Pending Revenue Proposals Could Impact Estate Planning Strategies Reviewed by Momizat on . FLPs Remain a Viable Intra-Family Transfer Option, But Act Now The Internal Revenue Service has floated the idea of making regulatory changes to the implementat FLPs Remain a Viable Intra-Family Transfer Option, But Act Now The Internal Revenue Service has floated the idea of making regulatory changes to the implementat Rating: 0
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Pending Revenue Proposals Could Impact Estate Planning Strategies

FLPs Remain a Viable Intra-Family Transfer Option, But Act Now

The Internal Revenue Service has floated the idea of making regulatory changes to the implementation of section 2704, in this article the author gives us an update on the subject and underscores the need to facilitate intra-family transfers of businesses.


Section 2704 has been used by the Internal Revenue Service (Service) to challenge valuation discounts.  Under Section 2704, if entity interests are transferred to a family member and if the transferor (and members of the transferor’s family) control the entity before the transfer, applicable restrictions (factors which allow for the use of discounts for lack of control and lack of marketability) are disregarded in the determination of the value of the transferred interest.  The Service has had limited success with this challenge using Section 2704[1] and thus, there have been proposals to create additional categories of restrictions.

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These revenue proposals would apply to transfers to a family member if, after the transfer, the restriction would lapse or be removed by the transferor (or transferor’s family).  The anticipated revenue proposal amendments are intended to tighten the perceived tax avoidance of FLPs.

The revenue proposals are meant to expand Section 2704.  With this, certain applicable restrictions which typically justify discounts are to be ignored for the purpose of the valuation.  Applicable restrictions, 2704(b), are any obstruction that limits the ability of a partner/member to liquidate his or her interest in a closely held entity that is more restrictive than the State law.


Background: Applicable IRC Sections

IRC sections 2701, 2702, 2703, and 2704 were enacted to prevent the reduction of taxes through the use of freezes and other arrangements designed to reduce the value of the transferor’s taxable estate (or gifts) and discount the value of the taxable transfer to the beneficiaries of the transfer without reducing the economic benefit to the transferee.

The following is a summary of notes of fiscal year revenue proposals for 1999 through 2016, as outlined in the respective fiscal year’s Green Book:[2]

FY99—proposed discounts for active businesses only, not marketable securities.

FY00—no revenue proposals mentioned for disregarded restrictions.

FY01—no revenue proposals mentioned for disregarded restrictions.

FY02—no revenue proposals mentioned for disregarded restrictions.

FY04–09—no revenue proposals mentioned for disregarded restrictions.

FY10—proposals reappear with two new applicable restrictions.  The reason for the change is that the tax court decisions did not support sections 2701-2704, particularly 2704(b).  The proposal was that restrictions on liquidations were disregarded.  Applicable restrictions were made inapplicable by re-categorizing restrictions so they no longer fall within the definition of applicable restrictions.

FY11–12—no revenue proposals mentioned for disregarded restrictions.

FY13—proposals for the creation of additional categories of disregarded restrictions.  If after the transfer, the restriction would be lapsed or removed by the transferor and/or the transferor’s family.

FY14–15— no revenue proposals mentioned for disregarded restrictions.

The fact that no revenue proposals for disregarded restrictions were issued after 2013 made it appear that final regulations were imminent.  Several years usually lapse from the time a proposed regulation is issued until it is finalized.  The steps from revenue proposal to finalization are generally as follows: 1) the regulation proposals are issued in proposed form (the Green Book); 2) comments are invited for a period of time; 3) the final regulations are issued.  Rarely are proposed regulations finalized retroactively to when they are initially proposed.

Current Status of Revenue Proposals and Possible Responses

A Treasury official suggested that the 2704 regulation proposals might be issued in the summer or fall of 2015, but that still has not happened.  Although no one knows what the proposed regulations will look like, they will presumably add to the list of discount generating restrictions on family ownership interests that are to be disregarded.

The FY 2013 Green Book which was the last to contain revenue proposals, provides clues to what the new regulations may look like:

  • The addition of disregarded limitations beyond the scope of the liquidation restrictions addressed in Section 2704.
  • The attribution of the voting power of certain minority interests held by charities or non-family members to the family for purposes of assessing control.
  • The addition of safe harbors to allow taxpayers to prepare documents for family controlled entities to avoid the application of the section 2704 regulation.

It is possible operating companies may receive an exemption and that discounts would be allowed.  The new regulations might distinguish between holding and operating companies and apply more restrictions on the former.  For a FLP that is a holding company, discounts would be denied.  IRC section 6166 speaks to the distinction between active companies and ones that are just holding entities.[3]

They might also limit the availability of the DLOC/DLOM for transfers involving family controlled entities.[4]

The ramifications could be significant.

Final Thoughts-Steps to Consider

Rather than waiting for the unknown, you may want to discuss with family business clients (or their representatives) discounting and non-discounting issues related to the management and the succession of their business.  It may be prudent to complete any transfers in the near future to avoid a possible retroactive application of more restrictive Treasury regulations.  If discounts are an important factor in achieving estate/financial plans, it may be that prompt action will be required.

Another action to consider would be to make sure that legitimate FLPs/LLCs are established on your client’s behalf.  Most of the taxpayers who lost to the IRS had structured or operated their FLPs carelessly.[5]  The IRS is concerned about taxpayers using FLPs as nothing more than a tax avoidance device.  In order to survive an IRS challenge, you need to show you had a substantial non-tax business purpose in forming the partnership and that you are operating it as a legitimate business.

There are plenty of acceptable reasons for setting up an FLP:

  • To facilitate the transfer of business to the younger generation without giving up management control.
  • To simplify your life, by consolidating ownership and management of real estate and other investments.
  • As a means to keep the family business in the family and out of the hands of creditors, by having the business owned by the FLP rather than the individual family members.


In conclusion, valuation professionals must remain vigilant in the face of uncertainty regarding the final revenue amendments to IRC section 2704.  The amendments could have both positive and negative impacts on your client’s estate plans.  Only time will tell.

[1] Business Valuation and Taxes, David Laro and Shannon Pratt.

[2] U.S. Department of Treasury, Resource Center, Tax Ruling, Administration’s Fiscal Year Revenue Proposals.

[3] Johnathan G. Blattmachr and Matthew Blattmachr, Anticipating New Regulations under IRC Section 2704, Trusts & Estates, Wealth, June, 4, 2015.

[4] Chad Makuch, IRS Plans to Further Restrict Family Business Valuation Discounts, WealthDirector, Private wealth Developments and Observations, August 21, 2015.

[5] Family Limited Partnership (FLP), the Dos and Don’ts of FLP, Feeley & Driscoll, P.C., 200 Portland Street, Boston, MA.

Tony L. Ray, CVA is Managing Member of New Horizon Financial, LLC, a West Des Moines, Iowa Management Consulting firm. Mr. Ray focuses on valuation and litigation support services.
Mr. Ray can be reached at (515) 657-3466 or by e-mail to

The National Association of Certified Valuators and Analysts (NACVA) supports the users of business and intangible asset valuation services and financial forensic services, including damages determinations of all kinds and fraud detection and prevention, by training and certifying financial professionals in these disciplines.

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