On Aug. 2, 2016, the U.S. Treasury Department (“Treasury”) and the Internal Revenue Service (“IRS”) released proposed regulations under Internal Revenue Code § 2704 that, if finalized, will drastically reduce the ability of franchisees to transfer their businesses to family members. Click here to write to the Treasury Department and express your concerns over their proposed regulations!
Currently, when gifts (during lifetime) or bequests (at death) are made, discounts are typically applied to allow for lack of marketability and for minority ownership. These discounts are commonly used by franchisees when transferring their family business from generation to generation. Treasury’s proposal severely limits the use of valuation discounts for any type of family limited partnership or other family business transfer where the family will retain control before and after the gift or bequest occurs. Specifically, the new rules would include the imposition of a new three-year look-back period to determine whether a minority valuation discount should apply (limiting deathbed transfers used to create a minority interest), expand restrictions in situations where the family will retain control after the transfer, and broaden their scope away from focusing on restrictions that are “more restrictive” than available state law (given that many states have already shifted their laws to become more restrictive in recent decades).
These proposed regulations, if finalized in their current form, will specifically impact franchisees, for whom the value of their business declines with every passing minute due to the pre-determined timeframe set forth in their franchise agreement. Because the franchise model allows a third party – the franchisor – the ability to place substantial restrictions on transfers and sales of franchise agreements, the ability to pass on the business is significantly lessened. For these reasons, and many others, current discounts are particularly valuable to franchisees who cannot as routinely and easily sell their business as larger, publicly-traded and less restricted companies.
Comments on the proposed regulations are due by Nov. 2; it is crucial that franchisees explain why and how this will hurt their business, family and employees. Click here to access a draft comment letter that you can personalize.
Click here to let the Treasury know why this proposal is bad for small business!