“The estate planning community should not feel a false sense of security from oral comments made at an estate planning conference, especially when those comments did not include a specific comment that the Treasury is working on changes to the proposed regulations which, as currently written, say the opposite. 

The Tax Court will not accept oral comments as law.  Rather, the Tax Court will apply the final regulations, as written, provided that the Treasury does not exceed its authority to modify them, and hopefully with language that follows Ms. Hughes’ public comments rather than tracking the language currently found in the proposed regulations.”

Steven J. Oshins, Esq., AEP (Distinguished) is an attorney at the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada.  Steve is a nationally known attorney who was inducted into the NAEPC Estate Planning Hall of Fame® in 2011.  He is listed in The Best Lawyers in America®.  He has written some of Nevada's most important estate planning and creditor protection laws.  Steve can be reached at 702-341-6000, x2 or at soshins@oshins.com.  His law firm's web site is http://www.oshins.com.

Steve authors three different annual state rankings charts and one state income tax chart:

·       The Annual Domestic Asset Protection Trust State Rankings Chart 

·       The Annual Dynasty Trust State Rankings Chart

·       The Annual Trust Decanting State Rankings Chart   

·       The Annual Non-Grantor Trust State Income Tax Chart

In LISI Estate Planning Newsletter #2467 (October 31, 2016), Jonathan Blattmachr, Alan Gassman and Kenneth Crotty’s newsletter titled, “Catherine Hughes' Keynote Address at Forty Second Annual Notre Dame Tax and Estate Planning Institute” was published. 

Now, with a different view, here is Steve’s commentary:

EXECUTIVE SUMMARY:

The Blattmachr, Gassman and Crotty LISI newsletter kindly gave thanks as follows:  “The authors would like to thank Steve Oshins, Marty Shenkman and Ed Morrow for their thoughtful advice on this newsletter.”

That thank you implied that those who were thanked all agreed with the primary message of that newsletter which was that Catherine Hughes’ comments made at a conference should calm the waters.  However, that is not the case.  I want to express my own opinion and specifically note that I am speaking only for myself and not on behalf of Marty Shenkman or Ed Morrow, regardless of whether their position is or is not in agreement my comments.    

According to LISI Estate Planning Newsletter #2467 (October 31, 2016):

On Friday, October 28, Catherine Hughes spoke as a keynote speaker at the luncheon of the Forty Second Annual Notre Dame Tax and Estate Planning Institute.  Ms. Hughes stated clearly that the Proposed Regulations were not intended to eliminate traditional discounts that now apply to the valuation of interests in family controlled entities related to conventional lack of control and lack of marketability characteristics that where supported by state law, and expressed surprise that commentators have come to this conclusion.

LISI Estate Planning Newsletter #2467 (October 31, 2016) further provided in part:

Prominent commentators have pointed out to us since Friday that the Treasury is not bound by Ms. Hughes’ interpretation, and have expressed frustration over what we have been through since these Proposed Regulations were issued.

COMMENT:

I was one of the commentators who “pointed out to [them] since Friday that the Treasury is not bound by Ms. Hughes’ interpretation” and therefore want to state my reasons because I fear that an overreliance on oral statements made at a conference will cause people to assume that the issues are solved.

Oral Comments

Catherine Hughes is a prominent, very important part of the Treasury’s Office of Tax Policy.  She would and should be one of the most reliable sources of the intent as it relates to the IRC Section 2704 regulations.

However, it is important to note that her comments about the intent of the regulations do not follow the actual language in the proposed regulations, as currently written.

One Prominent Example of Why the Proposed Regs Clearly Remove Most Discounts

As one example, the proposed regulations describe a new class of restrictions called “disregarded restrictions”.  Under the proposed regulations, a disregarded restriction includes one that:  (a) limits the ability of the holder of the interest to liquidate the interest; (b) limits the liquidation proceeds to an amount that is less than a minimum value; (c) defers the payment of the liquidation proceeds for more than six months; or (d) permits the payment of the liquidation proceeds in any manner other than in cash or other property, other than certain notes.  

Thus, this new class of restrictions disregards nearly any restriction on liquidation that can be created.  Since these restrictions are disregarded in the valuation of the transferred interest, the valuation discount becomes negligible.

Is there a way around this by including nonfamily members as we can currently do to negate IRC Section 2704?  Unfortunately, the new definition of nonfamily members is so nearly impossible to satisfy that the answer is essentially “no” except in an extreme scenario.

In determining whether the transferor and/or the transferor’s family has the ability to remove a restriction included in this new class of disregarded restrictions, any interest in the entity held by a person who is not a member of the transferor’s family is disregarded if, at the time of the transfer, the interest:  (a) has been held by such person for less than three years; (b) constitutes less than 10 percent of the value of all of the equity interests in a corporation, or constitutes less than 10 percent of the capital and profits interests in a business entity described in §301.7701-2(a) other than a corporation (for example, less than a 10-percent interest in the capital and profits of a partnership); (c) when combined with the interests of all other persons who are not members of the transferor’s family, constitutes less than 20 percent of the value of all of the equity interests in a corporation, or constitutes less than 20 percent of the capital and profits interests in a business entity other than a corporation (for example, less than a 20-percent interest in the capital and profits of a partnership); or (d) any such person, as the owner of an interest, does not have an enforceable right to receive in exchange for such interest, on no more than six months’ prior notice, the minimum value referred to in the definition of a disregarded restriction.  If an interest is disregarded, the determination of whether the family has the ability to remove the restriction will be made assuming that the remaining interests are the sole interests in the entity.

The above language very clearly removes almost every potential discount and makes it next to impossible to satisfy the draconian nonfamily member four-pronged test to work around the disregarded restrictions rules.

The Bottom Line

The bottom line is that Catherine Hughes, a prominent part of the Treasury’s Office of Tax Policy, made some very positive comments about the intent of the treasury regulations on valuation discounts.  However, she did not say that the Treasury is working on changes to the proposed regulations. 

Does this mean that the members of Treasury believe that the proposed regulations, as currently written, do not take away nearly every discount?  If so, then this reading of the proposed regulations is the opposite of the way thousands of taxpayers, business owners, estate planning professionals and lobbyists have read the proposed regulations.  Without any indication from Ms. Hughes that there will be substantial changes made to the final regulations, her comments should not be taken to mean that the proposed regulations aren’t significantly removing valuation discounts.

The estate planning community should not feel a false sense of security from oral comments made at an estate planning conference, especially when those comments did not include a specific comment that the Treasury is working on changes to the proposed regulations which, as currently written, say the opposite. 

The Tax Court will not accept oral comments as law.  Rather, the Tax Court will apply the final regulations, as written, provided that the Treasury does not exceed its authority to modify them, and hopefully with language that follows Ms. Hughes’ public comments rather than tracking the language currently found in the proposed regulations.

Summary

I appreciate the thank you given in the Blattmachr, Gassman and Crotty newsletter and respect all of their views since they are all well-respected as deep thinkers in the estate planning industry.  However, we should not overreact to oral comments that do not follow the actual language found in the proposed regulations which clearly removes most valuation discounts.  The issues still exist unless and until there is an indication that the Treasury is changing the language to comport to Ms. Hughes’ comments.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

Steve Oshins

CITE AS: 

LISI Estate Planning Newsletter #2472 (November 1, 2016) at http://www.leimbergservices.com  Copyright 2016 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.