On Monday, October 2, 2017, the US Treasury Department announced that various regulations identified as onerous would either be withdrawn, revoked in substantial part, or substantially revised, pursuant to a study of the regulations that were issued from January 1, 2016 to April 21, 2017, which was ordered by President Trump.
One of the regulations that is being withdrawn entirely is the highly publicized and criticized proposed Section 2704 regulations which limit the valuation discounts used in conjunction with various wealth transfer strategies.
During August of 2016, the proposed regulations were released to the public and severely restricted valuation discounts that had been used for decades by estate planners in wealth succession planning. These valuation discounts applied to the lack of marketability and the lack of control of business interests, when fractional ownership was transferred to family members or entities owned or controlled by family members.
At the 2017 Heckerling Conference, attendees were informed that the proposed regulation was met with significant objection, to the extent that the Treasury Department received over 3,000 responses from various professionals across the country.
The Treasury will be publishing the withdrawal in the Federal Register in the near future. This is great news to family-owned and closely-held businesses and a sign that the current administration is working toward revising, reducing, or potentially eliminating estate taxation.
A major set of regulations that could be revoked in part are the proposed and temporary partnership regulations that govern (i) how liabilities are allocated for disguised sale treatment and (ii) whether “bottom-dollar” guarantees create the economic loss necessary for the liability to be treated as a recourse liability with respect to the guaranteeing partner. The rules relating to the disguised sales are new and would change the tax treatment of the formation of many partnerships, so both the Treasury and the IRS are considering whether this aspect of these regulations should be revoked and the prior regulations reinstated. However, with respect to the regulations that govern the use of “bottom-dollar” guarantees, the Treasury and the IRS think that these rules should be retained. While they will both study the technical issues and the comments that have been made about the regulations, they do not plan to propose substantial changes.
Another major set of regulations that could be revoked in part are the final and temporary regulations on the treatment of certain interests in corporation as stock or indebtedness. One part of the regulations established minimum documentation requirements that are needed for debt obligations among related parties to be treated as debt for federal tax purposes. The Treasury and IRS now agree that the regulations departed from current practice and would have required corporations to incur substantial costs in order to comply with the regulations. While the effective date of the documentation rules has been delayed until 2019, the Treasury and the IRS are considering a proposal to revoke the regulations that have been issued and to develop revised documentation rules that will be simplified and streamlined.
Another part of these regulations treats as stock certain debt issued by a corporation to a controlling shareholder in a distribution. Generally speaking, these rules address corporate inversions and takeovers of U.S. corporations, by limiting the ability to generate additional interest expense deductions without any new investment in the U.S. The Treasury believes that legislation is the best way to address these issues and is working with Congress to pass tax reform measures that would eliminate the need for these regulations and they could be withdrawn. Until that is accomplished, the Treasury does not think that the regulations should be withdrawn. Ultimately, if new legislation is not passed or the legislation that is passed does not eliminate the need for the regulations, more streamlined and /or targeted regulations may be issued.
There are other regulations that were withdrawn, revoked in substantial part, or substantially revised but do not have the widespread application that the above regulations have.
Please reach out to your Citrin Cooperman advisor if you would like more information about any of the regulations that have been modified.