Last August, Dean Mead reported on the issuance of proposed regulations under Code section 2704 that would have significantly curtailed valuation discounts applicable to transfers of interests in closely-held family businesses for tax purposes. These proposed regulations were seen as one of the most important developments in the estate planning community in recent memory, and they were immediately met with fierce criticism from a variety of individuals and organizations.
On Tuesday, the IRS formally announced that the controversial 2704 proposed regulations are withdrawn as of October 20, 2017. This is welcome news to owners of closely-held businesses who find themselves subject to the Federal estate, gift and generation-skipping transfer tax regime and often rely on valuation discount planning to minimize tax.
Many practitioners and taxpayers complained that the IRS had overreached on its regulatory authority. They viewed the proposed regulations as an attempt to completely eliminate valuation discounts through the IRS regulatory rule-making authority rather than adhering to the traditional Congressional legislative process. This was characterized as an attack on closely-held businesses and the IRS was flooded with critical comments, including many from prominent lawmakers and prestigious professional organizations. The IRS countered that the 2704 proposed regulations were not intended to eliminate all valuation discounts and were being misinterpreted, but at a minimum, it was readily apparent that the 2704 proposed regulations contained serious flaws and ambiguities.
The result of the 2016 election in favor of the Republicans changed the course of history for the 2704 proposed regulations. On April 21, 2017, President Trump issued Executive Order 13789 instructing the Secretary of the Treasury to review all significant tax regulations issued on or after January 1, 2016, and to take concrete action to alleviate the burdens of regulations that imposed an undue financial burden on US taxpayers, added undue complexity to the federal tax laws, or exceeded the statutory authority of the IRS. In response, the Secretary of the Treasury issued Notice 2017-38 on July 24, 2017 identifying eight regulations, including the 2704 proposed regulations, that met the criteria listed in the President’s Executive Order. The official withdrawal of the 2704 proposed regulations on October 20, 2017 is the last nail in the coffin.
Clearly, the 2704 proposed regulations will not be revised and republished while the current administration is in office. It is possible that these rules could be revived under a different administration, but for now and the foreseeable future, they should not be of concern to taxpayers and tax practitioners.
About the Authors:
Matthew J. Ahearn is Board Certified in both Wills, Trusts & Estates and Tax Law by The Florida Bar Board of Legal Specialization. He has extensive experience in the areas of estate and business succession planning, asset protection planning, charitable planning and planning to minimize or avoid wealth transfer taxes. Mr. Ahearn handles all aspects of probate and trust administrations, including estate and gift tax audits before the Internal Revenue Service. He represents both beneficiaries and fiduciaries in contested matters. He may be reached at firstname.lastname@example.org.
Brian M. Malec is a shareholder in Dean Mead’s Orlando Office. He is Board Certified in Wills, Trusts and Estates. He handles all aspects of estate and succession planning, including the implementation of wills, trusts, business entities and sophisticated estate planning techniques to protect and transfer wealth among individuals and families while minimizing income, gift, estate and generation-skipping transfer taxes. Mr. Malec also handles all aspects of probate and trust administration, including advising fiduciaries throughout the administrative process and representing beneficiaries seeking to assert their rights in an estate or trust. He may be reached at email@example.com.