2704 Comment Period Closes Big

The official comment period on the proposed Section 2704 regulations closed yesterday, with nearly 10,000 comments filed!  You can review those comments here, but a cursory review this morning made clear they were nearly unanimous in their opposition to the Treasury action.

Eventually, all the comments submitted will be accessible at the regulations.gov website, but until then, here are some of the more significant comment letters we’ve seen.  Definitely worth a read if you have clients or businesses affected by the proposed rule:

The Small Business Administration’s Office of Advocacy also weighed in on the regulations. The Advocate is an independent office charged with representing the small business community before Congress and the federal government, particularly through the application of the Regulatory Flexibility Act (RFA).  According to the Advocate:

The Regulatory Flexibility Act (RFA)… gives small entities a voice in the rulemaking process.  For all rules that are expected to have a significant economic impact on a substantial number of small entities, federal agencies are required by the RFA to assess the impact of the proposed rule on small entities and to consider less burdensome alternatives.

In certifying that the 2704 rules would not impact small businesses, Treasury argued that “any economic impact on entities affected by section 2704, large or small, is derived from the operation of the statute, or its intended application, and not from the proposed regulations in this notice of proposed rulemaking.”  It also argued that the rules would “affect the transfer tax liability of individuals who transfer an interest in certain closely held entities and not the entities themselves.”

The former argument represents a novel legal approach that would effectively gut the RFA by exempting all regulatory implementations of statutes, while the latter argument is simply a hoot—we’re just taxing the owners of small businesses here, not the businesses themselves.  We don’t buy it, and neither does the Office of the Advocate.  They recommend Treasury go back and conduct a proper economic assessment like they were supposed to.

Meanwhile, the Ways and Means Republicans released a letter today expressing their strong opposition to the rules.  24 committee members signed the letter, which states:

These proposed regulations as drafted represent a dramatic change from past practice and history and are not consistent with congressional intent. In order to avoid immediate and substantial economic harm to family-owned businesses and the jobs they create, these regulations should be withdrawn. Any new proposal in this area should be clearly defined and narrowly targeted within the reach of the applicable statutory rules.

With Congress returning for a Lame Duck session in two weeks, the Ways and Means letter will help us rally House members in opposition to the rule.

Looking forward, the IRS is hosting a public hearing on December 1st where we expect dozens of business representatives to come speak out against the rule.  S-Corp will be there, together with many of our allies.  Following that, the official comment period is over and Treasury will need to wade through all of the comments and address them fully, either by stating clearly why they disagree or by redrafting the rules to address the suggested changes.

Can this all be accomplished prior to the end of the Obama Administration?  Treasury officials argue no, while the political people at Treasury and the White House are less reassuring.  The White House has embraced a policy of getting as many rules out the door as possible, so we continue to operate with the possibility that these 2704 rules are part of the last-minute rush.  We hope that’s not the case, but it’s just too important to take chances.

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