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Bloomberg Tax
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Detailed Analysis
I. Introduction
Introductory Material
A. General
B. Amount of the Qualified Family-Owned Business Deduction
II. Pre-Death Requirements For Eligibility
Introductory Material
A. Decedent a Resident or Citizen of U.S. and Ownership Test
B. Qualified Family-Owned Business Interests More Than 50% of Adjusted Gross Estate: “The 50 Percent Test”
1. Qualified Family-Owned Business Interest
2. Excess Cash in the Business
3. Calculation of 50% Test
C. “Passing From” Requirement
1. “Passing to” Qualified Heir
a. The “Acquired from” or “Passing from” Requirement
b. Passing by Disclaimer
c. Passing by Corporate Stock Redemption
d. Income Tax Basis of 2057 Assets
2. Member of Family
3. Qualified Heir
D. Qualified Use Test
E. Requirement of a “Trade or Business”
1. “Passive Asset” Test
2. When Test Must Be Met
3. No “Qualified Use” Test
4. Implications for Structuring Farms and Small Businesses
F. “Material Participation” Test
1. Nature of Requirement
2. Bar to Material Participation by Agent
3. Failure to Pay Self-Employment Tax
4. Judicial Interpretation of “Material Participation”
5. Lease Provisions Supporting Material Participation
6. Active Management Substituting for Material Participation
7. Section 2057 Committee Report Statements
G. Present Interest Test
1. Absence of Income Interest
2. Successive Interests
H. Other Pre-Death Eligibility Considerations
1. Eligibility of Residence
2. Tax-Free Exchanges and Involuntary Conversions
3. Community Property
III. Election
A. When Election Timely
B. Perfecting Defective Elections
C. Agreement of Personal Liability
D. Protective Elections
E. Partial Elections
IV. Post-Death Requirements to Avoid Recapture
Introductory Material
A. Absence of Material Participation
1. Meaning of “Material Participation”
2. “Active Management” as a Substitute for Material Participation
3. Role of Agent
4. Committee Report Language
B. Principal Place of Business Outside U.S.
C. Qualified Heir Loses U.S. Citizenship
D. Post-Death “Passive Asset” Test
E. Disposal of Interest
1. Transfers Affected
a. Disposition for Construction of Residence
b. Oil and Gas Leases and Exploration
c. Transfer to Non-Family Members
d. Corporate Stock Transactions
e. Easements
f. Transfer to Trust
g. Severance of Timber
h. Partitioning Property
i. Sale and Leaseback
j. Tax-Free Exchanges
k. Involuntary Conversions
l. Mortgaging Property
m. Bankruptcy
n. Foreclosure
o. Merger of Trusts
p. Death of Qualified Heir
q. Areas of Disposition or Transfer Without Specific Guidance
r. Provisions Adopted From Installment Payment of Federal Estate Tax
(1) Section 303 Stock Redemption
(2) Corporate Reorganizations
(3) Transfer at Death to Member of Family
2. Amount of the 2057 Deduction Benefit Recaptured
a. Interest Imposed
b. Amount of Recapture Tax
c. Partial Dispositions
d. Conveyance to New Entity
e. Phase-Out of Recapture
f. Only One Additional Tax Imposed
g. Period for Assessment
h. Recapture Form Filed
i. Agreement of Personal Liability
j. Lien Imposed
k. Personal Liability and Furnishing of Bond
l. Noncitizen Qualified Heirs
V. Other Post-Death Planning Considerations
Introductory Material
A. Special Use Valuation
B. Discounts
1. Discounts Under Special Use Valuation
2. Discounts for Fractional Interests
3. Discounts Under the Family-Owned Business Deduction
C. Installment Payment of Federal Estate Tax and Corporate Stock Redemption
VI. Planning Guidelines
A. Overview
B. Marital Deduction Planning
1. Types of Formula Clauses
a. General Observations
b. Pecuniary Formula Clauses-Post-Death Planning Concerns
(1) Drafting Language and Associated Concerns
(2) Distribution Values and Rev. Proc. 64-19
c. Fractional Share Clauses
d. Estate Balancing Clauses and the Terminable Interest Issue
2. Funding the Marital Deduction
a. Gain in Satisfying Marital Deduction Bequest
b. Effect of Special Use Value
(1) Funding With Fair Market Value
(2) Other Funding Possibilities
c. Effect of “Pre-Death” Gain
d. Potential Gift
e. The Potential “Double Deduction” Problem
3. Possible Approaches
4. Funding Marital and Nonmarital Deduction Portions: The Possibility of a Discount
C. Planning for Utilization of the FOBD and the GST Tax
1. General Planning Implications
2. Formula Clauses
VII. Other Considerations
Working Papers
Table of Worksheets
Worksheet 1 Checklist: Items to Be Included in 2057 Election
Worksheet 2 Affidavit Regarding Material Participation
Worksheet 3 Members of Family (and Qualified Heirs) - Pre–Death Eligibility
Worksheet 4 Members of Family of Qualified Heir - Post–Death Recapture
Worksheet 5 Material Participation Share Lease
Worksheet 6 Letter to Qualified Heirs on Aspects of the Family–Owned Business Exclusion
Worksheet 7 Tax Power Included in Financial Power of Attorney
Worksheet 8 Fiduciary Power
Worksheet 9 Planning Strategy
Worksheet 10 Transferee Agreement Consenting to Personal Liability Under 2057(b)(1)(B) - Individual
Worksheet 11 Section 2057 Worksheet for Determination of Eligibility
Worksheet 12 Section 2057 Checklist
Worksheet 13 Worksheet to Estimate Working Capital Needs by Operating Cycle Method
Worksheet 14 Will Provisions Concerning 2057 Election
Worksheet 15 IRS Questionnaire Directed to Agent
Worksheet 16 Form 706, Schedule T - Qualified Family-Owned Business Deduction
Worksheet 17 Form 706-D, United States Additional Estate Tax Return Under Code Section 2057
Worksheet 18 Excerpt from S. Rep. No. 33, 105th Cong., 1st Sess. (1997) (Taxpayer Relief Act of 1997)
Worksheet 19 Excerpt from H.R. Conf. Rep. No. 220 (Statement of Managers), 105th Cong., 1st Sess. (1997) (Taxpayer Relief Act of 1997)
Worksheet 20 Letter from Joint Committee on Taxation Interpreting Portions of Statute
Worksheet 21 Excerpts from H.R. Rep. No. 356, 105th Cong., 1st Sess. (1997) (Technical Corrections Act of 1997)
Worksheet 22 Excerpts from S. Rep. No. 174, 105th Cong., 2d. Sess. (1998) (Internal Revenue Service Restructuring and Reform Act of 1998)
Worksheet 23 Excerpts from H.R. Conf. Rep. No. 599, 105th Cong., 2d Sess. (1998) (Internal Revenue Restructuring and Reform Act of 1998)
Worksheet 24 Excerpts from Conference Report to Accompany H.R. 1836, the Economic Growth and Tax Relief Reconciliation Act of 2001, 107th Cong., 1st Sess., (May 30, 2001)
Bibliography
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Statutes:
Regulations:
Committee Reports:
Treasury Rulings:
Cases:
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