Treasury Withdraws Valuations Rule

October 11, 2017

On Oct. 4, 2017, the Department of Treasury announced recommended actions to withdraw, partially revoke, or revise eight regulations identified by Treasury for review under Executive Order 13789, which called for the identification of tax regulations that impose an undue burden on taxpayers.

Among the actions recommended, Treasury announced the withdrawal of proposed regulations under section 2704 on Restrictions on Liquidation of an Interest for Estate, Gift, and Generation-Skipping Transfer Taxes. The proposed regulations would have eliminated “valuation discounts,” a policy which currently permits certain discounts for lack of control (minority interests) and lack of marketability that are commonly applied to lower the value of transferred interests for gift, estate, and generation-skipping tax purposes. By eliminating valuation discounts, the proposed regulations would have negatively impacted succession planning for many small businesses.

The portion addressing the valuation rules reads:

After reviewing these comments, 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.

In light of these concerns, Treasury and the IRS currently believe that these proposed regulations should be withdrawn in their entirety.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.

The report released was in response to an earlier Executive Order instructing Treasury to identify and address regulations issued by the Department in 2016 that were harmful and/or exceeded Treasury’s authority. On July 7, 2017, Treasury issued Notice 2017-38 to announce that the agency would be reviewing eight deregulatory actions, including the estate valuation proposed regulations.

This report marks the successful culmination of the work of NSBA and our allies in the business community. In 2016, NSBA submitted a public comment letter conveying small business concerns about the estate valuation proposal.