Response to Valuation Rules Continues

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 Community Responds to Valuation Rules

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.

  1. 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!

  1. 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.

  1. 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.

Treasury Hits Family Businesses!

The verdict is in, and Treasury’s proposed rules on estate tax valuations of family-owned businesses are broad – very broad indeed. They are, simply put, a direct assault on America’s family-owned businesses.

Here’s the take of WealthManagement.Com:

Although the details are significant, the bottom line is that the proposed regulations would appear to eliminate almost all minority (lack of control) discounts for closely held entity interests, including active businesses owned by a family. To accomplish that, restrictions under the governing documents and even those under state law would be disregarded for valuation purposes.

And Steve Leimberg’s Estate Planning Email Newsletter:

In short, it may appear that, outside of the new three year rule, that not much is being proposed with respect to the valuation of minority discounts.  One might, therefore, conclude… that minority discounts remain largely intact with a narrow exception for transfers made within three years of death.  That reading would not, however, be accurate.  As will be discussed, the proposed regulations under Section 2704(b), in particular based upon a new concept referred to as “Disregarded Restrictions,” are a frontal attack on the concept of discounts in the context of family entities.  Given the failure the IRS has sustained in the courts in terms of its argument favoring a family-attribution principle and given its resulting frustration, it must be conceded that the new Disregarded Restrictions approach seems masterfully drafted.  

So so-called “minority interest” discounts are at risk under the proposed rules. What does that mean?  It means that family owned businesses will be valued, and taxed, at significantly higher rates than businesses owned by non-related parties.  How much more depends on the facts and circumstances of each case, but minority discounts of 20, 30, 40 percent and higher are common and have been approved by the courts.

But aren’t these discounts just a loophole? No, not at all.  Minority interest or “lack of control” discounts reflect the underlying economic reality that ownership without control – control to sell, control to make management decisions, control to distribute profits — is worth significantly less than ownership with control.  If you own 30 percent of a company, but have no say in how the business is run or when it is sold, then your share of the company is worth significantly less than 30 percent of the total value of the company.

For examples of minority discounts, look no further than the stock exchanges. Every stock on the New York Stock Exchange is traded with a minority discount imbedded in the price.  That is why investors seeking to buy a controlling interest in a publicly traded company are willing to offer a premium over the traded price.  Unlike retail investors, they expect to have a controlling interest at the end of the day, so they are willing to pay more.

So when Treasury calls this a “loophole”, what they are really upset about is the underlying economic reality of control. One might as well complain that the sky is blue.

This is not a new fight. The IRS has been waging, and losing, the battle over these discounts for decades.  But the newly proposed rule represents a whole new tact on the part of Treasury that needs to be taken seriously by the business community.  This is the first time in the long battle over discounts that Treasury has hung its efforts on an existing, albeit 26-year old, statute.

So does section 2704 give Treasury the authority to eliminate minority interest discounts for family-owned enterprises? Probably not.  But we won’t have the ultimate answer to that question until these rules are fully litigated in the press, the comments to Treasury, the elections, the Congress, and finally the courts.

For next steps, there’s the 90-day comment period ending in early November, a public hearing in early December, and then the bums rush by Treasury to get these regulations out the door before the end of the Obama Administration.

In the meantime, the business community, including your S Corporation Association, will be up in arms once again. This proposed rule combines the two signature trademarks of this Administration – a jaded view of private enterprise coupled with a willingness to push the envelope on legal authority. We expect to ultimately win this battle, but it will take a long time and waste innumerable resources that could otherwise be used to invest and create jobs.  What’s the point in that?

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