Over the summer, the Treasury Department released a fairly aggressive set of proposed regulations dealing with “Estate, Gift and Generation-Skipping Transfer Taxes: Restrictions on Liquidation of an Interest.” In comments by the National Association of Manufacturers (NAM) filed today, we told Treasury that, “Manufacturers believe that the proposed regulations—which incorporate some of the most sweeping changes to estate tax policies in the past 25 years—would unnecessarily increase estate and gift taxes on family-owned manufacturing companies by an estimated 30 percent or more, severely impacting the ability of owners of these family businesses to transfer their companies to the next generations.”
In particular, manufacturers are concerned that the proposed regulations would severely restrict the availability of well-established minority valuation discounts in intra-family transfers of family-owned enterprises. The concept of a valuation discount for a minority interest in an enterprise that lacks control or marketability is widely accepted throughout the free market. In the case of a family-owned entity, when there is a transfer of an interest that lacks control and that cannot be offered on the open marketplace, the value of the interest is appropriately discounted. This is not a contrivance but a reflection of the economic reality of the interest.
Interestingly, Treasury officials over the past several months have indicated in numerous public statements that they do not intend to harm ongoing active businesses with these regulations, and that they do not intend to erode the use of minority valuation discounts for active family-held businesses. Instead, they have stated that that they are targeting a specific type of abuse that reduces taxes unfairly for some closely held entities. However, while manufacturers understand that the Treasury does not intend that the rules disrupt the ability of small manufacturers and other business owners to pass their companies down to future generations, we remain concerned that, absent clarification, some of the rules in the proposal will have an unintended, negative impact on family-owned active businesses.
As described in our comments, manufacturers fear that the finalization of these regulations as drafted will result in an increase of tax burdens by more than 30 percent and that these additional taxes will make it more difficult to pass their companies on to the next generation by adding new costs that their non-family-owned competitors don’t have. Our comments highlight findings from a recent survey of family-owned NAM members indicating that more than 40 percent of respondents indicated they have spent more than $50,000—with half of these more than $100,000—in the past three years in estate-planning costs. In addition, more than 60 percent of respondents indicated that they would need to undertake new succession planning due to these regulations as they would disrupt much of those plans. These owners likely will face significant additional planning costs if the regulations are finalized.
In addition to concerns about the impact of the proposed rules on the use of valuation discounts, manufacturers also have serious concerns about the application of a three-year “look-back” period to determine if the minority share discounts should apply to a given estate. The proposed “look-back” rule would give the IRS the ability to determine whether the shares were transferred within a three-year period of the death of the original owner. We do not believe that the Treasury has the authority to extend Section 2035 of the tax code, “Adjustments for certain gifts made within three years of decedent’s death,” to transfers of family-owned businesses. Moreover, the application of the three-year rule also would significantly complicate succession planning. As vigilant as business owners are in planning for the transfer of their business, it is impossible for an owner to anticipate his or her death three years ahead of time. We urge Treasury to drop this proposal entirely.
Consequently, with our comments, and the comments submitted by the Family Business Estate Tax Coalition, of which the NAM is a founder and co-director, we urge Treasury to withdraw the proposed regulations and further study and analyze the specific problems they are trying to address and narrow the potential impact of the proposal.
In her role, Carolyn leads the Institute’s workforce efforts to close the skills gap and inspire all Americans to enter the U.S. manufacturing workforce, focusing on women, youth, and veterans. Carolyn steers the Institute’s initiatives and programs to educate the public on manufacturing careers, improve the quality of manufacturing education, engage, develop and retain key members of the workforce, and identify and document best practices. In addition, Carolyn drives the agenda for the Center for Manufacturing Research, which partners with leading consulting firms in the country. The Institute studies the critical issues facing manufacturing and then applies that research to develop and identify solutions that are implemented by companies, schools, governments, and organizations across the country.
Prior to joining the Institute, Carolyn was Senior Director of Tax Policy at the NAM beginning in 2011, where she was responsible for key portions of the NAM’s tax portfolio representing the manufacturing community on Capitol Hill and in the business community and working closely with the NAM membership. She served as the Director of Legislative and Government Affairs at the Telecommunications Industry Association, Manager of State and Federal Government Affairs for 3M Company, and in various positions on Capitol Hill including as Legislative Director for former U.S. Senator Olympia Snowe (R-ME), and as a senior legislative staff member for former U.S. Rep. Sue Kelly (R-NY).
Carolyn is a graduate of Gettysburg College in Gettysburg, Pennsylvania graduating with a B.A. in Political Science. She resides in Northern Virginia with her husband and three children.