On December 1, 2016, Bob Grossman joined 36 individuals from around the country in testifying in Washington, D.C., at the Department of the Treasury’s Public Hearing on Proposed Regulations. The public hearing was held in accordance with statutory protocol mandated any time new Treasury regulations are proposed. This particular hearing was held so that commentators and taxpayers could address their concerns regarding the “Estate, Gift, and Generation Skipping Transfer Taxes; Restrictions on Liquidation of an Interest.”
The proposed regulations, which are better known as the 2704(b) regulations, were released on August 2, 2016. In effect, the regulations, as proposed, work to minimize, or eliminate the valuation discounts related to lack of control ( the “minority discount”) and the discount for lack of marketability (the “marketability discount”) on certain intra-family transfers of ownership interest in family-owned enterprises. The rules ultimately work to make transfers of family-owned businesses more complex and more expensive.
The public reaction to these proposed regulations has been incredible. After they proposed regulations were published in the Federal Register on August 4, those wishing to submit comments to the Treasury had a 60-day window to do so (until November 2, 2016). In that short time frame, the Treasury Department received nearly 9,800 submissions.
Comment letters were sent from the American Institute of Certified Public Accountants, the S Corporation Association, the Real Estate Roundtable, the American College of Trust and Estate Counsel, the American Business Defense Council, FMV Opinions, Inc., the American Society of Appraisers, the Family Business Estate Tax Coalition, the National Association of Certified Valuators and Analysts and many, many others. Representatives from many of these organizations were invited to testify at the hearing on December 1, 2016.
Bob Grossman had co-chaired the NACVA Legislative Action Task Force, guiding that organization’s analysis and assessment of the proposed rules, as well as the drafting of their comment letter. He spoke on behalf of Grossman Yanak & Ford LLP and NACVA at the hearing. Click here for a summary of the points presented, which follow the formal written response submitted by NACVA on October 27, 2016.
Representatives of the government to which each speaker testified included Ms. Charlotte Chyr, Special Counsel to the Associate Chief Counsel, Ms. Leslie H. Finlow, Senior Technician Reviewer, and Mr. John D. MacEachen, Senior Trial Attorney, all of the Passthroughs and Special Industries Group. Also on the panel was Ms. Catherine Veihmeyer Hughes, Attorney-Advisor from the Office of Tax Policy. Ms. Hughes has been a vocal resource in the last many months, speaking to the perceived issues in the proposed regulations throughout the United States.
As was expected, the Panel will need time to digest the comments offered at the hearing, as well as the comment letters previously submitted. The most common call for action from speakers yesterday was to withdraw the proposed rules completely and take no further action. Most speakers offered a second remedy of a total withdrawal and rewrite.
Ms. Hughes made several comments to speakers, which did pique curiosity and offered a ray of hope for significantly changing these rules, at a minimum. Her comments included:
- It will be made clear in the final proposed regulations, if adopted, that the regulations are NOT intended to end the use of minority discounts.
- While many commentators have argued that there is a “deemed put right” in the rules, as proposed, Ms. Hughes noted that it was NOT their intent to invoke this put right.
- It is not expected that there will be a retroactive effect on the three-year look back rule.
- The final regulations would NOT apply to operating companies.
These four points of interest go a long way in removing ambiguity and the far reach of the rules as they are currently written, and Ms. Hughes’ comments were well received by the presenters in the auditorium.
It is difficult to say how soon taxpayers and the practitioner community will see further action on these proposed rules. Simply digesting all of the comments will take some time. However, it seems evident that the rules, as proffered in the proposed regulations, contain many problems. And, after yesterday, it appears that there is some opportunity for a total withdrawal.