Friday, September 16, 2016

Proposed Treasury Regulations Would Significantly Limit Valuation Discounts for Transfers of Interests in Family Controlled Entities

In early August, the IRS released proposed regulations regarding §2704 of the Internal Revenue Code.  Section 2704 was enacted in 1990 in an attempt by Congress to limit valuation discounts on intra-family transfers of family controlled corporations and partnerships for gift and estate tax purposes. 

Section 2704(a) treats the lapse of voting or liquidation rights in family controlled corporations or partnerships as a transfer by gift or as a transfer included in the transferor’s gross estate.  Section 2704(b) generally provides that “applicable restrictions” are disregarded in valuing intra-family transferred interests.  Applicable restrictions are those that (i) limit the ability of the entity to liquidate and (ii) lapse or can be removed by members of the family. 
However, based on a combination of favorable tax court rulings and changes in state law since 1990, estate planners have sought significant tax savings for their clients ranging from 30-50 percent of the value of the pre-transfer interest despite the restrictions imposed by §2704. 
Summary and Impact of Proposed Regulations
The proposed regulations would impose a three year look-back rule; if the transferor dies within three years of making a transfer, the value of the lapsed voting or liquidation right would be included in the transferor’s gross estate.  The three year look-back rule would significantly eliminate “deathbed transfers” designed to achieve valuation discounts. 
In addition to the three year look-back rule, to close what the IRS perceived as loopholes in the current §2704 regulations, the proposed regulations add the concept of “disregarded restrictions” and have also added LLCs to the types of entities covered by the regulations.  Interestingly, rather than defining specific types of restrictions, disregarded restrictions are defined by their effect.  Subject to certain limited exceptions, the proposed regulations would disregard most restrictions unless the interest holder has the ability to put its interest to the entity on six months’ notice for at least its pro rata share of the net value of the entity in cash or property. 
In sum, if the proposed regulations are enacted in their current form, they would significantly restrict transferors’ abilities to achieve lack of control and lack of marketability discounts in connection with transfers of interests in family controlled entities. 
Planning Considerations
There is significant uncertainty with respect to both the validity and interpretation of the proposed regulations.  Despite the uncertainty, clients contemplating transferring non-controlling interests in family controlled entities should consider completing such transfers prior to the date the regulations become effective (generally, the date when the regulations become final).
If the regulations are finalized, individuals may continue to achieve tax savings by transferring appreciating assets out of their estate. However, they will no longer be able to leverage the tax savings by taking many traditional discounts on the value of the transferred asset.
Effective Dates
The regulations generally will become effective on the date they become final, which could be before the current presidential administration ends. 

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Monday, November 9, 2015

New Inflation-Adjusted Thresholds for Estates and Gifts Announced by IRS for 2016

The Internal Revenue Service recently released Revenue Procedure 2015-53, which announced certain inflation-adjusted figures for 2016. A number of these items relate to estate, gift, and generation-skipping transfer (“GST”) tax amounts. Some of the more important items are highlighted below.

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Friday, August 7, 2015

New Law Revises Due Dates for Corporation and Partnership Returns

The recently enacted Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the “Act”) made significant changes in the deadlines for filing many corporate and partnership tax returns. These changes will be effective for returns filed for taxable years beginning after December 31, 2015.

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FBAR Deadline Changed to April 15

As part of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the “Act”) signed into law by President Obama on July 31, 2015, the deadline for filing Foreign Bank Account Reports (“FBARs”) has been changed from June 30 to April 15, thereby coinciding with the due date for an individual to file her or his federal income tax return.

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Tuesday, March 3, 2015

Recent Proposals on Taxing Offshore Earnings

Several recent proposals have been made for a one-time preferential corporate tax rate to encourage or, in some instances, force U.S. companies to pay tax on previously untaxed foreign income. These proposals may indicate that a legislative compromise among the proposals could be reached this year.

Under current law, U.S. multinational companies are subject to worldwide taxation but generally may receive credits for foreign taxes paid and may defer U.S. tax on active earnings of their foreign subsidiaries until these profits are paid as dividends to the U.S.

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Wednesday, June 25, 2014

IRS Releases New Rules on Taxpayer Voluntary Compliance Programs

On June 18, 2014, the IRS announced two major changes to its Offshore Voluntary Compliance Programs, which offer taxpayers with undisclosed income from offshore accounts an opportunity to correct their tax reporting. A Streamlined Procedure is now offered to taxpayers residing inside and outside of the U.S. if their failure to report was non-willful. The Offshore Voluntary Disclosure penalty on accounts in foreign banks and financial institutions under criminal investigation is now almost double the usual penalty.

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Tuesday, April 8, 2014

U.S. Shareholders of PFICs Must File Annual Report for 2013 and Future Years

On December 31, 2013, Temporary Treasury Regulations under Section 1298(f) of the Code were published. Under these rules, for the calendar years 2013 and thereafter, direct and indirect U.S. shareholders who are the first U.S. persons in a chain of ownership with respect to a passive foreign investment company (“PFIC”) must annually file a Form 8621 for each PFIC owned. Ownership of PFIC stock through another U.S. person may also trigger reporting requirements in circumstances where the U.S. shareholder is required to include an amount in income with respect to the PFIC. Certain exceptions may apply for U.S. shareholders who have in effect qualified electing fund (“QEF”) or mark-to-market (“MTM”) elections, or whose holdings fall below certain value thresholds.

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Thursday, October 31, 2013

New York Offers Tax Exemptions to New Businesses in Designated Tax-Free Areas

In June 2013, New York State enacted the START-UP NY program to encourage new businesses to move to New York, especially upstate New York, by offering a full tax exemption from New York state taxes for businesses locating in tax-free areas on or near certain institutions of higher education. The START-UP NY program may provide significant benefits and should be considered by out-of-state businesses operating in high tax states or foreign businesses seeking to establish or expand their U.S. presence.

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Monday, July 29, 2013

FBARs Must Be Filed Electronically

The Treasury Department will no longer accept FBARs in paper form.  Beginning August 1, 2013, all FBARs must be filed electronically.  U.S. persons with a financial interest in, or signature authority over, foreign financial accounts with an aggregate value exceeding $10,000 during any year are required to file a an FBAR – “Report of Foreign Bank and Financial Account” on Form TD F 90-22.1 -- by June 30 of the following year.  FBARs must now be filed online through the BSA E-Filing System of the Financial Crimes Enforcement Network (“FinCEN”).  Noncompliance may result in civil penalties.  


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Monday, July 22, 2013

Amendments to Immigration Reform Bill to Prevent “Taxpatriation”

Certain members of Congress are upset that more than 670 people expatriated from the United States in the first quarter of 2013, the largest quarterly number since the IRS started publishing the names of expatriates in 1998. While the press has actively reported on the immigration reform bill before Congress (the “Immigration Bill”), little notice has been taken of the two significant amendments proposed by Senators Reed (D-RI), Schumer (D-NY), and Casey (D-PA) on June 12, 2013,1 which would “punish” both past and future expatriates. While the Immigration Bill passed the Senate on June 27, 2013, without the two expatriation amendments, it is impossible to predict when and where these amendments may reappear.

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