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.
The Main Street Employers coalition sent a letter to congressional tax writers yesterday opposing the proposed rules on estate valuations and calling on Congress to weigh in with Treasury on the issue. From Politico:
The business community is escalating its efforts to beat back new Treasury regulations on the estate tax, which have somewhat fallen under the radar due to all the attention given to the Section 385 earnings stripping rules. A coalition called Parity for Main Street Employers sent leading congressional tax writers a letter asking Congress to urge Treasury to pull back rules that would make it harder for wealthy taxpayers to pass on a family business without paying estate or gift taxes. ” The impact of Treasury’s proposed changes should trouble Congress. Their attempt to legislate through regulation should be equally concerning. There is nothing in the statute or the legislative record to indicate Congress intended Section 2704 to be as broadly applied as the proposed rules suggest,” wrote the group, which includes the Independent Community Bankers of America, the National Association of Wholesaler-Distributors and the S Corporation Association.
Just a point of clarification – this isn’t about not paying estate taxes, it’s about paying more than you should owe. At issue are whether family businesses should be valued in the same manner as every other business, or in an alternative manner that artificially inflates what they are taxed on above fair market value. As the letter states:
The proposed regulations under Section 2704 target family businesses for higher estate and gift taxes, merely for being family-owned businesses. They would raise these taxes by largely eliminating the consideration of lack of control and lack of marketability when determining the fair market value of an interest in a family owned business, but only when that interest is passed on to a member of the family. Lack of control and lack of marketability are real economic factors that can reduce the fair market value of an asset by a sizable amount, so the proposed rules would have the effect of increasing the applicable estate and gift taxes by 30 percent or more.
The challenge for the business community is the short legislative window. There’s lots of interest on the Hill in responding to these rules, but very little time for Congress to take action. They leave town sometime next week and don’t come back until after the election. In the meantime, the official comment period for the rule will end on November 2nd. So if Congress is going to act, it will have to get moving.
Another S Corp Mod Provision In Play!
On Wednesday, the Senate Finance Committee approved the Retirement Enhancement and Savings Act by a unanimous vote and forwarded it on to the full Senate for consideration. Thanks to the urging of S-CORP Senate champions John Thune (R-SD) and Ben Cardin (D-MD), a modified version of an S Corporation Modernization Act provision was included in the final package.
This provision would expand the ability of S corporation banks to have IRA shareholders. Twelve years ago, Congress adopted a previous provision, but limited its application to banks that already had IRA shareholders as of October 22, 2004. This new provision enables even more community banks to become S corporations and helps to level the playing field in that industry.
Now that the pension bill has been reported from the Committee, the goal is for provisions from the bill to be included in one of the end-year vehicles the full Senate will consider. With unanimous committee passage, these provisions now have the support of over one quarter of the Senate. So, we will continue to monitor the progress of these reforms.
Business Valuation Wire reports there has been a sharp spike in the number of families asking valuation professionals to analyze what the newly proposed rules out of Treasury mean to their business succession plans:
Valuation practitioners tell BVWire they are already seeing an increase in valuation engagements triggered by the proposed Section 2704 regulations. And they expect this to gain steam as the regs continue to sink in with attorneys, wealth planners, and clients.
This should not come as a surprise. The proposed rules target family businesses for higher estate and gift taxes, simply for being family-owned businesses. They accomplish this by forcing the estates of family business owners to disregard important facts like control and marketability when ownership of the business is being passed on to the next generation. Read through the S-Corp presentation for a full explanation.
The good news is the rule is just proposed, and there is time for you to act to block this rule from becoming law. Here are three steps you can take right now to help us defeat this rule.
- Sign the Letter!
Are you a family business? Do you intend to pass your business on to the next generation? Do the pending rules threaten those plans? Then click on the link below and sign this letter opposing the new Treasury regulations.
Spearheaded by our allies at the National Association of Manufacturers, the goal of the letter is to get as many business groups and family businesses as possible to sign on prior to COB on September 26th. So click on the link, add your business, and forward the link to other family businesses!
Contact the Small Business Advocate
The Office of Small Business Advocate is charged with defending the Main Street business community against harmful federal rules, and they need to hear from you on this issue.
Submit Your Formal Comments!
The law requires Treasury to have a comment period on large rule changes like this one, so this is your chance to weigh in directly with the staff who drafted the proposed rule. Click on the link below to register your opposition!
The Comment Period lasts through November 2nd, but don’t wait. Already, dozens of family business owners have weighed in with comments like this one:
I am a 4th generation citrus grower and our family business is taxed high enough as it is. The citrus industry is suffering today greatly from a disease called Greening. We are having difficulty as it is without having to plan for additional estate taxes down the road.
Get your comments in today!
That’s it for now. Much more to follow.