Treasury Dept Considers Eliminating 2016 Rule on Valuation Discounts

On July 7, 2017 the Treasury Department published a notice proposing to revoke eight tax regulations (Notice 2017-38). The notice is in response to an executive order designed to reduce tax regulatory burdens issued by President Trump in April. Executive Order 13789 instructed the Treasury Secretary to review all “significant tax regulations” issued on or after Jan. 1, 2016, and submit two reports, followed promptly by actions to alleviate the burdens of regulations that meet criteria outlined in the order. Trump directed the Treasury Secretary Steven Mnuchin – in consultation with the Administrator of the Office of Information and Regulatory Affairs – to submit a 60-day interim report identifying regulations that impose an undue financial burden on U.S. taxpayers, add undue complexity to the federal tax laws, or exceed the statutory authority of the Internal Revenue Service. The order further instructs the Secretary to submit a final report to the President by Sept. 18, 2017, recommending “specific actions to mitigate the burden imposed by regulations identified in the interim report.”

The Notice reports points out that the Treasury and the IRS issued 105 temporary, proposed and final regulations between Jan. 1, 2016, through April 21, 2017. Of those, about half were minor or technical in nature and generated only minimal public comment. The Treasury treated the remaining 52 regulations as potentially significant and reexamined all of them for the purpose of compiling an interim report. Based on its review, the Treasury concluded that 8 of the regulations meet at least one of the first two criteria specified by Trump’s executive order. It intends to propose reforms to these regulations, ranging from streamlining problematic provisions in rules to full repeal of the rules in order to eliminate or reduce the burden of compliance to the regulations in a final report to President Trump.

Of interest to business owners, business appraisers and estate planners and other trusted business advisors is the Notice’s inclusion of the proposed but yet to be implemented regulations on restrictions on liquidation of an interest for estate, gift and generation- skipping transfer taxes (REG-163113-02; 81 F.R. 51413).

Section 2704(b) of the Tax Code provides that certain non-commercial restrictions on the ability to dispose of or liquidate family-controlled entities should be disregarded when determining the fair market value of an interest in the entity for estate and gift tax purposes. The proposed regulations would create an additional category of restrictions that also would be disregarded in assessing the fair market value of an interest.

Some people who commented expressed concern that the proposed regulations would eliminate or restrict common discounts, such as minority discounts and discounts for lack of marketability, which would result in increased valuations and transfer tax liability that would increase financial burdens. Commenters were also concerned that the proposed regulations would make valuations more difficult and that the proposed narrowing of existing regulatory exceptions was arbitrary and capricious. The Treasury Department is accepting public comments concerning this and the other proposed 7 regulation modifications or eliminations through August 7, 2017.

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