Article on Estate & Gift Tax Valuation Outlook for 2017

William H. Frazier recently published an Article entitled, Estate and Gift Tax Valuation Outlook for 2017: Hearing on Proposed Regs and Other Developments, Tr. & Est. 48 (Feb. 2017). Provided below is an abstract of the Article:

Since the release of the proposed changes to Internal Revenue Code Section 2704 on Aug. 2, 2016 (the proposed regs) and until the election of Donald J. Trump on Nov. 8, 2016, wealth taxpayers, family businesses, estate planners and business appraisers thought and talked about little else other than the possible valuation ramifications of these changes to the regulations. Many read the complicated and confusing document as a thinly disguised proscription of valuation discounts. Some interpreted the document as relatively benign. Others simply weren’t sure what the Internal Revenue Service was driving at and why this was even needed. 

Unexpectedly, the proposed regs didn’t exempt U.S. farms and family businesses. This was a great surprise to taxpayers and the estate-planning community. It was well known that the proposed regs might be forthcoming, but it was generally understood that any regulatory change would exempt family businesses. That it didn’t was a huge miscalculation by the Treasury, as this allowed the opponents of the proposed regs to tap into the same populism that swept Trump into office. Many perceived the proposed regs as a message that the IRS was unfairly targeting U.S. farms and family businesses, which were already challenged by foreign competitors and beleaguered by government regulations. The IRS received over 10,000 comment letters, an unprecedented amount. Almost all of the letters were negative, and almost all cited the attack on the family business as justification for the nullification of the proposed regs. 

Also contributing to the strong reaction from taxpayers and their advisors were two terms appearing in the document that, on even a relatively careful reading, indicated that the IRS was unleashing a novel and malevolent valuation construct that would eviscerate almost all forms of estate and succession planning. “Minimum value” was a new term coined by the IRS that essentially meant “enterprise value” for (the equity of) an operating business or net asset value for an investment or holding entity. “Disregarded restriction” meant any restriction that limited the ability of the holder of the interest to liquidate at less than minimum value in less than six months for cash. So, the first impression of the proposed regs was that it eliminated all valuation discounts. This belief was made more widespread by the publication of articles by well-known estate planners and appraisers stating that, under the proposed regs, the valuation of an equity interest of any member of a family control group must be made as if it had a “deemed” put right at minimum value.