Section 2704 Regs Withdrawn; IRS Priority Guidance List More Regs on the Chopping Block

(Parker Tax Publishing October 2017)

The IRS has withdrawn controversial regulations issued under Code Sec. 2704 which would have imposed major restrictions on valuation discount planning with respect to intra-family transfers of family owned businesses. The IRS also issued its annual list of projects that it hopes to complete during the 12-month period from July 1, 2017, through June 30, 2018. Unlike in prior years, the list includes regulations which the IRS says it may remove or update because they impose excessive burdens on taxpayers or fail to provide clarity and useful guidance. 82 FR 48013 (10/16/17); IRS 2017-2018 Priority Guidance Plan.

On October 20, the IRS released their 2017-2018 Priority Guidance Plan (the "Plan"), which sets forth guidance priorities for the Treasury Department and the IRS for the upcoming 2018 fiscal year. As noted in the Plan, the priorities take into account public input, as well as the burden-reducing policies and reforms described in Executive Order (EO) 13789 and EO 13777. Several days before releasing the Plan, the IRS withdrew two sets of regulations which had previously been identified in EO 13789 as ripe for amendment or repeal - proposed regulations under Code Sec. 2704 (REG-163113-02), which had been issued on October 4, 2016 and which had received more than 9,000 comments, most of which were unfavorable, and proposed regulations under Code Sec. 103 (REG-129067-15), which had been issued on February 23, 2016.

Executive Orders 13789 and 13777

On January 30, 2017, President Trump signed EO 13771, Reducing Regulation and Controlling Regulatory Costs. The EO directs agencies to eliminate two regulations for each new regulation issued and to limit costs for the fiscal year to zero. On February 24, 2017, the President issued EO 13777, Enforcing the Regulatory Reform Agenda, which requires agencies to convene a regulatory reform task force to assist in the implementation of EO 13771. Among other things, EO 13777 requires the task force to attempt to identify regulations that eliminate jobs or inhibit job creation; are outdated, unnecessary, or ineffective; impose costs that exceed benefits; or create a serious inconsistency or otherwise interfere with regulatory reform initiatives and policies.

On April 21, 2017, President Trump issued EO 13789, a directive designed to reduce tax regulatory burdens. The order instructs the Secretary of the Treasury to review all "significant tax regulations" issued on or after January 1, 2016, and submit two reports, followed promptly by concrete action to alleviate the burdens of regulations that meet the criteria outlined in the order. Specifically, Section 2 of EO 13789 directed the Treasury Secretary to submit a report identifying regulations that meet the following criteria: (1) they impose an undue financial burden on U.S. taxpayers; (2) they add undue complexity to the federal tax laws; or (3) they exceed the statutory authority of the IRS.

Eight Regulations Identified under EO 13789

In furtherance of EO 13789, the IRS issued Notice 2017-38 which identified eight tax regulations that fit the criteria for possible amendment or repeal. Included in the eight regulations were (1) temporary partnership liability regulations under Code Sec. 752, which significantly changed the rules relating to partnership disguised sales and the allocation of partnership liabilities; (2) proposed regulations under Code Sec. 2704, relating to valuation discounts with respect to interests in family owned businesses being transferred among family members, and which had received more than 9,000 comments, most of which were unfavorable; and (3) final and temporary regulations under Code Sec. 385, relating to the classification of instruments as debt or equity, and which practitioners had argued were a dramatic deviation from decades of debt/equity law.

Withdrawal of Sec. 2704 Proposed Regulations

When the IRS issued the proposed regulations under Code Sec. 2704(b) in 2016, practitioners immediately assailed the rules as overly complex and burdensome. They warned that the new rules would have the effect of eliminating a common estate planning technique used by owners of family controlled entities involving discounts, such as minority discounts and discounts for lack of marketability, for transfers of interests in the family controlled entities. This would result, they said, in increased valuations and transfer tax liability that would increase financial burdens on the family-controlled entities. Practitioners were also concerned that the proposed regulations would make valuations more difficult and that the proposed narrowing of certain rules under Code Sec. 2704 was arbitrary and capricious.

On October 16, the IRS officially withdrew the proposed regulations under Code Sec. 2704, as well as proposed regulations under Code Sec. 103, which defined a "political subdivision" of a state that is eligible to issue tax-exempt bonds for governmental purposes.

2017-2018 IRS Priority Guidance

The 2017-2018 IRS Priority Guidance Plan (the Plan) contains guidance projects that the IRS hopes to complete during the 12-month period from July 1, 2017, through June 30, 2018 (i.e., the Plan year). Part 1 of the Plan focuses on the eight regulations from 2016 that were identified in Notice 2017-38 (including the Code Sec. 2704(b) regulations and the Code Sec. 103 regulations that were withdrawn on October 16)) pursuant to Executive Order 13789 and the IRS's intended actions with respect to those regulations.

Part 2 of the Plan describes certain projects that the IRS has identified as burden reducing and that it believes can be completed in the 8 1/2 months remaining in the Plan year.

Part 3 of the Plan describes the various projects that comprise the IRS's implementation of the new statutory partnership audit regime, which goes into effect on January 1, 2018.

Part 4 of the Plan describes specific projects by subject area that will be the focus of the balance of our efforts this plan year.

The guidance listed in the Plan which the IRS considers as needing updating or revocation include the following:

(1) Guidance removing or updating regulations that are unnecessary, create undue complexity, impose excessive burdens, or fail to provide clarity and useful guidance.

(2) Regulations under Code Sec. 1014(f) and Code Sec. 6035 regarding basis consistency between estate and person acquiring property from decedent. Guidance under Code Sec. 170(e)(3) regarding charitable contributions of inventory.

(3) Final regulations under Code Sec.263A regarding the inclusion of negative amounts in additional Code Sec. 263A costs.

(4) Final regulations under Code Sec.4051 and Code Sec. 4071 on heavy trucks, tractors, trailers, and tires.

(5) Final regulations under Code Sec. 2642(g) describing the circumstances and procedures under which an extension of time will be granted to allocate GST exemption.

(6) Guidance under Code Sec. 1362(f) regarding the validity or continuation of an S corporation election in certain situations involving disproportionate distributions, inconsistent tax return filings, or omissions on Form 2553, Election by a Small Business Corporation.

(7) Guidance under Reg. Sec. 301.9100 regarding relief for late regulatory elections.

(8) Guidance on refunds under Combat-Injured Veterans Tax Fairness Act.

(9) Guidance under Code Sec. 954(c) regarding foreign currency gains.

(10) Guidance under Code Sec. 954, including regarding the use of foreign statement reserves for purposes of measuring qualified insurance income under Code Sec. 954(i).

(11) Guidance under Code Sec. 3405 regarding distributions made to payees, including military and diplomatic payees, with an address outside the United States.

(12) Rev. Rul. 67-390.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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