On December 1, 2016, I attended and testified at the hearing on the proposed regulations under IRC § 2704 in the Internal Revenue Service building located in the Federal Triangle in Washington D.C. The proposed regulations provide valuation rules that the Department of the Treasury (the “Treasury”) and the Internal Revenue Service (the “Service”) believe are necessary for the determination of fair market value of entity interests (such as corporations, partnerships, and LLCs) held by family members. These issues typically arise when property is transferred with respect to a large estate. The Service received thousands of comments during the three month comment period. The hearing was the next step in the process.
Treasury was represented by Catherine Hughes with the Office of Tax Policy. The Service was represented by John MacEachen (author of the proposed regulations), Leslie Finlow, and Charlotte Chyr, all with Passthroughs and Special Industries.
Thirty-six (36) witnesses provided oral testimony. Witnesses included attorneys, CPAs, valuation experts, and businesspersons. Attendance was significantly larger than a typical hearing.
Each witness was provided 10 minutes to testify. Nearly all comments were critical of the proposed regulations. Only one witness was in favor of the proposed regulations.
I focused my comments on family attribution. The proposed regulations will have the effect of broadly applying family attribution by causing the state law exception under IRC § 2704(b)(3)(B) to have rare or no effect. This is in direct conflict with the intent of Congress as clearly evidenced in the legislative history, as well as the language of the statute itself. The proposed regulations are an unwarranted amendment of the tax law that is not the result of a directive from Congress. IRC § 2704 has not been substantively amended since it was enacted in 1990. Broad application of family attribution is also against judicial precedent dating back to 1940. Please click on the following link to read a written copy of my comments for the hearing with citations:
Other attorneys and CPAs raised issues with respect the put right contained in the -3 proposed regulations. Comments also included requests to clarify whether the three year lookback will apply to transfers occurring before the effective date of the final regulations, i.e., transfers occurring in 2016, requests to clarify the determination of control, and requests to coordinate the proposed regulations with the rules for determining basis, among others.
The businesspersons and valuation experts provided anecdotes from their experiences about how the estate tax hinders operations of a closely held business. The valuation experts stressed that the valuation rules in the proposed regulations are a departure from the well-established standard for fair market value, which is based on a hypothetical willing buyer and willing seller rather than on the actual family members who own an entity. Their argument was that it should not be assumed that family members will agree on the management or liquidation of an entity. One witness pointed out that Cain and Abel were brothers.
Importantly, Ms. Hughes said that clarity will be provided: (1) to address concerns regarding the put right in the -3 proposed regulations, and (2) so that the new rules will not be considered retroactive. Her comments were immediately well received.
Ms. Hughes and the Service representatives did not provide any other substantive comments during the hearing. Many questions and comments remain unanswered. Perhaps the most important question among practitioners is – Will the proposed regulations be published as final? The timing of the proposed regulations and the election make it difficult to predict whether: (1) the regulations will be quickly published as final before the new administration takes office, (2) the regulations will be published as final after the new administration takes office, (3) the proposed regulations will be withdrawn, or (4) the regulations will remain in proposed form indefinitely.
If you have any questions or would like further information about the hearing, please feel free to contact me directly by phone at 214-709-7025 or by email at email@example.com, or any member of our estate planning group.