IRS Rev. Proc. 2015-53 on Inflation Adjustments for Tax ...



Selected Recent Federal Tax DevelopmentsAffecting Estate Planning and AdministrationMichael J. JonesDeeAnn L. ThompsonThompson Jones LLPMonterey, CaliforniaCPE Forum of the Central CoastDecember 1, 2015Table of Contents TOC \o "1-3" \h \z \u IRS Rev. Proc. 2015-53 on Inflation Adjustments for Tax Rate Schedules, Other 2016 Tax Provisions PAGEREF _Toc310621486 \h 3States Must License, Recognize Same Sex Marriage: Obergefell et al. v. Hodges, et al., 576 U.S. ___ (June 26, 2015) PAGEREF _Toc310621487 \h 4§ 170 Deduction For Charitable Contributions PAGEREF _Toc310621488 \h 5When All Interests In Charitable Remainder Trust Are Sold, Basis In Term Interest Is Reduced By Undistributed Realized Income And Gain: 80 F.R. 48249-48251 (Aug. 12, 2015) PAGEREF _Toc310621489 \h 5Tax Court’s Denial Of Charitable Deduction For Conservation Easement Affirmed: B.V. Belk Jr. et ux. v. Commissioner, No. 13-2161, 4th Cir. (Dec. 16, 2014) aff’g 140 T.C. 1, No. 005437-10 (Jan. 28, 2013). PAGEREF _Toc310621490 \h 6Conservation Easement Doesn’t Qualify For Charitable Income Tax Deduction: Costello, et ux. v. Commissioner, T.C. Memo. 2015-87, No. 24995-12 (May 6, 2015) PAGEREF _Toc310621491 \h 7§ 642(c) Deduction For Amounts Paid Or Permanently Set Aside For A Charitable Purpose PAGEREF _Toc310621492 \h 10Trust’s Charitable Set Aside Deduction Denied Because Possibility Of Non-Charitable Payments Not So Remote As To Be Negligible: Estate of Eileen S. Belmont et al. v. Commissioner, 144 T.C. No. 6, (Feb. 19, 2015) PAGEREF _Toc310621493 \h 10Trust May Claim Charitable Deduction For Property’s Fair Market Value Because Purchased “Out Of Gross Income”: Green v. U.S., No. 5:13-cv-01237 (Nov. 4, 2015) PAGEREF _Toc310621494 \h 12§ 664 Charitable Remainder Trusts PAGEREF _Toc310621495 \h 16Charitable Remainder Trust Net Income Limitation Ignored For Purposes of Ten Percent Remainder Test: Estate of Arthur E. Schaefer, No. 13183-11, 145 T.C. No. 4 (Jul. 28, 2015) PAGEREF _Toc310621496 \h 16§ 1014. Income Tax Basis Of Property Received From Decedent PAGEREF _Toc310621497 \h 16New Basis Consistency And Related Information Reporting PAGEREF _Toc310621498 \h 16Notice 2015-57; 2015-36 I.R.B. 1: IRS Defers Basis Consistency Reporting, Requests Comments PAGEREF _Toc310621499 \h 25IRS Won’t Rule On Income Tax Basis On Death When Property Held In Certain Grantor Trusts: Rev. Proc. 2015-37, 2015-26 IRB 1 (June 15, 2015) PAGEREF _Toc310621500 \h 27§ 1031. Like Kind Exchanges: California Treatment PAGEREF _Toc310621501 \h 27Like Kind Exchange Requirements Satisfied, Even Though Replacement Property Later Contributed to LLP: Rago Development Corp., et ux v. California State Board of Equalization, 2015-SBE-001 (2015) PAGEREF _Toc310621502 \h 27Valuation PAGEREF _Toc310621503 \h 29Tax Court Clearly Erred In Valuation Holding: Estate of Giustina v. Comm’r., No. 12-71747, 9th Cir. (Dec. 5, 2014), rev’g in part T.C. Memo 2011-141 (2011) PAGEREF _Toc310621504 \h 29The Tax Court Cuts the Cord on McCord & Provides Guidance for Net-Net Gift Valuation Discounts: Steinberg v. Commissioner, 145 TC 7, No. 23865-11 (Sept. 16, 2015) PAGEREF _Toc310621505 \h 30§ 2001. Imposition Of Estate Tax PAGEREF _Toc310621506 \h 36Estate Tax Return Closing Letters Must Now Be Requested PAGEREF _Toc310621507 \h 36§ 2010. Unified Credit Against Estate Tax PAGEREF _Toc310621508 \h 37Portability Regulations Finalized, Effective June 12, 2015: T.D. 9725, 80 FR 34279-34292, June 16, 2015 PAGEREF _Toc310621509 \h 37Extension Of Time To Elect Portability Available Only In Certain Cases PAGEREF _Toc310621510 \h 37Protective Election Not Needed PAGEREF _Toc310621511 \h 38Authority To Make Election PAGEREF _Toc310621512 \h 38Portability Return Must Be "Complete And Properly Prepared" PAGEREF _Toc310621513 \h 38Relationship To Income Tax Basis PAGEREF _Toc310621514 \h 38Qualified Domestic Trusts PAGEREF _Toc310621515 \h 38Availability Of DSUE Amount by Surviving Spouse Who Becomes A Citizen of the United States PAGEREF _Toc310621516 \h 38Effect of Portability Election on Application Of Rev. Proc. 2001-38 PAGEREF _Toc310621517 \h 39Basic Exclusion Amount In Examples Corrected PAGEREF _Toc310621518 \h 39§ 2055: Transfers For Public, Charitable, And Religious Uses PAGEREF _Toc310621519 \h 39Trust Reformation As Charitable Remainder Unitrust Qualifies For Charitable Estate Tax Deduction: PLR 201450003 (Aug. 20, 2014). PAGEREF _Toc310621520 \h 39§ 2056: Bequests, Etc., To Surviving Spouse PAGEREF _Toc310621521 \h 40§ 301.9100 Relief Granted for QTIP Election: PLR 201536002 (May 13, 2015) PAGEREF _Toc310621522 \h 40§ 2503(b): Exclusions From Gifts PAGEREF _Toc310621523 \h 40Demand Rights Qualify for Gift Tax Exclusion: Mikel v. Comm’r., Nos. 16538-13, 16563-13, T.C. Memo. 2015-64 (Apr. 6, 2015) PAGEREF _Toc310621524 \h 40§ 2206 Liability Of Life Insurance Beneficiaries PAGEREF _Toc310621525 \h 43Executor May Recover Estate Taxes From Life Insurance Beneficiary: Estate Of Smoot, No. 2:13-cv-00040, DC So. GA (March 31, 2015) PAGEREF _Toc310621526 \h 43§ 2501: Gift Tax Imposed PAGEREF _Toc310621527 \h 45No Gift Occurred From Family Business Dispute: Estate of Edward S. Redstone, et al. v. Commissioner, 145 T.C. No. 11, No. 8401-13 (Oct. 26, 2015) PAGEREF _Toc310621528 \h 45§ 6212: Notice Of Deficiency PAGEREF _Toc310621529 \h 46Taxpayer Can't Rely on Online Postmark As Evidence of Timely Filing: Robert H. Tilden v. Commissioner (September 22, 2015), T.C. Memo. 2015-188 PAGEREF _Toc310621530 \h 46§ 6324: Special Liens For Estate And Gift Taxes PAGEREF _Toc310621531 \h 46Donee Liability For Gift Taxes Affirmed: U.S. v. Elaine T. Marshall et al., No. 12-20804 (Aug. 20, 2015), affirming in part, reversing in part, and vacating No. 12-20804 (5th Cir. 2014). PAGEREF _Toc310621532 \h 46§ 6501(c)(9), Exception To Statute of Limitations PAGEREF _Toc310621533 \h 49Disclosure Inadequate; Gift Tax May Be Assessed At Any Time: FAA 20152201F (May 29, 2015) PAGEREF _Toc310621534 \h 49§ 6511: Limitations On Credit Or Refund PAGEREF _Toc310621535 \h 52Refund Barred By Statute Of Limitations Because Payment Was Not A Deposit: Winford v. United States, No. 13-31172, 5th Cir. (Dec. 11, 2014), aff’g. No. 2:12-cv-00322, W. Dist. LA (Sept. 9, 2013). PAGEREF _Toc310621536 \h 52§ 6662: Imposition Of Accuracy-Related Penalty On Underpayments PAGEREF _Toc310621537 \h 52Opinion Letters Allegedly Protected Under Attorney-Client Privilege Must Be Produced: Eaton Corporation, et al v. Comm’r., No. 5576-12 (Apr. 6, 2015) PAGEREF _Toc310621538 \h 52IRS Rev. Proc. 2015-53 on Inflation Adjustments for Tax Rate Schedules, Other 2016 Tax Provisions.33 Unified Credit Against Estate Tax. For an estate of any decedent dying in calendar year 2016, the basic exclusion amount is $5,450,000 for determining the amount of the unified credit against estate tax under § 2010. .34 Valuation of Qualified Real Property in Decedent’s Gross Estate. For an estate of a decedent dying in calendar year 2016, if the executor elects to use the special use valuation method under § 2032A for qualified real property, the aggregate decrease in the value of qualified real property resulting from electing to use § 2032A for purposes of the estate tax cannot exceed $1,110,000. .35 Annual Exclusion for Gifts.(1) For calendar year 2016, the first $14,000 of gifts to any person (other than gifts of future interests in property) is not included in the total amount of taxable gifts under § 2503 made during that year. (2) For calendar year 2016, the first $148,000 of gifts to a spouse who is not a citizen of the United States (other than gifts of future interests in property) is not included in the total amount of taxable gifts under § § 2503 and 2523(i)(2) made during that year..39 Notice of Large Gifts Received from Foreign Persons. For taxable years beginning in 2016, § 6039F authorizes the Treasury Department and the Internal Revenue Service to require recipients of gifts from certain foreign persons to report these gifts if the aggregate value of gifts received in the taxable year exceeds $15,671..50 Attorney Fee Awards. For fees incurred in calendar year 2016, the attorney fee award limitation under § 7430(c)(1)(B)(iii) is $200 per hour.States Must License, Recognize Same Sex Marriage: Obergefell et al. v. Hodges, et al., 576 U.S. ___ (June 26, 2015)In Obegerfell, the U.S. Supreme Court held that the Fourteenth Amendment of the U.S. Constitution “requires a State to license a marriage between two people of the same sex and to recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out-of-State.”The Court based its opinion largely on the U.S. Constitution’s Fourteenth Amendment’s Due Process Clause, which provides that no State shall “deprive any person of life, liberty, or property, without due process of law.”Because the Supreme Court’s holding rests on the Fourteenth Amendment, all state laws banning same-sex marriage are void ab initio.Previously, in U.S. v Windsor, No. 12-307, 133 S. Ct. 2675 (Sup. Ct. 2013), the Supreme Court held same-sex marriages must be recognized for all federal purposes, finding unconstitutional § 3 of the Defense of Marriage Act. Here are key areas affected in the federal transfer tax area (estate, gift, and generation-skipping transfer taxes):Existence of community property (however, registered domestic partners may own property as community property)Spouses’ election to split gifts for gift tax purposesAbility to transmit a deceased spouse’s unused exclusion amount to a surviving spouseMarital deduction for transfers to spouses and surviving spouses, including in certain trusts (both during lifetime and at death)Marital deduction with respect to property transferred to a Qualified Domestic Trust (“QDOT”) for the benefit of a surviving spouse10-year deferral of estate tax payments (§ 6166)-definition of familyGeneration assignment for purposes of the generation-skipping transfer tax, including with respect to descendants§ 170 Deduction For Charitable ContributionsWhen All Interests In Charitable Remainder Trust Are Sold, Basis In Term Interest Is Reduced By Undistributed Realized Income And Gain: 80 F.R. 48249-48251 (Aug. 12, 2015)IRC § 1001(a) generally provides that gain or loss from the sale or exchange of property is the difference between the amount realized and the adjusted basis of the property sold or exchanged.§ 1001(e)(1) assigns zero basis to a term interest in property that is sold or exchanged. For example, a life estate is a term interest, as is the right to payments from a charitable remainder trust to a non-charitable beneficiary.Nevertheless, § 1001(e)(3) provides that the zero basis rule of § 1001(a) won’t apply to a sale or other disposition which is a part of a transaction in which the entire interest in property is transferred to any person or persons.§ 1014 provides rules for establishing the income tax basis of property acquired from a decedent. Although § 1015 provides rules relating to basis of property acquired by gifts and transfers in trust, Treasury added basis determination rules under § 1014. New § 1.1014-5(c), assigns a reduced basis to a term interest in a charitable Unitrust or a charitable annuity trust held by a non-charitable beneficiary when such interest is sold or exchanged for income tax purposes. That basis is (1) the trust’s basis in all of its property, reduced by the sum of realized, undistributed net income and realized, undistributed capital gains, times (2) the actuarial factor used to value the term interest.Basis in interests of charitable (tax-exempt) beneficiaries is nevertheless recognized and given regard. Under Regs. § 1.1014-5(e), the income tax basis of a charitable interest that is sold or exchanged is determined using standard actuarial factors contained in Regs. § 20.2031-7Example 7, illustrating a charitable remainder Unitrust, and Example 8, illustrating a charitable annuity trust, are added to § 1.1014(d). Here’s Example 7:(a) Grantor creates a charitable remainder unitrust (CRUT) on Date1 in which Grantor retains a unitrust interest and irrevocably transfers the remainder interest to Charity. Grantor is an individual taxpayer subject to income tax. CRUT meets the requirements of § 664 and is exempt from income tax.(b) Grantor's basis in the shares of X stock used to fund CRUT is $10x. On Date 2, CRUT sells the X stock for $100x. The $90x of gain is exempt from income tax under § 664(c)(1). On Date 3, CRUT uses the $100x proceeds from its sale of the X stock to purchase Y stock. On Date 4, CRUT sells the Y stock for $110x. The $10x of gain on the sale of the Y stock is exempt from income tax under § 664(c)(1). On Date 5, CRUT uses the $110x proceeds from its sale of Y stock to buy Z stock. On Date 5, CRUT's basis in its assets is $110x and CRUT's total undistributed net capital gains are $100x.(c) Later, when the fair market value of CRUT's assets is $150x and CRUT has no undistributed net ordinary income, Grantor and Charity sell all of their interests in CRUT to a third person. Grantor receives $100x for the retained unitrust interest, and Charity receives $50x for its interest. Because the entire interest in CRUT is transferred to the third person, § 1001(e)(3) prevents § 1001(e)(1) from applying to the transaction. Therefore, Grantor's gain on the sale of the retained unitrust interest in CRUT is determined under § 1001(a), which provides that Grantor's gain on the sale of that interest is the excess of the amount realized, $100x, over Grantor's adjusted basis in the interest.(d) Grantor's adjusted basis in the unitrust interest in CRUT is that portion of CRUT's adjusted uniform basis that is assignable to Grantor's interest under § 1.1014-5, which is Grantor's actuarial share of the adjusted uniform basis. In this case, CRUT's adjusted uniform basis in its sole asset, the Z stock, is $110x. However, paragraph (c) of this § applies to the transaction. Therefore, Grantor's actuarial share of CRUT's adjusted uniform basis (determined by applying the factors set forth in the tables contained in § 20.2031-7 of this chapter) is reduced by an amount determined by applying the same factors to the sum of CRUT's $0 of undistributed net ordinary income and its $100x of undistributed net capital gains.(e) In determining Charity's share of the adjusted uniform basis, Charity applies the factors set forth in the tables contained in § 20.2031-7 of this chapter to the full $110x of MENTS: Although § 1014 relates to property acquired from a decedent, the new rule apparently applies to both inter vivos and testamentary charitable remainder trusts. Perhaps this rule should have been placed under § 1015, relating to basis of property acquired by gifts and transfers in trust, instead.Tax Court’s Denial Of Charitable Deduction For Conservation Easement Affirmed: B.V. Belk Jr. et ux. v. Commissioner, No. 13-2161, 4th Cir. (Dec. 16, 2014) aff’g 140 T.C. 1, No. 005437-10 (Jan. 28, 2013). A conservation easement relating to a golf course located in North Carolina did not qualify for any part of a $10,524,000 charitable income tax deduction claimed by the limited liability company organized by taxpayers, which deduction passed through to them and was deducted on their personal income tax returns.The Tax Court upheld the Commissioner’s denial of any charitable deduction for the easement. Upon motion for reconsideration, the Tax Court declined to review because the taxpayers failed to demonstrate unusual circumstances or substantial errors of fact or law. (T.C. Memo. 2013-154, No. 5437-10 (Jun. 19, 2013). The Federal Court of Appeals for the Fourth Circuit reviewed the Tax Court’s legal decision de novo. IRC § 170(h) provides the requirements a conservation easement must meet in order to qualify for a charitable income tax deduction, stating, in relevant part:(1) In general. For purposes of sub§ (f)(3)(B)(iii), the term "qualified conservation contribution" means a contribution-- (A) of a qualified real property interest, (B) to a qualified organization, (C) exclusively for conservation purposes.(2) Qualified real property interest. For purposes of this subsection, the term "qualified real property interest" means any of the following interests in real property: (A) the entire interest of the donor other than a qualified mineral interest, (B) a remainder interest, and (C) a restriction (granted in perpetuity) on the use which may be made of the real property. The swap provision failed to qualify for the charitable income tax deduction because its presence meant that the property initially placed under the conservation easement would not, in all events, be subject to that easement in perpetuity, in violation of the plain meaning of the statute.The savings clause failed because it placed the government in the untenable position of having to discover that that conservation easement failed before the savings clause could take effect – for example, after the statute of limitations on assessments and collections had run. In so finding, the Court cited its own decision in Commissioner v. Procter, 142 F.2d 824, 827-28 (4th Cir. 1944).Conservation Easement Doesn’t Qualify For Charitable Income Tax Deduction: Costello, et ux. v. Commissioner, T.C. Memo. 2015-87, No. 24995-12 (May 6, 2015)A conservation easement deduction failed because several technical requirements weren’t met, including a timely acknowledgement of the gift and a timely qualified appraisal. Moreover, no deduction was available because the easement was part of a quid pro quo arrangement, whereby the grant of the easement was required as a condition of selling development rights to a third-party buyer (a developer). The taxpayers’ alternative argument that a bargain sale occurred failed because the sale to the developer could not be characterized as a bargain sale to the county that received the easement.During 2000, David and Barbara Costello purchased a farm located in Howard County, Maryland, known as “Rose Hill”, for $1,682,556. Its 72 acres included a working farm, a residence, and a three-car detached garage. After making improvements, the Costellos’ cost basis in Rose Hill was $1,977,556.Howard County offered a program that allowed sale of farmland development rights, together with placement of a conservation easement on the farmlands. The sale could be to the county, or it could be to a third party. If the sale was to a third party, the program also allowed the seller to transfer the sold development rights to that buyer. The buyer could then use those rights to develop residential lots. However, the sale and transfer of those development rights was required to be approved by the county.The program was authorized under Howard County Agricultural Land Preservation Program, which were part of that county’s zoning provisions.The County offered to buy their development rights for $375,000 in 2001, but Mr. and Mrs. Costello declined. They eventually sold their development rights during 2006 to a third-party buyer, a developer, for $2.56 million, and a conservation easement was placed on their land. The Costellos executed and delivered a Deed of Agricultural Land Preservation Easement (deed of easement) on September 25, 2006 to the county. The County accepted the deed on October 6, 2006.The Costellos claimed an income tax deduction of $5,543,309 on their 2006 federal income tax returns, based on their transfer of the conservation easement to the County. Because annual limitations on the charitable deduction were exceeded, the deduction was carried over to and deducted on their 2007 and 2008 returns.A condition of claiming a charitable income tax deduction is that a written “qualified” appraisal must be obtained no later than the extended due date of the income tax return covering the tax period when the charitable contribution was made. An appraisal was obtained by taxpayers within the time period, but, as of the extended due date of the income tax return, the Court found that the appraisal did not meet the charitable deduction qualified appraisal requirements. The appraisal valued the farm based on its highest and best use as a residential subdivision with 25 dwelling units, “free of all liens or encumbrances.” A value of $7.69 million was concluded by the appraiser.The farm and residence were then valued assuming a conservation easement. Under this assumption, a value of $2.1 million million was concluded by the appraiser.The appraisal did not take into account the $2.56 million paid for the development rights in 2006. The report’s stated valuation date was December 1, 2006 (not the effective date of the conservation easement). The appraisal also failed to state the “[t]he date (or expected date) of contribution to the donee,” a requirement of Treas. Regs. § 1.170A-13(c)(3)(ii)(C). Finally, the appraisal failed to state “[t]he terms of any agreement or understanding entered into (or expected to be entered into) by or on behalf of the donor or donee that relates to the use, sale, or other disposition of the property contributed.” See Treas. Regs. § 1.170A-13(c)(3)(ii)(D).Regarding the required information not present in the appraisal, the Court noted:These omissions were not trivial, formal, or mechanical. Because of them, the appraisal failed to inform the IRS of the essence of the transaction in which petitioners engaged. Because the July 1, 2007, appraisal did not provide an accurate description of the property contributed, did not specify the date of the contribution, and did not inform the IRS of the salient terms of the agreements among petitioners, Howard County, and Mr. Warfield, we find that it was not a “qualified appraisal” within the meaning of § 1.170A-13(c)(3)(i), Income Tax Regs. (Footnote omitted.)Modifications of the appraisal were made after the due date of the 2006 return, including extensions, but those modifications could not cure the failure to meet all of the qualified appraisal requirements as of that due date. Form 8283, Noncash Charitable Contributions, accompanied the Costello’s 2006, income tax return. But, because the county declined to sign it before the return due date, including extensions, it didn’t satisfy the requirements of a charitable property gift written acknowledgment. Neither could a Form 8283 signed after that due date timely satisfy that requirement.The Court went on to observe that the deductions also failed because no charitable deduction is allowable when property is transferred to a charity under a quid pro quo exchange, citing Hernandez v. Commissioner, 490 U.S. 680 (1989). The Court summarized:The Supreme Court in Hernandez stated that “[t]he relevant inquiry in determining whether a payment is a 'contribution or gift' under § 170 is * * * whether the transaction in which the payment is involved is structured as a quid pro quo exchange.” In examining whether a transfer was made with the expectation of a quid pro quo, we give most weight to the external features of the transaction, avoiding imprecise inquiries into taxpayers' subjective motivations. If it is understood that the property will not pass to the charitable recipient unless the taxpayer receives a specific benefit, and if the taxpayer cannot garner that benefit unless he makes the required “contribution,” the transfer does not qualify the taxpayer for a deduction under § 170. The external features of the transaction show that [the Costellos] granted an easement to Howard County in exchange for the county's granting them permission to sell their development rights. … Petitioners would not have conveyed the easement unless they received permission to sell their development rights; and they could not legally sell their development rights unless they executed the deed of easement. Petitioners' transaction thus bears the classic features of a quid pro quo exchange as defined in Hernandez and its progeny. (Cites omitted.)The taxpayers unsuccessfully argued that, alternatively, they were entitled to a charitable deduction because they engaged in a bargain sale with the County. But no sale actually occurred between the Costellos and the County. The Court pointed out that characterizing their sale to the developer as a sale to the County flew in the face of the facts.The final issue considered by the Court was determination of the amount of gain on the sale of the development rights. A capital gain resulted, and the amount of basis was determined under Revenue Ruling 77-414, 1977-2 C.B. 299. Because the basis in development rights can’t be determined, basis in the property is allocated to the sale, up to the amount of the selling price. Accuracy penalties of assessed by the government under § 6662 for valuation misstatement were sustained. The taxpayers’ assertion that they reasonably relied on a qualified appraisal failed. The definition of “qualified appraisal” under Regs. § 6664(c)(4)(B) incorporates by reference the definition of that term under § 170(f)(11) for purposes of claiming the charitable income tax deduction. Because the Court had found that the appraisal wasn’t a qualified appraisal for purposes of the charitable income tax deduction with respect to tax years 2006, 2007 and 2008, use of that defense against the accuracy related penalty necessarily failed.§ 642(c) Deduction For Amounts Paid Or Permanently Set Aside For A Charitable PurposeTrust’s Charitable Set Aside Deduction Denied Because Possibility Of Non-Charitable Payments Not So Remote As To Be Negligible: Estate of Eileen S. Belmont et al. v. Commissioner, 144 T.C. No. 6, (Feb. 19, 2015)The Tax Court has held that an estate’s income tax deduction for an amount permanently set aside for charity was invalid because the possibility that amount set aside ultimately won’t be devoted to the charitable purposes was not “so remote as to be negligible.”§ 642(c) allows an estate or a trust to claim an income tax deduction for amounts of income are paid or permanently set aside for a charitable purpose, pursuant to the terms of a “governing instrument” (in this case, a decedent’s will). When it comes to the charitable set aside deduction, Regs. § 1.642(c)-2(d) provides that the possibility that property set aside ultimately won’t be devoted to the charitable purposes must be “so remote as to be negligible.”In this case, Eileen S. Belmont designated Columbus Jewish Foundation (foundation) as the residuary beneficiary of her estate under her will. She died testate on April 1, 2007, a resident of Ohio. Following her death, her will’s probate was opened in Cincinnati, Ohio. Under the terms of her will, $50,000 passed to her brother David, with the remainder of her estate passing to the foundation. The foundation was a recognized § 501(c)(3) charitable organization.When Eileen’s estate filed its income tax return for the tax year ended March 31, 2008, it reported:Income from State Teachers Retirement Pension Fund of Ohio $243,463 Interest Income721 Capital loss(3,000)Deductions(21,604)Charitable set-aside deduction(219,580)Taxable income$0 The charitable deduction was claimed on the basis of the residuary bequest to the foundation.The tax return was filed on July 17, 2008.As of March 31, 2008, the estate held $272,675 in cash. The estate did not segregate $219,580 to satisfy the amount of the charitable deduction.The estate’s income tax return was filed on July 17, 2008. As of that date, the charitable contribution had not been paid.At time of her death, Eileen owned a condominium unit located in Santa Monica, California. Eileen had purchased that condo after Eileen and David’s mother, Wilma, died. The condo’s presence in the decedent’s estate required that an ancillary probate be opened in California, with attendant costs.By the time when the estate’s income tax return was filed, legal claims against the estate had arisen. David had taken up residence in the Santa Monica condominium about nine months before Eileen died. After her death, David litigated his right to remain there for life, and eventually won that litigation in the California probate court. That decision was appealed by the estate, which, as stated in the Tax Court’s opinion:… argued that David: (1) did not contribute to the purchase of the 5th Street residence in 1986; (2) had no interest in the 5th Street residence when it was sold in 2000; (3) had no interest in Wilma's estate; and (4) had no ownership interest in the funds decedent used to purchase the Santa Monica condo or in the Santa Monica condo itself. In an unpublished opinion, the appellate court sustained the lower court’s decision awarding David a life estate in the condominium. The costs of the court battle, together with the costs of estate administration in two states depleted the estate’s cash reserves. The Tax Court said that the litigation costs, together with ongoing litigation expenses, caused the estate to deplete some of the $219,580 that it had ostensibly set aside for the foundation. By the date of the Tax Court trial, September 11, 2013, the estate’s checking account balance had dropped to approximately $185,000.The Court commented on the meaning of the term, “so remote as to be negligible”, saying:Although this Court has not had occasion to consider the "so remote as to be negligible" standard in the context of § 642(c)(2), we have examined identical language in connection with the regulations prescribed under § 170. See Graev v. Commissioner, 140 T.C. 377 (2013). In 885 Inv. Co. v. Commissioner, 95 T.C. 156, 161 (1990) (quoting United States v. Dean, 224 F.2d 26, 29 (1st Cir. 1955)), we defined "so remote as to be negligible" as "a chance which persons generally would disregard as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction". In Briggs v. Commissioner, 72 T.C. 646, 657 (1979), aff'd without published opinion, 665 F.2d 1051 (9th Cir. 1981), we construed the standard as being "a chance which every dictate of reason would justify an intelligent person in disregarding as so highly improbable and remote as to be lacking in reason and substance." [footnote omitted] With these interpretations in mind, we will consider the facts and circumstances of the matter sub judice to determine whether the possibility that the estate would invade the money set aside for the foundation was "so remote as to be negligible". See Graev v. Commissioner, 140 T.C. at 394; sec. 1.642(c)-2(d), Income Tax Regs.In the case before it, the Tax Court found: The facts and circumstances known to the estate when it filed its Form 1041 on July 17, 2008, were sufficient to put the estate on notice that the possibility of an extended and expensive legal fight -- and consequently the dissipation of funds set aside for the foundation -- was more than “so remote as to be negligible”.By that date, the estate had depleted its cash and was faced with the very real prospect of costly litigation. The Court rejected the estate’s contention that David’s claim had “no reasonably foreseeable impact” on its claimed charitable, set-aside amount, citing Commissioner v. Upjohn's Estate, 124 F.2d 73 (6th Cir. 1941). The Tax Court distinguished that case based on its facts. Unlike Upjohn's Estate, the threat of litigation in the case before the Tax Court wasn’t present. The Court also rejected the estate’s attempt to advance Estate of Wright v. United States, 677 F.2d 53 (9th Cir. 1982), holding, in part, that “[W]e cannot say that funds are ‘permanently set aside’ if the will is the subject of a compromised will contest.” The Tax Court declined to apply § 691(c)’s “so remote as to be negligible” test only on the presence or absence of a will contest. Rather, the Tax Court said: … we find the Court of Appeals' reasoning in Estate of Wright supportive of our decision. The rationale underlying the Court of Appeals' holding in Estate of Wright is that pending litigation (e.g., a will contest) creates a possibility that a charitable gift may not be effected and consequently, an estate cannot permanently set aside funds as required by § 642(c)(2).Trust May Claim Charitable Deduction For Property’s Fair Market Value Because Purchased “Out Of Gross Income”: Green v. U.S., No. 5:13-cv-01237 (Nov. 4, 2015)The David and Barbara Green 1993 Dynasty Trust (the "Trust" or “GDT”) contained a provision authorizing the trustee to “distribute to charity such amounts from the gross income of the Trust as the Trustee determines appropriate.”COMMENT: In many cases, such a provision may be difficult for a trustee to interpret.The Trust goes on to say that “[a] distribution may be made from the Trust to charity only when both the purpose of the distribution and the charity are as described in Section 170(c) of the Code.”The Trust owned a 99% limited partnership interest in Hob-Lob Limited Partnership ("Hob-Lob"), which was classified as a partnership for income tax purposes. That partnership owned most Hobby Lobby stores. A web search reveals that Hobby Lobby sells arts and crafts through retail stores and over the internet.Hob-Lob reported calendar year distributions and ordinary business income to the Trust for 2002 through 2004 as follows:DistributionsOrdinary Income2002$38,722,126$72,465,6462003$41,076,436$68,303,3182004$29,480,397$60,543,215March 19, 2004 Charitable Contribution of Virginia PropertyOn February 19, 2003, GDT, using money received from a Hob-Lob distribution made out of Hob-Lob income, purchased real estate located in Lynchburg, Virginia (“Virginia Property”), and then contributed “a significant portion” of the property to the National Christian Foundation Real Property, Inc. (“NCF”), an organization described in § 170(b)(1)(A) on March 19, 2004. The Trust reported on Form 8283, Noncash Charitable Contributions, attached to its 2004 income tax return, that its adjusted basis in the Virginia Property as of March 19, 2004 was $10,368,113. It was agreed for purposes of this action only, that its fair market value was at least $10,368,113.October 5, 2004 Charitable Contribution of Oklahoma PropertyOn March 19, 2004, GDT, using money received from a Hob-Lob distribution made out of Hob-Lob income, purchased real estate located in Ardmore, Oklahoma (“Oklahoma Property”), and then contributed all of that real estate to the Southwest Oklahoma District Church of the Nazarene (“SWODCN”), an organization described in § 170(b)(1)(A).The Trust reported on Form 8283, Noncash Charitable Contributions, attached to its 2004 income tax return, that its adjusted basis in the Oklahoma Property as of October 5, 2004 was $160,477. The fair market value of the Oklahoma Property was $355,000 when contributed.June 5, 2004 Charitable Contribution of Texas PropertyDuring June 2003, GDT, using money received from a Hob-Lob distribution made out of Hob-Lob income, purchased real estate located in Dickinson, Texas (“Texas Property”), and then contributed all of that real estate to the Lighthouse Baptist Church ("LBC"), an organization described in § 170(b)(1)(A) on June 5, 2004.The Trust reported on Form 8283, Noncash Charitable Contributions, attached to its 2004 income tax return, that its adjusted basis in the Texas Property as of June 5, 2004 was $145,180. The fair market value of the Texas Property was $150,000 when contributed.The Trust’s income tax returns claimed deductions for charitable contributions on its original return totaling $20,526,383. An amended return was later filed, claiming $29,654,233, an increase of $3,194,748. The IRS disallowed the refunds.The trustee, as plaintiff, and the IRS, as defendant, filed cross motions for summary judgment. The Court summarized the question before it:Plaintiff's Motion presents the following issue: “whether a charitable deduction under 26 U.S.C. § 642(c)(1) for donated real property purchased out of gross income should be calculated based on the property's fair market value or the [T]rust's adjusted basis in the property.” Plaintiff contends the fair market value standard should apply to the charitable deduction because Congress did not specify a different valuation standard in 26 U.S.C. § 642(c)(1). Defendant argues (1) that 26 U.S.C. § 642(c)(1) limits a trust's deduction to the amount of gross income it contributed to charity; (2) gross income does not include unrealized appreciation; and (3) a liberal construction of the statute allowing fair market valuation would negate the gross income derivative requirement. (Motion citation, footnote omitted.)IRC § § 642(c)(1) provides:[T]here shall be allowed as a deduction in computing its taxable income (in lieu of the deduction allowed by section 170(a), relating to deduction for charitable, etc., contributions and gifts) any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, paid for a purpose specified in section 170(c) (determined without regard to section 170(c)(2)(A)). If a charitable contribution is paid after the close of such taxable year and on or before the last day of the year following the close of such taxable year, then the trustee or administrator may elect to treat such contribution as paid during such taxable year. The election shall be made at such time and in such manner as the Secretary prescribes by regulation.The Court found that the contributions were made out of gross income, noting: “the fact that the Donated Properties were given to charities in a year subsequent to their purchase does not disqualify them from being considered as charitable donations derived from gross income.”The IRS argued that the contribution wasn’t made “out of gross income” because, under applicable state fiduciary accounting law, a portion of the contribution was made from principal, not income. The Court disposed of this argument rather quickly, saying: “Plaintiff counters that Defendant conflates the federal tax concept of ‘gross income,’ with state law fiduciary accounting concepts of ‘income’ and ‘principal.’ The Court agrees with Plaintiff.”The IRS argued that allowing the deduction for full fair market value is barred because the difference between basis and fair market value constituted unrealized capital gains.The Court rejected this view because that would always defeat deductions of appreciated property based on fair market value.The Court concluded:The plain language of 26 U.S.C. § 642 supports a construction in favor of Plaintiff. The Court finds that Congress sought in § 642(c)(1) to authorize a deduction “without limitation,” and fair market value is the appropriate valuation standard regarding the Donated Properties. Therefore, the Oklahoma Property is to be valued at $355,000 as of the date of donation, and the Texas Property is to be valued at $150,000 as of the date of donation. The Virginia Property's fair market value remains to be determined.Accordingly, the Court granted partial summary judgment to the Trust and denied the government’s motion for partial summary judgment.§ 664 Charitable Remainder TrustsCharitable Remainder Trust Net Income Limitation Ignored For Purposes of Ten Percent Remainder Test: Estate of Arthur E. Schaefer, No. 13183-11, 145 T.C. No. 4 (Jul. 28, 2015)The Tax Court has held that the value, for estate tax purposes, of the remainder interest in a charitable remainder unitrust that pays to the non-charitable beneficiary the lesser of a stated unitrust percentage and the trust’s net income is calculated based on the Unitrust percentage only. In this case, two unitrusts failed to meet the Unitrust requirement that the actuarial value of the trusts’ remainder interests must equal or exceed ten percent because the Code § 7520 interest rate was less than the Unitrust percentage.This case seems to say that a charitable remainder Unitrust established during lifetime, which trust continues to may payments to one or more non-charitable beneficiaries after the trustor’s death, must pass the ten-percent remainder value test twice: first, upon creation; second, upon the trustor’s death. In both instances, the Unitrust percentage, and not the § 7520 interest rate, is used to value the remainder interest.§ 1014. Income Tax Basis Of Property Received From Decedent New Basis Consistency And Related Information ReportingSteve Leimberg's Estate Planning Email Newsletter - Archive Message #2334. Reprinted by permission. Subject: Mike Jones & DeeAnn Thompson: How Tax Practice Is Affected by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015EXECUTIVE SUMMARY: Effective July 31, 2015, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, P.L. 114-41 contains new requirements that affect tax reporting requirements and impose new information return requirements. Key provisions include: · Income tax basis used to compute gain or loss on sale or exchange of property must be consistent with values reported for estate tax purposes, but only for property that increases estate tax, net of allowable credits (effective immediately);· New required income tax basis information reporting by estates required to file estate tax returns (effective immediately);· Changes to tax return due dates and automatic extensions of time to file for partnership, C corporation and S corporation income tax returns;· Treasury mandated to make regulatory adjustments to maximum extension of certain return due dates;· Increased annual mortgage reporting requirements;· Clarification that overstatement of income tax basis can trigger the income tax’s six-year statute of limitations.FACTS: On July 31, 2015, President Obama signed the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, P.L. 114-41 (referred to in this article as “Act”). Financing provisions contained in the bill affect income and estate taxes. Act, Title II contains revenue provisions, including: SEC. 2001. EXTENSION OF HIGHWAY TRUST FUND EXPENDITURE AUTHORITY.SEC. 2002. FUNDING OF HIGHWAY TRUST FUND.SEC. 2003. MODIFICATION OF MORTGAGE REPORTING REQUIREMENTS.SEC. 2004. CONSISTENT BASIS REPORTING BETWEEN ESTATE AND PERSON ACQUIRING PROPERTY FROM DECEDENT.SEC. 2005. CLARIFICATION OF 6-YEAR STATUTE OF LIMITATIONS IN CASE OF OVERSTATEMENT OF BASIS.SEC. 2006. TAX RETURN DUE DATES.SEC. 2007. TRANSFERS OF EXCESS PENSION ASSETS TO RETIREE HEALTH ACCOUNTS.SEC. 2008. EQUALIZATION OF HIGHWAY TRUST FUND EXCISE TAXES ON LIQUEFIED NATURAL GAS, LIQUEFIED PETROLEUM GAS, AND COMPRESSED NATURAL GAS.This commentary discusses only §§ 2003, 2004, 2005, and 2006. COMMENT:INCOME TAX BASIS “CONSISTENCY” CHANGES EFFECTIVE BEGINNING AUGUST 1, 2015Income tax basis consistency with estate tax value under new IRC § 1014(f) The next estate tax return you prepare will include new information reporting to comply with new basis consistency information reporting requirements. The next income tax return you prepare that includes gain or loss on the sale or exchange of property acquired from a decedent may be subject to new statutory provisions regarding income tax basis. Effective for property with respect to which an estate tax return is filed after July 31, 2015, Internal Revenue Code § 1014 has been amended to add new § 1014(f). The new provisions require that income tax basis of property reported for income tax purposes must not exceed the value of property determined and reported in a decedent’s estate tax return, but the rule doesn’t apply to all taxable estates. This provision, taken together with new information reporting provisions under new Code § 6035, discussed later, appear to address a budget proposal in President Obama’s current and past revenue proposals (the so-called “green book”). The Secretary may, by regulations, provide exceptions to the application of income tax basis conformity. The date of the decedent’s death doesn’t affect the effective date – property reported on any estate tax return filed after July 31, 2015 is potentially subject to Code § 1014(f). That includes returns timely filed by the original due date and the extended due date, as well as late-filed returns. The basis consistency rule only applies to property that increases estate tax liability, net of credits against the tax. It could be questioned which properties reported in an estate tax return specifically increase estate tax liability, but it could also be said that all properties contribute pro rata to all estate tax liability – an approach that harmonizes with general tax apportionment principles. Property that qualified for a marital deduction in the estate tax return of the first spouse to die and that is includible in the taxable estate of a surviving spouse will increase estate tax in the surviving spouse’s estate, if that estate generates an estate tax. Thus, marital deduction property can be subject to basis consistency requirements after the surviving spouse dies. Property that qualifies for an estate tax deduction can’t be said to increase the estate tax liability of an estate. Examples include property for which the marital deduction or the charitable deduction is claimed. Because such property doesn’t increase estate tax, the new consistency requirement arguably won’t apply. If property is not shown on an estate tax return, whether inadvertently or otherwise, such property can’t be said to increase estate tax liability unless and until it is brought into estate tax return reporting by filing a supplemental return, or under examination. Nevertheless, IRS guidance might effectively subject property not shown on a return to consistency requirements because it would have increased estate tax liability, if properly included on the decedent’s estate tax return. But, such guidance might also relax or extend the time for complying with information reporting requirements when the executor wasn’t able to discover the existence of a property after reasonable efforts to discover property failed to reveal its existence in time to comply. There might also be rules promulgated about discovery of property after the time for filing information returns has passed. Because estate tax returns are required and basis consistency rules apply only if there’s an estate tax to pay, the basis consistency rule appears not to apply to returns filed in order to elect portability of a deceased spouse’s unused exclusion amount. One consequence of not being subject to basis consistency is that relaxed DSUE reporting rules lifting the requirement to report certain property values under Treas. Regs. § 20.2010-2(a)(7)(ii) aren’t likely to be negated in practice by basis consistency requirements. Estate tax returns that reduce the estate tax to zero by reason of a marital deduction and/or a charitable deduction also fall outside the consistency requirements. § 1014(f)(3) provides that the value of property is “determined” if shown on an estate tax return and that value has not been contested by the Secretary before the statute of limitations on assessment and collections expires. In the absence of an estate tax return, the Secretary may determine the value and, if not contested, that value is treated as “determined.” If the value is either agreed upon or is determined in court proceedings, that value becomes the value “determined” for reporting purposes. Here’s an example of how the basis conformity requirement applies. FACTS: Property consisting of an apartment building and land owned by a decedent is includible in her taxable estate. The presence of the property gives rise to estate taxes. Its value for estate tax purposes is $7 million. In accordance with the decedent’s will, the property is held in trust for the lifetime of the decedent’s children. Eight years after death, the trust sells the property for $12 million. At the time of sale, the basis of the property, net of allowances for depreciation, is $5 million. RESULTS: For purposes of determining gain or loss on sale of the property, the basis in the property may not exceed $7 million, its value for estate tax purposes. Because the basis of $5 million does not exceed the $7 million estate tax value, the taxable gain may be determined using the $5 million basis. VARIATION: What if the trustee determines the value at date of death was $7.5 million, recalculates depreciation and concludes the basis on sale is $5.5 million? Is that determination disallowed by the new basis consistency rule because the value before depreciation reported on the estate tax return was lower? The answer is that § 1014 establishes basis not only for purposes of determining gain or loss on sale or exchange, but also for purposes of claiming depreciation. Under the basis consistency requirement, the income tax basis claimed for purposes of computing gain or loss, as well as for depreciation is $7 million. Also note that, if the trustee errs in claiming too much depreciation, depreciation in excess of what’s allowable lowers basis because basis for computing gain or loss is determined by the amount of depreciation allowed or allowable. Information Reporting of Estate Tax Value Basis consistency introduces new reporting requirements for the executor of an estate under new § 6035, Basis Information To Persons Acquiring Property From Decedent. Reporting is due on the date when the Secretary provides. But that date must be no later than 30 days after the date when estate tax return is required to be filed or, if earlier, 30 days after the date when the return is actually filed. Apparently, if no return is timely filed, information reporting is nevertheless required to be filed no later than 30 days after the date when estate tax return would have been required to be filed. Each report must furnish to the Secretary and to each person who holds a beneficial interest in property subject to reporting the property’s description as reported in the estate tax return, its value reported in the estate tax return, and such other information as the Secretary may prescribe. Although reporting will soon be due for some estates, the IRS has, so far, had no chance to issue forms and instructions to do so. It may not always be possible to identify, by the reporting due date, each person acquiring any interest in property that was included in the decedent's gross estate for Federal estate tax purposes. Many estate plans provide that an executor (in the case of an estate) or a trustee (in the case of a trust administering property of the decedent) will pick and choose assets to be given to various beneficiaries. It’s not uncommon for decisions about what property will be distributed to whom occur long after the estate tax return is filed. Guidance will be needed to address that administrative reality. For estates that meet the estate tax filing requirement of § 6018(a), information reporting must be furnished to the Secretary as well as to each person acquiring any interest in property included in the decedent's gross estate for Federal estate tax purposes. The value of each interest in property that is reported for estate tax purposes must be reported under § 6018(a). The Secretary is granted authority to require any other information. The § 6018 information reporting requirement isn’t the same as the § 1014(f) consistency requirement. For example, the estate of a decedent that meets the filing requirement may have no tax due because the estate tax marital deduction reduces the estate tax to zero. § 6018 information reporting is required, but there’s no § 1014(f) consistency requirement. Those holding a beneficial interest in property includible in the decedent’s gross estate may be required to file basis information reporting when an estate tax return must be filed under § 6018(b). That estate tax filing requirement is imposed when two conditions are met. First, the executor must be unable to make a complete return as to any part of the gross estate of the decedent. In such a case, the executor is required, under § 6018(b), to provide information to the Secretary that includes a description of the part of the gross estate the executor is unable to report, as well as the name of every person holding a legal or beneficial interest therein. Second, the Secretary must notify each such person about the requirement that each such person is required to file an estate tax return as to the part of the gross estate the executor was unable to report. Judicial Doctrine of Duty of Consistency Could Still Apply While the new statutory rules force consistency only in specified circumstances discussed above, the judicial doctrine of duty of consistency will continue to have vitality. For example, in Janis v. Commissioner, No. 04-4443-ag, 469 F.3d 256, 2nd Cir. (2006), aff’g T.C. Memo. 2004-117 (2004) an estate’s beneficiaries sold inherited artwork. In reporting the taxable gains for income taxes, those beneficiaries sought to deduct the value of the artwork as reported on a decedent’s estate tax return, but without giving regard to fractional interest discounts that reduce the value of the artwork for estate tax purposes. Affirming the Tax Court, the Court of Appeals held that income tax basis must reflect those valuation discounts. Expansion of Penalty Provisions The § 6724(d)(1) list of information returns subject to penalty for failure to file such a return has been expanded to include the new income tax basis information returns required under § 6035. § 6662, imposing an accuracy-related penalty on underpayments, has been expanded to impose that penalty on “any inconsistent estate basis”. That item is now included in the § 6662(b) list of items subject to penalty, at new paragraph 8. Under new § 6662(k), inconsistent estate basis exists “if the basis of property claimed on a return exceeds the basis as determined under § 1014(f)." Both of the new penalties apply to property with respect to which an estate tax return is filed after July 31, 2015. Valuations for taxable estates now have the potential to incur either estate tax penalties for understating values or the new income tax accuracy penalties for overstating values. The latter penalty could apply to the estate, or to a beneficiary who receives property from an estate. For estates with no estate taxes due, including returns filed to elect portability of the deceased spouse’s unused exclusion amount, the new basis consistency rule and its related accuracy related penalty for overstating values don’t apply (because there has to be a tax payable for the consistency rules to apply). That a penalty can apply for both undervaluation and overvaluation heightens the need to obtain a defensible appraisal when estate taxes will be incurred. INCOME TAX DUE DATES ADJUSTED Income Tax Due Date Changes Effective for Income Tax Years Beginning after December 31, 2015 The due dates for partnerships and C corporations have essentially been flipped. In addition, various changes have been made to the extended due dates of various types of entities. Returns of Partnerships and S Corporations Effective for taxable years beginning after December 31, 2015, § 6072 is amended to provide that, for partnerships and S corporations with calendar years, the returns must be filed on or before the 15th day of March following the close of the calendar year. Returns made on the basis of a fiscal year must be filed on or before the 15th day of the third month following the close of the fiscal year. This represents no change for S corporations, but it does for partnerships. Prior to enactment of the due date changes, partnership returns were due on or before April 15 for calendar year filers or by the 15th day of the fourth month following the close of the fiscal year for fiscal year filers. RETURNS OF C CORPORATIONS Effective for taxable years beginning after December 31, 2015, § 6072 is amended to provide that for C corporations with calendar years, the returns must be filed on or before the 15th day of April following the close of the calendar year. With one exception, returns made on the basis of a fiscal year must be filed on or before the 15th day of the fourth month following the close of the fiscal year. Exception for C Corporations with Fiscal Years Ending on June 30 For C corporations with fiscal years ending on June 30, the effective date for these changes is extended to taxable years beginning after December 31, 2025. Extensions of Time to File: C Corporations C corporations will be entitled to an automatic 6-month extension for filing income tax returns, effective for taxable years beginning after December 31, 2015, under revised § 6081(b). But, some corporations will get 5-month extensions, while others will get 7-months extensions. 5-month extensions of time to file apply to C corporations with calendar year ends for tax years that begin before January 1, 2026. 7-month extensions apply to C corporations having June 30 year-ends that begin before January 1, 2026. Actions Required to Be Taken before Extended Due Dates Conformed to Revised Due Dates Conforming amendments were made to the following code §s affecting C corporations: 1. § 170(a)(2)(B), regarding payment of charitable contributions by accrual basis corporations;2. § 563, relating to payment of dividends after the end of the year for purposes of calculating the accumulated earnings tax;3. §1354(d)(1)(B)(i), relating to revocation of the election by a qualified vessel operator;4. § 6167, sub§s (a) and (c), relating to extension of time for payment of tax attributable to recovery of foreign expropriation losses;5. § 6425(a)(1), relating to adjustment of overpayment of estimated income tax by corporations; and,6. § 6655, sub§s (b)(2)(A), (g)(3), (g)(4) and (h)(1), relating to calculation of penalties for failure by corporations to pay estimated income tax.MANDATED REGULATORY ADJUSTMENTS TO MAXIMUM EXTENSION OF CERTAIN RETURN DUE DATES New maximum extended due dates for a variety of returns is now mandated to be incorporated in Treasury Regulations. Here’s the list, as stated in Act § 2006(a)(3): 1. The maximum extension for the returns of partnerships filing Form 1065 shall be a 6-month period ending on September 15 for calendar year taxpayers. 2. The maximum extension for the returns of trusts filing Form 1041 shall be a 5 1/2-month period ending on September 30 for calendar year taxpayers. 3. The maximum extension for the returns of employee benefit plans filing Form 5500 shall be an automatic 3 1/2-month period ending on November 15 for calendar year plans. 4. The maximum extension for the returns of organizations exempt from income tax filing Form 990 (series) shall be an automatic 6-month period ending on November 15 for calendar year filers. 5. The maximum extension for the returns of organizations exempt from income tax that are required to file Form 4720 returns of excise taxes shall be an automatic 6-month period beginning on the due date for filing the return (without regard to any extensions). [NOTE: Form 4720 is entitled: Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code §s 170(f)(10), 664(c)(2), 4911, 4912, 4941, 4942, 4943, 4944, 4945, 4955, 4958, 4959, 4965, 4966, and 4967] 6. The maximum extension for the returns of trusts required to file Form 5227 shall be an automatic 6-month period beginning on the due date for filing the return (without regard to any extensions). [NOTE: Form 5227 is entitled: Split-Interest Trust Information Return] 7. The maximum extension for filing Form 6069, Return of Excise Tax on Excess Contributions to Black Lung Benefit Trust Under § 4953 and Computation of § 192 Deduction, shall be an automatic 6-month period beginning on the due date for filing the return (without regard to any extensions). 8. The maximum extension for a taxpayer required to file Form 8870 shall be an automatic 6-month period beginning on the due date for filing the return (without regard to any extensions). [NOTE: Form 8870 is entitled: Information Return for Transfers Associated With Certain Personal Benefit Contracts] 9. The due date of Form 3520-A, Annual Information Return of a Foreign Trust with a United States Owner, shall be the 15th day of the 3d month after the close of the trust's taxable year, and the maximum extension shall be a 6-month period beginning on such day. 10. The due date of Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, for calendar year filers shall be April 15 with a maximum extension for a 6-month period ending on October 15. 11. The due date of FinCEN Report 114 (relating to Report of Foreign Bank and Financial Accounts) shall be April 15 with a maximum extension for a 6-month period ending on October 15 and with provision for an extension under rules similar to the rules in Treas. Reg. § 1.6081-5. For any taxpayer required to file such Form for the first time, any penalty for failure to timely request for, or file, an extension, may be waived by the Secretary. (The previous due date for FBAR reporting was June 30, with no provision for extension of time to file.) ADDITIONAL MORTGAGE REPORTING REQUIREMENTS: RETURNS AND STATEMENTS REQUIRED AFTER DECEMBER 31, 2016 § 6050H(b)(2) mortgage reporting requirements are expanded under Act § 2003 to include: · The amount of outstanding principal on the mortgage as of the beginning of such calendar year,· The date of the origination of the mortgage,· The address (or other description in the case of property without as address) of the property which secures the mortgage, and· Such other information as the Secretary may prescribe. The new requirements apply to returns and statements required after December 31, 2016. CHANGE CLARIFYING APPLICATION OF THE SIX-YEAR STATUTE OF LIMITATIONS Act § 2005 clarifies that an overstatement of basis can trigger the 6-year income tax statute of limitations on assessment and collections that applies when gross income is understated by more than 25 percent. The Act accomplishes this by providing that, overstatement of basis is treated the same as understatement of gross income. This change overturns the Supreme Court’s holding in United States v. Home Concrete & Supply LLC, 132 S. Ct. 1836 (2012). In that case, the U.S. Supreme Court held that overstatement of basis in determining gain or loss on the sale or exchange of property does not constitute an understatement of gross income that potentially triggers the 6-year income tax statute of limitations on assessment and collections. HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE! Mike JonesDeeAnn Thompson CITE AS: LISI Estate Planning Newsletter #2334 (August 17, 2015) at Copyright 2015 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Written Permission. CITES: Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, P.L. 114-41; Primary IRC §s: 1014, 6035, 6018, 6072, 6081, 6050H, 6662, 6724. Copyright ? 2015 Leimberg Information Services Inc.Notice 2015-57; 2015-36 I.R.B. 1: IRS Defers Basis Consistency Reporting, Requests CommentsTreasury and the IRS have announced that the due date for filing basis consistency information returns is delayed until February 29, 2016, stating:For statements required under §s 6035(a)(1) and (a)(2) to be filed with the IRS or furnished to a beneficiary before February 29, 2016, the due date under § 6035(a)(3) is delayed to February 29, 2016. This delay is to allow the Treasury Department and IRS to issue guidance implementing the reporting requirements of § 6035. Executors and other persons required to file or furnish a statement under § 6035(a)(1) or (a)(2) should not do so until the issuance of forms or further guidance by the Treasury Department and the IRS addressing the requirements of § 6035.The Treasury Department and the IRS expect to issue additional guidance to assist taxpayers with complying with §s 1014(f) and 6035. The Treasury Department and the IRS invite comments. Submissions should be submitted to: CC:PA:LPD:PR (Notice 2015-57), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2015-57), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20044, or sent electronically, via the following e-mail address: ments@irscounsel.. Please include "Notice 2015-57" in the subject line of any electronic communication. All comments submitted will be available for public inspection and copying.Here are your author’s comments, sent via email to IRS:Comments Regarding Reporting Forms:§ 6035 requires basis reporting for all estates that meet the filing requirement of § 6018. The basis consistency rule of § 1014(f) only applies to property that increases estate tax liability, net of credits against the tax.Consider including a box that can be checked indicating whether basis consistency is required because the item reported increased estate taxes. Clarification is needed regarding which properties reported in an estate tax return specifically increase estate tax liability and so are subject to the reporting requirements. Do all properties contribute pro rata to all estate tax liability? What if a marital or charitable estate tax deduction is present? What if property that an executor can choose to satisfy a marital or charitable deduction isn’t identified in time to meet the reporting requirement?Consider providing a form that accommodates listing multiple items transferred to the same transferee on the same ments Regarding Guidance:How should the executor proceed when the recipient of property isn’t (or can’t) be determined by the information return due date? For example, in California, it’s common practice for the community property of a couple to form a part of a single trust. The division of community property after the death of the first spouse to die can be satisfied on a pro rata basis (i.e. half of each property is designated by the executor as the decedent’s property disposed upon death) or on a non pro rata basis, where any property of the trust that adds up to the half of the value of all property is so designated. In practice, that division is frequently made only after an estate tax closing letter is received. In other cases, court approval may be required before property is identified as passing to legatees. Thus, in some cases, it can’t be determined what property is subject to reporting within the time prescribed by statute, or to whom such report shall be directed.Consider exempting property from reporting in certain cases:Cash and cash equivalentsRetirement accounts (employer plans, IRAs). Any basis in such accounts results from contributions that may not be deducted for income tax purposes. Death of the participant has no effect on basis. Distributions are taxed to the death beneficiaries entitled to receive such distributions and are already subject to information reporting requirements.The recipient of property has actual knowledge of the value required to be reportedExample: A decedent’s property is held in trust. The trust provides that, following the decedent’s death, trust property is divided into two or more subtrusts. The trustee of trust who makes allocations to the subtrusts is also the trustee of the receiving subtrusts. The trustee of the subtrusts has actual knowledge of the values of all properties required to be reported.Surviving spouse is executor and also recipient of property under a marital bequest. Surviving spouse has actual knowledge of the values of all properties required to be reported.Decedent is survived by three children. Child 1 is executor of the decedent’s estate and also is the recipient of 1/3 of property under the decedent’s will. Child 1 has actual knowledge of the values required to be reported.Transfers to tax-exempt organizations (charitable, etc.). Tax exempt organizations with no possibility of either paying a tax on sale or exchange of property or of passing such gains out to non-charitable beneficiaries (such as a charitable remainder trust).Address how required reporting applies (or doesn’t apply) to: Allocation of basis in real property between land and depreciable property permanently affixed theretoProperty under a § 2032A election, relating to Valuation Of Certain Farm, Etc., Real Property, when the so-called recapture provisions of § 2032A(c), Tax Treatment Of Dispositions And Failures To Use For Qualified Use, applies.Changes to estate tax valuations resulting fromFiling a supplemental return; or Examination of an estate tax return, appeals settlement, or final determination by a court decision. Possibly, supplemental reporting is needed where the value changes after the estate tax return is filed.IRS Won’t Rule On Income Tax Basis On Death When Property Held In Certain Grantor Trusts: Rev. Proc. 2015-37, 2015-26 IRB 1 (June 15, 2015)The Internal Revenue Service National Office will not rule, in a private letter ruling, on the income tax basis of property held in a grantor trust that is not includible in the taxable estate of the grantor.Example: Trevor establishes and funds a trust that is treated as a grantor trust for income tax purposes. As a result, for all income tax purposes, Trevor is treated as owning all trust property. However, the trust is structured in such a way that the trust is not includible in his taxable estate upon Trevor’s death.For income tax purposes, Trevor is treated as having owned the trust property up until his death. Upon his death, grantor trust status terminates and, arguably, the property is treated for income tax purposes as passing from Trevor to the trust at death. The basis of property acquired from a decedent is its date-of-death fair market value.§ 1014 has several provisions prescribing the basis of property included in the gross estate of a decedent. An example is property held in trust, which trust qualified for an estate tax marital deduction. But § 1014 doesn’t appear to contemplate the situation where property is acquired from a decedent for income tax purposes while, at the same time, is not recognized as forming a part of the decedent’s taxable estate for estate tax purposes.§ 1031. Like Kind Exchanges: California TreatmentLike Kind Exchange Requirements Satisfied, Even Though Replacement Property Later Contributed to LLP: Rago Development Corp., et ux v. California State Board of Equalization, 2015-SBE-001 (2015)The California State Board of Equalization (BOE) has held that the state of California must recognize in like-kind exchanges under Internal Revenue Code § 1031 where property received in the exchanges were subsequently transferred to a partnership.Apartments located in San Rafael, California, were owned by Sonoma Bell Apartments, a general partnership. Its partners included Louis La Torre Living Family Trust, Martin Bramante and Estate of Velia Bramante (Dec’d), and Frank Sabella (“Bramante appellants”). Two properties in St. Helena, California adjacent to each other were owned by seven individuals and a family living trust (“Rago appellants”).All parties entered into an agreement with Consolidated Title Services (CTS) to facilitate like-kind exchanges intended to qualify under Internal Revenue Code § 1031 to defer recognition of gains.Properties were sold, and, at a later time that occurred within the § 1031 replacement period, the sellers acquired tenancy in common interests in the Sand Creek Crossing Shopping Center on June 30, 2003. Specifically, the replacement property “included two parcels forming the Sand Creek Crossing Shopping Center and two adjacent parcels of undeveloped ‘pads’.”Also on June 2, 2003, as part of acquiring Sand Creek Crossing Shopping Center, the appellants entered into a loan agreement that required transferring the appellants’ interest in Sand Creek Crossing Shopping Center to a limited liability company no later than January 31, 2004. Accordingly, Appellants formed Sand Creek Crossing, LLC on January 23, 2004.California Franchise Tax Board (FTB) denied income tax-free kind exchange treatment, arguing that no like kind exchange occurred because the like kind exchange requirement that property received be held for a qualified purpose was not met with respect to the Sand Creek Crossing Shopping Center. FTB argued that was so because all property received in the exchange had to be, and was, transferred to the LLC, pursuant to the loan provision requiring that transfer. FTB alternatively argued that, by application of the step transaction doctrine, a partnership interest was received instead of qualifying replacement property. BOE found that the form of ownership didn’t prevent the owners of the replacement property to fail the qualified purpose test, citing Magneson v. Commissioner (9th Cir. 1985) 753 F.2d 1490 (Magneson) and Bolker v. Commissioner (9th Cir. 1985) 760 F.2d 1039 (Bolker).In Magneson, replacement property received in an exchange (“swap”) was transferred to a general partnership on the same day (“drop”). In Bolker, real estate was distributed in a corporate liquidation (“drop”), followed by a like kind exchange of that real estate (“swap”) three months later.BTA summarized:[T]he development of case law on the holding requirement shows that the courts examine the intent of the taxpayers at the beginning of the exchange to determine whether there is an intent to hold replacement property for investment or use in a business or trade. The courts also find that the holding requirement can be met when there remains an economic interest in essentially the same investment, despite a change in the form of ownership.BTA then examined the step transaction doctrine, a substance over form doctrine, noting:Courts have generally used three alternative tests in determining whether to apply the step transaction doctrine: (i) the end result test; (ii) the interdependence test; and (iii) the binding commitment test.If any of the three tests is met, one or more steps will be disregarded for tax purposes. Instead, the transaction will be deemed to have taken a form as if the intermediate steps never occurred. In this case, FBT sought to treat the parties as having received partnership interests in exchange for the properties sold, instead of Sand Creek Crossing Shopping Center.BTA refused to apply the step transaction doctrine. The sellers held Sand Creek Crossing Center for seven months before transferring it to the LLC. During that time, the sellers enjoyed ownership, including rights to income and appreciation, and also bore the risks of loss, value depreciation or physical damage.Held: “[T]he exchange was properly executed, the replacement property was held for investment purposes, and the later contribution of the property to appellants’ wholly owned LLC altered the form of appellants’ ownership but did not alter appellants’ fundamental objective to hold the property for investment. Furthermore, the step transaction doctrine does not apply to disregard appellants’ acquisition of the replacement property”. ValuationTax Court Clearly Erred In Valuation Holding: Estate of Giustina v. Comm’r., No. 12-71747, 9th Cir. (Dec. 5, 2014), rev’g in part T.C. Memo 2011-141 (2011)The Ninth Circuit Circuit Court of Appeals has held the Tax Court clearly erred in some aspects of its valuation holding. The Court reversed and remanded for recalculation by the Tax Court in an unpublished per curiam opinion.The taxable estate of Natale B. Giustina included a 41.128% interest in Giustina Land and Timber Company Limited Partnership. In the lower court, an expert valuation witness was qualified for each of the Taxpayer and the government.The Appeals Court first considered whether the Tax Court committed clear error when it concluded that valuation is based 25% on the net asset value method of valuation and 75% on cash flow method of valuation. The appeals court found there was no evidence in the record for a finding that there was a 25% likelihood of liquidation of the partnership, and then, on that basis, justifying weighing asset-base valuation by 25% and weighting the going-concern value of the partnership by 75%. The court went on to say:In order for liquidation to occur, we must assume that (1) a hypothetical buyer would somehow obtain admission as a limited partner from the general partners, who have repeatedly emphasized the importance that they place upon continued operation of the partnership; (2) the buyer would then turn around and seek dissolution of the partnership or removal of the general partners who just approved his admission to the partnership; and (3) the buyer would manage to convince at least two (or possibly more) other limited partners to go along, despite the fact that "no limited partner ever asked or ever discussed the sale of an interest." Alternatively, we must assume that the existing limited partners, or their heirs or assigns, owning two-thirds of the partnership, would seek dissolution. We conclude that it was clear error to assign a25% likelihood to these hypothetical events. As in Estate of Simplot v. Commissioner, 249 F.3d 1191, 1195 (9th Cir. 2001), the Tax Court engaged in "imaginary scenarios as to who a purchaser might be, how long the purchaser would be willing to wait without any return on his investment, and what combinations the purchaser might be able to effect" with the existing partners. See also Olson v. United States, 292 U.S. 246, 257 (1934) (explaining in a condemnation case that, when a court estimates "market value," "[e]lements affecting value that depend upon events or combinations of occurrences which, while within the realm of possibility, are not fairly shown to be reasonably probable[,] should be excluded from consideration"). We therefore remand to the Tax Court to recalculate the value of the Estate based on the partnership's value as a going concern.The Appeals Court then let stand the Tax Court’s adoption of capitalizing pre-income tax cash flows instead of after-tax cash flows to arrive at the value of the partnership as a going concern, and also let stand the Tax Court’s conclusion regarding the marketability discount to be applied to the partnership interest. Finally, the Appeals Court considered the Tax Court’s adjustment to company-specific risk, which was one of four factors used by the Taxpayer’s expert in developing the discount rate used to discount cash flows in arriving at the going concern value of the entity. The Appeals Court held that “the Tax Court clearly erred by failing to adequately explain its basis for cutting in half the Estate's expert's proffered company-specific risk premium”.The Tax Court Cuts the Cord on McCord & Provides Guidance for Net-Net Gift Valuation Discounts: Steinberg v. Commissioner, 145 TC 7, No. 23865-11 (Sept. 16, 2015)LISI Estate Planning Newsletter #2357 (October 21, 2015) at Copyright 2015 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission. Reprinted by permission Date: 21-Oct-15From: Steve Leimberg's Estate Planning NewsletterSubject: Mike Jones & DeeAnn Thompson on Steinberg v. Commissioner: The Tax Court Cuts the Cord on McCord & Provides Guidance for Net-Net Gift Valuation Discounts “The Tax Court’s opinion in Steinberg v. Commissioner will likely lower the risk of engaging in carefully planned and documented net, net gift arrangements. However, IRS will be able to scrutinize the underlying facts and challenge whether a negotiated arrangement supporting a net, net gift treatment exists.”In Estate Planning Newsletter #2349, Owen Fiore provided LISI members with commentary on the Tax Court’s decision in Steinberg v. Commissioner. Now, Mike Jones and DeeAnn Thompson weigh-in with their observations. Here is their commentary:EXECUTIVE SUMMARY: A net gift occurs when the donee of a gift agrees to assume and pay federal gift tax liability as a condition of receiving the taxable gift. The value of such a gift may be reduced by the gift tax, because assumption of the gift tax liability constitutes consideration for the gift. A net, net gift occurs when the donee also assumes to pay federal estate taxes that may arise from inclusion of the gift tax in the donor’s taxable estate under Internal Revenue Code section 2035(b), should the donor die within three years of making the gift. Whether a net, net gift’s value is reduced by the amount of the estate tax liability attributable to Section 2035(b) has been questioned by the government. Steinberg v. Commissioner, (Steinberg II), involved a so-called net-net gift, and the Tax Court held for the taxpayer. A valuation adjustment equal to the actuarial value of the contingent estate tax liability was determined and allowed for federal gift tax purposes. The Court found the net, net gift valuation methods used by William Frazier, the Taxpayer’s expert witness to be “persuasive,” going so far as to say that the method used in this case by that same expert witness was approved by the Fifth Circuit Court of Appeals in Succession of McCord v. Commissioner, 461 F.3d 614 (2006), rev'g 120 T.C. 358 (2003). This opinion will likely lower the risk of engaging in carefully planned and documented net, net gift arrangements. However, IRS will be able to scrutinize the underlying facts and challenge whether a negotiated arrangement supporting a net, net gift treatment exists. FACTS: In Steinberg v. Commissioner, 141 TC 8, No. 23865-11 (2013) (Steinberg I), the U. S. Tax Court denied the government’s motion for summary judgment that claiming a valuation adjustment for the potential application of Code section 2035(b) is barred as a matter of law. A valuation adjustment was held to be allowable under appropriate circumstances. As a result, the Court could try the case and then pass on the contested valuation adjustment, based on the evidence. The case thus proceeded and was decided in 145 TC 7, No. 23865-11 (Sept. 16, 2015) (Steinberg II). Jean Steinberg was the surviving spouse of Meyer Steinberg. The Steinbergs were married in 1944. Mr. Steinberg died in 2003. A marital trust was established for Mrs. Steinberg under Mr. Steinberg’s will. Mrs. Steinberg held a general power of appointment over the Marital Trust. On April 17, 2007, at the age of 89, Mrs. Steinberg, under a binding gift agreement between herself and all four of her daughters, withdrew $10 million from the Marital Trust, caused the trust to pay over $3.4 million in legal fees, and gave the rest of the Trust’s property to each of her four daughters. Under the agreement, the donees assumed the obligation to pay gift taxes, as well as all estate taxes payable on the gift taxes by reason of Code section 2035(b) in the event of Mrs. Steinberg’s death within three years of the date when the gifts were completed. The net gift agreement was negotiated over several months, with the benefit of separate representation for all parties. Pertinent provisions of the net gift agreement, Section 3 were reproduced in the Court’s opinion: a. Assumption of Federal and State Estate Tax Liability. Each Donee hereby agrees to assume, pay and indemnify the Executor against all additional federal and state estate tax liability assessed pursuant to Code section 2035(b) (i) if Mrs. Steinberg [petitioner] does not survive for three years following the Effective Date and (ii) that is directly attributable to Mrs. Steinberg's transfer of the Gift Property made under the Instruments of Transfer, including all penalties and interest which accrue upon such estate tax liability except such penalties and interest that are directly attributable to actions or delays committed by the Executor or another Donee (the Estate Tax Liability). For purposes of determining and allocating the Estate Tax Liability, (i) the value of all additional tax shall be as finally determined for federal estate tax purposes, (ii) the only gift tax taken into account in the calculation shall be the gift tax on Mrs. Steinberg's transfers of the Gift Property to the Donees made under the Instruments of Transfer, and (iii) the amount of the Estate Tax Liability each Donee shall bear shall be an amount equal to the Estate Tax Liability attributable to the Donee's Gift Tax Share A and the Donee's Gift Tax Share B (in each case, collectively, the Donee's Estate Tax Share). * * * * * * * c. Payment of Estate Tax Liability. i. Donees’ Payment to Executor. Each Donee shall deliver to the Executor an amount equal to the Donee's Estate Tax Share by certified check made payable to the United States Treasury, no later than thirty days before the due date for payment of the Estate Tax Liability, or, if later, as soon thereafter as the Executor notifies the Donee of the amount of the Estate Tax Liability. The agreement also imposed economic consequences for failure to honor its terms. According to the opinion: Section 7(c), Remedy Available in Event of Default, of the net gift agreement provides in pertinent part: ii. Default in Payment of Estate Tax Liability. If the Executor determines that a Donee is in default * * * the Executor shall give notice to the Donee that the Donee is in default (Estate Tax Default Notice and Estate Tax Default Notice Date, respectively). If the Donee fails within 10 business days after the Default Notice Date to deliver to the Executor the remaining balance of the Donee's Estate Tax Share of the Estate Tax Liability (Donee's Estate Tax Balance), all Cash Distributions [i.e., certain quarterly distributions to which the donees are entitled] otherwise distributable to a Donee shall be delivered directly to the Executor * * *. Each Donee agrees that, upon the date on which the Executor gives an Estate Tax Default Notice to a Donee, the Executor also shall deliver a duplicate copy of the Estate Tax Default Notice to the Manager, and the Donee shall be deemed to have directed the Manager to deliver the Cash Distribution otherwise distributable to the Donee directly to the Executor in satisfaction of the Donee's Estate Tax Balance as provided in this paragraph. Each Donee agrees to perform any and all acts necessary as a shareholder, partner, member, manager or director of any entity governed by an Applicable Agreement to effect the payment of the Donee's Estate Tax Balance to the Executor. After the agreement was signed, Mrs. Steinberg transferred Trust property to her daughters valued at $109,449,307. In addition, the daughters, pursuant to an escrow agreement they signed on the date of gift, transferred $40 million to an escrow account in order to pay the gift tax and also to hold funds that might be needed to pay estate tax on the gift tax. Mrs. Steinberg filed a federal gift tax return reporting the gifts, reducing the value of those gifts by both the gift tax and the value of the contingent estate tax, determined under an actuarial calculation. The IRS examined the return and determined a deficiency, based on its determination that the value of the gifts should be increased from the returned amount of $71,598,056 to $75,608,963, a difference of $4,010,907. COMMENT: The Tax Court set aside the question of burden of proof because its decision would be decided on the preponderance of the evidence. The government argued unsuccessfully that the obligation of the donees to pay the estate tax on gift taxes under the net, net gift agreement merely duplicated New York State apportionment statutes because the decedent could change domicile and die in another state. Because of that possibility, the Court said it was not possible to determine whether New York’s apportionment statutes would reach the donees. The government also argued unsuccessfully that the obligation of the donees to pay the estate tax on gift taxes under the net, net gift agreement merely duplicated a tax apportionment clause in the Decedent’s will because the will could be changed any time before death. For example, the Decedent could leave none of her estate to any of the four daughters. Noting its decision in Steinberg I that the value of a gift may be adjusted “under appropriate circumstances” for assumption of the estate tax on gift taxes under Code section 2035(b), the Court said that “[a]n appropriate circumstance arises when the donee's assumption of the section 2035(b) estate tax liability is a detriment to the donee and is a benefit to the donor.” The net, net gift arrangement in this case was found to have been entered into at arm’s length in the ordinary course of business, largely because of the negotiation process with separate representation. The standard of valuation applied by the Court was the price at which the property transferred under the net, net gift agreement would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts, as provided under Treasury Regulations § 25.2512-1. The agreement to pay the Code section 2035(b) additional estate tax constituted consideration in money or money’s worth that reduced the value of the gifts because the consideration was found to be both a detriment to the donees and a benefit to the donor, each of which must be recognized by a hypothetical willing buyer and willing seller. Next, the opinion turns to the question whether there existed both a detriment and a benefit, framing its analysis within the willing buyer-willing seller test. In this case, a hypothetical willing buyer’s detriment was the possibility that the buyer would indeed have to pay the estate tax on the gift tax, should the donor die within three years of the date of transfer. A hypothetical willing seller’s benefit was the possibility that the seller’s estate would be enriched, thus relieving that estate of the cost of that same amount of estate tax. The transaction was thus properly characterized as a part sale, part gift. Turning to the determination of value, the Taxpayer’s expert witness, William Frazier, provided computations supporting his valuation conclusion. The government offered no valuation evidence. Rather, it raised two concerns with Mr. Frazier’s methodology. Its first argument was that his analysis was flawed because it failed to consider contingencies such as Mrs. Steinberg’s health and general medical prognosis. The Court pointed out that Mr. Frazier did take the possibility of Mrs. Steinberg’s death within three years of executing the net gift agreement into account and that he used the Commissioner’s own mortality tables to do so. The Court found the net, net gift valuation methods used by the Taxpayer’s expert witness “persuasive,” observing that the method used in this case by same expert witness was approved by the Fifth Circuit Court of Appeals in Succession of McCord v. Commissioner, 461 F.3d 614 (2006), rev'g 120 T.C. 358 (2003). Computation of the gift tax liability assumed by the donees was based upon net gift authority and methodology provided under Code section § 2512, Treasury Regulations Section 25.2511-1, and Rev. Rul. 75-72, 1975-1 C.B. 310. The expert’s report calculated the gift tax liability, taking into account the net gift, to be $32,012,711. The expert’s method used to value the net, net gift involved applying an interest-based discount factor to account for the time value of money, and also a mortality based discount to account for risk of death within the Code section 2035(b) three-year exposure period. The government objected to the valuation methods, arguing that Mr. Frazier incorrectly applied the section 7520 interest rates as the interest-based discount factor used to calculate the donees’ assumption of the contingent estate tax liability, contending that the section 7520 rates apply only to annuities, life interests, term of years, remainders and reversionary interests. However, the government failed to persuade the Court that there was a more appropriate method that should have been used. The Court said that the presence of a contingent payment does not preclude the use of section 7520 interest rates. Those rates may be used together with an adjustment that takes the contingency of death into account. Thus, it was found appropriate to use: 1. The Code section 7520 discount rate in effect on the date of gift to account for the time value of money from date of transfer to the date at the end of the three-year period following the date of transfer, when exposure to the Code section 2035(b) additional estate tax expired; and2. The Code section 7520 mortality rates in effect on the date of gift to account for the possibility that death would occur during the three-year Code section 2035(b) exposure period.Regarding the mortality component of valuation, in this case, it was appropriate to use IRS-published mortality tables 90 CM (published in Treasury Regulations 20.2031-7(d)(7)) may be used to determine the likelihood that death would occur during that same period of time. The opinion describes that method, stating: [T]he report calculated the value of the section 2035(b) estate tax liability. Mr. Frazier testified that he used the actuarial tables promulgated by the Commissioner to calculate the probability that petitioner would die within each of the three years after the date of the net gift agreement. The report calculated petitioner's annual mortality rate for year 1, year 2, and year 3 to be 13.84%, 13.04%, and 12.13%, respectively. The report used the section 7520 interest rate applicable on the date of the transfer to determine the present value factors for each of the three years. Then the report took the effective State and Federal estate tax rates for each of the three years and multiplied them by the gift tax included in the estate under section 2035(b). Using this methodology, the report calculated that the daughters’ assumption of the section 2035(b) estate tax liability reduced the value of the combined gift by $5,838,540. (Footnote omitted.) The Court apparently used the term “mortality rate” to refer to the probability that the donor would die in any of the three years following the date of gift. However, the computations aren’t disclosed in the opinion. Here’s a summary of the results (aggregating all four gifts to all four children):Value of property transferred $109,449,307 Gift Taxes assumed and paid by donees $32,012,711Actuarial present value of potential estate taxes payable by donees $5,838,540 Total value of gift tax liabilities assumed by donees $37,851,251 Gift Tax Value of Net, Net Gift $71,598,056 HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE! Mike JonesDeeAnn Thompson CITE AS:LISI Estate Planning Newsletter #2357 (October 21, 2015) at Copyright 2015 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission. CITES: Steinberg v. Commissioner, 145 TC 7, No. 23865-11 (Sept. 16, 2015); (Steinberg II); Steinberg v. Commissioner, 141 TC 8, No. 23865-11 (2013) (Steinberg I); Succession of McCord v. Commissioner, 461 F.3d 614 (2006), rev'g 120 T.C. 358 (2003); Internal Revenue Code section 2035(b) Copyright ? 2015 Leimberg Information Services Inc.§ 2001. Imposition Of Estate TaxEstate Tax Return Closing Letters Must Now Be RequestedThe IRS has announced that it will no longer issue estate tax return closing letters unless requested to do so. That announcement was posted on the IRS’ website, stating:For all estate tax returns filed on or after June 1, 2015, estate tax closing letters will be issued only upon request by the taxpayer. Please wait at least four months after filing the return to make the closing letter request to allow time for processing. For questions about estate tax closing letter requests, call (866) 699-4083.No procedure for requesting a closing letter was provided in the announcement. Hopefully, that will appear in Form 706 instructions.§ 2010. Unified Credit Against Estate Tax Portability Regulations Finalized, Effective June 12, 2015: T.D. 9725, 80 FR 34279-34292, June 16, 2015The Unified Credit Against Estate Tax under § 2010 is based on the applicable exclusion amount, as is the Unified Credit Against Gift Tax under § 2505. The applicable exclusion amount is the sum of the Basic Exclusion Amount and any Decease Spouse’s Unused Exclusion. The Basic Exclusion Amount is $5,430,000 for decedents dying during 2015, as well as for gifts made in 2015. Temporary regulations on portability of a deceased spouse’s unused applicable exclusion amount (DSUE) to the decedent’s surviving spouse were published on June 18, 2012 in TD 9593, 77 FR 36150. Final regulation have now been published, effective for decedents dying and for gifts made on or after June 15, 2015.Changes to the temporary regulations were made.Extension Of Time To Elect Portability Available Only In Certain CasesGenerally, a portability election must be made by the due date of a decedent’s estate tax return, including extensions of time to file actually granted. For example, if a six-month extension to file has been requested and granted, the decedent’s estate tax return will be due 15 months following the decedent’s date of death. For a DSUE return, Reg. § 20.2010-2(a)(1) sets the due date to coincide with the due date of a return when tax is due, plus extensions actually granted.Under final Reg. § 20.2010-2(a)(1), it will be possible to request an application to further extend the due date, but only if no estate tax return was required to be filed under Code § 6018. Such an extension is applied for under Regs. § 301.9100-3 by filing a request for a private letter ruling and paying both a fee.For example, a decedent dies in 2015. The decedent’s estate meets the estate tax filing requirements, but a marital deduction is claimed, reducing the taxable estate to zero. That return could qualify for an election to port the decedent’s unused exclusion amount to the surviving spouse. Because the estate would have incurred a tax but for the marital deduction, the estate tax return is required to be filed under § 6018. The estate will not be able to request an additional extension under Regs. § 301-9100-3.On the other hand, if the decedent’s estate does not meet the estate tax filing requirements, an estate tax return electing portability is required to be filed under the portability regulations, but that return is not a return required to filed under § 6018. Accordingly, the due date of that estate tax return is not set by statute. Rather, the due date is set by regulation in Regs. § 20.2010-2(a). Because the due date is set by regulation and not by statute, Regs. § 301.9100 relief is available. Treasury felt it helpful to say so in the final portability regulations.The Preamble to the regulations further states:As transitional relief in the wake of TRUIRJCA and ATRA, the Treasury Department and the IRS have published guidance regarding the availability of an automatic extension of time for executors of certain estates under the filing threshold of § 6018(a) to file an estate tax return to elect portability of an unused exclusion amount. See Notice 2012-21, 2012-10 IRB 450; Rev. Proc. 2014-18. The Treasury Department and the IRS continue to receive, and are continuing to consider, requests for permanent extensions of this type of relief. However, such relief is not included in the final regulations.Protective Election Not NeededResponding to a commenter asking about making a protective election where a return is filed but a later supplemental return is filed, freeing up exemption amount, the final regulations confirm that a portability election is made by timely filing a complete return that does not elect out of portability. Regs. § 20.2010-2(b) now provides that that the computation requirement in § 2010(c)(5)(A) will be satisfied if the estate tax return meets the requirements of Regs. § 20.2010-2(a)(7), setting forth the standard for recognition as a complete and properly prepared return. No protective election is needed to preserve the ability to create or increase an exemption amount under a supplemental return.Authority To Make ElectionThe final regulations adopt the temporary regulations without change regarding who may make the portability election. Comments asking for expansion beyond the statutory requirement that the executor make the election were denied.Portability Return Must Be "Complete And Properly Prepared"Requests to allow and offer a simplified return to elect portability were denied. The final regulations continue the requirement of the temporary regulations that “a complete and properly prepared estate tax return for the decedent's estate” be timely filed. As in the temporary regulations, the value of certain property that qualifies for the marital or charitable deduction need not be reported, provided certain requirements are met.However, the final regulations add a provision that leaves the door open to additional non-regulatory guidance regarding what may be excluded from reporting.Relationship To Income Tax BasisRegs. § 20.2010-2T(a)(7)(ii)(A)(2) was amended to provide that determining income tax basis of the decedent’s property is not considered for purposes of determining whether property must be valued under the DSUE rules.Qualified Domestic TrustsNo changes were made in response to comments regarding a non-citizen, nonresident surviving spouse who has been granted a lifetime interest in Qualified Domestic Trust. Availability Of DSUE Amount by Surviving Spouse Who Becomes A Citizen of the United StatesIn response to a commenter, Regs. §§ 20.2010-3 and 25.2505-2 allow a surviving spouse who becomes a U.S. citizen after the death of the deceased spouse to use the deceased spouse’s DSUE upon and after the date when: The deceased spouse's executor makes the portability election,The surviving spouse becomes a citizen of the United States, andThe requirements in § 2056A(b)(12) (special QDOT rule where spouse becomes a U.S. citizen) and the corresponding regulations are satisfied. Effect of Portability Election on Application Of Rev. Proc. 2001-38Rev. Proc. 2001-38, 2001-24 IRB 1335 renders a QTIP election that does not reduce estate taxes null and void. That ruling avoids inclusion of what would otherwise have been property under a QTIP election in the gross estate of a surviving spouse. In the DSUE context, an executor may wish to make a QTIP election that increases (or maximizes) DSUE passing to a surviving spouse. Rev. Proc. 2001-38 arguably frustrates that wish.In response to several comments, the IRS will provide guidance in a future Internal Revenue Bulletin, regarding whether a QTIP election made under § 2056(b)(7) may be disregarded and treated as null and void under Rev. Proc. 2001-38 when an executor has elected portability of the DSUE amount under § 2010(c)(5)(A).Basic Exclusion Amount In Examples CorrectedExamples in Regs. §§ 20.2010-3T and 25.2505-2 have been corrected for mathematical error.§ 2055: Transfers For Public, Charitable, And Religious UsesTrust Reformation As Charitable Remainder Unitrust Qualifies For Charitable Estate Tax Deduction: PLR 201450003 (Aug. 20, 2014).A trust entitled to receive a decedent’s property was payable to charity after the death of an income beneficiary, an individual who survived the decedent (“Beneficiary”). The trust was also responsible for paying (1) estate, transfer, inheritance, legacy and succession taxes by reason of Decedent's death; (2) debts of the Decedent and funeral expenses; and (3) all legacies payable by the executor under Decedent's will.Because the trust was neither a charitable remainder Unitrust nor a charitable remainder annuity trust, no charitable deduction was available for estate tax purposes.The estate’s executor and the trust’s trustee proposed to reform the trust, apparently in conformance with a negotiated settlement agreement with all parties, subject to court approval. The trust was to be reformed into one administrative trust and one charitable remainder Unitrust (CRUT) for the lifetime of the Beneficiary, with Unitrust payments beginning after the decedent’s death. The CRUT payments during the trust’s term were payable in part to the Beneficiary and in part to the charity, according to stated percentages. A portion of the trust will be transferred to the reformed CRUT. Once the decedent’s taxes, expenses and debts were paid from the administrative trust, any amounts remaining were to be added to the charitable remainder Unitrust.In order to qualify for § 2055’s estate tax charitable deduction, the charitable interest must be a reformable interest within the meaning of § 2055(e)(3)(C)(i). Because the trust, as constituted at the time of the decedent’s death, provided for a charitable remainder interest that was presently ascertainable and, hence, severable from the noncharitable interests, the charitable interest was found to be a reformable interest.In addition, judicial proceedings must be timely commenced. Under § 2055(e)(3)(C)(iii), a timely judicial proceeding is generally one that is commenced to change such interest into a qualified interest not later than the 90th day after--(I) if an estate tax return is required to be filed, the last date (including extensions) for filing such return, or (II) if no estate tax return is required to be filed, the last date (including extensions) for filing the income tax return for the 1st taxable year for which such a return is required to be filed by the trust. The IRS held that the CRUT, as reformed, qualifies for § 2055’s estate tax charitable deduction.§ 2056: Bequests, Etc., To Surviving Spouse§ 301.9100 Relief Granted for QTIP Election: PLR 201536002 (May 13, 2015)Upon the death of the Decedent, the surviving spouse hired Attorney to file Form 706. Attorney mistakenly did not include on Schedule M the property of Trust B, which qualified for the marital deduction under § 2056(b)(7). Form 706 was timely filed. Relief was granted under Treasury Regulations § 301.9100-3, because the taxpayer is deemed to have acted reasonably and in good faith if the taxpayer reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election.§ 2503(b): Exclusions From GiftsDemand Rights Qualify for Gift Tax Exclusion: Mikel v. Comm’r., Nos. 16538-13, 16563-13, T.C. Memo. 2015-64 (Apr. 6, 2015)The IRS challenged qualification of annual exclusion gifts claimed by Israel and Erna Mikel, a married couple.Mr. and Mrs. Mikel established the IEM Family Trust (trust) on June 7, 2007 for the benefit of their children and lineal descendants, and their respective spouses. At inception, the trust’s beneficiaries numbered 60, many of whom were under 18 years of age. The spouses transferred property with an asserted value of $3,262,000 to that trust. Each beneficiary was granted a withdrawal power over contributions to the trust. That power expired 30 days after the date of contribution. The amount of the withdrawal power could be no more than maximum federal gift tax exclusion under § 2503(b) in effect at the time of the transfer. But the withdrawal right could be lower, based an amount determined under a formula.The trustees were authorized to satisfy demands with cash, property, or the proceeds of loans.The trustee was required to provide written notice to each of the beneficiaries advising them of the presence of a contribution to the trust. The trust provided that, upon receipt of exercise of a withdrawal right, immediate distribution would occur.As to amounts held in trust, distributions for health, education, maintenance, or support of any beneficiary or family member could be made in the trustee’s discretion. In addition, distributions in the trustee’s “absolute and unreviewable discretion” could be made to help with “reasonable wedding costs, * * * purchasing a primary residence, or * * * entering a trade or profession.”Any dispute that a beneficiary raised with respect to the trust was required, under the trust’s terms, to be submitted to arbitration before a panel consisting of three persons of the Orthodox Jewish faith.” The Court added that such a panel is called a “beth din”. The panel was charged to “enforce the provisions of this Declaration * * * and give any party the rights he is entitled to under New York law.” But the trust went on to provide that the trust was to be administered “to effectuate the intent of the parties * * * that they have performed all the necessary requirements for this Declaration to be valid under Jewish law.”A so-called “in terrorem provision” appeared in the trust, stating:In the event a beneficiary of the Trust shall directly or indirectly institute, conduct or in any manner whatever take part in or aid in any proceeding to oppose the distribution of the Trust Estate, or files any action in a court of law, or challenges any distribution set forth in this Trust in any court, arbitration panel or any other manner, then in such event the provision herein made for such beneficiary shall thereupon be revoked and such beneficiary shall be excluded from any participation in the Trust Estate * * *.On October 9, 2007, the settlors made a $24,000.00 contribution to the trust and the trustee, through the trustee’s attorney, sent notices to all beneficiaries advising them of their withdrawal right, and when it expired. No evidence was offered indicating that a prearranged plan or understanding existed regarding withdrawals. There was no indication whether any beneficiary had or had not exercised a withdrawal right, whether the trustees made discretionary distributions, or whether a dispute had ever arisen concerning either.During calendar year 2007, the couple contributed to the trust assets valued at $3,262,000, including real estate. However, they filed no gift tax MENT: in 2007, the gift tax applicable exclusion amount was $1 million.After receiving an IRS inquiry, Mr. and Mrs. Mikel filed gift tax returns, electing to split gifts. Each return reported total gifts of $1,631,000. Based on 60 annual exclusion amounts of $12,000 per donee, a total of $720,000 in annual exclusion amounts was claimed.Their returns were selected for examination. The IRS disallowed all of the annual exclusions and assessed taxes, plus additions to the tax for late filing. Mr. and Mrs. Mikel petitioned the Tax Court to overturn their assessments, and the Tax Court consolidated their cases.Both the IRS and petitioners moved for partial summary judgment. Observing that the parties agreed upon all material facts, the Court found the case ripe for summary adjudication.The Court summarized the standard for recognition of withdrawal rights as qualifying for the annual gift tax exclusion:We adopted the Court of Appeals for the Ninth Circuit's reasoning [in Crummey v. Commissioner, 397 F.2d 82 (1968), rev'g in part T.C. Memo. 1966-144] and result in Estate of Cristofani v. Commissioner, 97 T.C. 74 (1991), a unanimous reviewed Opinion of this Court. The proper focus of analysis, we explained, is not “the likelihood that the minor beneficiaries would actually receive present enjoyment of the property,” but “the legal right of the minor beneficiaries to demand payment from the trustee.” Id. at 80. We therefore examined “the ability of the beneficiaries, in a legal sense, to exercise their right to withdraw trust corpus, and the trustee's right to legally resist a beneficiary's demand for payment.” Id. at 83. Considering the terms of the trust agreement, we concluded that “each grandchild possessed the legal right to withdraw trust corpus and that the trustees would be unable to legally resist a grandchild's withdrawal demand.” Ibid. We accordingly held that the minor beneficiaries’ withdrawal rights constituted “a present interest for purposes of § 2503(b). Id. at 84.The government agreed there was nothing to suggest that “the trustees here could ‘legally resist a * * * [beneficiary's] withdrawal demand’ under the trust’s terms”; nor did the government argue that a “prearranged understanding” that withdrawal rights would not be exercised was present. Rather, it asserted the annual exclusion withdrawal rights were illusory and should be given no regard because “any attempt to seek legal enforcement of that right ‘would result in adverse consequences to its holder’”, citing AOD 1996-10. The government apparently believed that resulted from the in terrorem clause, as well as the requirement to go before the beth din to resolve trust disputes.The Court found the in terrorem clause applied only when decisions by the trustees to make discretionary distributions of trust property were challenged by a beneficiary, and not to seeking legal enforcement of withdrawal rights. For that reason, it did not reach the withdrawal powers.The Court also found that, because the beth din was charged with enforcing New York Law, state law, and not the beth din, had the ultimate authority to enforce withdrawal demands.The Court thus found that, because the annual exclusion withdrawal rights were legally enforceable under New York law, and so qualified for the gift tax annual exclusion.§ 2206 Liability Of Life Insurance BeneficiariesExecutor May Recover Estate Taxes From Life Insurance Beneficiary: Estate Of Smoot, No. 2:13-cv-00040, DC So. GA (March 31, 2015)Life insurance proceeds exceeding $2.8 million were paid under several policies insuring the life of Thomas H. Smoot, II ("Smoot II"). The proceeds were payable to Dianne Smoot, the ex-spouse of Smoot II and were included in the decedent’s taxable estate. Also includible were deferred compensation/deferred commission plan accounts, an IRA account, a 401(k) account, and an annuity that passed to Dianne outside Smoot II’s estate (“other assets”).A resident of Georgia, Smoot II died testate on February 16, 2009. His will, at X, provided: All transfer, estate, inheritance, succession and other death taxes which shall become payable by reason of my death, other than any tax on any generation-skipping transfer and any additional estate tax imposed pursuant to § 2032A(c) of the Internal Revenue Code of 1986, as amended, shall be charged against and be paid by the recipient of such property or from the property to be received.Thomas H. Smoot, III ("Smoot III"), as executor of his father’s estate, sought to recover estate taxes attributable to the life insurance proceeds, as authorized by IRC § 2206, which applies unless a decedent directs otherwise in his will. The amount the estate is entitled to recover is “such portion of the total tax paid as the proceeds of such policies bear to the taxable estate.” The executor also sought to recover estate taxes paid on the other assets, based on either the Will, Item X, or apportionment under state law.Finally the estate sought to recover interest paid on estate taxes, to the extent attributable to the life insurance polices of Smoot II, as well as the other assets that passed outside Smoot II’s estate. The estate introduced evidence establishing that the life insurance proceeds were required to be included in the taxable estate of Smoot II, prevailing against Diane Smoot’s challenges under Federal Rules of Evidence. The Court found that the evidence did establish that insurance proceeds were required to be included in the taxable estate of Smoot II, and that § 2206’s requirement that death benefits of life insurance must be includible in the decedent’s taxable estate was thus satisfied. Accordingly the estate could apply § 2206 to determine the amount of tax it could recover under its terms.However, the Will, Item X, could not operate to allow recovery of estate taxes attributable to the other benefits. According to the opinion:In Georgia, "[a]ll provisions of a will made prior to a testator's final divorce or the annulment of the testator's marriage in which no provision is made in contemplation of such event shall take effect as if the former spouse had predeceased the testator . . ." Ga. Code Ann. § 53-4-49. The Court found that, because there was no ambiguity in Item X, the statute must be applied literally, with the result that it could not be used by the executor recover estate taxes, interest or penalties from Dianne.The Court held that the estate could recover interest relating to the amount recoverable under § 2206, saying:The I.R.C. states that taxes paid on an estate and the interest imposed on such tax are one and the same:Interest prescribed under this section on any tax shall be paid upon notice and demand, and shall be assessed, collected, and paid in the same manner as taxes. Any reference in this title (except subchapter B of chapter 63, relating to deficiency procedures) to any tax imposed by this title shall be deemed also to refer to interest imposed by this section on such tax.I.R.C. § 6601(e)(1). Plaintiff is liable for the interest and fees on her share of the taxes to the same extent she is liable for the tax MENT: This result is wrong. The Court errs in saying that Dianne “is liable for the interest and fees on her share of the taxes to the same extent she is liable for the tax itself.” The person from whom estate taxes may be recovered is not the person who is liable for the tax. See Estate of Morgens, No. 10-73698, 9TH Cir. (2012) (gift tax recoverable from donees by surviving spouse pursuant to statutory recovery right is nevertheless a tax paid by her).§ 6601(e)(1) provides for the assessment and collection of interest. It does not convert interest into tax. If interest were regarded under the estate tax provisions as an addition to the estate tax, no deduction would be allowable for interest paid with respect to estate taxes under any provision of the Code. For example, interest payable on estate taxes paid after the due date of the return can generally be claimed as a deduction in arriving at the amount of the taxable estate under § 2053. Alternatively, such interest may be deducted on the estate’s income tax return under § 163. Estates of decedents dying before 1988 that elected under § 6166 to make deferred payments with respect to closely held business interests could deduct interest paid on those deferred payments, and may continue, even after 1987, to deduct the interest as it is paid. § 2053 prohibits deduction of interest on § 6166 deferred tax payments, effective for decedents dying after 1987. If the Court’s interpretation were correct, this provision would be rendered superfluous, as would §§ 2053 and 163, to the extent those §s relate to interest paid on estate taxes.The Court’s interpretation would also render superfluous § 2207A(c). § 2207A(a) provides that a taxable estate that includes qualified terminable interest property (QTIP) is entitled to recover estate taxes attributable to qualified terminable interest property within the meaning of § 2056(b)(7). § 2207A(c), provides that the estate is entitled to recover interest and penalties related to those taxes. § 2501: Gift Tax ImposedNo Gift Occurred From Family Business Dispute: Estate of Edward S. Redstone, et al. v. Commissioner, 145 T.C. No. 11, No. 8401-13 (Oct. 26, 2015)Michael "Mickey" Redstone founded and grew a drive-in movie theater chain throughout the U.S. Northeast. For each theater, one corporation owned land, another operated the film shows and a third operated snack bars. Management was provided by Northeast Theatre Corporation (Northeast), incorporated in 1954. Eventually, on September 1, 1959, a holding company, NAI, a Massachusetts was organized to own all of the movie companies. By that time, Mickey’s two sons, Sumner Redstone and Edward Redstone, were owners (in addition to Mickey) and key employees.At the time of the reorganization, the capital contributions to and shareholdings in all of the movie companies were:Mickey $33,328 47.87%Edward17,845 25.63%Sumner18,445 26.49%Total $69,618 100.00%After the reorganization, each owned 1/3 of Northeast, a decision attributed to Mickey. The percentage held by Mickey decreased, while the percentage held by each of Edward and Sumner increased. But Mickey never expressly made his intentions clear regarding his ownership decrease.All of the physical stock certificates were retained in NAI's corporate office.As Mickey approached age 70, he formed plans to make a gift of 50 shares of common stock in trust for his grandchildren, and to exchange his remaining shares for newly-authorized preferred stock.Family relations with Edward deteriorated over the care of his son, who suffered from “serious psychiatric problems”. Over time, he also became dissatisfied with his role in the family business. Ultimately, he sought to redeem his shares.But, Mickey advanced a theory that, in consequence of Mickey’s taking back a lower percentage of MAI’s stock than he had in the family business before the business reorganization, Edward had bound himself to make a gift of some of Edward’s MAI shares to Edward’s children. Mickey said that, from the date of the reorganization, Edward held shares in an oral trust for the benefit of Edward’s children.Edward saw that assertion as unfounded, and he litigated against it in Massachusetts Superior Court, filing two lawsuits against Mickey, Sumner, and the Redstone family companies. But, in negotiations, it became what was described in the court’s opinion as a “deal breaker”. Ultimately, the litigation ended in a negotiated settlement, wherein Edward transferred one-third of his shares to trusts for his children and was paid $5 million for the rest of his stock.Edward filed no gift tax returns reporting the stock transfers to trusts for the benefit of his children. His accountant shared Edward’s view that no gifts were made.Apprised of the litigation during 2010, and therefore about Mickey’s theory that Edward tacitly agreed to make gifts to his children, the IRS asserted a gift tax against Edward. The Tax Court held that Edward received a full and adequate consideration in exchange for his stock. Accordingly Edward made no gifts.The Court’s opinion serves as a roadmap to litigators as to what will constitute receipt of full and adequate consideration and avoid classification as a taxable gift.§ 6212: Notice Of DeficiencyTaxpayer Can't Rely on Online Postmark As Evidence of Timely Filing: Robert H. Tilden v. Commissioner (September 22, 2015), T.C. Memo. 2015-188A clerical person in the office of the taxpayer’s counsel mailed the taxpayer’s Tax Court petition on the last date for timely filing, affixing postage purchased online through , as well as a certified mailing sticker with a 20-digit tracking number. The petition was delivered to the Tax Court eight days later, according to the US Postal Service tracking data. That date (eight days later) was too late for a timely Tax Court petition to be filed. Although mailed at a post office, the envelope bore no postmark placed there by the US Postal Service. The Tax Court concluded that the taxpayer couldn't rely on a "postmark" in lieu of USPS Tracking data. Therefore the petition was not timely mailed and so was therefore not timely filed.§ 6324: Special Liens For Estate And Gift TaxesDonee Liability For Gift Taxes Affirmed: U.S. v. Elaine T. Marshall et al., No. 12-20804 (Aug. 20, 2015), affirming in part, reversing in part, and vacating No. 12-20804 (5th Cir. 2014).In 1995, J. Howard Marshall, II (“J. Howard”) sold his stock in Marshall Petroleum, Inc. (“MPI”) back to the company for a price below its fair market value. This “bargain” sale increased the value of the stock of the remaining stockholders, causing indirect gifts to occur. The amounts of the indirect gifts to those stockholders, as found by the U.S. Tax Court included:Eleanor Pierce (Marshall) Stevens ("Stevens"), J. Howard's former wife, who was the income beneficiary of a so-called grantor retained income trust (GRIT) that was funded with MPI stock, $35,939,316; E. Pierce Marshall ("E. Pierce"), J. Howard's son, $43,768,091; Elaine T. Marshall ("Elaine"), E. Pierce's wife, $1,104,165; The Preston Marshall Trust ("Preston Trust"), which had been formed for the benefit of J. Howard's grandson, Preston Marshall, $1,104,165; and The E. Pierce Marshall, Jr. Trust ("E. Pierce Jr. Trust"), which had been formed for the benefit of J. Howard's grandson, E. Pierce Marshall, Jr., $1,104,165. J. Howard died soon after making the indirect gifts, without paying any gift taxes.In 2008, the Tax Court issued decisions finding deficiencies in J. Howard's 1995 gift taxes.J. Howard’s estate never paid the assessed taxes. In 2008, the IRS assessed gift tax liability for the unpaid donor gift tax against the donees pursuant to IRC § 6324(b). In May and June 2010, E. Pierce's Estate paid the IRS an amount equal to the value of the gifts received by E. Pierce, Elaine, the Preston Trust, and the E. Pierce Jr. Trust. Stevens died in 2007. E. Pierce Jr. became the executor of her estate. Finley L. Hilliard was the trustee for her Living Trust. E. Pierce Jr. and Finley L. Hilliard were both aware that Stevens' Estate and the Living Trust could be held liable for the unpaid gift tax. E. Pierce Jr. distributed the personal property of the Estate. Hilliard paid legal and accounting expenses for several charities and set aside $1.1 million for charity. Stevens’ Estate paid nothing for Stevens’ share of the gift tax liabilities.The Government filed a motion for partial summary judgment for donee liability against Elaine in her individual capacity, as executrix of E. Pierce's Estate, as trustee of the Preston Trust, and as trustee of the E. Pierce Jr. Trust. The Government argued that it could “charge interest pursuant to I.R.C. §§ 6601 and 6621 on the unpaid donee liability created by § 6324(b).” The Government claimed that there were two separate obligations: the obligation of the donor and the obligation of the donee. § 6324(b), according to the Government, only limited the obligation of the donor, and so the donee's liability for the unpaid gift tax was not capped under § 6324(b). Elaine filed a cross-motion for summary judgment, arguing that the plain language of § 6324(b) capped all donee liability at the value of the gift received, and so the donees could not incur unlimited interest on any separate donee liability.The district court agreed with the Government and found that (1) the donees had an independent liability under § 6324(b) that was not capped at the value of the gift and (2) this independent liability was subject to interest under § 6601.Finally, the Government moved for summary judgment against E. Pierce Jr. and Hilliard for violations of 31 U.S.C. § 3713, the Federal Priority Statute, and against E. Pierce Jr. for breach of state law fiduciary duties. Title 31 of the U.S. Code is entitled Money and Finance. § 3713 provides:§3713. Priority of Government claims(a)(1) A claim of the United States Government shall be paid first when-(A) a person indebted to the Government is insolvent and-(i) the debtor without enough property to pay all debts makes a voluntary assignment of property;(ii) property of the debtor, if absent, is attached; or(iii) an act of bankruptcy is committed; or(B) the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor.(2) This subsection does not apply to a case under title 11.(b) A representative of a person or an estate (except a trustee acting under title 11) paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.The Court summarized:Liability under the Federal Priority Statute requires that (1) a fiduciary (2) distributed the estate's assets before paying a claim of the Government and (3) knew or should have known of the Government's claim. See Renda, 709 F.3d at 480-81. The only dispute in this case is whether E. Pierce Jr. and Hilliard met the knowledge requirement. Actual knowledge is not required; “[t]he knowledge requirement of [31 U.S.C. § 3713] may be satisfied by either actual knowledge of the liability or notice of such facts as would put a reasonably prudent person on inquiry as to the existence of the unpaid claim of the United States.” Leigh v. Comm'r, 72 T.C. 1105, 1110 (1979) (citations omitted).We hold that Hilliard and E. Pierce Jr. knew of the potential liability to the Government, and thus, the Federal Priority Statute applies. In Renda, this Court held that “a representative's actual knowledge of a federal claim is sufficient, notwithstanding that representative's reliance on the erroneous advice of counsel as to how to address the claim.” Renda, 709 F.3d at 484. We are unpersuaded by E. Pierce Jr.'s and Hilliard's reliance on Little to distinguish their case from Renda based only on the fact that the Government had not made an actual claim against Stevens's Estate when they received the erroneous legal advice. This Court has already declined to follow Little to the extent that its analysis of the effect of erroneous legal advice “is inconsistent with the weight of authority on this issue.” Renda, 709 F.3d at 484 n.15. The same considerations that, in Renda, led us to refuse to read an exception due to erroneous legal advice into the Federal Priority Statute apply with equal force here: (1) “the statute does not provide for an attorney-reliance exception,” and (2) “a contrary interpretation would create an exception to the Priority Statute that might swallow the rule.” Id. at 485. Thus, because erroneous legal advice as to the validity of a claim is not an excuse for violating the Federal Priority Statute and E. Pierce Jr. and Hilliard both admitted in depositions that they had knowledge of the potential claims against Stevens's Estate, we hold that the Federal Priority Statute applies.The Fifth Circuit held:Stevens, as income beneficiary of the GRIT had a present interest in the GRIT and so was a donee of a gift who is liable for unpaid gift taxes under § 6324(b).The donees had liability as transferees under § 6324(b) independent of the donor’s liability. Donee liability was capped at the value of the gift (reversing the 5th Circuit’s now vacated decision)E. Pierce Jr., as trustee, could not use the opinion of counsel as a shield against assertion of federal priority statute (of 31 U.S.C. § 3713). However, as E. Pierce’s estate paid over amounts equal to the value of gifts except for Stevens' Estate’s liability, it appears no further amounts could be recovered from E. Pierce’s estate, except for amounts due with respect to Stevens' Estate (recall that E. Pierce was executor of Stevens’ estate).E. Pierce Jr. was not a fiduciary with respect to creditors of the trust, and so did not breach state law fiduciary duties allegedly owed.E. Pierce Jr. and Hilliard were jointly liable for gift taxes to the extent of the charitable set-aside.Hilliard was personally liable for gift taxes to the extent of the amount he caused the Living Trust to pay for accounting and legal services on behalf of other charitable MENT: Application of 31 USC § 3713, known as the Federal Priority Statute, can be of concern in other situations. Before accepting an appointment as trustee, evaluation of potential unpaid taxes of any type may be advisable. One situation worth noting is a trust named as death beneficiary of an Individual Retirement Account. A fifty percent excise tax applies to shortfalls of Required Minimum Distributions. The tax may be waived for reasonable cause. Although this tax falls on the payee of the distributions, it may ultimately become a fiduciary’s 767personal obligation under the Federal Priority Statute. § 6501(c)(9), Exception To Statute of LimitationsDisclosure Inadequate; Gift Tax May Be Assessed At Any Time: FAA 20152201F (May 29, 2015)The IRS, in field advice, determined that the statute of limitations on assessment and collection of gifts taxes hasn’t begun to run because an exception applies. The letter begins with its conclusion: [T]he exception applies because Donor's Form 709 fails to adequately disclose his transfer of interests in two partnerships. The return failed to sufficiently identify one of the partnerships, and it failed to adequately describe the method used to determine the fair market values of both partnership interests. The Service may assess gift tax based upon those transfers at any time.Two different parcels of land were held in two different entities characterized as partnerships. An S corporation was general partner of both partnerships. Gifts of partnership interests were made by the donor to the donor’s daughter.The land had been appraised. However, the partnership interests were not appraised. Disclosures in the gift tax return for the year of the gift were found to be otherwise deficient.Here are the adequate disclosure standards stated analyzed in the letter: § 2501 of the Internal Revenue Code imposes a tax for each calendar year on an individual's transfers by gift during that year. In general, any individual who makes a transfer by gift in any calendar year must file a gift tax return for that year using Form 709. I.R.C. § 6019; Treas. Reg. § 25.6019-1(a); Estate of Sanders v. Commissioner, T.C. Memo. 2014-100, *5. Absent an exception, the Service must assess the amount of any gift tax within three years after Form 709 is filed. I.R.C. § 6501(a). In the case of a gift that is required to be "shown" on a return, but which is not shown, the gift tax may be assessed at any time. I.R.C. § 6501(c)(9). This exception does not apply to a gift that is disclosed on the return or in a statement attached to the return in a matter that is "adequate to apprise the [Service] of the nature" of the gift. Id.[Under Treas. Reg. § 301.6501(c)-1(f)(2) a] transfer will be considered adequately disclosed to the Service if the return or a statement attached to the return provides the following information:(i) A description of the transferred property and any consideration received by the transferor;(ii) The identity of, and relationship between, the transferor and each transferee; . . .(iv) A detailed description of the method used to determine the fair market value of property transferred, including any financial data (for example, balance sheets, etc. with explanations of any adjustments) that were utilized in determining the value of the interest, any restrictions on the transferred property that were considered in determining the fair market value of the property, and a description of any discounts, such as discounts for blockage, minority or fractional interests, and lack of marketability, claimed in valuing the property. . . . In the case of the transfer of an interest in an entity (for example, a corporation or partnership) that is not actively traded, a description must be provided of any discount claimed in valuing the interests in the entity or any assets owned by such entity. In addition, if the value of the entity or of the interests in the entity is properly determined based on the net value of the assets held by the entity, a statement must be provided regarding the fair market value of 100 percent of the entity (determined without regard to any discounts in valuing the entity or any assets owned by the entity), the pro rata portion of the entity subject to the transfer, and the fair market value of the transferred interest as reported on the return. If 100 percent of the value of the entity is not disclosed, the taxpayer bears the burden of demonstrating that the fair market value of the entity is properly determined by a method other than a method based on the net value of the assets held by the entity. . . .;1 and(v) A statement describing any position taken that is contrary to any proposed, temporary or final Treasury regulations or revenue rulings published at the time of the transfer.The letter then describes the ways in which the gift tax return failed to meet the adequate disclosure standard:Partnership interests were given in * * * (Taxpayer ID: * * *) and in * * * (Taxpayer ID: * * * [)]. The assets of the partnership were primarily farm land. The land was independently appraised by a certified appraiser. Discounts of * * *% were taken for minority interests, lack of marketability, etc[.], to obtain a fair market value of the gift.This valuation description does not include "a detailed description of the method used to determine the fair market value of the property transferred, including any financial data . . . utilized in determining the value of the interests." § 301.6501-1(f)(2)(iv). This description recites that Donor had the land appraised, not that he had the partnership or the donated partnership interest appraised. The description does not identify "any restrictions on the transferred property that were considered in determining the fair market value". Id.This description further suggests (by asserting that the assets are primarily farm land and that the land was appraised) that * * * and * * * are properly valued based upon the net value of their assets. Id. If that is the case, the return's valuation description is not "detailed" as required by the regulation. There is no financial data (e.g., actual land values) used in determining the value of the gifts. Id. There is no explanation of the method (e.g., comparable sales) used to determine the value nor any explanation of either how the * * *% discount breaks down between different discount types or the basis for the discounts taken. The "etc" in the return's description suggests that unlisted discounts were applied to the gifts. Id. There is also no statement regarding the 100 percent value of either * * * or * * *, even though both entities appear to be valued based upon their net assets.Donor's return arguably identifies the * * * partnership (because the complete EIN will lead to the unabbreviated partnership name), but it does not adequately identify the * * * * * partnership, and it fails to describe adequately the method used to determine the interests' fair market values. Thus, the statute of limitations exception in I.R.C. § 6501(c)(9) applies to assessing gift tax based upon the * * * Form 709. The Service may assess such tax at any time.§ 6511: Limitations On Credit Or RefundRefund Barred By Statute Of Limitations Because Payment Was Not A Deposit: Winford v. United States, No. 13-31172, 5th Cir. (Dec. 11, 2014), aff’g. No. 2:12-cv-00322, W. Dist. LA (Sept. 9, 2013). In an opinion designated not to be published or cited as precedent, the Court of Appeals for the Fifth Circuit upheld the District Court’s holding that a payment of $230,884 made in July, 2003 that accompanied Form 4768 Application for Extension of Time to File a Return was property characterized as an estimated payment of estate taxes and not as an amount designated as a deposit. The estate tax return was filed more than three years after the payment was made, showing a refund due of $136,268. The IRS properly refused to honor the refund because the three-year statute of limitations on requesting a refund of estate taxes had expired. COMMENT: See Rev. Proc. 2005-18; 2005-1 C.B. 798 (Mar. 14, 2005) regarding how to designate a payment as a deposit. Also, where a payment has been made a protective claim for refund may be filed, effectively preventing the statute of limitations from tolling. § 6662: Imposition Of Accuracy-Related Penalty On UnderpaymentsOpinion Letters Allegedly Protected Under Attorney-Client Privilege Must Be Produced: Eaton Corporation, et al v. Comm’r., No. 5576-12 (Apr. 6, 2015)The taxpayers had received opinion letters regarding negotiating and entering into advance pricing agreements with the IRS. Those letters were represented to be protected under attorney-client privilege. The taxpayers asserted reasonable cause and/or good faith defenses against imposition the § 6662 penalty for substantial underpayment of tax. The Court found that, by so doing, the taxpayers placed the opinion letters protected under attorney-client privilege in controversy. Following the Court’s decision in AD Inv. 2000 Fund LLC v. Commissioner, 142 T.C. at 250-251, the Court held the opinion letters lost protection under attorney-client privilege. CITE AS:?LISI?Estate Planning Newsletter #2368 (December 17, 2015) at 2015 Leimberg Information Services, Inc. (LISI).?Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.? ................
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