Potential Repeal of the Proposed Regulations Intended to Eliminate Certain Valuation Discounts
On August 4, 2016, IRS issued proposed regulations under IRC section 2704 that were aimed at eliminating planning strategies that taxpayers have used to avoid:
1. A transfer tax provision that treats the lapse of certain rights in a closely held business as a transfer to family members; and
2. Another transfer tax provision that values transfers of an interest in a closely held business to a family member without considering certain restrictions on that interest.
Specifically, the proposed regulations would eliminate or restrict common discounts, such as minority discounts and discounts for lack of marketability, which are typically taken into consideration when closely-held entities are valued.
In April 2017, President Donald Trump issued an executive order designed to reduce tax regulatory burdens. The order instructed the Treasury Secretary to review all significant tax regulations issued on or after January 1, 2016 and submit two reports, followed promptly by actions to alleviate the burdens of the regulations that meet the following criteria:
1. Impose an undue financial burden on U.S. taxpayers;
2. Add undue complexity to the Federal tax laws; or
3. Exceed IRS’ statutory authority.
In Notice 2017-38, the Treasury Department described its review of significant tax regulations as directed by the President’s executive order and has identified the proposed regulations under IRC Section 2704 on restrictions on liquidation of an interest for estate, gift and generation-skipping transfer taxes as one of eight (8) other regulations qualifying for burden reduction. The Treasury intends to propose reforms potentially ranging from streamlining problematic rule provisions to full repeal to mitigate the burdens of the regulations, and it has until September 18, 2017 to submit a final report to the President.
We will provide an update once the final report of the Treasury is released. In the meantime, if you have any questions regarding the proposed regulations under IRC section 2704 and Notice 2017-38, contact Esther Streete at 410-266-9909.