In September, we posted a blog discussing the Treasury Department’s issuance of proposed regulations under Section 2704 of the Internal Revenue Code (sometimes referred to as the 2704 proposed regulations) that could significantly impact the valuation of interests in family-owned businesses for estate and gift tax purposes. When first issued, there was significant discussion among business and estate planning advisors, valuation firms and business owners regarding the extent to which valuation discounts (primarily, lack of control and lack of marketability discounts) would be reduced (or even eliminated) when valuing gifts or other transfers of family-owned businesses. In the following months, a consensus emerged that the 2704 proposed regulations would not entirely eliminate valuation discounts, but many questions remained regarding their impact on valuations of family-owned businesses.

On December 1, 2016, the IRS held a much-anticipated hearing on the 2704 proposed regulations. At the hearing, numerous valuation experts, business advisors and taxpayer advocacy groups commented on potential problems and other valuation issues that would result if the 2704 proposed regulations were finalized in its current form. Also at the hearing, the Treasury Department representative confirmed they did not intend to include a “deemed put right” in the 2704 proposed regulations that would eliminate the use of all discounts when valuing transfers of business interests, and that the Treasury Department planned to clarify this when the regulations were finalized. Therefore, while it is likely that the proposed 2704 regulations (if finalized) will still impact how family business interests are valued for gift and estate tax purposes, the impact on such valuations should not be as significant as originally feared.

It is difficult to predict what changes will be included in the final regulations, or when the 2704 proposed regulations will be finalized. The IRS must consider the comments made at the hearing and a very large number of written comments that it has received in response to the regulations. Most advisors believe the earliest the regulations could be finalized is late in the first quarter of 2017. Further, the timing of when the 2704 proposed regulations will be finalized (or whether they are finalized at all) may be impacted by the transition from the Obama administration to the new Trump administration in January 2017, including the possibility of the repeal of the estate tax under a Trump administration.

We will continue to post updates regarding the progress of the 2704 proposed regulations and any activity by the new administration regarding estate and gift tax issues of importance to family business owners. Please let us know if you would like to discuss these developments and their impact on transfers of ownership interests in your family business.