Proposed Treasury Regs Could be Game Changer for Select Few

Last month, the IRS issued proposed regulations designed to close a tax loophole that has become indispensible to family owned businesses and their tax advisers. According to Mark Mazur, assistant secretary for tax policy at the Treasury Department, the regulations (REG-163113-02 ) will “close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift purposes.” The loophole involves the valuation of corporate and partnership interests for estate, gift, and generation skipping transfer tax purposes. The rules and application are complex, but essentially, by allowing certain liquidation rights to lapse, the value of a transferred business interest between family members is artificially decreased.

Nearly everyone had heard of the estate tax. This is the tax the IRS imposes on the recently deceased who died owning over $5.45 million of property (net). Thus, for example, a married couple will avoid the estate tax if they have less than $10.9 million of net assets at death. If the couple had $15.9 million of assets, the estate tax would be imposed on $5.9 million of wealth, which could result in a tax bill of approximately $2.3 million. If the couple was able to discount the value of their property by 30% through the use of liquidation, lack or marketability or other discounts, they might escape all estate tax and recognize several million dollars of tax savings. The IRS has not been pleased with this result.

Earlier this week, 41 Senate Republicans wrote to Treasury Secretary Jacob Lew in an effort to lobby the Treasury into abandoning the proposed regulations. The Republicans argued the regulations would significantly increase the estate tax burden on family farms and businesses, and would contradict long-standing legal precedent and greatly discourage families from continuing to operate and grow their farms and businesses for eventual transfer to future generations.

If the proposed regulations become law, how many people will be impacted? Not a whole lot. According to a 2015 report from Congress’s Joint Committee on Taxation, 4,700 estate tax returns reporting tax liability were filed in 2013, out of 2.6 million total deaths in the United States. In other words, the estate tax hits about 1 out of every 500 people who die, or approximately 0.2% of Americans. — By Michael S. Cooper, Barnes Law

Michael Cooper is an associate attorney with Barnes Law, and is licensed to practice law in California.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.