21 / September 2016

Appraisers see spike in engagements due to proposed Section 2704 regs

Posted in: BVWire News Written by: Andy Dzamba
Categories: discount for lack of marketability (DLOM) discount for minority interest estate and gift taxation legislation valuation of minority interests
Tags: discount for lack of control (DLOC) discount for lack of marketability (DLOM) discount for minority interest estate and gift tax family limited partnership (FLP) IRC Section 2704 IRS regulations

At the ASA Advanced Business Valuation Conference last week in Boca Raton, Fla., valuation practitioners tell BVWire they are seeing an increase in valuation engagements triggered by the proposed Section 2704 regulations (prior coverage here). And they expect this to gain steam as the regs continue to sink in with attorneys, wealth planners, and clients. This is by no means a scientific poll, merely the result of conversations with practitioners we talk with continuously and see at conferences.

Under the wire: The proposed regs seek to curtail valuation discounts on transfers of interests in family entities. Letters we’ve seen from wealth planners, law firms, and other advisors are urging clients to plan before year-end when these new rules could become effective. This harkens back to 2012, when the reduction in the estate tax exemption triggered a year-end rush of estate plan activity before the change took effect. Of course, it could take months or years to finalize the regs—and they may never see the light of day in any shape or form. But advisors are proceeding as though the regs will be finalized as proposed.

Down but not out? “I do not think they have succeeded in eliminating valuation discounts in fair market value determinations for family partnerships or other family entities,” writes Chris Mercer (Mercer Capital). In a new white paper, he goes through an example using the proposed changes in the regs and concludes that some discounts would still be appropriate. The paper states: “The problem with the Proposed Changes is that they fail to realize that even with no restrictions on transfer, and if all applicable restrictions are ignored and we consider all of the named disregarded restrictions, appraisers are left with illiquid minority interests in family partnerships that have investment characteristics that still require analysis to determine fair market value.” A link to the white paper is in the September 14 issue of BVWire.

In any event, it’s important for the profession to submit formal comments by the November 2 due date. Details on how to submit comments are in the proposed regs, which you can download here. A public hearing will be held at the IRS in Washington, D.C., on December 1.

Learn more about the proposed regs during a September 29 webinar with Mercer and Curtis Kimball  (Willamette Management Associates): The IRS’ Proposed Section 2704 Regulations: The Impact on and the Future of Estate and Gift Valuation.

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