Recent developments on Capitol Hill appear to show that valuation discounts for family-owned businesses are not going away anytime soon.

In April, President Donald Trump issued an executive order requiring the U.S. Treasury to identify within 60 days any regulations that impose an undue financial burden on taxpayers, add undue complexity to federal tax laws, or exceed the statutory authority of the Internal Revenue Service.

Many in the estate planning community saw Trump’s move as squarely putting the unpopular U.S. Treasury Code § 2704 on the tax chopping block. It was published in August 2016 as Proposed Regulations, to restrict the use of minority discounts to transfer family controlled business interests at a lower estate tax value, according to a recent article released by WealthCounsel.com.

Following the President’s directive, the Treasury issued Notice 2017-382 in July, identifying eight regulations that met the executive order’s criteria as burdensome, including the Proposed Regulations.

Most recently, the House Committee on Appropriations entered the fracas with Section 115 of a new Appropriations Bill that, if enacted, puts increased pressure on the Treasury to rewrite the Proposed Regulations.

Background on Code § 2704
Valuation discounts have long been a legitimate strategy in succession planning. The Proposed Regulations created a very uncertain time for owners of family businesses on how to plan.

Estate planning attorneys, CPAs and appraisers have panned Code § 2704 because it curbed valuation discounts and increased estate taxes on the deaths of owners of family businesses, according to Forbes.

A public hearing in December 2016 on Code § 2704 lasted almost six hours, as 36 of the 37 commentators requested that the regulations be withdrawn and reconsidered. Although the Treasury noted the comments, neither it nor the IRS provided any indication of whether the regulations would be withdrawn.

What’s Next?
The long national estate planning nightmare brought about by the Treasury’s proposed changes to IRC Section 2704 has ended. The Treasury Department formally announced it was withdrawing the proposal in its entirety.

In “Identifying and Reducing Tax Regulatory Burdens” (dated October 2, 2017) Secretary of the Treasury Steven T. Mnuchin said the following:

After reviewing these comments, Treasury and the IRS now believe that the proposed regulations’ approach to the problem of artificial valuation discounts is unworkable. In particular, Treasury and the IRS currently agree with commenters that taxpayers, their advisors, the IRS, and the courts would not, as a practical matter, be able to determine the value of an entity interest based on the fanciful assumption of a world where no legal authority exists. Given that uncertainty, it is unclear whether the valuation rules of the proposed regulations would have even succeeded in curtailing artificial valuation discounts. Moreover, merely to reach the conclusion that an entity interest should be valued as if restrictions did not exist, the proposed regulations would have compelled taxpayers to master lengthy and difficult rules on family control and the rights of interest holders. The burden of compliance with the proposed regulations would have been excessive, given the uncertainty of any policy gains. Finally, the proposed regulations could have affected valuation discounts even where discount factors, such as lack of control or lack of a market, were not created artificially as a value-depressing device.

In light of these concerns, Treasury and the IRS currently believe that these proposed regulations should be withdrawn in their entirety. Treasury and the IRS plan to publish a withdrawal of the proposed regulations shortly in the Federal Register.

Unless you have a non-tax reason for gifting minority interests to family members or others, it’s perhaps best to wait for additional clarification before making any gifts in anticipation of the potential enactment of the Proposed Regulations, according to the WealthCounsel.com article.

We hope this information is useful to you and helps you make an informed decision. If you have a specific case or a question, please don’t hesitate to call our office.

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