MSBA Probate & Trust Law Section

Federal Tax Committee Monthly Update

     December 2007

     AMT Relief.  Congress has sent the "Tax Technical Corrections Act of 2007" to the President for signature which raises the AMT exemption levels for 2007, and prevents 20 million taxpayers from incurring unintended AMT tax. However, it will also delay processing of early filed returns in January, and delay refunds for probably a month or more. The 2007 AMT exemption will increase to $66,250 for joint filers and $44,350 for single filers. The Act also (1) liberalizes the rules for claiming the refundable AMT credit, (2) revises the rules for a shareholder basis reduction on account of contributions of appreciated property by S corporations, and (3) revises several important tax rules dealing with the definition of active business income under Code §355 and computing the foreign earned income exclusion.

     Charitable Remainder/Lead Trusts Forms.  The IRS will be releasing a new Form 5227, Split-Interest Trust Information Return, toward the end of December which will incorporate information previously reported on Form 1041-A, and includes a new schedule requesting information about donors and assets donated.

     Tax Court Opinions.  On its web site, the Tax Court now has archived TC and Memorandum opinions from 09/25/95, along with the Summary Opinions from 01/01/01.

     Inherited IRA's.  Beginning January 1, 2008 the IRS has said that all qualified plans, 403(b) plans and 457 plans must provide an inherited IRA alternative for non-spouse beneficiaries. Previously the Service had said in Notice 2007-7 that this was optional for qualified plans to provide. Some practitioners, including Natalie Choate, have pointed out that the subsequent IRS announcement to make this mandatory in 2008 is still subject to possible change because (1) the announcement was made "pursuant to an impending technical correction" in Congress that did not ultimately get enacted, and (2) a recent IRS notice of "2007 Cumulative List of Changes in Plan Qualification Requirements" simply makes reference to the earlier Notice 2007-7. If the plan does allow the use of inherited IRA's, the assets should be moved by December 31 in the year following the owner's death, so that the beneficiary can use a life expectancy payout option (with payments beginning in the year after death). If the rollover is not timely, the beneficiary still can use an inherited IRA account but is stuck with the payout options available under the plan (probably less favorable).

     Estate Tax History.  The IRS published a 90-year history of the estate tax, which can be found at its web site at www.irs.gov

     Employer-owned Life Insurance.  The IRS has issued temporary regulations to provide immediate guidance on the information reporting required on employer-owned life insurance contracts under Code §6039I. This applies to the requirement that employers treat death benefits from such insurance on many employees as taxable income, for contracts issued after August 17, 2006. The new regulations apply for tax years ending after November 13, 2007. It is expected that the IRS will provide more substantive direction as to the time and manner a return must be filed in other less formal guidance, such as revenue rulings or procedures, or in its forms and instructions.

     Appraisers.  The IRS has issued a general legal memorandum concluding that there is no statute of limitation on assessing penalties against an appraiser under §6695A. The statute applies to appraisals prepared after May 25, 2007 that are used in connection with an estate or gift tax return or claim for refund or credit that results in a gross valuation misstatement.

     Tax Exempt E-Notice Rule.  For tax years beginning after 2006, tax-exempts with gross receipts under $25,000 (who are not currently required to file a Form 990 with the IRS), must begin filing an annual notice, Form 990-N, Electronic Notification for Tax Exempt Organizations. The requirement does not apply to §401 plans (qualified pension, profit-sharing, and stock bonus plans) or religious and apostolic organizations. The IRS will provide a simple-to-use internet based process that does not require special software, and the returns will be due by the 15th day of the fifth month after the close of the year (May 15th for calendar year tax-exempt organizations).

     Estate Tax Value Reduced by Built-in Gain Tax.  In Estate of Frazier Jelke III, the 11th Circuit agreed with the taxpayer that the estate tax value of a closely-held C corporation should be reduced by the entire built-in capital gain as of the date of death. The dissent adopted the view of the Tax Court that the built-in capital gain should be discounted to reflect when it is reasonably expected to be incurred. Because other circuit courts have allowed some but not full reduction for built-in capital gain, it is expected to eventually go to the Supreme Court if the IRS continues to litigate this issue.

     S Stock to a Charitable Lead Trust.  In PLR 200747001, the IRS has favorably ruled on a charitable lead trust funded with S corporation stock. The ruling provides a blueprint for how to structure a charitable lead trust funded with S stock in such a way that the trust will qualify as a permissible S shareholder and its grantor or grantors will simultaneously achieve an income tax deduction for the lead interest going to charity.

     Business Mileage.  Rev. Proc. 2007-70 contains the 2008 limits for transportation costs, and announces the 2008 business mileage rate of 50.5 cents per mile, a charitable contribution rate of 14 cents per mile, and medical/moving rates of 19 cents per mile.

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     November 2007

     Installment Payments of Estate Tax.  §6166 allows eligible estates to pay the estate tax attributable to the decedent's interest in a closely-held business in up to 10 equal installments, with the first principal payment due by the 5th anniversary of the due date of the estate tax. Interest is payable annually at a reduced rate. Under § 6324(a), a general federal estate tax lien attaches for 10 years to all assets of the gross estate, leaving the government unsecured for the last 4 years and 9 months. IRS has traditionally required a bond or extension of the security interest, but in Estate of Roski v. Commissioner, 128 T.C. 113 (2007), the tax court found that this policy is inconsistent with the statute. The IRS has issued Notice 2007-90 in response, stating it will look at each case to determine whether additional security is needed. The factors they will consider include: (1) Duration and stability of the business; (2) Ability to pay the installments; and (3) Compliance history.

     WI Estate Tax.  The Wisconsin estate tax was not addressed in the recent budget bill and will therefore sunset on January 1, 2008 for deaths occurring after December 31, 2007.

     IRD.  IRS has privately ruled that any gain realized on a sale of property by an individual's revocable trust that was begun while he was living and completed after his death did not generate income in respect of a decedent (IRD). IRS reached this result because various unforeseeable uncertainties caused a delay of the closing of the sale, as explained below. (PLR 200744001) This ruling was very favorable for the trust because it got to use a stepped up basis, i.e., a basis equal to the fair market value of the property at the date of the decedent's date. As a result, the trust was not taxed on any pre-death appreciation in the value of the property.

     Qualified Terminable Interest Property Elections—Extensions.  Decedent's estate was granted 60-day extension from date this letter was issued to make QTIP election under Code Sec. 2056(b)(7) for stated trust where taxpayer acted reasonably and in good faith. (PLR 200743018)

     Qualifying Family Owned Business Interest—Extensions.  Co administrators were granted 60-day extension from date this letter was issued to elect to include building as qualifying family owned business interest under Code Sec. 2057 where co-administrators acted reasonably and in good faith. (PLR 200743027)

     Qualified Family-owned Business Interests—Extensions.   Executor of decedent's estate was granted 60-day extension from date of letter to include building as qualified family-owned business interest under Code Sec. 2057, where executor acted reasonably and in good faith. (PLR 200743031)

     Generation-skipping Transfer Taxes—Proposed Creation of New Trusts and Merger of Trust Assets—Exempt Status.  Proposed creation of new trusts and merger of original trust assets won't affect original trusts' exempt status, won't constitute constructive addition, and won't cause distribution from, or termination of any interest in, original or new trusts to be subject to GST tax where transaction won't shift beneficial interest to any beneficiary who occupies lower generation than person(s) who hold beneficial interest prior to modification or extend time for vesting of any beneficial interest in trust beyond period provided in original trust. (PLR 200743019)

     Generation-skipping Transfer Taxes—Proposed Creation of New Trusts and Merger of Trust Assets—Exempt Status.  Proposed creation of new trusts and merger of original trust assets won't affect original trusts' exempt status, won't constitute constructive addition, and won't cause distribution from, or termination of any interest in, original or new trusts to be subject to GST tax where transaction won't shift beneficial interest to any beneficiary who occupies lower generation than person(s) who hold beneficial interest prior to modification or extend time for vesting of any beneficial interest in trust beyond period provided in original trust. (PLR 200743020)

     Generation-skipping Transfer Tax-Exempt Status—Gain or Loss.   Proposed modification won't cause original remaining trust share or 4 separate subtrusts to lose their GSTT-exempt status, and won't cause distributions from those trusts to be subject to GSTT under Code Sec. 2601. Also, modification won't cause any trust or beneficiary thereof to recognize gain or loss from sale or disposition of property under Code Sec. 61 or Code Sec. 1001. (PLR 200743017)

     Generation-skipping Transfer Taxes—Exemption Allocations—Extensions.  Grantor and spouse were each granted 60-day extension from date this letter was issued to make allocations of their respective GSTT exemptions to transfers to trust on stated dates where taxpayers acted reasonably and in good faith. (PLR 200743028)

     Generation-skipping Transfer Tax-Exemption Allocations—Extensions.  Grantor and spouse were each granted 60-day extension from date this letter was issued to make allocations of their respective GSTT exemptions to stated transfers to trusts where taxpayers acted reasonably and in good faith. (PLR 200743025)

     Generation-skipping Transfer Tax-Exemption Allocations—Extensions.  Grantor and spouse were each granted 60-day extension from date this letter was issued to make allocations of their respective GSTT exemptions to stated transfers to trusts where taxpayers acted reasonably and in good faith. ( PLR 200743026 )

     Reverse QTIP Elections—Generation-skipping Transfer Tax.  Decedent's estate was granted 60 day extension from date this letter was issued to sever trust into GST exempt and non-exempt trusts, make reverse QTIP election with respect to exempt trust, and to allocate decedent's available GST exemption to exempt trust. ( PLR 200743029)

     Exempt Orgs—Transactions of Interest.  IRS is issuing letters and questionnaires to organizations that may have received certain interests in real property (known as "successor member interests") in a type of reportable transaction described as a transaction of interest. Background. In final regs issued in August of 2007, IRS added a new category of reportable transactions consisting of "transactions of interest" - to be identified in later published guidance - that are subject to the tax shelter disclosure requirements of Code Sec. 6011, Code Sec. 6111, and Code Sec. 6112. (Reg. § 1.6011-4(b)(6)) These are transactions that IRS believes have potential for tax avoidance or evasion, but for which it lacks enough information to determine whether they should be identified specifically as tax avoidance transactions. In this particular case, the taxpayer acquires a successor member interest in real property, transfers the interest more than one year after acquiring it to an organization qualified to receive charitable contributions, and then claims a charitable contribution deduction that is significantly greater than the amount the taxpayer paid to acquire the interest.

     S corps.—Inadvertent Termination—Failure to File ESBT Elections for Trusts.  Corp. will be treated as continuing to be S corp. from stated date and thereafter, and trustees of 2 trusts will be treated as having timely filed ESBT elections for trusts effective stated date, where termination of its S status was inadvertent due to trustees' failure to make ESBT election, provided that corp's S corp. election wasn't otherwise terminated under Code Sec. 1362(d) and that trustees file ESBT elections for trusts, effective stated date, within 60 days from date this letter was issued. (PLR 200743009)

     Qualified Disclaimers—Trusts.   The IRS determined that the taxpayer's disclaimer of stated trust property will be a qualified disclaimer under §2518 provided that the disclaimer is executed and delivered to the appropriate party within 9 months of decedent's death; and, distribution of disclaimed property to foundation/exempt org. will qualify for the estate tax charitable deduction under §2055. (PLR 200744005).

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     October 2007

     EIN Available Instantly On-line.  The IRS has announced in IR 2007-161 that taxpayers can now request an Employer Identification Number through a web-based system that instantly processes requests and generates identification numbers in real time. Although an on-line system has been available, the system has been updated and revised to be more user-friendly. The system can be accessed through the IRS web site, www.irs.gov.

     Early Termination of CRUT.  In Ltr. Rul. 200739004 the IRS ruled that an early termination of a charitable remainder unitrust and distribution of trust corpus to the income recipients and remainder beneficiary (a donor-advised fund) according to the present value of their respective interests will be treated as a distribution of long-term capital gain and will not be considered a prohibited act of self-dealing.

     Conservation Easements.  H.R. 3708, the American Family Farm and Ranchland Protection Act introduced by Congressman Earl Blumenauer (D-OR) on October 1, 2007, would increase the estate tax exclusion for conservation easements, IRC §2031(c), from $500,000 to $5 million. It also would increase the applicable percentage of the value of land subject to a qualified conservation easement.

     Tax Reduction and Reform Act of 2007.  House Ways and Means Chair Charlie Rangel (D-NY) introduced a bill on October 25 that would (1) extend the current IRA charitable rollover provision from PPA 2006 for one year, (2) repeal the AMT for post-2007 tax years, paid for with a tax increase on upper-income taxpayers; (3) reduce the top corporate tax rate from 35% to 30.5%, paid for by reducing or eliminating a variety of business tax breaks (e.g. eliminating the §199 domestic production activities deduction and repealing the LIFO accounting method); and (4) boost 2007 AMT exemption amounts to the same level they were in 2006, allow nonrefundable personal credits to offset regular tax and AMT for 2007, and provide a one-year reprieve for a number of provisions expiring at the end of 2007, paid for with a variety of changes including taxation of carried interest of investment fund managers as ordinary income, taxing deferred compensation plans of offshore hedge funds, and basis reporting on securities.

     Marital Deduction Allowed for Defective Provision in Self-Prepared Will.  In Sowder v. U.S. (CA 9, 10/18/07), 100 AFTR 2d ¶2007-5377, the 9th Circuit upheld a district court decision that the marital deduction should be allowed despite a Will provision requiring the spouse to survive until the distribution is made, in violation of the requirements for a marital deduction under IRC §2056(b). The district court allowed extrinsic evidence to show the testator's marital deduction intent under a Washington State law provision that "if it is determined that the testator intended a marital deduction gift, the governing instrument shall be construed to comply with the marital deduction provisions of the Internal Revenue Code in every respect."

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     September 2007

     Decrease in Estate Tax Returns.  The Statistics of Income Bulletin released this summer shows the total number of estate tax returns filed fell by 58% to about 45,000 in 2005 from about 108,000 in 2001. The total amount of assets represented by these returns fell by 14% to $185 billion in 2005 from $216 billion in 2001. The net estate taxes reported on these returns declined by only 8%. The report appears in IR 2007-153.

     Type III Supporting Organizations.  The IRS intends to propose regulations explaining changes made by the Pension Protection Act of 2006 to the rules for Type III supporting organizations. Such organizations generally are operated in connection with one or more publicly supported organizations, and pay substantially all of their income to or for the use of one or more publicly-supported organizations. The regulations will provide (1) the payout requirements for non-functionally integrated Type III supporting organizations, (2) the criteria for determining whether a Type III supporting organization is functionally integrated, (3) the modified responsiveness test for Type III supporting organizations organized as charitable trusts, and (4) the type of information a Type III supporting organization must provide to its supported organization(s) to demonstrate that it is responsive.

     Proposed GST Regs for Trust Severance.  The IRS has issued final regulations on the qualified severance of a trust for generation-skipping transfer (GST) tax purposes under IRC §2642(a)(3) and proposed regulations on the GST tax consequences of trust severances that are not qualified severances. The proposed regulations also would provide (1) guidance on the GST tax consequences of a qualified severance of a trust with an inclusion ratio between zero and one into more than two resulting trusts, and (2) special funding rules for the non pro rata division of certain assets between or among resulting trusts. Treas. Reg. §26.2642-6 and 26.2654-1.

     2% AGI Floor for Trusts & Estates.  The IRS has issued proposed regulations on which costs incurred by an estate or non-grantor trust would be subject to the 2% floor for miscellaneous itemized deductions under Code Sec. 67(a). The regulations, which would apply to payments made after the date they are finalized, would identify expenses that are unique to estates and non-grantor trusts and therefore not subject to the 2% floor. The test also would depend on the type of services provided, rather than on taxpayer characterizations or labels for them. For example, the 2% floor could not be circumvented by "bundling" investment advisory fees and trustees' fees into a single fee. Prop. Reg. §1.67-4.

     Tax Patents.  The U.S. Patent and Trademark Office has published a patent application in which the inventors claim a unique use of combinations of charitable remainder trust, charitable lead trusts, gifts of remainder interest in real property, options, and life insurance to accomplish business tax planning objectives. There is a great deal of discussion and controversy in the tax planning community about the issuance of patents for such plans, and Congress is considering legislation to limit the issuance of patents or to limit a practitioner's exposure to liability for infringing on such patents.

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     June 2007

     Trusts with Retained Interests.  The IRS has issued proposed regulations under IRC §2036 and §2039 that would clarify what portion of a grantor trust with a retained interest is subject to estate tax. The regulations incorporate prior guidance issued for valuation of charitable remainder trusts, and apply those principles to other grantor trusts such as grantor retained annuity, income and unitrusts, qualified personal residence trusts, and personal residence trusts. CRT's and GRT's that do not qualify under IRC §664 or §2702 also would be covered. The portion of the trust included in the estate would be the value computed under §7520 that would yield the retained annual payment (or use). Also, the regs would clarify that valuation occurs under §2036 rather than §2039, which means the estate would need to include retained interests that had been released within three years of death under §2035(a).

     Lottery Winnings.   In Negro v U.S. (DC OH 06/04/07) the district court denied the IRS request to use the §7520 rate of 5.6% to value the annuity, when the Estate had cashed in the remaining payments for a lump sum through the Lottery Commission. The Court found it would be unrealistic and unreasonable to use the §7520 rate when the lump sum calculated with the 9% factor was the only way the estates could choose the cash in the future payments.

     Investment Advice Fees.  In Rudkin Testamentary Trust (CA 2, 10/18/06), the Supreme Court granted certiorari on June 25, 2007 to decide the issue of whether investment advisory fees are subject to the 2% of AGI floor. This will resolve a conflict among the circuits. The 2nd Circuit decided that such fees are subject to the 2% floor (i.e., that they did not qualify for the §67(e)(1) deduction for expenses paid or incurred in connection with the administration of a trust that wouldn't have been incurred if the property were not held in the trust).

     Split-Dollar Life Insurance.  IRS Notice 2007-34 provides guidance on the application of the §409A deferred compensation rules to split-dollar life insurance arrangements. The regulations under §409A were finalized on April 10, 2007, the same day this notice was released. Split dollar plans entered into after September 17, 2003, or older plans that are materially modified after that date, are subject to the new deferred compensation regulations and the principles of regulation §1.61-22, which use the "economic benefit approach" and the "loan approach" for taxation purposes.

     Family Limited Partnerships.  In Estate of Erickson, T.C. Memo 2007-107, the Court determined that there was an implied agreement among the family members that the decedent retained the right to possess or enjoy the assets transferred to the limited partnership, and that there was no legitimate and significant nontax business purpose for the formation of the partnership. The assets were included in the decedent's estate under §2036.

     Charitable Lead Trusts.  The IRS has published sample charitable lead annuity trusts in Rev. Proc. 2007-45 and 2007-46. They include sample forms, annotations and alternate provisions for inter vivos and testamentary grantor and nongrantor charitable lead annuity trusts. The procedures also provide a safe harbor for trusts that satisfy the requirements listed, subject to certain exceptions.

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     May 2007

     Ruling Under the New Inherited IRA Rollover Rules.   The IRS issued its first ruling under the new inherited IRA rollover rules enacted as part of the Pension Protection Act of 2006. The taxpayer had requested a rollover of his employer retirement plan to an IRA, and had completed the IRA documentation indicating the same primary beneficiary (not a spouse) as he had on the employer retirement account. The taxpayer died before the rollover was completed by the employer, and the ruling allows the rollover to be completed, with a required minimum distribution being made to the beneficiary as required beginning in the year following the owner's year of death. The employer plan must have been amended to allow the rollover, and if the owner died before reaching age 70½, the beneficiary has the options to take distributions over five years, or over her life expectancy starting in the year after the owner's death. PLR 200717023.

     Proposed Regulations Regarding the Deduction of Claims Against an Estate.  Proposed regulations have been issued under IRC §2053 that would change the approach for determining the deduction of claims against an estate. In general, post-death events would be taken into account in determining the deductible amount, and deductions would be limited to amounts actually paid by the estate in satisfaction of deductible claims and expenses. The Regs would also cover the new deduction for state death taxes, and would allow a protective refund claim to be filed for contested or contingent claims that had not been finalized before expiration of the statute of limitations for filing the estate tax return. The new regulations will be effective for decedents dying after the regulations are finalized.

     Reduction of the Tax Gap.  The General Accounting Office has issued a list of promising targets for working on reduction of the tax gap, the amount by which taxpayers are estimated to underreport their tax liability each year. The tax gap for 2001 was estimated at $345 billion, consisting of nonfiling ($27 billion), underreporting ($285 billion), and underpayment ($33 billion). For the trust and estate practitioner, an item of focus might be the deduction for charitable contributions, which might include more third party reporting (e.g. by the charity when it receives contributions). The study is based on the IRS's 2001 National Research Program.

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     April 2007

     Estate Tax Reform.  There is speculation that the U.S. Senate is moving toward a permanent adoption of the $3.5 million Estate/GST tax exemption currently scheduled for 2009, and an estate tax rate of 45% on the excess. The legislation would also repeal the carryover basis rules.

     Action is more likely as we approach 2009, since any increases in the exemption after 2009 would require the Senate to adopt offsetting tax increases.

     GST Tax.  Several PLR's have been issued in this area. They include (from our tax service):

Code Section 2642-Generation-skipping transfer tax-exemption allocations—extensions.

Taxpayer was granted 60-day extension, from date this letter was issued, to allocate deceased husband's and her own GST exemptions to gifts made to trust in stated years, where accountant failed to make requested allocations and taxpayer acted reasonably and in good faith. (PLR 200715008)

Code Section 2642-Generation-skipping transfer tax-exemption allocations—extensions.

Taxpayer was granted 60-day extension, from date this letter was issued, to allocate deceased husband's and her own GST exemptions to gifts made to trust in stated years, where accountant failed to make requested allocations and taxpayer acted reasonably and in good faith. (PLR 200715009)

Code Section 2642-Generation-skipping transfer taxes-exemption allocations—extensions.

Husband and wife were each granted 60-day extension, from date this letter was issued, to make allocations of respective GST exemptions with respect to their transfers to trusts in stated tax year. (PLR 200715001)

Code Section 2642-Generation-skipping transfer tax-charitable lead unitrusts (CLUTs)-severance-exemption allocations—extensions.

Decedent's estate was granted 60-day extension, from date this letter was issued, to sever GST non-exempt CLUT into 2d GST-exempt CLUT and GST non-exempt CLUT, and to allocate decedent's remaining GST exemption equal to stated amount to 2d GST exempt-CLUT. (PLR 200715002)

Code Section 2601-Generation-skipping transfer taxes—modification of trust-exemptions.

Modification of trust didn't shift beneficial interest in trust to any beneficiary who occupied lower generation than persons who held beneficial interest prior to modification, and modification didn't extend time for vesting of any beneficial interest in trust beyond period originally provided. So, modification won't cause trust to lose its GST tax-exempt status, and distributions during term of trust and terminating distributions won't be subject to provisions of Chap. 13. (PLR 200714009)

Code Section 2601-Generation-skipping transfer taxes—division of trust-exemptions.

Proposed division of trust into separate trusts for son and daughter and proposed modifications to those trusts won't shift any beneficial interest in trusts to beneficiary who occupies lower generation than person or persons who held beneficial interest prior to division. Also, division and modifications won't extend time for vesting of any beneficial interest in trust beyond period provided in original trust.

So, provisions of Chap. 13 won't apply to trusts. (PLR 200714016)

Code Section 2632-Generation-skipping transfer taxes-exemption allocations—extensions.

Taxpayer was granted extension, 60 days from date this letter was issued, to make allocation of her available GST exemption with respect to stated year transfer to trust, where taxpayer acted reasonably and in good faith. (PLR 200714001)

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     March 2007

     Direct Rollovers to Nonspouse Beneficiaries.  The IRS has clarified its guidance in original Notice 2007-7, that even if the plan sponsor requires distributions to be made within 5 years after the participant's death, the beneficiary can still use life expectancy if the plan allows the beneficiary to roll over the account to the beneficiary's own rollover IRA. The plan still has discretion to allow the rollover (it is not mandatory that plans allow this), and the rollover must take place prior to the end of the year following the year of the participant's death.

     Charitable Insurance Contract Reports.  The Pension Protection Act of 2006 requires charity to report (from August 17, 2006 to August 17, 2008) their involvement in insurance plans to the IRS. This was in lieu of a proposed 100% excise tax that would have effectively eliminated the benefits of these plans. In Notice 2007-24 the IRS announced Forms 8921 and 8922 for reporting purposes. The reporting is required when an "applicable exempt organization" acquires "a direct or indirect interest" in a pool of insurance contracts. There are exceptions for insurance contracts if the nonprofit's sole interest in the contract is as a named beneficiary or for independent insurable interests by the original insured (i.e. the insured can make an irrevocable gift of a policy to charity or a revocable charitable beneficiary designation).

     Grantor Trust Transfer of Life Insurance.  In Rev. Rul 2007-13, the IRS determined that (1) a transfer of life insurance between two grantor trusts (with the same grantor) in exchange for cash, and (2) a transfer of life insurance from a nongrantor trust to a grantor trust for cash will not be "transfers for value" under IRC §101, and therefore the death benefits will not be taxable for income tax purposes. In the second case, the ruling further explains that the rule does not apply because the transfer is treated as a transfer to the grantor, who is also the insured. This might provide a planning opportunity when attempting to remove life insurance from a grantor or nongrantor trust.

     The Ultimate Gift.  The National Planned Giving Council sent out a note about this movie now showing across the country. They are encouraging estate planning professionals to see this movie based on a book review by NPGC a few years ago. The synopsis of the book by Jim Stovall is that "a billionaire uses some very creative estate planning to construct a series of character-shaping tasks his grandson must complete to receive his inheritance. What his grandson doesn't know is just how valuable his journey and ultimate gift will be." If you go to www.foxfilmfund.com and provide organization code 500754, a $1 donation will be made from every ticket purchase to a worthy charitable organization.

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     February 2007

     Unneeded Marital Deduction.  In PLR 200702018, the IRS agreed to disregard an unneeded and incorrect marital deduction taken on a decedent's estate tax return. The result was that the property subject to the incorrect marital deduction was not included in the surviving spouse's taxable estate. There has been discussion in the professional literature about possibly using this ruling for estates in decoupled estate tax jurisdictions such as Minnesota. The plan would involve a marital deduction election at the first death that is unnecessary for federal purposes but necessary to eliminate state estate tax, and then an application to the IRS at the second death to invalidate the election for federal estate tax purposes, reducing the taxable estate of the surviving spouse.

     IRS Notice 2007-7.  The IRS has issued further guidance on he qualified plan distribution changes made in the Pension Protection Act of 2006. The Notice can be found at the IRS web site. The Notice, in Q & A format, covers eight changes including the rollover option for nonspouse beneficiaries and nontaxable transfers from IRAs to charity.

     Tax-exempt On-line Education.  The IRS is now providing free on-line education for staff of charitable organizations, at www.stayexempt.org. The modules cover (1) tax-exempt status, (2) unrelated business income, (3) employment issues for workers, (4) filing the annual report Form 990l, and (5) required disclosures when requested by donors and other persons.

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     January 2007

     Family Limited Partnership Tax Decision.  The 8th Circuit Court of Appeals issued its decision in the Korby case, another family limited partnership tax case involving retained interests under §2036 of the Internal Revenue Code. Despite the attempted gift of partnership interests to children, the Court found that the parents retained the rights to the income from the property, and the transfers into the trust were not a bona fide sale for full and adequate consideration. 98 AFTR 2d 2006-5897.

     Fact Sheet on the Tax Relief and Health Care Act.   The IRS has published more guidance through a series of "Fact Sheets" available at its web site on implementation and reporting of the changes enacted in the Tax Relief and Health Care Act of 2006. For example, Fact Sheet 2007-02 highlights the 2006 tax law changes, and it makes reference to other Fact Sheets for changes affecting 2006 tax returns. New details regarding Qualified Charitable Distributions and rollovers from IRA's are covered in Q & A format in Notice 2007-7.

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     December 2006

     Tax Relief and Health Care Act of 2006.  At adjournment, Congress passed the Tax Relief and Health Care Act of 2006. The most significant items for individuals include an extension of (1) the deduction for payment of tuition and fees (subject to AGI limits), (2) the teacher deduction for out-of-pocket expenses, and (3) the option to deduct the higher of an individual's state sales taxes or income taxes for the year. Because the 2006 forms do not reflect these changes, check the IRS web site at www.irs.gov for information on how to report these deductions, and for a list of other changes made by the Act. Minnesota returns also will not reflect these changes (note: as of January 30, 2007, the legislature and Gov. Pawlenty have passed a bill retroactively adopting these changes. However, they did not adopt the change to §179 expense deductions for acquisition costs of business equipment).

     Appeals Settlement Guidelines.  The IRS issued Appeals Settlement Guidelines for family limited partnerships and family limited liability companies. The ASG document focuses on four key issues: (1) discounts for the transferred interests; (2) includibility in the estate under IRC §2036 or §2038; (3) indirect gifts of the entity's underlying assets; and (4) whether accuracy-related penalties should be imposed. The ASG also examines a number of cases addressing these issues. The report can be found at the IRS web site.

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     November 2006

     Tax on Private Annuity.  The IRS has released proposed regulations that would require immediate recognition of income tax on a private annuity at the time it is received in exchange for property. This will impact the economics of private annuities, private annuity trusts, sales to intentionally defective grantor trusts, and any other transaction involving a private annuity. The regs are effective for private annuities received after October 18, 2006, with a delayed effective date of April 18, 2007 if the property exchanged for the annuity is not sold for at least two years.

     Prop. Reg. § 1.72-6(e) would be applicable for annuity contracts received after Oct. 18, 2006 in an exchange subject to the rules for determining gain or loss when an annuity is received other than for Prop. Reg. § 1.1001-1(j). Prop. Reg. § 1.72-6(e) would be applicable for annuity contracts received after Apr. 18, 2007 in an exchange subject to Prop. Reg. § 1.1001-1(j) if all of the following conditions are met:

• The issuer of the annuity contract is an individual.
• The obligations under the annuity contract are not secured, either directly or indirectly.
• The property transferred in exchange for the annuity contract is not later sold or otherwise disposed of by the transferee during the two-year period beginning on the date of the exchange. For purposes of Prop. Reg. §1.72-6(e), a disposition includes without limitation a transfer to a trust (whether a grantor trust, a revocable trust, or any other trust) or to any other entity even if solely owned by the transferor.

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     October 2006

     Decision on 'defined value clause.'  The 5th Circuit issued its decision in the McCord case involving a "defined value clause."

     Revised Form 706.  The IRS released a revised Form 706 for use by estates of decedent's dying in 2006. The revision reflects a number of law changes and a few IRS administration changes.

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     September 2006

     Pension Protection Act.  The Pension Protection Act of 2006 was signed by the President on August 17, 2006. Of most significance to probate and trust lawyers are the numerous changes to the charity and charitable contribution provisions of the Code. For the highlights of the charitable provisions, you can view a summary prepared by the House Ways and Means Committee on July 28, 2006 at waysandmeans.house.gov

     Telephone Excise Tax.  The IRS has also announced the repeal of the telephone excise tax on long-distance calls. The tax was enacted in 1898 to fund the Spanish-American War, and became a legal issue in the 1990's because of the way the tax was assessed. For anyone who paid telephone bills between March 1, 2003 and July 31, 2006, you should remember to include a claim for refund of the excise tax on your 2006 tax return. Individuals can take a standard refund amount ranging from $30-$60 depending on the number of dependents, and businesses can use either a "Simplified Actual Method" or "True Actual Method" using new Form 8913. Further information is available at the IRS web site, www.irs.gov.

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     May 2006

     Tax Increase Prevention and Reconciliation Act.  The Tax Increase Prevention and Reconciliation Act of 2005 (signed May 16, 2006) includes Alternative Minimum Tax ("AMT") relief, and extension of the special capital gains tax rates. The law extends and increases the AMT exemption amounts for 2006, and it extends the favorable capital gains tax rates, which had been scheduled to expire, through 2010. The rate is 15% (5% for taxpayers in the 10% and 15% brackets, and 0% for those taxpayers starting in 2008). However, the law also raises the "Kiddie tax" age limit to children under the age of 18 (it was under the age of 14).

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     March 2006

     Medical Assistance Rules.  Minnesota is expected to adopt the new medical assistance rules that were effective for federal purposes on February 8, 2006 under the Deficit Reduction Act of 2006.

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     February 2006

     Rev. Proc. 2005-24.  The IRS has suspended the effect of Rev. Proc. 2005-24 (relating to the effect of spousal election rights on a trust's status as a charitable remainder trust) pending further review and guidance.

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     January 2006

     K-1 Form.  A new K-1 form was issued by the IRS on January 12 (for reporting tax items to trust beneficiaries), there are new automatic extension rules in effect for estates, trusts and individuals, the Gulf Opportunity Zone Act was enacted to extend the Hurricane Katrina tax relief provisions to victims of Hurricanes Rita and Wilma, the top marginal estate tax rate is 46% for 2006, and federal and Minnesota estate tax exemption amounts are $2 million and $1 million respectively.

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     November 2005

     2006 Inflation-Adjusted Tax Numbers.  IRS Rev. Proc. 2005-70 contains the 2006 inflation-adjusted tax numbers, including the new gift tax annual exclusion of $12,000.

     Panel on Federal Tax Reform.  The President's Advisory Panel on Federal Tax Reform issued its report on November 1.

     Katrina Tax Relief Legislation.  The Hurricane Katrina Tax Relief legislation raised the AGI limit to 100% for charitable cash contributions made by December 31, 2005.

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     October 2005

     Katrina Tax Relief Legislation.  Hurricane Katrina Tax Relief legislation has passed, and the President's Advisory Panel will issue its report on federal tax reform on November 1.

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     September 2005

     Katrina Tax Relief Legislation.  Congress is expected to enact Hurricane Katrina legislation late this month. Some of the proposed changes include penalty-free IRA tax withdrawals for hurricane relief and other charities, and possibly a charitable deduction for non-itemizers.

     IRS Circular 230.  The ABA has posted useful links to information about the implementation of and response to IRS Circular 230, governing tax practitioners.

     Senate Panel on the Nonprofit Sector.  The Senate Finance Committee Panel on the Nonprofit Sector is scheduled to issue its report recommending a number of changes to prevent abuses by tax-exempt organizations, and requiring greater disclosure on Form 990.

     Family Partnership Decision.  The Court has issued it latest decision in the Strangi family partnership case, and it emphasizes the importance of observing business and tax formalities, and having legitimate business purposes.

     Senate Update.  Although the Senate was close to voting on a permanent estate tax exemption (15% rate on estates over $5 million, and 25% on the taxable estate over $25 million), the momentum was lost with the costs of hurricane tax relief.

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     April 2005

     Charitable Remainder Trusts.  The IRS issued Rev. Proc. 2005-24, which would invalidate the tax benefits of charitable remainder trusts in states where the spouse can later claim an "elective share" against the value of the trust property. The spouses would need to sign a consent to the trust and a waiver of their elective share rights in order to validate the trust's tax benefits.

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     March 2005

     Recent Decisions.  The Washington Supreme Court declared their state's decoupling estate tax statute unconstitutional. This does not appear to apply to Minnesota, as it was decided under specific restrictions in the Washington State constitution. Another decision adverse to the taxpayer was issued by the 8th Circuit Court of Appeals in a family partnership case.

     Anticipated Legislation.  No federal tax changes are expected until after the President's Commission on Tax Reform issues its report, and new rules for tax-exempt organizations are being drafted in a manner similar to the corporate reform in the Sarbanes-Oxley Act.

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