Treasury and IRS to Withdraw Controversial 2704 Proposed Regulations

    The long, tumultuous road of the proposed regulations under I.R.C. Section 2704 (the “2704 Proposed Regulations”) should be coming to an end with Treasury’s recent report in response to Executive Order 13789. To recap what brought us to this point, Executive Order 13789 [here], issued by President Trump on April 21, 2017, directed Treasury to review all “significant tax regulations” issued on or after January 1, 2016, and to publish an interim report identifying regulations that (1) impose an undue financial burden on U.S. taxpayers, (2) add undue complexity, or (3) exceed the statutory authority of the IRS. Notice 2017-38 [here], issued by the IRS on July 7, 2017, was an Interim Report that identified the 2704 Proposed Regulations as one of eight regulations that meet at least one of the first two criteria from the Executive Order (the IRS did not comment on exceeding statutory authority). The Second Report [here], just issued by Treasury, sets forth its final recommendations to the President regarding the eight proposed, temporary, or final regulations identified in the Interim Report for withdrawal, revocation, or modification.

The Second Report

In the Second Report, Treasury recommended the following:

    1.    two proposed regulations, which includes the Proposed 2704 Regulations, are to be
           withdrawn entirely;
    2.    three temporary or final regulations are to be revoked in substantial part; and
    3.    the remaining three regulations from the Interim Report are all to be
           substantially revised.

    In addition, the Second Report discussed Treasury’s new initiative: a comprehensive review of all tax regulations, regardless of when they were issued, in order to pursue reform or revocation of regulations that are “unnecessary, create undue complexity, impose excessive burdens, or fail to provide clarity or useful guidance.”

Withdrawal of the 2704 Proposed Regulations   

    Treasury recognizes the undue burden imposed by the 2704 Proposed Regulations. According to the Second Report, the approach taken by the 2704 Proposed Regulations was “unworkable” and “would have compelled taxpayers to master lengthy and difficult rules on family control and the rights of interest holders.” In agreeing with commenters, Treasury stated that “taxpayers, their advisors, the IRS, and the courts would not, as a practical matter, be able to determine the value of an entity interest based on the fanciful assumption of a world where no legal authority exists.” In its coup de grace, the Second Report concludes the 2704 Proposed Regulations “could have affected valuation discounts even where discount factors, such as lack of control or lack of a market, were not artificially created as a value-depressing device.” Treasury and the IRS plan to withdraw the 2704 Proposed Regulations shortly.