Valuation Discounts Appear to Be Sticking Around

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December 2016 on Code § 2704 lasted almost six hours, as 36 of the 37 commentators requested that the regulations be withdrawn and reconsidered.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the Treasury noted the comments, neither it nor the IRS provided any indication of whether the regulations would be withdrawn.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

It’s not clear if Section 115 of the Appropriations Bill will remain intact as it makes its way through the legislative process. If it does, it would shut down the application of the Proposed Regulations by failing to provide fines necessary for enforcement.

The Treasury is expected to submit its final report to the President later this month.

Unless there’s 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.

However, it is expected the Treasury will either tone down or totally withdraw the Proposed Regulations.

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