The College appreciates the difficulty of defining changes in value not resulting from market conditions. The College proposes that in lieu of the control standard described in the proposed regulations, the [mal regulations define a change in value not resulting from market conditions as a change in value attributable to an event, other than a corporate or other entity reorganization, that
(1) the estate was a party by reason of the estate's volitional affirmative act or consent,
(2) would not have occurred, at least with respect to the estate, but for the volitional affirmative act or consent of the estate, and
(3) in the case of an interest in an entity or a distribution from an entity, is not the result of -
(a) management decisions in the ordinary course of the business or activities of that entity,
(b) a distribution by the entity not in excess of the net income of the entity earned in the alternate valuation period following the decedent's death, or
(c) a legitimate and substantial business (including investment) purpose other than carrying out the dispositive terms of the decedent's will, revocable trust, or other controlling instrument.
Any change in value resulting from a reorganization would be regarded as a change resulting from market conditions, except to the extent of any cash or other property received pursuant to the reorganization and not treated as excluded property under regulation § 20.2032-1(d).
Under any circumstances, much more should be required than a mere ability to sell, which could be construed as the standard for determining control under the proposed regulations. If the decedent or his or her estate does not have the unilateral power to cause an event to happen, or at least to block an event from happening, any change in value resulting from that event should be considered as resulting from market conditions.
CLARIFYING SUGGESTIONS REGARDING POST-MORTEM
ENTITY FORMATIONS AND DISTRIBUTIONS
In regard to the other areas addressed in the proposed regulations, the College shares the concerns addressed by the proposed regulations of the Service with certain qualifications.
1. Post-Mortem Entity Formation. In regard to the post-mortem formation of corporations, partnerships, and limited liability companies, the College fully recognizes the potential for abuse. In some instances, however, the formation of an entity, especially where one or more operating businesses are involved, may resemble acquisitive reorganizations. For example, both sections 351 and 368could apply to certain transactions. For the reasons stated above, the College encourages the adoption of rules for such entity formations similar to the rules applicable to reorganizations. Absent a compelling business purpose, however, the College would not take exception to any reasonable approach to curtailing the abusive post-mortem formation of entities that does not involve use of a control standard. In this regard, the College recognizes that the Internal Revenue Service's ability to challenge a post-mortem entity formation would probably be limited undersection 2703, thus warranting special scrutiny under the final section 2032regulations.
2. Post-Mortem Distributions from Entities. The College suggests that theproposed regulations contain clarification regarding distributions from an entity after death. The College believes that any distribution during the six-month period following death, with a record date after the date of death, should not be added back to the assets held by the entity for purposes of determining the alternate value of an interest in an entity so long as the distribution is consistent with historic distributions or is from post-mortem earnings of the entity. If a decedent personally owned income producing real estate, the net rents from such real estate for the six months after death would not be includible for purposes of determining the alternate valuation date value of the real estate. Why should the results be any different if the real estate is held by a corporation or other entity in which the decedent owns an interest as of his or her death?
Under Treasury Regulation § 20.2032-1(d), post-mortem distributions attributable to an entity's post-mortem earnings are “excluded property.” In contrast, the proposed regulations could be construed as requiring that the alternate value of an interest in an entity be determined by treating the entity as holding on the alternate valuation date all post-mortem distributions of cash or other property to the estate from such entity. The College suggests that the approach taken in regard to the entity distribution provisions of Treasury Regulation § 20.2032-1(f), when finalized, should, at a minimum, be consistent with the approach taken in Treasury Regulation § 20.2032-1(d). Post-mortem distributions attributable to an entity's post-mortem earnings should not be taken into account in determining the alternate value of the estate's interest in the entity.
3. Distribution of Fractional Interests. The College supports the effective disallowance of fractionalization discounts resulting from distributions of fractional interests in an entity or the distribution of undivided fractional interests in real estate. See Examples 4 and 5 of Prop. Reg. Sec. 20.2032-1(f)(3)(ii).
PREMIUMS AS WELL AS DISCOUNTS.
A change in value resulting from market conditions should apply to increases in value as well as to decreases in value. For example, if an estate holds only a minority interest in an entity as of the decedent's date of death but for valid business (or investment) reasons acquires an additional interest within six months after the date of death, resulting in the aggregate in a controlling interest held by the estate, the alternate value should be determined on a minority interest basis.
A cross reference to section 2703 would be appropriate if reorganizations are excepted from the normal rules.
Similarly, the College recommends that the preparation of these regulations in final form be coordinated with the promulgation of proposed and final regulations under section 2704(b)(4) (item 13 under the heading “Gifts, Estates and Trusts” on the Treasury-IRS Priority GuidancePlan for the 12 months beginning July 1, 2007), so as to provide for the treatment of the object of those regulations in a comprehensive and consistent manner.
Example 3 of proposed regulation § 20.2032-1(f)(3)(ii) is unusually complicated, involving the creation of four limited partnerships in which the estate has a 25 percent interest. The reciprocal relationship between four and 25 percent seems to have no relevance to the point of the example and therefore is merely a distraction that could limit understanding of the example. An example with just one partnership would seem to work just as well and would avoid the problem.
The College supports for the most part the concepts set forth in the proposed regulations. The College is concerned, however, that the proposed regulations may create new problems and are an over-reaction to the Kohler decision.
We thank you for giving us this opportunity to provide these comments. The two individuals primarily responsible for the preparation of the comments, Mr. Milford B. Hatcher (404.581.8510; firstname.lastname@example.org) and Mr. Dennis I. Belcher(804.775.4304; email@example.com), are available to answer your questions.Mr. Ronald D. Aucutt, Mr. Steven B. Gorin, and Mr. Bruce Stone also participated in the preparation of the comments.