Treasury Department Drops Proposed Changes To Business Inheritance Regulations

The U.S. Treasury Department is withdrawing proposed regulations that would have made it more difficult and expensive for interests in a family-owned business to be gifted to the younger generation. The Small Business Legislative Council (SLBC), of which PPAI is a member and PPAI President and CEO Paul Bellantone, CAE, serves as a board director, has actively opposed the regulations since their introduction.

In comments to the Treasury submitted in August, the SLBC said, in part, “Family-owned businesses play an integral role in the small business engine that fuels growth and provides jobs in this country. Family-owned businesses can be found operating in every major sector of the American economy while the majority of small business farms and ranches are family-owned. … It is important for our economy, and yet very difficult, for these family-owned businesses to successfully transition the business to the next generation. Many members of the associations that comprise the SBLC are family-owned businesses, and many have been in business for more than one generation. It is essential that new regulations do not cause unnecessary harm to this vital business sector of our economy.

“The proposed regulations under Section 2704 apply only to family-owned businesses. It appears that their intent is to eliminate minority discounts and largely eliminate marketability discounts. … It is fundamentally unfair to single out active family-owned small businesses for worse treatment under the tax laws than non-family-owned businesses. The SBLC believes that the proposed regulations are not needed and are harmful to the many family-owned businesses in the country and thus, should be withdrawn and not replaced.”

In the announcement that the Treasury would pull the proposed regulations, Treasury Secretary Steven Mnuchin said, “Section 2704 addresses the valuation, for wealth transfer tax purposes, of interests in family controlled entities. In limited cases, Section 2704 disregards restrictions on the ability to liquidate family-controlled entities when determining the fair market value of an interest for estate, gift, and generation-skipping transfer tax purposes.

“Also, in limited cases, Section 2704 treats lapses of voting or liquidation rights as if they were transfers for gift and estate tax purposes,” he adds. “The proposed regulations, through a web of dense rules and definitions, would have narrowed longstanding exceptions and dramatically expanded the class of restrictions that are disregarded under Section 2704. In addition, the proposed regulations would have required an entity interest to be valued as if disregarded restrictions did not exist, either in the entity’s governing documents or under state law. No exceptions would have been allowed for interests in active or operating businesses.”

More on the Treasury’s decision to drop the proposed regulations can be found here.

filed under October 2017
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