Valuation Discount Regulations under Review

The valuation and estate planning community breathes a collective sigh of relief that the Proposed Regulations under 2704 regarding use of certain discounts in valuing family-owned business interests were one of the areas identified in IRS Notice 2017-38 as imposing undue financial burdens on taxpayers and/or adding “undue complexity” to federal tax laws. Valuation professionals had made these assertions in Fall 2016 in response to the August 2016 issuance of the proposed regulations. In fact, certain commenters had opined that the regulations as proposed also exceeded the IRS’s Grant of Authority from Congress under IRC Section 2704, a view apparently not shared by Treasury.

The four areas addressed in the Proposed Regulations were as follows:

  1. Rules for what constitutes control of an LLC or other entity or arrangement that is not a corporation, partnership, or limited partnership are defined.
  2. So-called “deathbed” transfers are limited, and there is clarification of what occurs if a transfer results in the creation of an assignee interest.
  3. The definition of “applicable restriction” under Reg. Section 25.2704-02 is amended to eliminate the tie-in to local law.
  4. A new section is added to address restrictions on the liquidation of an individual interest in an entity and the effect of insubstantial interests held by persons who are not family members.

I expect that Treasury will roll back the elimination of the use of minority discounts in the valuation of family-owned business interests on the basis that it imposes undue financial burdens on taxpayers. The nature of the undue burden is the disparity of treatment between business owners who are family members versus those who are not. My expectation is not a guarantee, however. Family business owners are advised to do estate planning as soon as possible.

Treasury Secretary issues Response to Executive Order 13789

On July 7, 2017, the IRS issued Notice 2017-38 outlining recent regulations that it identified as requiring review pursuant to Executive Order 14789 (April 21, 2017).  Of 105 sets of regulations that have been issued since January 1, 2016, 53 were deemed minor or technical and not required to be addressed under EO 13789.  The remaining 52 issuances were reviewed by the IRS and Treasury Department.  Eight (8) sets of regulations were identified as warranting further review in order to comply with the EO.  The eight areas identified were as follows:

  1. Proposed Regulations under Section 103 on Definition of Political Subdivision (REG-129067-15; 81 F.R. 8870)
  2. Temporary Regulations under Section 337(d) on Certain Transfers of Property to Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs) (T.D. 9770; 81 F.R. 36793)
  3. Final Regulations under Section 7602 on the Participation of a Person Described in Section 6103(n) in a Summons Interview (T.D. 9778; 81 F.R. 45409)
  4. Proposed Regulations under Section 2704 on Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes (REG-163113- 02; 81 F.R. 51413)
  5. Temporary Regulations under Section 752 on Liabilities Recognized as Recourse Partnership Liabilities (T.D. 9788; 81 F.R. 69282)
  6. Final and Temporary Regulations under Section 385 on the Treatment of Certain Interests in Corporations as Stock or Indebtedness (T.D. 9790; 81 F.R. 72858)
  7. Final Regulations under Section 987 on Income and Currency Gain or Loss With Respect to a Section 987 Qualified Business Unit (T.D. 9794; 81 F.R. 88806)
  8. Final Regulations under Section 367 on the Treatment of Certain Transfers of Property to Foreign Corporations (T.D. 9803; 81 F.R. 91012)

These eight sets of regulations were deemed to potentially be in conflict with the first two requirements of EO 13789; that is, they may pose an undue financial burden on taxpayers, and/or they may add “undue complexity” to federal tax laws.  The IRS and Treasury apparently did not identify any regulations that exceeded its authority – the third requirement of the EO.

A further report is due September 18, 2017, outlining recommendations for remediation to bring the regulations into compliance with the requirements of EO 13789.