Proposed Estate Tax Regulations Opposed by AICPA to be Withdrawn, Treasury Department Says

The U.S. Department of the Treasury announced on October 4 that it will withdraw proposed regulations issued under section 2704 regarding restrictions on liquidation of an interest and the valuation of interests in corporations and partnerships for estate, gift and generation-skipping transfer tax purposes, as the American Institute of CPAs (AICPA) advocated in testimony at an Internal Revenue Service hearing on December 1, 2016 and also recommended in a January 13, 2017 letter. 

Reacting to the news of Treasury’s announcement, Eileen Sherr, AICPA senior manager for tax policy and advocacy, said, “The diligent efforts over the past year of the AICPA Family Limited Partnership Issues Task Force are very much appreciated because they were instrumental in crafting the AICPA’s comment letters and IRS testimony, which I believe contributed to Treasury’s decision.  This change is a relief to many tax and valuation practitioners who will no longer have to include on relevant gift tax returns the AICPA suggested adequate disclosure statement regarding the section 2704 proposed regulations.” 

Testifying for the AICPA at the IRS hearing were Justin P. Ransome, J.D., past chair and current member of the AICPA Trust, Estate, and Gift Tax Technical Resource Panel and the chair of the AICPA Family Limited Partnership Issues Task Force, and Michelle F. Gallagher, CPA/ABV/CFF, chair of the AICPA Accredited in Business Valuation (ABV) Credential Committee and past chair and current member of the ABV Exam Task Force and vice chair of the AICPA Family Limited Partnerships Issues Task Force.

Annette Nellen, CPA, CGMA, Esq., chair of the AICPA Tax Executive Committee summed up the AICPA’s position this way in the January 13 letter, “The AICPA urges Treasury and the IRS to formally withdraw the proposed regulations.”  She wrote that the regulations “are overly broad and expand the breadth of section 2704 in a manner not contemplated by Congress.”  

Treasury’s action this month followed the Department’s review of tax regulations under President Trump’s April 21 executive order directing a review of all significant tax regulations used by Treasury on or after January 1, 2016.

The AICPA continued to press for withdrawal of the section 2704 proposed regulations in a May 16 letter and in an August 2 letter in response to Notice 2017-38, in which the Department of the Treasury identified eight specific regulations for further review and possible action under the executive order.

The AICPA also recommended in its August 2 letter that three other proposed regulation be withdrawn:

• section 385 regarding recharacterization of certain debt instruments issued between related corporations, as equity for United States (U.S.) federal income tax purposes,
• section 987 regarding income and currency gain or loss with respect to a qualified business unit, and
• section 367 regarding the exception for outbound transfers of foreign goodwill and going concern value and the application of the active foreign trade or business exception.

In its report, the Treasury Department said it plans to withdraw the documentation requirements under section 385 and replace them with “streamlined” rules.  The proposed section 987 regulations are slated for “substantial revisions.”  Treasury said it would continue to implement the section 367 regulations, but plans to “develop exceptions to the regulations.”

For further details about the Treasury’s report, read the October 4 Journal of Accountancy article.