IRS Can Expect Groups in ‘Full Force’ at Estate Tax Hearing

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By Allyson Versprille

Nov. 28 — The IRS should expect a full house at its Dec. 1 hearing on the estate valuation discount regulations even though the guidance is unlikely to survive under President-elect Donald Trump.

A preliminary list of speakers for the hearing includes 30 individuals, including trade group representatives, estate tax attorneys and appraisers. The proposed regulations (REG-163113-02), issued in August under tax code Section 2704, would make changes to the valuation of interests in family-owned businesses for estate, gift and generation-skipping transfer tax purposes.

The Internal Revenue Service rules have seen significant political opposition in recent months, with legislation introduced in both the House and the Senate to block funding for them. In a Nov. 21 interview with CNBC, House Ways and Means Committee Chairman Kevin Brady (R-Texas), said: “After eight years, we finally have a way to stop these job-killing regulations coming out of Washington. This president and the Treasury secretary will have a chance to stop on day one regulations such as the new proposal on the death tax and the family-owned businesses,” referring to the Section 2704 guidance.

But practitioners and trade groups aren’t prematurely banking on the rules being withdrawn or shelved. “I’m a big fan of not counting chickens before they hatch, so until this rule is officially dead, we are going to continue to educate folks on why it will hurt the family business community,” Brian Reardon, executive director of the S Corporation Association, said in an e-mail to Bloomberg BNA. Reardon is one of the individuals scheduled to testify at the IRS’s hearing.

William H. Frazier, a managing director in the Valuation & Financial Opinions Group at Stout Risius Ross Inc., expressed a similar sentiment. “As Yogi Berra said: ‘It ain’t over ‘til it’s over,’ ” he said in an e-mail. “Who knows what is really going to happen next year? So, I plan to testify as if nothing had happened.”

Full Turnout

The IRS issued the rules in an attempt to stem abuses under Section 2704, but opponents say the regulations are too broad and prevent family businesses from applying discounts to transferred assets for legitimate purposes like lack of marketability and lack of control.

“I cannot recall in recent memory a set of proposed regulations that have created the response that these regulations created,” said Dennis I. Belcher, a partner at McGuireWoods LLP. Belcher said he expects most groups will attend the hearing despite discussions about halting the Section 2704 regulations or repealing the estate tax entirely under a Trump administration.

“We cannot assume that there’s going to be no transfer tax and I think that’s why these people are going to show,” Belcher said. And even if there is a system created to replace the estate tax—such as taxing capital gains at death above an exemption amount of $10 million, which Trump proposed during his campaign—“we can’t assume that there’s not going to be some version of 2704 out there” for valuing those assets, he said.

Belcher said “heavy-weight” groups, such as the American Institute of CPAs, are expected at the hearing. “I see them showing up, I see them being heard and I see them making an impact.”

Shelved Versus Withdrawn

Frazier noted that if the rules are shelved for a later date, as opposed to being withdrawn, “at some point in the future, they may be taken down, re-examined and then finalized.”

“If this is to be the case, having your opinion in the archive is important,” he said. “However, one would hope that, if there is a long interlude, the proposed regs would be re-proposed.”

Another worry is that Treasury will rush final rules through the regulatory process before Trump takes office, though Catherine Hughes, estate and gift tax attorney-adviser in the Treasury Department’s Office of Tax Policy, said Nov. 16 at an AICPA meeting that practitioners shouldn’t expect them anytime soon.

“We’re doing everything that we possibly can given the current environment” to make sure family businesses aren’t hurt by the Section 2704 regulations if the rules are rushed through, said Palmer Schoening, chairman of the Family Business Coalition, who intends to testify at the hearing. “What that means right now is showing up in full force and show the Treasury Department why family-owned businesses are against these regulations and how they use these discounts legitimately to help more fairly value their businesses.”

What to Expect

John W. Porter, a senior partner who is in charge of the Houston office of Baker Botts LLP and handles federal gift, estate and income tax litigation, said he expects most of the discussion at the hearing to revolve around the “scope” of the rules, particularly regarding Section 2704(b).

“There have been significant and justified concerns raised regarding the scope of these regulations,” said Porter, who plans to testify at the hearing. “What the proposed regulations under 2704(b) on their face do is apply a general family attribution test that has the potential to eliminate all discounts for lack of control or lack of marketability,” he said, noting that Treasury representatives have said that wasn’t their intention.

A specific provision that Porter expects to be addressed involves whether the regulations impose a “deemed put right” for all family business interests that would otherwise be subject to Section 2704. The proposed regulations don’t address what would happen if an entity’s governing instrument is silent on the ability of a business interest owner to withdraw or demand liquidation of his or her interest.

Many practitioners interpreted that silence to mean the rules’ intent was to give interest holders the right to demand the sale of their interest and receive equivalent cash or property within six months. At the recent AICPA meeting, Hughes said Treasury isn’t assuming such a right.

To contact the reporter on this story: Allyson Versprille in Washington at

To contact the editor responsible for this story: Meg Shreve at

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