Treasury Department Withdraws Regulations Increasing Estate Tax Burden on Family Businesses

In a positive development for NATSO members and family businesses throughout the country, the Treasury Department has formally announced that it will withdraw the so-called "Section 2704 regulations" on family business valuation. These regulations would have increased the estate tax (aka "death tax") burden on family businesses.

NATSO has been an active member of the Family Business Coalition to oppose these regulations, and applauded the Treasury Department's decision. "Many travel plazas and truckstops in the United States are run as family businesses, passed down from one generation to the next," said Tiffany Wlazlowski Neuman, NATSO's Vice President of Public Affairs. "These regulations would have made it harder for family owned businesses to transition to the next generation, and we therefore applaud the Treasury Department's decision to withdraw them."

The regulations in question woud have removed legitimate valuation discounts for estate, gift, and generation skipping taxes, which businesses have used for the past two decades to prevent the IRS from overvaluing their businesses at death.

"The proposal was clearly designed to eliminate minority interest discounts, since the holder of any interest would be deemed to be able to liquidate his or her interest in an entity without restrictions," said David Fialkov, NATSO's Vice President of Government Affairs and Regulatory Counsel. "It didn't make any sense because if an individual creates a limited liability company (LLC) to purchase and manage a commercial property, and the individual transfers interest in the LLC to his or her child, the interest is, as a practical matter, subject to standard restrictions on its sale." This is generally because the asset owned by the LLC is illiquid (cannot be sold) and often times leveraged.

"The current policy, which will now remain in place, permits the value of this interest to be reduced to reflect this restrictions," Fialkov said. "This is sound to me. The regulations would have changed the policy so that the value of the LLC interest transferred would not reflect these de facto restrictions and thus would be artificially inflated for gift tax purposes. If the regulations were allowed to take effect, families that transferred their businesses to the next generation would have seen a large increase in their estate and gift taxes."

Republican leadership on Capitol Hill and in the White House are actively seeking to repeal the estate tax entirely as part of their effort to enact comprehensive tax reform legislation. Those debates will continue in the coming months.


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