On December 1, the Internal Revenue Service held a public hearing to allow individuals to present oral testimony on the proposed regulations regarding “Estate, Gift and Generation-Skipping Transfer Taxes; Restrictions on Liquidation of an Interest (REG-163113-02)” that were released on August 2, 2016. The publication of these proposed regulations indicated that the IRS would potentially disallow the discounting of the value of family business interests for purposes of the federal transfer taxes. For years, estate planners have relied upon a discount for marketability and a discount for minority control when assisting clients who transfer family business interests to other members of the family, and these discounts have regularly been respected by the IRS.
I attended this public hearing as an interested citizen and estate planning attorney, and was accompanied by Matthew S. Pritzkur (Associate Director at Bernstein Private Wealth Management in Washington, D.C.).
The panel at the hearing consisted of Charlotte Chyr (IRS Special Counsel to the Associate Chief Counsel), Leslie H. Finlow (IRS Senior Technician Reviewer), John D. MacEachen (IRS Senior Trial Attorney), and Catherine Veihmeyer Hughes (Department of Treasury Attorney-Advisor).
Thirty-seven individuals requested an opportunity to present oral testimony. Among them were attorneys, CPAs, appraisers, lobbyists, representatives of trade organizations, and family business owners. These individuals’ comments would supplement the 9,779 written comments that had been submitted to IRS by the deadline of November 2.
All of the individuals focused primarily on five specific issues. The first was that the regulations implied a deemed put right when valuing a family business interest, thus inflating the value of the interest. The second was the retroactive application of a new “three-year rule” (retroactive to 1990) that was stated in the proposed regulations. The third was proposed regulations’ re-defining of the term “fair market value.” The fourth was the proposed regulations’ definitions of control and family attribution, and how they were inconsistent with other similar laws. The fifth was a request by many of the individuals for an exception to be made to these regulations for an operating business.
The hearing lasted for approximately six hours. The only comments were made by Cathy Hughes. She confirmed that the regulations are not meant to create a deemed put right, although many of the commentators urged the IRS to clarify that the regulations do not create a deemed put right so they will never be misinterpreted by a court. Ms. Hughes also stated that any final publication of these regulations would clarify that the new “three-year rule” would be applied only from the date when the regulations are finalized, and would not be made retroactive. Ms. Hughes’ only other comment was that the discount for minority interest would not be eliminated by these regulations, although interestingly, she did not mention the discount for marketability.
Nearly every speaker asked the IRS to withdraw these proposed regulations. The speakers asked that, if the IRS intends to finalize regulations that will impact taxpayers who abuse the use of discounts, the IRS re-propose new regulations with clearer language, so that the new regulations can be reviewed by the public before they are finalized.
If the IRS intends to ignore the speakers and move forward with the finalization of these regulations, the earliest that the regulations may be finalized would be January 1, 2017. However, considering the criticism that these regulations have created, they likely will not be finalized by that time, if ever. Consider also that the incoming presidential administration intends to eliminate the federal estate tax, which may make these regulations irrelevant. Stay tuned!
For those interested in the Agenda, List of Speakers, and prepared remarks of the first two speakers that were handed out to everyone who attended the hearing, click here.
This is Nick Nanovic, reporting from the IRS Auditorium in Washington, D.C. Over and out.
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