Treasury Targets January for Final Estate-Basis Rules

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By Allyson Versprille

Nov. 16 — The Treasury Department is working to complete controversial rules on estate-basis consistency by the end of January, a department official said.

“I’m not sure we’re going to make it, but we’re trying,” said Catherine Hughes, estate and gift tax attorney-adviser in Treasury’s Office of Tax Policy. For the final rules, “we are looking at the impact, at whether or not you get an adjustment in date-of-death basis for assets that are not included in the decedent’s gross estate for tax purposes,” she said Nov. 16 at the American Institute of CPAs Fall Tax Division Meeting.

The basis consistency regulations require that the basis of assets received from a decedent be consistent with the basis reported on the estate tax return.

Under the tax code, a regulation can only be retroactive if it is issued within 18 months of the date of enactment of the statute, Hughes told Bloomberg BNA. “The statute was enacted July 31, 2015, so if we publish a final reg on or before Jan. 31, 2017, that reg can be retroactive to the date of enactment of the statute, instead of purely prospective.” That’s the “magic” of issuing the rules before the end of January, she said.

Clock Is Ticking

Also, the sooner the rules become final, the sooner forms and instructions can be changed, which helps taxpayers comply with ongoing filing requirements, Hughes said.

The consistent-basis requirement was enacted by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (Pub. L. No. 114-41). The Internal Revenue Service issued proposed regulations (REG-127923-15) in March under tax code Sections 1014(f) and 6035.

Hughes and Leslie Finlow, senior technician reviewer in Branch 4 of the Office of the Associate Chief Counsel (Passthroughs and Special Industries), also said the IRS and Treasury are continuing to work on the rules on valuation discounts under Section 2704, despite backlash from trade groups and uncertainty surrounding the future of the estate tax in general under President-elect Donald Trump, who has called for repeal.

‘We Don’t Have a Crystal Ball.’

Leigh-Alexandra Basha, a partner at McDermott, Will & Emery LLP representing the American Bar Association, asked the officials if discussions about a potential estate tax repeal are being factored in as they work on preparing final Section 2704 regulations, noting that such work cuts into the limited resources of Treasury and the IRS. The rules (REG-163113-02) proposed in August would make changes to the valuation of interests in family-owned businesses for estate, gift and generation-skipping transfer tax purposes.

Many argue that the regulations are too broad and would make it harder to transfer businesses to succeeding generations. Trade groups, family business owners and politicians are among the groups that raised concerns in the nearly 10,000 comments the IRS received by Nov. 2—of which only three were positive, according to Hughes. Bills introduced in both the House and Senate would block funding to the regulations, and many assume that with a Republican majority in Congress and Trump in the White House, the regulations will be shot down.

Different administrations have different priorities, but “for the time being, the statute is still on the books and this is still a part of our job,” Hughes said.

“We’ll work as long as we’re asked to work,” Finlow said. However, because there is so much uncertainty, the agency can’t “give a lot of comfort to people” on the future of the Section 2704 regulations, she said.

‘Nothing Is Retroactive.’

Until more is known, business will continue as usual, the officials said. Treasury and the IRS are sifting through the comments they have received and have extended the comment period by 30 days. Finlow and Hughes also confirmed that a scheduled Dec. 1 hearing on the proposed valuation rules hasn’t been canceled.

In the final regulations, which practitioners shouldn’t expect anytime soon, Treasury and the IRS intend to clarify some of the “misinformation” that exists regarding the valuation rules, the officials said.

The final guidance will address the concern that the three-year provision—which says that the transfer of an interest in a family-owned entity made within three years of the transferor’s death will be treated as a lapse occurring on the decedent’s date of death and includable in his or her gross estate—is retroactive.

“We’ve heard that complaint and we’re going to fix it,” Hughes told Bloomberg BNA following the AICPA panel. “There is nothing in this regulation that is retroactive,” she said.

Surprising Concern

An issue that Hughes said she was surprised to see arise in comments was the concern that the rules impose a “deemed put right” for all family business interests that would otherwise be subject to Section 2704.

The proposed regulations don’t address the result that would occur 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. That isn’t the case, Hughes clarified.

Treasury and the IRS want practitioners to continue to provide comments, especially if they offer suggestions on how to reword confusing sections, Hughes said.

The regulations include a provision that allows taxpayers to value a decedent’s interests that aren’t going to a family member—to charity, for example—differently from those that are. But as one attorney attending the AICPA panel pointed out, it isn’t entirely clear how transfers to a charitable lead trust or charitable remainder trust that includes both the family and a charity as beneficiaries would be treated.

Hughes said Treasury “needs to give more thought” to that issue before issuing final regulations.

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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