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.
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.