August 14, 2017 - Weekly Legislative Update
TIA Opposes Treasury Notice 2017-38
TIA and over 50 national small business association members of the Family Business Estate Tax Coalition have written to the Treasury Department in opposition to a proposed rule to deny family-owned businesses ordinary valuation discounts for lack of control and lack of marketability when calculating gift and estate tax liability.
The proposed regulations will discourage families from continuing to operate and build their family businesses and passing them on to future generations, undermining economic growth and job creation. The Treasury proposal is not only bad policy, but also unlawful. It should be withdrawn.
How assets are valued makes a dramatic difference for gift and estate tax purposes. For closely held businesses, there are few if any comparable sales and no ready markets, so their value must be determined by estimating the likely sale price between two willing and unrelated parties. A variety of factors are considered, but three key discounts often apply: (i) Lack of Control - If the interest being transferred is not a controlling interest, it is worth less; (ii) Lack of Marketability - If there no ready market for the interest, finding a willing buyer may be difficult and the asset is worth less; and (iii) Restrictions on Control or Liquidation (Sale) Rights - When passing on businesses to the next generation, families often limit the rights associated with those shares so as to keep a business within the family or reduce potential sources of family friction, reducing the value of those shares. Under current law and established legal precedent, these discounts can amount to 30 percent or more of the asset value and reflect the underlying economic reality that non-controlling ownership interests, assets without ready markets, and assets encumbered by restrictions have lower values.
The proposed regulations would deny these discounts in many or even most circumstances, through several changes to tax law. The first retroactively imposes additional tax liability on the transfer of shares subject to restrictions on voting or liquidation if the giver dies within three years of the transfer, deeming those restrictions to be "lapsed." The second denies a discount for transferred shares that are subject to restrictions on liquidation. The third denies a discount for restrictions on liquidation under state law. And the fourth denies a discount for restrictions that may turn on ownership stakes of non-family members. In short, the proposal adopts the assumption that family members who own a business will inevitably collude with one another to defeat nearly any restriction or other limitation on the control or liquidation of a family-owned business, such that those limitations must be disregarded when calculating gift and estate tax liability. If finalized, the regulations could increase estate and gift tax liabilities by 30 percent or more on family-owned businesses, resulting in fewer family businesses surviving from one generation to the next.
Concluded TIA, "the proposed regulations are ultra vires, bad policy, inadequately supported, and impermissibly arbitrary in their design and function. They should be withdrawn."
Congressional Republican Leaders And White House Issue Joint Statement On Tax Reform
Congressional Republicans and the White House have issued a one-page broad statement of goals and principles for tax reform. Available at www.whitehouse.gov/briefing-room/statements-and-releases/
This is the product of weeks of high-level discussions of the parameters to be set for tax reform by White House National Economic Council Director Gary Cohn, Treasury Secretary Steven Mnuchin, House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, Ways and Means Committee Chairman Kevin Brady, and Finance Committee Chairman Orrin Hatch.
Republican leaders in Congress and the White House are committing to collaborate to produce a single tax reform measure to be passed this fall. The Joint Statement assigns writing of the bill to Ways and Means and Finance.
Requirements set for tax reform are as follows:
*"We have always been in agreement that tax relief for American families should be at the heart of our plan. We also believe there should be a lower tax rate for small businesses so they can compete with larger ones, and lower rates for all American businesses so they can compete with foreign ones. The goal is a plan that reduces tax rates as much as possible, allows unprecedented capital expensing, places a priority on permanence, and creates a system that encourages American companies to bring back jobs and profits trapped overseas."
Comment: Tax rates are lowered "as much as possible"-no tax rates specified as in the original Ryan and Mnuchin plans. Reference to "a priority on permanence" implies revenue neutrality-taxes can be cut only so much as revenue is raised-necessary to make the bill permanent and use reconciliation for passage. Permanence is only a "priority," not a firm benchmark--should revenue loss from tax cuts exceeds revenue raised, the tax reform bill must sunset at the end of the budget window-currently ten years, although Congress can make it longer.
*"We are now confident that, without transitioning to a new domestic consumption-based tax system, there is a viable approach for ensuring a level playing field between American and foreign companies and workers, while protecting American jobs and the U.S. tax base. While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform."
Comment: A crushing blow to Ryan and Brady who staunchly defended the border tax till today, but also unhelpful to WOTC's chance for permanent authorization. We take no position on the border tax, but can say its demise isn't favorable for WOTC because there can be more pressure to curb tax credits to pay for tax cuts. It's too early to say this will occur because tax writers may come up with another source of revenue or decide not to lower tax rates so much.
While setting aside the border tax, the Joint Statement assures us "there is a viable approach" for closing the gap between revenue lost and revenue raised. The possibilities are (1) add any revenue shortage to the deficit, in other words, borrow to finance part of the tax cuts-this is the Freedom Caucus' recommendation; (2) balance the books with estimated future taxes from growth of national income resulting from tax reform-this is Mnuchin's idea, a sound assumption within reason, but raises the question of how much will be allowed when a point of order is raised in the Senate; (3) find another revenue stream or cobble one together from several sources; or (4) reduce the size of tax cuts so revenue loss balances revenue offset.
The authors of the Joint Statement are smart people backed by smart staffs. They likely have in mind the measures they plan to combine into "a viable approach," and staffs are surely costing them out now. But until this known unknown is disclosed, we'll have to work harder to make sure tax writers don't panic and start slashing programs like WOTC solely for the reason they need money to finance tax cuts. This abrogates Congress' commitment-now enacted in law-to use evidence-based policymaking in evaluating programs like WOTC.
Remind congressmen and staffs of this every chance you get. Evidence-based policymaking calls for evaluating program outputs rather than inputs, and WOTC's output was nearly 2.5 million hires of disadvantaged, poor and homeless workers, youth, veterans, and people with disabilities in FY 2016, at an average cost of approximately $1,200 per hire. No other Federal jobs program has proven to be as scaleable to the size of the aided population as WOTC, nor has any Federal jobs program been more cost-effective, relying as it does on employers to pay the bulk of compensation costs.
We'll be lobbying House Republicans, and Senate Democrats and Republicans, concurrently in the months ahead. We haven't had to do this in four years, but "working harder" can't be avoided now-this is the championship season.