Recent reports suggest that the IRS may be preparing to issue new regulations that will restrict valuation discounts on transfers of interests in limited partnerships and limited liability companies. An owner of an interest in a limited partnership or LLC who is considering transferring the interest may wish to act before the new regulations are announced.

The reports concern Section 2704 of the Internal Revenue Code. As enacted, Section 2704 was intended to target valuation discounts applied to transfers of limited partnership and LLC interests.

Specifically, Section 2704 provides that certain restrictions set forth in a partnership or operating agreement that might otherwise reduce the value of a transferred interest are to be disregarded for valuation purposes. Section 2704 further provides that the IRS may issue regulations that cause additional restrictions to be disregarded. A regulation is the IRS's interpretation of how it should enforce tax laws passed by Congress. A primary focus of the regulations under Section 2704 is directed at disregarding intrafamily transfers of family-controlled entities when such transfers are undertaken for estate planning purposes.

There are indications that the IRS is preparing to issue draft regulations expanding the class of disregarded restrictions later this year. The specifics of any disregarded restrictions and the date that the draft regulations might be issued are not certain. Also uncertain is the effective date of any new regulations under Section 2704. Typically regulations are effective from the date they become final, but it is possible for regulations to be treated as effective from the date the initial draft regulations are issued.

To avoid the uncertainty about the timing and nature of any new regulations under Section 2704, it may be sensible to make a planned transfer of a limited partnership or LLC interest within the next few months.