Will Estate Tax Valuation Rules Survive Under Trump?

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By Allyson Versprille

Dec. 13 — A pervasive thought on Capitol Hill and among trade groups is that the IRS’s unpopular estate tax rules on valuation discounts could get pulled when Donald Trump takes office, but it is unclear whether they will disappear for good.

The proposed guidance under tax code Section 2704 was intended to stem abuses in which valuation discounts were being used solely to avoid paying estate tax on transfers of interests in closely held businesses. But the rules have generated strong protests from family businesses and conservative lawmakers, who say they are too broad.

The future of the regulations (REG-163113-02) is tied to two things—what happens to the rules themselves and what happens to the estate tax as a whole. Neither aspect bodes well for the guidance. House Ways and Means Committee Chairman Kevin Brady (R-Texas) said in a Nov. 21 interview with CNBC that the new Treasury secretary could stop the rules from moving forward on “Day One.” And President-elect Trump made repealing the estate tax—which would essentially make the rules unnecessary—one of his core campaign promises.

Treasury officials have indicated the regulations won’t be finalized before President Barack Obama leaves office, Carolyn Lee, senior director of tax policy at the National Association of Manufacturers, told Bloomberg BNA. “We are hopeful that they will be withdrawn under the new administration and we’re hopeful that tax reform tackles the whole question of the estate tax,” she said.

However, NAM is still taking the rules seriously and proceeding as if they could resurface someday, which may be the case if they are shelved for four years instead of withdrawn, she said.

Temporary Hold

Dennis Belcher, a partner and wealth planner at McGuireWoods LLP, also warned against people assuming the rules would be gone for good.

“I think 2704 is on hold until next May,” Belcher told Bloomberg BNA. “Then I think it’ll come right back.”

Trump’s promise to repeal the estate tax would make the regulations unnecessary, but Congress will be hard-pressed to come up with a replacement system that works better than the current one, Belcher said.

During his campaign, Trump proposed taxing capital gains held until death above an exemption amount of $10 million “to exempt small businesses and family farms,” according to the campaign website. Such a plan would be similar to a system used in Canada.

“That’s an extremely complicated system,” Belcher said.

Valuing Capital Gains

William H. Frazier, a managing director in the Valuation & Financial Opinions Group at Stout Risius Ross Inc., said valuation issues would persist under a capital gains tax at death.

If Trump and Republican lawmakers try to replace the current transfer tax system, they will have to figure out how assets will be valued for purposes of the new capital gains tax, he said.

It would appear that Chapter 14 of the Internal Revenue Code—which Section 2704 falls under—wouldn’t apply to fair market value appraisals for capital gains purposes, Frazier said. If Chapter 14 doesn’t apply, “essentially we would be back in 1989 in terms of how we would value an interest in a company,” he said.

Section 2704 was enacted in 1990 as a part of Chapter 14. The goal was to limit discounts for certain family partnership or limited liability company interests that are transferred to family members and to prevent strategies that were being used to artificially lower estate and gift tax liability.

‘Harrison’ Case

A specific example is Section 2704(a), which provides that if an individual and his or her family hold voting or liquidation control over a corporation or partnership, the lapse of a voting or liquidation right shall be taxed as a transfer subject to gift or estate tax.

That provision, often referred to as the “Anti-Harrison Rule,” was created to prevent outcomes like the 1987 decision in the U.S. Tax Court case Estate of Harrison v. Commissioner, T.C. Memo 1987-8.

As a result of the Harrison decision, the estate tax appraisal of the decedent’s limited partnership interest was valued at less than what it was worth in the hands of the decedent right before his death and to family members immediately afterward.

“We would go back to the times of Harrison,” said Frazier, who has participated as an appraiser and expert witness in numerous Tax Court cases. “Whether that’s a good thing or not, I don’t know, but it appears to be what we would be doing if capital gains taxes were the issue that was being valued at death,” he said.

That would mean greater valuation discounts for interests in closely held businesses, Frazier said, which at times already can reach 20 percent to 40 percent.

Looking Ahead

Trump also hasn’t mentioned plans for the gift tax. If not repealed, the tax would be governed by Section 2704, Frazier said. “So we would have two valuation regimes—one at death using capital gains taxes, and the gift tax that would still fall under Chapter 14,” he said. “That would be a confusing landscape.”

Adrienne M. Penta, executive director of the Center for Women & Wealth at Brown Brothers Harriman, where she advises families on estate tax planning, said the lack of detail in Trump’s plan has created an “unprecedented” level of uncertainty.

“Until the date of the election, we were planning with an eye toward 2704 becoming final at some point,” she said. But because that seems less likely, Penta said she is advising her clients to “wait and see” what happens over the next few months. Her firm isn’t undoing any of the planning that has already been completed, she said, but is taking a closer look at it and putting some of the planning that was “teed up” on pause.

The center isn’t assuming that estate tax repeal or withdrawal of the Section 2704 regulations is a given, Penta said, noting that permanent repeal would require 60 votes in the Senate, which could prove difficult. If there’s temporary repeal through reconciliation—which would allow conservatives to pass the change with a simple majority—clients who “aren’t planning on dying in the near term” will still need to consider their estate-planning options, she said.

The Treasury Department also isn’t making assumptions. Following a Dec. 1 hearing, Catherine V. Hughes, estate and gift tax attorney-adviser in the Office of Tax Policy, told Bloomberg BNA, “We don’t know his priorities and what he’s going to want to pursue,” referring to Trump.

For now, Treasury and the Internal Revenue Service are continuing to work through the normal regulatory process.

To contact the reporter on this story: Allyson Versprille in Washington at aversprille@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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