United States

Treasury will withdraw the proposed 2704 regulations

First described as “burdensome,” they are now deemed “unworkable”


In Notice 2017-38, issued pursuant to an Executive Order issued on April 21, 2017, Treasury included the proposed regulations under section 2704 in a group of regulations that “impose undue financial burden, undue complexity or exceed the statutory authority of the IRS” and placed them under review for withdrawal, revocation or modification. See prior alert, “Treasury identifies eight regulations for review under executive order,” for more information. The proposed regulations under section 2704 were intended to address perceived shortcomings that have developed in the effectiveness of section 2704 to prevent taxpayers from using various structural artifices to discount the value of interests in family-controlled entities for gift, estate and generation-skipping transfer tax purposes.

The proposed regulations met with considerable technical skepticism on the part of estate planners and valuation professionals, as well as considerable concern from taxpayer groups around the country. What’s more, various members of Congress expressed concern about the proposed regulations.

In a new announcement dated Oct. 2, 2017 and entitled, “Identifying and Reducing Tax Regulatory Burdens,” Treasury and the IRS elucidate the reasons why the proposed regulations are in some ways so technically (and practically) incomprehensible to planners, appraisers and taxpayers alike that they are beyond repair. Indeed, the proposed regulations seemed to raise many more issues than they addressed. Treasury and the IRS will publish the withdrawal of the proposed regulations, in their entirety, in the Federal Register in the very near future.

This announcement removes a cloud of uncertainty that has been hovering over wealth transfer planning for more than a year. We will now just to have to wait to see if Treasury and the IRS still perceive there to be abuses in valuation along the lines that were to be addressed by the proposed regulations and if they assign any priority to addressing those concerns. There will be much to watch here, because if the estate tax is repealed and the gift tax isn’t, individuals will still look to make tax-efficient transfers of business interests and other assets to the next generation. And valuation will continue to be a key component of that planning. We will also have to see whether the forthcoming announcement sheds any light on the tax compliance implications of withdrawal of the proposed regulations.


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