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:
- S Corporation Association
- Family Business Estate Tax Coalition (NFIB-led coalition)
- American Institute of Certified Public Accountants
- American Society of Appraisers
- Associated General Contractors
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.
Yesterday, the S Corporation Association submitted its formal comments to the IRS on the pending Section 2704 valuation rules. You can read all 15 pages of comments here, but the basic message of the submission was that Treasury should discard this effort and start over. As the comments conclude:
Promulgation of the Proposed Regulations in their current form and scope will generate significant uncertainty and constitute a significant impediment for the continuity of family-controlled businesses. The Proposed Regulations inappropriately and illegally discriminate against family controlled businesses in form and effect. If Treasury is inclined to promulgate regulations to address perceived abuse, those regulations should be targeted in scope, capable of reasonable application and administration, and consistent with Congress’s intent, as set forth in § 2704 and the legislative history of Chapter 14. The Proposed Regulations do not satisfy any of those conditions.
The comment period for these proposed regulations doesn’t end until November 2nd, but already Regulations.Gov reports there have been more than 3200 comments submitted, with many more expected prior to the deadline. The NFIB-NAM letter to Treasury Secretary Jack Lew had more than 3800 signatories, so this issue is getting people’s attention.
Meanwhile, Treasury Officials continue to speak to groups and make the following two points:
- The proposed rules are not nearly as far-reaching as what outside experts have reported; and
- It is highly unlikely that the IRS and Treasury will be able to finalize these rules prior to the end of the Obama Administration.
We take these points seriously, but are still left with the reality of what Treasury proposed back on August 2nd. As our comments make clear, what Treasury printed in the Federal Register is a very broad proposal that would largely eliminate the consideration of control and marketability for a wide swath of family businesses when valuing them for gift and estate taxes. The result goes well beyond what Congress enacted back in 1990 and would be a significant hike in taxes on those family businesses, leading to fewer family businesses and a further consolidation of economic power with large, publicly-traded companies.
Thousands of family businesses signed a letter this week calling on the Department of the Treasury to withdraw proposed regulations that target family businesses for sharply higher gift and estate taxes.
Getting that many private companies to weigh in on a public issue like this one is simply astounding, and should serve as an indication of just how threatening these regulations are to the ability of family businesses to survive from one generation to the next. As Law360 reported on the letter:
NAM released a letter with more than 50 pages of signatures urging Lew to pull the proposed regulations, which tax practitioners and estate planners have been quick to reprove for purportedly ignoring the economic realities of transferred interests in closely held businesses.
The regulations, which were announced in early August, will have a detrimental effect on family-owned businesses because they could increase estate and gift taxes by 30 percent or more, divert capital from business investment, threaten jobs, and force families to sell their businesses to outsiders, Wednesday’s letter said.
“These proposed regulations would throw the succession and estate planning of thousands of family-owned manufacturers into disarray, increase tax bills and impose additional planning and legal costs on these businesses, drawing valuable resources away from the ability of family businesses to grow, invest and create jobs,” NAM said. “It is critically important that Treasury withdraw these ill-conceived regulations as soon as possible.”
The letter was released during a week full of activity on the valuation issue. Senator John Thune (R-SD) also released a letter calling on Treasury to pull back the proposed rules. Signed by 41 Senators, including numerous members of the Finance Committee, the letter follows a similar communication authored by Thune last year and makes clear the policy challenge posed by the draft rules:
Treasury should pursue policies that encourage the creation and growth of family businesses and not propose regulatory changes that make it more difficult and costly for families to transfer ownership to future generations. We thus request that Treasury withdraw the proposed regulations and ask that any regulations that Treasury may issue in the future more directly target perceived abuses in the valuation of transferred interests in family businesses.
Meanwhile, legislation has been introduced in both the House and the Senate to block Treasury from finalizing the proposed rules. Sponsored by Congressman Warren Davidson (R-OH) in the House and Senator Marco Rubio (R-FL) in the Senate, this legislation objects to the underlying premise of the proposed rules and prohibits Treasury from taking action to make them final. The House bill was introduced just last week, but already has more than 60 cosponsors.
S-Corp plans to spend October meeting with Hill offices and building support for the two bills. With Congress coming back in mid-November, the challenge will be to build sufficient support on this issue to compel the House and Senate to take action before the end of the year.
You can help. The NAM letter has already been sent, but the official comment period is open until November 2nd, so trade groups and family businesses still have the ability to weigh in on this issue. If you would like to comment, click here and file your comments! The more Treasury hears from the business community on this issue, the less likely they will be able to finalize the harmful rules as drafted. It’s that simple.