Update: Proposed Valuation Discount Regulations Withdrawn

October 17, 2017
Kristine A. Tidgren

Update: IRS formally withdrew these proposed regulations (REG 163113-02) in FR Doc. 2017-2776, filed October 17, 2017, for publication on October 20, 2017.

The following was orginally published on October 4, 2017:

On August 2, 2016, IRS proposed regulations under IRC § 2704 (Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes (REG-163113-02)) that were met with swift criticism. These proposed regulations sought to restrict valuation discounts long employed by closely-held family businesses to reduce or eliminate gift, estate, and generation skipping transfer taxes. At the time they were issued, a Treasury official stated that the proposed regulations “close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposes.” Many critics of the proposed rules argued that the rules would do away with valuation discounts for family-owned businesses and that IRS had exceeded its statutory authority in issuing them.

On April 21, 2017, President Trump issued Executive Order 13789, directing the Secretary of the Treasury to review all significant tax regulations issued on or after January 1, 2016, and determine which ones (1) impose an undue financial burden on U.S. taxpayers, (2) add undue complexity to the Federal Tax laws or (3) exceed the statutory authority of the IRS. On the list for review were the Proposed Regulations under Section 2704 on Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes (REG-163113-02; 81 F.R. 51413). Treasury was directed to propose reforms ranging from “streamlining problematic rule provisions to full repeal.”

After receiving comments through August 7, 2017, Treasury has issued its second report to the President on Identifying and Reducing Tax Regulatory Burdens (dated October 2, 2017).  

In this report, Treasury states with respect to the proposed valuation discount regulations, "these proposed regulations should be withdrawn in their entirety. Treasury and the IRS plan to publish a withdrawal of the proposed regulations shortly in the Federal Register."

In support of this decision, the report states:

Treasury and the IRS now believe that the proposed regulations’ approach to the problem of artificial valuation discounts is unworkable. In particular, Treasury and the IRS currently agree with commenters that taxpayers, their advisors, the IRS, and the courts would not, as a practical matter, be able to determine the value of an entity interest based on the fanciful assumption of a world where no legal authority exists. Given that uncertainty, it is unclear whether the valuation rules of the proposed regulations would have even succeeded in curtailing artificial valuation discounts. Moreover, merely to reach the conclusion that an entity interest should be valued as if restrictions did not exist, the proposed regulations would have compelled taxpayers to master lengthy and difficult rules on family control and the rights of interest holders. The burden of compliance with the proposed regulations would have been excessive, given the uncertainty of any policy gains. Finally, the proposed regulations could have affected valuation discounts even where discount factors, such as lack of control or lack of a market, were not created artificially as a value-depressing device.

The report also states that the agencies are considering revoking, in part, Regulations under Section 707 and Section 752 on Treatment of Partnership Liabilities (T.D. 9788; 81 F.R. 69282). These partnership tax regulations include: (i) proposed and temporary regulations governing how liabilities are allocated for purposes of disguised sale treatment; and (ii) proposed and temporary regulations for determining whether so-called bottom-dollar” guarantees create the economic risk of loss necessary to be taken into account as a recourse liability.

We'll be watching for further updates!

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