IRS addresses some concerns of valuators at Sec. 2704 regs hearing

A record number of speakers showed up in Washington, D.C., to fight the controversial proposed Section 2704 regulations designed to curb estate valuation discounts for minority interests. Speakers testifying at the December 1 hearing at the IRS said the rules are so broad and convoluted that they are beyond repair and should be withdrawn permanently. 

While the format of these hearings is simply for speakers to present their 10 minutes of comments, IRS and Treasury officials on the panel felt compelled to make a few remarks in response to the strong concerns of valuation experts, attorneys, wealth planners, and family business owners who testified.

A common issue speakers brought up was the so-called “implied put right” that exists in the proposed regs. This is the ability of each member of the entity to force the company to buy back his or her interest for cash equal to a minimum value within six months of exercising the right. No such right exists in the real world, speakers told the panel, and it should be removed from the regs.

No put right:
“It is not our intention for the regs to contain a put right,” said Charlotte Chyr, IRS Special Counsel. This put this matter to rest and short-circuited some comments by subsequent speakers.

Another recurring theme was the three-year rule, which would nullify discounts taken for certain transfers that occurred within three years of the transferor’s death. Speakers were concerned that the rule would apply to transfers that occurred prior to the regs being finalized. As written, the regs are unclear on this.

Not retroactive: The three-year lookback rule “will not be retroactive,” Chyr told the audience. It would only affect transfers made after the date the final regs are published.

Speakers representing family businesses, farms and ranches sang a familiar refrain of other speakers: The loss of minority discounts could devastate family businesses.

Discounts will remain: “We will make it clear that these regs will not eliminate minority discounts,” said Catherine Hughes, attorney-advisor at the Treasury. Audience members were happy to hear that, to some extent. Of course, this doesn’t mean that discounts won’t be significantly reduced, which they will be under the regs as written.

Not all of the witnesses were against the regs. A speaker from Americans for Tax Fairness fully supports the regs, saying they will close loopholes the wealthy use to avoid estate taxes. Everyone agrees that some abuses are going on that should be stopped, but why not focus the regs on those egregious cases without hurting the family business that was formed for legitimate reasons?   

What’s next: The IRS will “seriously consider” the comments made at the hearing—and those about 10,000 people submitted on the IRS website. It is highly unlikely the IRS will finalize the proposed regs as written because of remarks officials made at the hearing. Some observers think the regs will be tweaked and rushed through before the Trump administration moves in, otherwise they will have little chance to see the light of day. Stay tuned!

More coverage of the hearing will appear in BVWire.