Treasury withdraws controversial estate valuation regulations


The Treasury Department has withdrawn proposed estate tax valuation regulations (NPRM REG-163113-02) under Code Sec. 2704. The announcement follows Treasury’s determination that the regulations were “unworkable” and “would have made it difficult and costly for a family to transfer their businesses to the next generation.” According to Treasury, “it is unclear whether the valuation rules of the proposed regulations would have even succeeded in curtailing artificial valuation discounts.”

Background

Valuation rules in Code Sec. 2704 address how to value intra-family transfers of interests in corporations and partnerships subject to lapsing voting or liquidation rights and restrictions on liquidation. Code Sec. 2704(a)(1) generally provides that, if there is a lapse of any voting or liquidation right in a corporation or a partnership and the individual holding the right immediately before the lapse and members of the individual’s family hold, both before and after the lapse, control of the entity, the lapse will be treated as a transfer by the individual by gift, or a transfer which is includible in the gross estate, whichever is applicable.

Proposed regulations

In August 2016, the IRS released proposed regulations that would treat certain transfers occurring within three years of death that result in the lapse of a liquidation right as transfers occurring at death for purposes of Code Sec. 2704(a). At that time, the IRS explained that the regulations were intended to address estate planning strategies that avoid the application of Code Sec. 2704. The proposed regulations added a three-year rule to narrow the exception to the definition of a lapse of a liquidation right to transfers that occur three or more years prior to the transferor’s death and that do not restrict or eliminate the rights associated with the ownership of the transferred interest.

Withdrawal

In Executive Order (EO) 13789, President Trump directed the Treasury Department to review all significant tax regulations issued since January 1, 2016. The Treasury Department would identify regulations that may be unduly burdensome or complex, and propose actions to mitigate those burdens.

The Treasury Department identified the Code Sec. 2704 regulations as ones that are unduly burdensome or complex under EO 13789. According to the Treasury Department, the proposed regulations “would have hurt family-owned and operated businesses by limiting valuation discounts.” Additionally, the regulations “would have made it difficult and costly for a family to transfer their businesses to the next generation.” The Treasury Department also noted stakeholders’ concerns that the regulations were vague and would be burdensome to administer.