The government lost estate and gift tax cases that attracted headlines.
The government lost estate and gift tax cases that attracted headlines. In response, the Department of Treasury (“Treasury”) proposed new regulations in early 2016 that would amend definitions in the 1992 regulations that were problematic in the court cases. In addition, Treasury it added requirements designed to defeat valuation discounts in the estate and gift tax areas.
The 1992 regulation gave IRS the right to disregard certain provisions in shareholder partnership and operating agreements for purposes of estate and gift tax valuation. The 1992 regulations defined an applicable restriction, however, it applied only to a transferor and members of his or her family. An applicable restriction effectively limits the ability to liquidate the entity (in whole or in part) and is more restrictive than a limitation imposed by state law. The law in many states limits the ability of a partner in a partnership or a member in a limited liability company to liquidate the entity. The result was that one could rely upon state law to avoid any problem. A second aspect of the regulation was the definition of a lapse. A liquidation right would lapse when it was eliminated or restricted, so the mere transfer of an interest that held such a right was not a lapse. These rules provided a clear framework for planning and were an obstacle for the government.
The Proposed Regulations
The proposed regulations created a new class of restrictions called disregarded restrictions which are focused on impacting valuation. The first disregarded restrictions is any provision that limits or permits liquidation can be disregarded. Second, any amount received on liquidation or redemption is disregarded if it is less than minimum value. Minimum value is the pro rata share of the enterprise and this prevents discounts. Third, payment is deferred beyond six months after notice of liquidation is given may also be disregarded. Fourth, the agreement permits payment to be in any manner other than cash or property. Debt obligations of the entity are not property for this purpose unless the entity is engaged in an active trade or business.
The proposed regulations address state law restrictions. Only a state or federal law restriction that cannot be changed by the governing documents will not be an applicable restriction. In most states, the statute is the default rule so it is expected that any restrictions would have to be imposed by the written agreement. This change would impact discounts for lack of control and was intended as such.
The 1992 rules only applied to families while the proposed rules would expand coverage beyond the prior definition of family. An interest owned by a non-family member would be disregarded unless: (i) it was held for three years before the transfer under examination; (ii) the interest constituted 10% or more of the equity; (iii) nonfamily members must own 20% or more of the equity; and (iv) the nonfamily member has a put right on the terms specified in the proposed rules.
Additional Changes
There are additional changes, such as an assignee’s interest would be treated as a lapse in order to reduce or eliminate discounts which have haunted the IRS in the past. Finally, there are inconsistencies in the application of the effective date or dates. For example, if the new regulations are effective upon adoption or 30 days thereafter, then how can the rules require that an interest of a non-family member be held for three years? In effect, a blackout period is created by regulation.
What is clear is that Treasury and the IRS want to end discounts. The public hearing on the regulations attracted many negative comments from small business owners and professional organizations. This outcry and a change in the administration may put these regulations on hold. Succession planning faces a major hurdle if these rules are ever adopted in the present form.
Do you have any questions? Would you like to discuss the matter further? If so, please contact me, James McDonough, at 201-806-3364.
Corporate Transactions: Best Practices for Successful Deals
Corporate transactions can have significant implications for a corporation and its stakeholders. For deals to be successful, companies must act strategically to maximize value and minimize risk. It is also important to fully understand the legal and financial ramifications of corporate transactions, both in the near and long term. Understanding Corporate Transactions The term “corporate […]
How to Conduct a Fair and Legal Employee Termination in 2025
Ongoing economic uncertainty is forcing many companies to make tough decisions, which includes lowering staff levels. The legal landscape on both the state and federal level also continues to evolve, especially with significant changes to the priorities of the Equal Employment Opportunity Commission (“EEOC”) under the Trump Administration. Terminating an employee is one of the […]
Admin Dissolution for Annual Report: What You Need to Know
While filing annual reports may seem like a nuisance, failing to do so can have significant ramifications. These include fines, reputational harm, and interruption of your business operations. In basic terms, “admin dissolution for annual report” means that a company is dissolved by the government. This happens because it failed to submit its annual report […]
Antitrust laws are designed to ensure that businesses compete fairly. There are three federal antitrust laws that businesses must navigate. These include the Sherman Act, the Federal Trade Commission Act, and the Clayton Act. States also have their own antitrust regimes. These may vary from federal regulations. Understanding antitrust litigation helps businesses navigate these complex […]
Dissolving Your Business: Essential Legal Steps to Protect Your Interests
If you’re considering closing your business, it’s crucial to understand that simply shutting your doors does not end your legal obligations. Unless you formally dissolve your business, it continues to exist in the eyes of the law—leaving you exposed to ongoing liabilities such as taxes, compliance violations, and potential lawsuits. Dissolving a business can seem […]
The Role of Corporate Restructuring in Mergers & Acquisitions
Contrary to what many people think, corporate restructuring isn’t all doom and gloom. Revamping a company’s organizational structure, corporate hierarchy, or operations procedures can help keep your business competitive. This is particularly true during challenging times. Corporate restructuring plays a critical role in modern business strategy. It helps companies adapt quickly to market changes. Following […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
