The Treasury Department has come out with proposed regulations related to certain restrictions on the transfer of right of liquidations. Officially these are:
DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 25 [REG-163113-02] RIN 1545-BB71 Estate, Gift, and Generation-skipping Transfer Taxes; Restrictions on Liquidation of an Interest AGENCY:
These proposed regulations are exactly that. “Proposed”. That is they are open for public comment as indicated in the document. I suspect in the next 90 days from August 4, 2016 that appraisal organizations, CPA societies, estate tax organizations and others will be offering public comments.
In the summary it states:
The legislative history of section 2704 states that the provision is intended, in part, to prevent results similar to that in Estate of Harrison v. Commissioner, T.C. Memo. 1987-8. Informal S. Rep. on S. 3209, 136 Cong. Rec. S15629-4 (October 18, 1990); H.R. Conf. Rep. No. 101-964, 2374, 2842 (October 27, 1990).
I suggest you read the Estate of Harrison case and this well written commentary on the case by Leagle Inc.
Regarding the transfer of the right of liquidation
“The Treasury Department and the IRS, however, believe that this exception should not apply when the inter vivos transfer that results in the loss of the power to liquidate occurs on the decedent’s deathbed.” See Harrison, supra. The enactment of section 2704 was intended to prevent this result. See Informal S. Rep. on S. 3209, supra; H.R. Conf. Rep. No. 101-964, supra. See also section 2704(a)(3) (conferring on the Secretary broad regulatory authority to apply section 2704(a) to the lapse of rights similar to voting and liquidation rights). The Treasury Department and the IRS have - 5 - concluded that the regulatory exception created in §25.2704-1(c)(1) should apply only to transfers occurring more than three years before death, where the loss of control over liquidation is likely to have a more substantive effect. A bright-line test will avoid the fact-intensive inquiry underlying a determination of a donor’s subjective motive which is administratively burdensome for both taxpayers and the IRS. Cf. section 2035(a) (replacing the contemplation of death presumption of prior law with a bright-line, three year test). Accordingly, the proposed regulations treat transfers occurring within three years of death that result in the lapse of a liquidation right as transfers occurring at death for purposes of section 2704(a).”
In terms of the Explanation of the Provisions the Treasury states:
“The proposed regulations would amend §25.2701-2 to address what constitutes control of an LLC or other entity or arrangement that is not a corporation, partnership, or limited partnership. The proposed regulations would amend §25.2704-1 to address deathbed transfers that result in the lapse of a liquidation right and to clarify the treatment of a transfer that results in the creation of an assignee interest. The proposed regulations would amend §25.2704-2 to refine the definition of the term “applicable restriction” by eliminating the comparison to the liquidation limitations of state law. Further, the proposed regulations would add a new section, §25.2704-3, to address restrictions on the liquidation of an individual interest in an entity and the effect of insubstantial interests held by persons who are not members of the family.”
There should be some interesting responses to this proposal by the Treasury Department in the next 90 days.
Mike is a manager with over 25 years’ experience at all levels of management. He also worked at the IRS for 28 years. Mike provides services related to negotiation, mediation, and value added services (business valuation reviews, research credit advice, transfer pricing assistance, strategic planning and leadership development) to help clients and boards of directors on a wide variety of issues. When not serving clients as a consultant or blogging, Mike is an avid writer, speaker and educator. When not working Mike enjoys family, church, volunteering, and daily yoga, meditation and exercise.
About the author
Mike Gregory is a professional speaker, an author, and a mediator. You may contact Mike directly at firstname.lastname@example.org and at (651) 633-5311. Mike has written 12 books (and co-authored two others) including his latest book, The Collaboration Effect: Overcoming Your Conflicts, and The Servant Manager, Business Valuations and the IRS, and Peaceful Resolutions that you may find helpful. [Michael Gregory, ASA, CVA, MBA, Qualified Mediator with the Minnesota Supreme Court]