Through the process of its amended tax law regulations, the IRS is likely to encounter hostility at the upcoming December 1 hearing on the matter. Much of the discussion will focus on whether or not it will be accused of “overstep[ing] its authority” in this regard.
What are the experts saying on this? Pioneer Wealth Partners principal Johnathan Blattmachr believes that regarding the authority the Treasury and IRS are to be “viciously attacked by taxpayers and their advisers.” However, the Tax Court might uphold the regulations using the three-decade old deference doctrine set forth by the US Supreme Court decision in the Chevron USA Inc. v Natural Res. Def. Council case. Back then, the court formed a legal test to determine whether or not to “grant deference to a government agency’s interpretation of a statute that it administers.”
In terms of valuation discount elimination, Blattmachr notes that the regulations “would seem to eliminate minority (or lack of control) discounts for all family ‘controlled’ entities including active businesses.”
Charles (Chuck) Rubin sees one possible silver lining in a recent article in JDSupra Business Advisor. He said: “assuming the higher Section 2704 values allow for higher basis for interests held at death, this will allow for income tax savings. For estates within annual exclusion amounts (and thus no estate tax) such basis step-ups could make this a revenue loser for the IRS.” But in the same journal in an article by Leah Bishop, Tarin Bross and Alyse Pelavin, it was pointed out that “the proposed regulations, which attempt to significantly limit the ability to claim valuation discounts.”
Still, should these regulations be finalized there are still various exceptions. Bishop, Bross and Pelavin point out that: a) the regulations are not applicable to all entities; and, b) when a taxpayer dies, the valuation discounts of that estate tax benefit are “often offset by an income tax cost due to lower tax basis of the inherited property.”
The three concluded that where these regulations are “particularly important” is vis-à-vis infra-family gifts and sales to reduce estate tax payable with a death. In all such situations like these, consulting an expert in the industry on the specific case is the best way forward to avoid difficulties and gain clarity, given the complexity of the tax laws and their fluctuations.
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