CHECKING OFF THE BOXES - AN UPDATE ON THE IRS'S PRIORITY GUIDANCE PLAN

Cathy Hughes, Attorney-Advisor on Estate and Gift Tax for the IRS Office of Tax Policy, spoke at the American Bar Association’s Estate Planning and Real Estate Spring Symposia Trust and Estates, Hot Topics Breakfast, April 30, 2015 about the current IRS Priority Guidance Plan, which was updated April 28, 2015. Among her comments, she noted these items from the Priority Guidance Plan as being “very close” to being issued:1

Section 1014 Final Regulations

The IRS proposed regulations on January 17, 2014 to address the basis of appreciated property donated to charitable remainder trusts (CRTs). Notice 2008-99, noted the problem of the sale and reinvestment of appreciated property within CRTs that resulted in income going back out to the donor with little or no gain, and no tax on the income prior to the donation. The proposed regulations created a formula to address the issue:

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Ms. Hughes also mentioned that the basis regulations are being revised to include references to §1022, which provides for a carryover basis election for estates of decedents dying in 2010.

Section 2801 Proposed Regulations

To date, the IRS has not issued any guidance except the instructions to Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. There are two problems taxpayers face in attempting to comply with the requirements:

  • trying to determine the fair market value of gifted or inherited assets when they are located in another country, and
  • how to trace the gifts – the recipient is responsible for reporting the gift, but a recipient may not be aware of the donor’s status (i.e., was the donor a U.S. resident some 20 years ago, and how long prior to departing was he or she a resident?).

Hopefully, the regulations will address these taxpayer concerns with a practical set of standards to apply.

Section 2032(a) Final Regulations

Proposed regulations for §2032(a) came out in 2011, replacing those issued in 2008. The 2011 regulations reduced the scope of the 2008 proposed regulations, and addressed the decision in Kohler v. Commissioner,2 where a post-death reorganization occurred. While the court accepted the taxpayer’s argument that this was simply a change in the form of the assets, the IRS nonacquiesced.3 Assuming that the IRS continues to focus on the fair market value on the date of any distribution, sale or exchange of estate assets, precluding the “change of form” argument accepted in Kohler, the final regulations should continue with the line of reasoning reflected in the 2011 proposed regulations and the IRS nonacquiescence, with minor adjustments.

The 2011 proposed regulations currently allow two exceptions: (i) exchanges during the alternate valuation period, and (2) accounting for distributions from entities in which the estate holds an interest. Nothing indicates that these exceptions will change.

Section 2053 Proposed Regulations

Ms. Hughes stated that proposed regulations for “unascertainable” amounts claimed as expenses by an estate, and these are also “very close” to release.

Taxpayers and practitioners have had a difficult time with the practical application of §2053 to claims by or against the estate when determining the taxable estate. These unascertainable amounts can lead to liquidity problems for the estate if estate taxes are paid based on claims that are ultimately found to be worthless.

Taxpayers have been hoping for relief, but the IRS has limited the relief, to date, to a $500,000 cap on all unpaid claims against the estate.4

While the IRS, by its description in the Priority Guidance Plan, implies using the present value of these claims and guarantees to craft relief for taxpayers, present value calculations, by their definition, must account for the factors that make a claim unascertainable in the first place, namely the timing of the claim and the ultimate amount. It will be interesting to see if the IRS continues using a cap limit or if they might consider calculations based on reasonable and verifiable estimates of time and amount.

Section 2704 Proposed Regulations

Ms. Hughes also indicated that the IRS is working on these regulations, and that they will very likely reflect the budget proposals from a few years back.5

Restrictions on the liquidation of an entity, or disposing of an interest in an entity, have been the basis for marketability discounts on the value of an interest in a taxable estate. As Kerr v. Commissioner6 has shown, this can be effective in reducing the value of the taxable estate.

The budget proposals Ms. Hughes referred to indicate that some of the transfer restrictions will be disregarded when determining the value transferred, and will possibly create a specific category of restrictions that will be disregarded in valuing the interest or property. These disregarded items are most likely to impact transfers via a separate entity, a corporation or a partnership, used to benefit the transferor’s family, particularly if there is effective family control of the entity, and the transfer restrictions can lapse or be removed by the family. The budget proposal specifically states it will substitute assumptions, set out in the regulations, in place of restrictions in order to limit the restrictions’ effect on the discount.

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 by Kathleen Adcock