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ASA Testifies at IRS Hearing Regarding Proposed Section 2704 Regulations Address Family Attribution, Standard of Value, and the Impact of the Proposal

Dec 01, 2016

On December 1, 2016, William H. Frazier, ASA, testified today on behalf of the American Society of Appraisers at a hearing hosted by the Internal Revenue Service regarding the IRS’s proposed Section 2704 regulations. The hearing follows the formal comment period, where IRS received thousands of comment letters opposing the proposed regulations and their impact on family owned businesses. ASA filed its own comments, joined by the American Society of Farm Managers and Rural Appraisers, which you can read here.

In his testimony, Mr. Frazier began by discussing the de facto repeal of Revenue Ruling 93-12, which stands for the proposition that discounts for lack of marketability or control cannot be denied simply because the interest in a family controlled is passed from one family member to another. He also dealt with the extension of family attribution of control to all businesses, including operating businesses, and whether this meshes with the IRS’s stated concerns and intent in publishing the proposed rule.

Mr. Frazier moved on to address the standard of value required under the proposal (liquidation value, in effect) versus the long held use of fair market value when valuing business interests for tax purposes. He then went on to talk about how the proposed regulations, in applying family attribution, create an untenable tension between how arm’s length parties would negotiate versus the “in concert” family members assumed by IRS in the proposal.

In closing, Mr. Frazier dealt with practical impacts of the proposal, from the need for guidance to be shared both with IRS agents and professional appraisers, to the need most family owned businesses will have to obtain two different appraisals in contemplation of the different valuation requirements imposed by the proposal. He finished by pointing out the methodological problems created by the proposal, and the likely confusion and litigation that will result from the lack of clarity in the proposal.

ASA wishes to acknowledge Mr. Frazier for his efforts on behalf of ASA throughout the 2704 proposed regulation process. In addition, ASA would like to thank Bruce Johnson, ASA, and Jeffrey Tarbell, ASA, for their work in developing ASA’s comments to IRS.