IRS Withdraws Proposed Estate Tax Valuation Rules

On October 4, 2017, the Treasury Department announced that it would withdraw the proposed regulations under Internal Revenue Code Section 2704.  IRS formally withdrew the proposed regulations in FR Doc. 2017-2776 filed October 17, 2017.

Back in August 2016, the Treasury issued proposed tax regulations under Section 2704 of the Code. The proposed regulations sought to narrow or eliminate “valuation discounts,” a policy which currently permits certain discounts for lack of control (minority interests) and lack of marketability that are commonly applied to lower the value of transferred interests for gift, estate, and generation-skipping tax purposes. By eliminating valuation discounts, the proposed regulations, if passed, would have negatively impacted succession planning for many small businesses.

The announcement to withdraw the proposed regulations is part of President Trump’s initiative to lessen the regulatory burden on taxpayers due to excessive regulations (Executive Order 13789).  In a press statement, Treasury explained that the Code Section 2704 proposed regulations were being withdrawn because they:

…would have hurt family-owned and operated businesses by limiting valuation discounts.  The regulations would have made it difficult and costly for a family to transfer their businesses to the next generation.  Commenters warned that the valuation requirements of the proposed regulations were unclear and could not be meaningfully applied.

Numerous practitioners were critical of the proposed regulations because they disregarded restrictions for valuation purposes on the ability to liquidate family-controlled entities. Since the release of the proposed regulations in the summer of 2016, estate tax planning and valuation professionals have noted that the proposed regulations were vague, difficult to apply and resulted in inaccurately high estate valuations. Indeed, if finalized, the proposed regulations would have disallowed discounts for lack of control and marketability commonly used by families in wealth transfer planning.

Practice Point

 With the withdrawal of the proposed Code Section 2704 regulations, the use of liquidation restrictions to reduce the valuation of a closely-held family business continues to be an effective wealth transfer planning tool.  For further context, we covered the initial rollout of the 2016 regulations proposed by Treasury at this link.

If you want to discuss planning opportunities that may be available to you with the valuation discounts, contact one of our estate and trust experts at 925.271.8700 or at info@ssfllp.com.