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An Update on the Uncertain Fate of the Proposed Section 2704 Regulations

By Christopher C. Weeg on January 31, 2017

    Before they were released in August of last year, we all knew the proposed regulations under section 2704 were going to be controversial. What we didn’t know back then was that Donald Trump was going to be president. With the new administration, the section 2704 regulations project could be altogether abandoned. And even if finalized, the Republican controlled Congress could severely undermine the impact of the regulations with a major tax overhaul, including a possible repeal of the estate tax. Despite this uncertainty, Treasury has provided some good news, hinting at the addition of a closely-held business exception to the regulations.

The Regulatory Freeze

    On January 20, 2017, the White House declared a “regulatory freeze,” whereby no regulations will be sent to the Office of the Federal Register (OFR) without review and approval by a department or agency head appointed or designated by President Trump, except in the case of emergency situations or urgent circumstances. Furthermore, regulations sent to the OFR but not yet published were immediately withdrawn for review and approval. Will the proposed section 2704 regulations feel the chill of the regulatory freeze? And if so, for how long? It’s certainly possible that a newly appointed Secretary of the Treasury may shelve the regulations indefinitely.

New Regulations Policy: One in, Two Out

    In addition to the regulatory freeze, President Trump issued an executive order on January 30, 2017, outlining a new policy in an effort to curtail costs and cut regulations. According to the order, for every one new regulation issued by an executive department or agency in 2017, at least two prior regulations must be identified for repeal. How valuable are the section 2704 regulations to the IRS and Treasury? Only time will tell.

Proposed Repeal of the Estate Tax

    Both the Republican controlled Congress and President Trump have estate tax reform in their crosshairs, with an outright repeal on the table. If the estate tax is repealed, the section 2704 regulations will attack only lifetime gifts, assuming the gift tax will be retained in order to preserve the integrity of the income tax.

Closely-Held Business Exception

    At the ABA Section of Taxation meeting on January 20, 2017, Cathy Hughes, a Treasury department attorney, stated that Treasury is considering a closely-held business exception from the regulations based on the feedback from the written comments and public hearing testimony. While Hughes said Treasury doesn’t know yet how the regulations will define a closely-held business, the narrowing of the application of the regulations is a welcomed change for business owners.

    What direction the regulations will go in the coming months is unknown. If you have any questions in the meantime, please contact Chris Weeg at (214) 749-2430 or cweeg@meadowscollier.com.

    For prior coverage on the section 2704 proposed regulations, read these previous firm blog posts:

        Proposed Regulations Under I.R.C. Section 2704 (Video Included)       

        Report from Public Hearing on Proposed 2704 Regulations

        Congress Takes Aim at the Proposed 2704 Regulations

        Without Further Ado, The Proposed Regulations Under Section 2704