IRS to Withdraw Special Valuation and Political Subdivision Proposed Regulations, and Continue Regulation Review


The U.S. Department of the Treasury issued a report today to comply with Executive Order 13789 announcing the actions to be taken on the eight complex and burdensome regulation projects identified in Notice 2017-38. The Treasury announced the withdrawal of the proposed regulations under §2704 on restrictions and lapsing rights for estate, gift and generation-skipping transfer tax purposes, and the withdrawal of the proposed regulations under §103 on defining political subdivisions. In addition, the Treasury announced that the IRS, in coordination with the Treasury Regulatory Reform Task Force, will be reviewing all IRS regulations.

Withdrawal of proposed regulations on restrictions on interest liquidation

The stated goal of the §2704 proposed regulations was to address changes in state law and developments in federal case law that impacted the applicability of §2704. These changes enabled family-controlled entities to generate artificial valuation discounts, such as for lack of control and marketability, reducing the value of property for gift and estate tax purposes. Comments submitted after the proposed regulations were issued noted that the requirements were unclear and that their effect on current case law was uncertain. The commenters noted that the disjunction between the legal restrictions under state law, and the regulations’ disregard for those restrictions made applying the regulation impossible. Commenters also noted that the proposed regulations could diverge from the current fair market value standard.

The Treasury and the IRS recognized the proposed regulations are unworkable, and that taxpayers, the IRS, and the courts would not be able to apply the regulations in a practical manner. Given the difficulty in applying the proposed regulations, the Treasury concluded it was unclear whether the valuation rules reduced artificial valuation discounts, that the burden of compliance with the proposed regulations would be excessive, and that the proposed regulations could impact valuation where discounts were appropriate. The proposed regulations will be withdrawn shortly.

Withdrawal of proposed regulations on definition of political subdivision

The proposed regulations would have required a political subdivision to meet heightened standards to allow municipal bond interest to be tax exempt to bond holders. The Treasury noted that commenters had stated that settled law only requires a political subdivision to possess sovereign powers, and many commenters argued that the proposed regulations would force costly and burdensome changes to entities’ structures. The Treasury and the IRS concluded that some enhanced standards for political subdivisions may be appropriate, and they will continue to study the issues. However, the Treasury and IRS concluded that these proposed regulations should be withdrawn in their entirety, although they may propose more targeted guidance in the future.

Ongoing review

The Treasury will continue to analyze all recently issued, significant regulations and will consider possible reforms of recent regulations not identified in the Notice 2017-38, including ones under the Foreign Account Tax Compliance Act (FATCA).

Also, the IRS Office of Chief Counsel has already identified over 200 regulations for potential revocation, as unnecessary, duplicative, or obsolete. The IRS is also considering streamlining regulations where possible. The evaluation of all IRS regulations is expected to start this year, and will identify the regulations that are unnecessary, create undue complexity, impose excessive burdens, or fail to provide clarity and useful guidance, the reasons for revocation, and the manner of revocation. There is no indication in the report to indicate that there will be further public input beyond the Administrative Procedure Act.

For everything necessary to research, plan, and implement strategies for maximizing your clients’ control while minimizing taxes, take a free trial to the Estates, Gifts and Trusts Portfolios Library.