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IRS Estate Tax Undervaluation Rules Opposed

by Mike Godfrey, Tax-News.com, Washington

27 September 2016


A September 22 letter sent to US Treasury Secretary Jack Lew from the Family Business Coalition (FBC), and signed by more than 100 organizations and business groups in the United States, called for the withdrawal of the proposed changes to Section 2704 of the Internal Revenue Code on estate and gift tax valuation discounts.

The FBC, which is campaigning for a repeal of the estate tax and revisited the reasons for such a measure in its letter, noted that the proposed rules would "significantly change family businesses' succession plans and make it harder for family owned businesses to transition to the next generation."

"The changes proposed to Section 2704 would remove legitimate valuation discounts for estate, gift, and generation skipping taxes which businesses have used for the past two decades in order to prevent the Internal Revenue Service (IRS) from overvaluing their businesses at death," it wrote. "The proposed regulations would force even more family businesses and farms to grapple with the complicated and costly estate tax."

On its website, the FBC confirmed that under current rules the fair market value of an interest in a family-held business where no current market is available is based on the "willing-buyer/willing-seller" test. However, it added that, in recent court cases challenging such valuation discounts for gift and estate taxes, the IRS has used significantly higher valuations than accountancy firms hired by the family-held businesses, and this has often resulted in the IRS seeking larger tax collections.

It explained that "the proposed rule would disregard any restrictions on liquidation or redemption an heir uses to claim a valuation discount, if that restriction either lapses after the transfer or the heir or heir's family has the ability to remove the restriction after the transfer. An heir, under current law, could claim a lack of marketability discount if there is a restriction on sale of the interest, [but] the proposed rule could eliminate that discount."

In fact, Warren Davidson (R – Ohio) has introduced the Protect Family Farms and Businesses Act to prevent the new Section 2704 rules, or any future similar regulations, from having any "force or effect." He stated that the proposed rules are "simply bad policy which will remove billions of dollars invested into our economy."

He pointed out that "family businesses are the bedrock of our economy," but, while they "generate over 50 percent of the [US economy] and employ 62 percent of the workforce, only 30 percent survive to the second generation, many of them citing financial difficulties in transition."

TAGS: inheritance tax | compliance | tax | small business | business | tax compliance | interest | law | gift tax | United States | regulation

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