IRC Section 2704 – Summary of Proposed Regulations

IRC Section 2704 – Summary of Proposed Regulations

On August 2, 2016 the U.S. Treasury released proposed regulations to section 2704 of the Internal Revenue Code (IRC). The proposed regulations seek to limit the availability of valuation discounts used for estate and gift tax purposes. These regulations target the practice of putting valuable property into entities like Family Limited Partnerships (FLPs) or other legal structures for no other purpose than the reduction of estate and gift taxes.

A summary of proposed regulations includes:

  • Addresses what constitutes control of a limited liability company (LLC) or similar entity.
  • Addresses deathbed transfers that result in the lapse of a liquidation right.
  • Clarifies the treatment of a transfer that results in the creation of an assignee interest.
  • Refines the definition of “applicable restriction” by eliminating the comparison to the liquidation limitations of state law.
  • Addresses restrictions on liquidation of an individual interest in an entity and the effect of insubstantial interests held by persons who are not members of the family.

Most critical, in simple terms, is that the discounts for lack of control and lack of marketability (often referred to as “minority interest discount” and “marketability discount”), may not be permitted. These discounts, which regularly stand up in U.S. Tax Court can often reduce the “value” of an entity significantly, which in turn reduces gift and estate taxation.

Although there is support in Congress to defeat the proposed regulations, CPAs should start considering how the proposed regulations could affect their clients. A public hearing to review the proposed regulations occurred December 1, 2016. A record 37 witnesses testified and almost 10,000 comments have been submitted to-date. The Administrative Procedure Act (APA) requires the IRS to consider these comments.

Proposed regulations can be found here (as of the date of this post):

It is unclear if or when the proposed regulations may be finalized; however, early and proper understanding of the proposed regulation and the impact it may have on family businesses is prudent.  Any of the SteelGate associates would be happy to discuss this topic in further detail.


SteelGate Advisors is a multidiscipline investment bank specializing in buy- and sell-side representation, corporate finance, business valuation and tax planning/structuring for middle market companies. Our expertise, objectivity and individualized approach have helped stakeholders develop the important – and often challenging – business strategies that help them achieve their professional and personal financial goals.

Thomas Krahe, CPA/ABV/CFF; Managing Director; 724.719.3220;

Bill Collier, CPA/MST; Managing Director;

Christopher Miller, CPA/ABV/CFF; Director of Valuation Services;

Some associates of SteelGate Advisors are registered representatives of, and securities transactions are conducted through, Stillpoint Capital LLC, Member FINRA and SIPC, Tampa, FL.  Stillpoint Capital is not affiliated with SteelGate Advisors.

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