IRS Withdraws Proposed Code §2704 Regulations on Lapsing Rights and Restrictions

The IRS has withdrawn the controversial proposed regulations under Code §2704 that would have significantly affected the use of discounts in US estate planning.

Code §2704 provides that certain “applicable restrictions” on ownership interests in family entities – that is, entities where the transferor and family members control the entity – should be disregarded for valuation purposes.  The proposed regulations created new rules relating to a lapse of a liquidation right.  They also created a class of restrictions known as “Disregarded Restrictions” that included many common types of restrictions in business entities and would be ignored for gift and estate tax valuation purposes.  See our prior blog post on this topic.

The effect of the proposed regulations appeared to be that they would eliminate or greatly restrict minority interest and lack of marketability discounts that are commonly applied in gift and estate tax valuations (resulting in higher valuations).  The regulations were very controversial from the moment they were issued.  Among other things, commentators said the regulations were unclear and unrealistic.

Treasury and the IRS have stated that they now believe that the approach of the proposed regulations to valuation discounts is unworkable.  The IRS issued a notice (Notice 2017-38) that it was reviewing the proposed regulations as unduly complex or overly burdensome, and has now withdrawn the proposed regulations.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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