On July 7, 2017 the internal revenue service issued Notice 2017-38, 2017-30 IRB* which announced the implementation of Executive Order 13789.  Executive order 13789 was issued by President Donald J. Trump on April 21, 2017, and was a directive designed to reduce tax regulatory burdens.

This executive order instructed the Secretary of the Treasury to review all significant tax regulations issued after January 1, 2016.  The Secretary of the Treasury is tasked to identify proposed regulations that:

1. Impose an undue financial burden on U.S. taxpayers;
2. Add undue complexity to the Federal tax law;
3. Exceed the statutory authority of the Internal Revenue Service (“IRS”).

One of the proposed regulations that was issued after January 1, 2106 was the change to Section 2704 on Restrictions on liquidation of an Interest for Estate, Gift, and Generation-Skipping Transfer Taxes.
These proposed regulations attempted to reduce significantly the ability to take discounts for estate and gift valuations.

Proposals:

• Definition of control – control of an LLC, or any other entity that is not a corporation, partnership, or limited partnership, as the holding of an interest or capital of at least 50%.
• Changes to the lapse rule – a transfer that results in the restriction or elimination of any rights or powers associated with the transfer interest is treated as a lapse within the meaning of Code Sec. 2704(a).
• Narrow the exception to when a lapse of a liquidation right occurs and limits it to a transfer occurring three or more years prior to the transfer’s death that does not restrict or eliminate the rights associated with the ownership interest.
• Amend Regulation Sec. 25.2704-1(c)(2)(i)(B) to conform the existing provision for testing the family ability to liquidate an interest with the elimination of the comparison with local laws.
• Disregard certain restrictions placed on liquidation or transfer.  These disregarded restrictions are detailed in Section 25.2701-3(b) and are specifically defined.

The IRS and other government bodies have received many comment letters mainly addressing the fact that these proposed regulations could potentially create an additional category of restriction that would be disregarded in assessing the fair market value of an interest.  Commenters expressed a major concern upon the potential financial burden to the tax payer through the elimination of discounts, particularly the discount for lack of marketability and control, ultimately increasing the value of the business and the potential transfer tax liability.  In addition, many commenters were concerned that the narrowing of existing regulatory exceptions was arbitrary and capricious.

Grassi & Co. professionals have highly qualified members in both the trust and estate department and the valuation department that can provide advice on the importance of estate planning, as well as, valuing your business.  This will help you take advantage of rules that are currently in place and  assist you in properly complying with potential changes in the future. Contact Grassi & Co. professionals Lisa Rispoli, Partner-in-Charge of Trust & Estates, at lrispoli@grassicpas.com, or Pasquale Rafanelli, Valuation Manager, at prafanelli@grassicpas.com.