Section 2704: Major Changes on the Way?

A Brief History of Section 2704

In 1990, Congress enacted section 2704 of the Internal Revenue Code, titled “Treatment of Certain Lapsing Rights and Restrictions,” in an effort to limit the valuation discounts for gift and estate tax purposes applicable in the case of intra-family transfers of interests in family-owned, or “closely held,” corporations and partnerships. Here is what it said:

  • Under section 2704(a) if an individual and the individual’s family hold voting or liquidation control over a corporation or partnership, the lapse of a voting or liquidation right shall be taxed as a transfer subject to gift or estate tax.
  • Under section 2704(b) when an interest in a family-owned corporation or partnership is transferred within the family, if a restriction limits the ability of the corporation or partnership to liquidate and that restriction can be removed by the family, that restriction is disregarded in valuing the transferred interest for gift or estate tax purposes.
  • Under section 2704(b)(4), Congress authorized Treasury to issue regulations providing “that other restrictions shall be disregarded in determining the value of the transfer of any interest in a corporation or partnership to a member of the transferor’s family if such restriction has the effect of reducing the value of the transferred interest for purposes of this subtitle but does not ultimately reduce the value of such interest to the transferee.”

For the last decade there has been an expectation of change to these regulations which were first adopted into law more than 25 years ago.

So What’s Finally Happened?

On August 2, 2016 newly proposed regulations were offered that would put into effect major changes to the valuation of interests in many family-controlled entities for estate, gift, and generation-skipping transfer tax purposes which would result in treating the lapse of voting or liquidation rights as an additional transfer while disregarding certain restrictions on liquidation in order to determine the fair market value of a transferred interest.

What Will the Changes Look Like?

As published by the IRS in the Federal Register on August 4 under 81 Fed. Reg. 51413-51425, if and when finalized, the regulations would:

  • Treat as an additional transfer the lapse of voting and liquidation rights for transfers made within three years of death of interests in a family-controlled entity, thereby eliminating or substantially limiting the lack of control and minority discounts for these transfers
  • Eliminate any discount based on the transferee’s status as a mere assignee and not a full owner and participant in the entity
  • Disregard the ability of most nonfamily member owners to block the removal of covered restrictions unless the nonfamily member has held the interest for more than three years, owns a substantial interest in the entity, and has the right, upon six months’ notice, to be redeemed or bought out for cash or property, not including a promissory note issued by the entity, its owners, or anyone related to the entity or its owners
  • Disregard restrictions on liquidation that are not mandated by federal or state law in determining the fair market value of the transferred interest
  • Clarify the description of entities covered to include limited liability companies and other entities and business arrangements, as well as corporations and partnerships

The Impact on Your  Business

When the regulations are finalized, if they are at all similar to the proposed regulations, taxpayers in corporations and partnerships, as well as in limited liability companies and other entities and business arrangements, will have lost a significant estate planning technique, and the tax cost of transferring interests in family-owned entities will increase.

Here are some of the areas of key concern:

  1. Lapse of voting or liquidation rights
  2. Disregarding certain restrictions on redemption or liquidation
  3. Restrictions imposed or required by law

Now What?

It is anticipated that there will be challenges to the proposed regulations being adopted in their present form raised at the public hearing scheduled for December 1, 2016 – especially because of the broad sweep of the proposed regulations. Therefore it is a safe guess that the earliest the regulations will not become final sometime in 2017.

So if you are considering transferring interests in family-controlled entities (that are not controlling interests and do not have liquidation rights) you might consider making the transfers soon.  There are, as always, mitigating circumstances that would need to be discussed by you and your trusted advisors to determine what is best for your company and your situation. To be prudent, you should always give careful consideration to your company’s existing and future operating agreements and other governing documents.


Photo Credit: MPI

Workflow Automation Systems: What Do They Do?

Why are they important?

Why should you care?

Ask any executive what makes their company different, and the majority will answer that their unique business processes are the lifeblood that makes them successful and gives them a competitive edge.  These business processes reflect the company’s culture, spirit and identity.  It is their “secret sauce.”


But then ask how they make sure these processes are performed the same way, every single time?  How does their team know exactly what these business processes are?  How will they know if they are being executed properly?  For the majority of companies, the answer is that they don’t know, and without the right systems in place, really can’t know.


An example of why processes are so important can be seen at McDonald’s.  Whether you like their Big Mac or not, consumers expect it to be prepared the same way, every time they visit.  Ray Kroc, the founder of the McDonald’s franchise empire, knew that uniformity in service and quality among all of the McDonald’s locations would drive success.  So he created and implemented a system to ensure that McDonald’s burgers are prepared the same way, regardless of where the store is located or who is doing the cooking.  And that’s one of the reasons McDonald’s has grown to over 35,000 stores worldwide.


For many small and mid-sized businesses (and even some larger businesses), defining processes and then making sure that they are being followed is daunting, if not impossible.  They try by documenting their processes, and while that’s a good start, it’s no guarantee that they will be followed.  What’s missing is a systemized approach that guarantees both complete visibility of all open tasks and accountability as to who owes what to whom.


To further make this challenging, many (if not most) of an organization’s processes exist outside its accounting and operational software systems.  For example, let’s say you are a window manufacturer.  Your customer service department receives periodic complaints about product failures, and you want to:


  • Review and validate reported failures (before creating costly return and replacement orders)
  • Track the quantity of failures and the specific parts that are failing (so you can analyze what’s happening and then eliminate the failures through engineering improvements)
  • Attach documents (pictures, e-mail, etc.) associated with each failure
  • Require special review and approvals for failures over a certain dollar threshold


Now, consider that this process occurs long before a return order is created in your ERP system.  How do you track and measure them?  How do you permanently record the activities for analytic review?  And how to avoid sending internal e-mails (which can only be seen by the sender and recipients) and which are not easily tracked, counted, analyzed and acted upon?


The answer is in implementing a Workflow Automation system.  These systems allow you to define your hundreds of unique workflows, attach documents, provide visibility into both open and closed workflows, and ensure that they are performed the same way, every time.  Imagine being able to see every completed business process, from a Cap-Ex request to a New Hire process to a Contract Approval workflow.  To know where each individual process stands, when it was done, who did it, who approved it, and to be able to see supporting documents.


Workflow Automation systems provide a platform for transforming a business and improving productivity to levels never before seen in most organizations.  They’re affordable, easy to start with and ramp up as you see success, and easily integrated with your existing business software systems.  And best of all, the business intelligence and analytic information that Workflow Automation systems provide will more than pay for the systems themselves… many times over.


What are some other workflow examples?

  • Interviewing, Hiring & Onboarding Process
  • Vendor Contract Review & Approval Process
  • Expense Review and Reimbursement Process
  • Request for Pre-Sales Engineering Assistance
  • Employee Review Process
  • Requisition Submission and Approval Process
  • Travel Approval Request
  • Product Development Processes
  • Quality Assurance (e.g. Non-Conformity) Process
  • ISO 9000 Processes
  • Lean Six Sigma Process Automation


The list is endless.  Here’s one more… How about simply being able to create To-Do requests, assign them to others in the organization, and then – at the press of a button – being able to track who owes you something?


There are many Workflow Automation systems available, and they each have their strengths and weaknesses.  Some are expensive and targeted at enterprise-level companies, and some are so simple that you will quickly outgrow their capabilities.  You may want to consider retaining a consultant to help you identify your requirements and assist with the software review and selection process.


So get on the Internet and search for “Workflow Automation software.” You’ll be amazed at what you find, and more importantly, your eyes will be opened to productivity tools you previously only dreamt of.


Next time… I’ll review the key features (and benefits) to look for in Workflow Automation systems.


About Evan Berk


Evan Berk is Managing Partner at Certus Technologies, a managed and cloud services IT firm that specializes in helping clients dramatically improve their business productivity.


Evan is passionate about simplifying and demystifying complex Information Technology systems, and believes that the best IT systems should make our lives easier and more productive, both in the workplace and at home.  He can be contacted at [email protected] or at 973-944-5000.


To learn even more about Workflow Automation Systems join CIANJ at its Technology for Business Roundtable: Workflow Automation, Work Smarter, Not Harder on November 17, 2016. Click here to register for the event! 

9 Tips for Search Engine Optimization (SEO)

A program focusing on SEO should get a standing-room-only crowd. Often this is not the case, however. It is unfortunate that small business owners and CEOs do not recognize SEO as a critical tool in identifying new clients and promoting their businesses.

I am celebrating 20 years as a CEO, and I have been providing SEO services for over 15 years for a small group of clients. I am puzzled as to why many CEOs of small businesses, as well as companies in my networking groups, are not investing their marketing dollars in their SEO campaigns. The main reason that comes to mind is a lack of education and understanding about the power of SEO and search marketing. I am puzzled because to date, the larger clients that my firm, Web Epoch, have acquired are through our website and our SEO campaigns. Somehow, my peers do not embrace SEO the same way. I hope this blog will encourage them to take steps to implement their own SEO campaigns.

  • TIP 1. Google Business Listing
    One of the first steps for any CEO is to implement Local SEO using Google Business listing. This listing is critical for local search placement. Be sure to get it right and keep this account fresh and current by adding new content, such as project images, testimonials, reviews and recommendations.
  • TIP 2. On-page SEO I recommend using on-page SEO techniques to optimize each page on your website.You are optimizing your page to have prominence for the written subject matter. Your page title and description are critical to getting a click-through from the buyer. A keyword rich title and a persuasive description increases the number of visitors to your website.
  • The title link should take the buyer to a landing page with great content that ultimately turns the click-through into a conversion by receiving a web form request or a phone call for a proposal. Now, to recap, on-page optimization by creating a strong title, persuasive description and great content. That’s easy! Only three steps for search optimization? Not quite; for on-page optimization there are several other meta tags that are optimized including the ALT tag for images.
  • TIP 3. Off-page SEO
    In addition to on-page techniques, you must implement off-page SEO campaigns that include videos, articles, blogs, newsletters, interviews, white papers, press releases and social media posts. One of the easiest ways to build cross-links is with a press release.
  • TIP 4. Explainer Video
    Use an animated explainer video. At Web Epoch we have produced videos for clients and our approach is to post them on nine video sharing sites, all pointing back to the client’s website and or  specified landing page.
  • TIP 5. Articles or Blogs
    Another way to build cross-links is by submitting and publishing articles to authoritative sites such as CIANJ’s weekly blog.
  • TIP 6.  LinkedIN Recommendations
    Try to get lots of recommendations posted by your clients on LinkedIN, including posting your own articles with links back to your website.
  • TIP 7. Informative Infographic
    Create an informative infographic so you can ask for visitors’ contact information via a short form before providing a download link.
  • TIP 8. Get Interviewed
    Get interviewed by NJ Tech Weekly or other publications, and have them link a few keywords to back to your website.
  • TIP 9. as Google Ad Words
    I recommend that as a CEO, you implement a pay per click (PPC) campaign such as Google Ad Words. Having a Google Ad Words campaign will actually help your organic SEO campaigns because you have more visibility, increasing the chance of a click-through.

Don’t think to yourself, “That’s a lot of work, with videos, white papers, articles and more…” A regular work schedule is required to create cross-links by writing great content on a monthly basis with a minimum six month commitment each year to be effective in search engines, but that’s not what I am suggesting here. The bigger picture of off-page SEO is about building cross-links over time by publishing a variety of great content that usually provides the reader with some useful tips and links back to your website to increase your monthly visitors. You can do it!