths of owners of family businesses.

The Treasury, after extensive deliberation in furtherance of the policies stated in Executive Order 13789, decided to withdraw these regulations entirely for the following reasons:

  • In limited cases, Section 2704 disregards restrictions on the ability to liquidate entities and treats lapses of voting or liquidation rights as if they were transfers for gift and estate tax purposes
  • The proposed regulations would have narrowed longstanding exceptions and dramatically expanded the class of restrictions disregarded under Section 2704
  • The proposed regulations would have required an entity interest to be valued as if disregarded restrictions did not exist
  • Reservations about whether taxpayers, their advisors, the IRS, and the courts would be able to determine the value of an entity interest based on the fanciful assumption of a world where no legal authority exists
  • Uncertainty whether the valuation rules of the proposed regulations would have even succeeded in curtailing artificial valuation discounts
  • The proposed regulations would have affected valuation discounts even where discount factors, such as lack of control or lack of marketability, were not created artificially as a value-depressing device
  • The burden of compliance with the proposed regulations would have been excessive

This decision was a major victory for family-owned and operated businesses, as the regulations would have made it difficult and costly for a family to transfer their businesses to the next generation. Limiting valuation discounts would have had a particularly negative effect on these businesses.

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

If you would like to take advantage of the current discount rules, please contact Jeff Faust, CVA, Director of Valuation Services at or 408-377-8700 x232.