Hello to all my readers, and I am pleased to be in recovery from open heart surgery and back with you. My plan is to begin my webinars under the sponsorship of CPECredit.com in December and to have a full schedule in 2018! On September 6th, my surgery took place and I received a new aortic valve plus a double bypass - which necessitated the open heart surgery. So now I am in cardiac rehab 3 days a week, and expect that my chest bone will be healed up in another month. It truly is amazing what the surgical team at Providence St. Patrick's Hospital, the International Heart Institute, can do. While 10 days in the hospital dragged on a bit, I feel wonderful now and thank so many of you for your thoughts, emails and prayers.
In the meantime, tax law developments continue on - including the demise of the Proposed Sec. 2704 Treasury Regulations and the publication with great fanfare of United Framework for Fixing Our Tax Code (once again an outline without any tax legislative content as yet!).
My CPE Educational Offerings - Check out the CPECredit.com website for my December, 2017 tax webinars, with emphasis on closely-held and family business succession planning. Regardless of whatever tax reform bill my be released and even enacted at some point, succession planning is important to tax practitioners of all types. Even with the possible (likely?) repeal of the Federal estate and GST taxes, wealth succession planning should be part of the active practitioner's area of expertise - thus my focus in several webinars offered by CPECredit.com.
The Proposed 2704 Regulations -
My prior Newsletters advised readers of the Treasury Department effort to adopt broad changes in family and other closely-held business valuation discount planning that would be injurious to such businesses. The focus group in Treasury long wanted to restrict valuation discounts (adjustments for minority and non-marketable interests) through broadening and tightening up IRC Sec. 2704, one of the four (4) provisions of Chapter 14, enacted in October, 1990. A fight took place between Treasury and both tax practitioners and small business groups that spilled over into the late 2016 public hearing on the Proposed Regs announced in the summer of 2016.
What happened was that, with President Trump coming into office, all of a sudden a review of tax regulations was commenced, which sounded the death knell of these Proposed Regs which would have gutted in many ways traditional valuation discounts. Steve Leimberg's website, with its series of wonderful Newsletters (see Leimberg Information Services Inc.), just published a Keith Schiller piece, as LISI Estate Planning Email Newsletter #2587, titled "Proposed Regs Under 2704 Finally Die" (10/2/17).
President Trump's Executive Order 13789 (also see IRS Notice 2017-38) called for the Department of Treasury (Steven Mnuchin, Secretary of Treasury) to provide a report on identifying and reducing ta regulatory burdens - A second report was issued October 2, 2017 calling the Proposed 2704 Regs "unworkable" and giving specifics as to why! First, the 2704 Prop. Regs were identified as among regulations that (i) impose an undue burden on U.S. taxpayers, (ii) add undue complexity to the Federal tax laws, or (iii) exceed the statutory authority of the IRS (as claimed by many commentators). The Proposed Regs went into great detail to expand "disregarded restrictions" on business interests so that valuation discounts would be lost to taxpayers. The Treasury's October 2nd report to the President cited the following deficiencies in the 2704 Proposed Regs: (1) Dense rules and definitions, (2) Narrowing long standing exceptions and dramatically expanding the class of restrictions disregarded under 2704, (3) proposed valuation of entity interests as if disregarded restrictions did not exist, whether per business agreements or state law, (4) no exceptions allowed for interests in active or operating businesses, (5) creation of impractical standards for valuation and use of 'fanciful assumptions', (6) imposition of lengthy and difficult rules, and, finally, (7) reduction of legitimate discounts not created artificially as a value-depressing devices. Wow - what condemnation of the regulations process under control of the tax staff folks at Treasury! Note there were over 28,000 adverse comments on the 2704 Prop. Regs. submitted prior to and at the 12/1/16 hearing.
So the 2704 Regs are dead for now, but of course we must be vigilant in our defense of succession planning techniques using valuation adjustments or discounts as part of the plan - and retention of capable, experienced valuation appraisers is at the top of the list in planning.
The United Framework for Fixing Our Tax Code - more of a sketch than a detailed plan, and certainly not actual proposed legislation. Yet we must pay attention to the "Framework".
The "Big Six" put together the Framework, namely, Senate Majority Leader Mitch McConnell, House Speaker Paul Ryan, Treasury Secretary Mnuchin, White House economic adviser Gary Cohn, Kevin Brady, Chair of the House Ways & Means Committee (where all tax legislation begins) and Orrin Hatch, Chair of the Senate Finance Committee. The Framework was announced with great fanfare by President Trump in Indiana on September 27, 2017 - yet details are in short supply, and the concept of substantial benefit to middle class taxpayers rather clearly elusive and perhaps even non-existent. This is a 9-page Framework, and I suggest all my readers obtain a copy and follow its development into legislative form. In fact, there is reason to believe that there will be many changes even in the Framework and certainly surprises in actual legislative language developed by the tax writing committees.
I have found over many years that the committee process works on tax law changes; but in a Trump Administration, it appears this will be a big rush at the end. The Trump tax plan announced 4/26/17 was only 4 pages and now we have the 9/27/17 9-page Framework. Yet as advisors and clients we must pay attention to what is proposed and be prepared to act fast accordingly. I believe an excellent summary of the Framework (remember my readers should obtain and review a copy) is contained in the Wealth Management (Trusts & Estates magazine), Penton Financial Services article of (October 2, 2017). Also, look at the LISI Estate Planning Email Newsletter #2585 (10/2/17) authored jointly by Bob Keebler and Jim Magner - great stuff as will apprise you of the Framework and its contents, so you will be prepared to move ahead with client planning when appropriate!
Some general points on the Framework, in part taken from the above identified sources:
1 - rates - C corporation rate 20%, down from 35%; pass-through entity rate (assuming an active business) at 25%, down from the top individual rate of 39.6%. The present 7-bracket rate structure for individuals would be cut to 3 - 12%, 25% and 35% (but with Congress able to add a 4th "wealthy taxpayer" rate as well!
2 - individual and corporate AMT provisions of the Code to be eliminated.
3 - Federal estate and GST taxes eliminated, but gift tax provisions of Code preserved and uncertain as of now whether any change to the Sec. 1014 stepped-up income tax basis at death provisions.
4 - An area of ambiguity is in the credits and deductions provisions of the Framework - many exemptions, e.g. personal exemptions, to be eliminated and note that the near doubling of the Standard Deduction could be ineffective to help taxpayers who have several children. The Framework states that "tax preferences that encourage work, higher education and retirement security are to be preserved"!
5 - Note the Framework is silent on the "carried interest" loophole often criticized by candidate Trump!
6 - A minimum of a 5-year provision is proposed for expensing capital expenditures (except real estate or "structures"); many business deductions and credits could be eliminated, such as the domestic production deduction and there to be perhaps a partial limitation on the interest deduction; and industry-specific tax incentives could be eliminated, but the R&D deduction and the low income housing credit would be preserved.
7 - As to International Taxation, once again clear legislative language is needed to show just what the "territorial regime" will be as well as the "global minimum tax" on repatriated foreign earnings of U.S. companies.
I sincerely hope that my readers enjoy this Newsletter, and sincerely thank you for your emails, prayers and support as to my heart surgery. Look for future Newsletters announcing my December, 2017 and 2018 webinars.
Regards to all, Owen Fiore