NCC Comments on Estate Tax Proposal

The National Cotton Council filed comments on a draft IRS regulation change for Section 2704 of the estate tax law that sought to eliminate a valuation exception that occurs when someone dies who has made estate planning decisions within the prior three years.

Published: November 3, 2016
Updated: November 3, 2016

November 2, 2016


CC:PA:LPD:PR (REG-163113-02)
Room 5203
Internal Revenue Service
POB 7604, Ben Franklin Station
Washington, DC 20044

RE:  Estate, Gift, and Generation-skipping Transfer Taxes; Restrictions on Liquidation of an Interest.  Docket No. (IRS REG-163113-02).

The National Cotton Council (NCC) is the central organization of the United States cotton industry.  Its members include producers, ginners, cottonseed processors and merchandizers, merchants, cooperatives, warehousers and textile manufacturers.  A majority of the industry is concentrated in 17 cotton-producing states stretching from Virginia to California. The NCC represents producers who cultivate between 10 and 14 million acres of cotton.  Annual cotton production, averaging approximately 16 to 20 million 480-lb bales, is valued at more than $5 billion at the farm gate.  The downstream manufacturers of cotton apparel and home furnishings are located in virtually every state. Farms and businesses directly involved in the production, distribution and processing of cotton employ more than 230,000 workers and produce direct business revenue of more than $27 billion.  Accounting for the ripple effect of cotton through the broader economy, direct and indirect employment surpasses 420,000 workers with economic activity well in excess of $120 billion. In addition to the cotton fiber, cottonseed products are used for livestock feed, and cottonseed oil is used as an ingredient in food products as well as being a premium cooking oil.


Section 2704(a)(1) provides generally that, if there is a lapse of any voting or liquidation right in a corporation or a partnership and the individual holding such right immediately before the lapse and members of such individual’s family hold, both before and after the lapse, control of the entity, such lapse shall be treated as a transfer by such individual by gift, or a transfer which is includible in the gross estate, whichever is applicable.  The amount of the transfer is the fair market value of all interests held by the individual immediately before the lapse (determined as if the voting and liquidation rights were non-lapsing) over the fair market value of such interests after the lapse.

Section 25.2704-1(c)(1) provides a rule that a lapse of a liquidation right occurs at the time a presently exercisable liquidation right is restricted or eliminated.  However, under §25.2704-1(c)(1), a transfer of an interest that results in the lapse of a liquidation right generally is not subject to this rule if the rights with respect to the transferred interest are not restricted or eliminated.  The effect of this exception is that the inter vivos transfer of a minority interest by the holder of an interest with the aggregate voting power to compel the entity to acquire the holder’s interest is not treated as a lapse even though the transfer results in the loss of the transferor’s presently exercisable liquidation right.

The Treasury Department and the IRS, however, believe that this exception should not apply when the inter vivos transfer that results in the loss of the power to liquidate occurs on the decedent’s deathbed.


This action seeks to broaden the scope of the estate tax in order to accumulate more tax dollars at the death of farmers and other small business owners.

The NCC opposes the Department of Treasury’s proposed changes to Section 2704 on estate and gift tax valuation discounts. These rules will significantly change family farms’ and businesses’ succession plans and make it harder for family owned businesses to transition to the next generation. The changes proposed to Section 2704 would remove legitimate valuation discounts for estate, gift, and generation skipping taxes which businesses have used for the past two decades in order to prevent the IRS from overvaluing their businesses at death.  These proposed regulations would force even more family businesses and farms to grapple with the complicated and costly estate tax, removing even more money from growing their businesses and the economy while they hire tax attorneys and accountants to try to save their assets for their children.

Treasury also proposes a “bright line test” on the inclusion of a “nonfamily-member interest” as to whether any exception should apply.  This goes against the right of any citizen to bequeath assets or bring anyone, non-family or family, into the business as that person sees fit.  Furthermore the “test” would deny the exception to any nonfamily member brought into the interest unless it was done more than three years prior to a trigger event plus meeting a complicated formula of the value of the interest.   Since most people don’t know what sort of trigger event may happen three years into the future, this proposal makes advance planning for business and estate transferal a gamble.  Three years of spent resources and planning could be wasted.

Treasury goes further to mention the use of LLCs.  The overall tone of the proposal, where it mentions the use of nonfamily interest or LLCs seems to be that Treasury believes that these mechanisms are inherently bad because they reduce the transfer tax going to Treasury while keeping more assets in the hands of heirs and also in the economy.  First, LLCs have grown in use due to the nature of society that we live in now, which is rife with lawsuits and liability issues. LLCs are a mechanism to protect businesses, such as a family farm, from both internal and external sources and events that could tear a farm apart.  Second, most individuals who have built a business wish to preserve as much of that business as they can for their chosen heirs and future generations.

Another of Treasury’s proposed “bright-line tests” would require that the regulatory exception only apply to transfers that occurred more than three years before death.  This test is promoted as a way to avoid inquiries that are “burdensome” to the taxpayer and the IRS.  There’s no mention of the burden to prepare one’s estate planning only to have all of the time and effort potentially wasted if a taxpayer dies prior to the three years required for Treasury’s “test.”  That burden and resulting losses are placed solely upon the heirs of the deceased as well as the increased amount of taxes owed to the Treasury upon the death of the taxpayer.


It is especially troubling that Treasury is proposing changes that would result in more families paying a confiscatory tax on the business or farm that represents their livelihood. Often this tax is paid by selling all or a portion of family assets like farms and businesses. Other times, employees of the family business must be laid off.

The NCC strongly urges that the Treasury Department support family farms seeking to pass their businesses to the next generation by withdrawing the proposed changes to Section 2704.  In addition, the NCC strongly supports the requests included in the September 22, 2016 letter from the Family Business Coalition to Treasury Secretary Lew regarding this issue.  Please contact us with any questions or for more information.

Respectfully submitted,


Reece Langley
VP – Washington Operations