MSBA Probate & Trust Law Section

Federal Tax Committee Monthly Update - 2010

     November 2010

      IRS Releases some 2011 Inflation Adjustments.   At the end of October, the IRS released a partial list of some inflation adjustment items for 2011, but reserved many of the items for future release, apparently on the belief that Congress may address relevant tax provisions before year end. Rev. Proc. 2010-40 confirmed the CCH estimation that the Annual Gift Tax Exclusion will remain at $13,000 and up to $136,000 for gifts to an alien spouse. For decedents dying in 2011, the aggregate decrease in the value of qualified real property resulting from special use valuation under Code Section 2032A is limited to $1,020,000. The IRS also announced that the 2% portion for calculating interest under Section 6166 is $1,136,000.

      IRS Draft Form for Carryover Basis Allocation not yet Released.  In a telephone call to the CCH, an IRS representative confirmed that they had released a draft form 8939 Allocation of Increase in Basis to selected tax practitioners for review. This form, if approved, would be used to report the carryover basis adjustment calculations required by the 2001 Tax Act for decedents dying in 2010. Copies of this draft were circulated, but the IRS wanted to state that this was not an official draft of the form and that they had already determined that any final draft would significantly differ from this version. The representative predicted that the official draft would be available sometime before year end.

     Although the modified carryover basis for which this form would be used is scheduled to be repealed after 2010 by the sunset provisions of the Tax Act (EGTRRA), CCH reminds us that at least one bill, the Death Tax Repeal Permanency Act of 2005 would permanently replace the stepped up basis rules with a modified carryover basis regime.

     CPA Disbarred from Practice before the IRS.  The IRS Office of Professional Responsibility (OPR) announced that a certified public accountant had been disbarred from practicing before the IRS for violations of Circular 230. Although multiple infractions were cited, OPR and the administrative law judge indicated each were sufficient to support the decision. The count of interest for practitioners is a lack of due diligence in preparing tax returns of clients in violation of Section 10.22 of Circular 230. Of note were the inconsistencies between the tax returns of the individual taxpayers and their closely-held corporations’ returns, also prepared by this CPA. In rejecting the CPA’s argument that he simply relied upon the information provided to him by his client in conformity with Reg. Sec. 1.6694-1(e)(1), the ALJ faulted the CPA for failing to recognize that it was “inconceivable” that the taxpayers could support their lifestyle based on the income reported on their tax returns. Tim W. Kaskey, Complaint No. 2009-26 (Treasury Department, OPR, September 9, 2009; May 28, 2010, final admin review) Journal of Tax Practice and Procedure, August-September 2010, 43.

     Watch List

• H.F. 436 (Pomeroy)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 498 (Mitchell)— nothing new reported. Referred to House Ways & Means Committee.
• S.F. 722 (Baucus)— nothing new reported. Referred to Senate Finance Committee.
• H.F. 96 (Conaway)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 3905 (Berkley, et al)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 4154 (Pomeroy)— passed the House on 12/3/2009. Placed on Senate legislative calendar under general orders (Calendar #253).
• S.F. 3773 (McConnell)— By-passed committee hearings. Placed on Senate legislative calendar under general orders (Calendar #562).

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     October 2010

     2011 Gift Tax Exemption Remains at $13,000.  Commerce Clearing House released its estimates of various federal tax figures for 2011 after adjusting for inflation. Among those is the annual gift tax exclusion which will remain at $13,000, foreign gifts exceeding $14,375 will require the filing of an information return, the gift tax exclusion for a non-citizen spouse will increase to $136,000. Many other thresholds and the 2001 income tax brackets were unofficially projected and announced on September 20, 2010.

     US Tax Court rejects IRS' attempt to Impute Trustee with Trust's Assets.   On appeal from the IRS' rejection of individual taxpayer's offer in compromise and subsequent notice of levy, the Tax Court ruled that the IRS must respect the independent existence of the trust. In a fact-driven decision, the Court ruled that the individual trustee/taxpayer was not the equitable owner of the home in which they lived that was titled in the name of the trust because the taxpayers paid rent in the form of mortgage debt service and payment of property taxes, maintenance and other occupancy costs in addition to other factors. A. Dalton, Jr., 135 Tax Court ___, #20, Decision 58,341

     IRS Announces Penalties for Late Filing of Nonexistent Form; Carryover Basis.  The IRS is going to require a tax return allocating the allowable basis adjustment to property acquired from a decedent if the fair market value of the property owned by the decedent exceeds $1.3 Million or generally if the decedent acquired property by gift. Within 30 days after the filing of the tax return, the executor must give a written statement to each recipient of the property providing them the information contained in the return. This tax return will have to be submitted with the decedent’s final income tax return with a due date of April 15 of the following calendar year. At this point, the IRS has not created the tax return that we must file for this purpose. Gifts trigger the return even for estates under $1.3 Million where the gift was received by the decedent (except from his/her spouse) during the three years immediately prior to death if the gift exceeded or did not qualify for the annual gift tax exemption amount when it was given. (As a side note, the IRS apparently has already determined that the penalty to file this currently non-existent form by its due date could result in a penalty of up to $10,000.00 plus a per beneficiary penalty of $50 for each failure to provide said written information to the beneficiary within 30 days after filing the form.)

     The IRS discusses several other specific items on its FAQ webpage found at www.irs.gov/businesses/small/article/0,,id=224519,00.html. Notable among those items are:

• Property controlled by the decedent dying with a power of appointment does not receive a step-up in basis.
• Property in a community property state owned by a resident decedent and spouse still gets a full step-up in tax basis.

     Federal Tax Preparation License—Sign up for your PTIN.  The program to apply for your PTIN is now up and running and can be found on the IRS' website, www.irs.gov/. Go to their Tax Professional's tab and you will see the button right on top to "Sign Up Now." You can do this online with a credit or debit card or you may do it by mail using Form W-12. New regulations were published in the September 30, 2010 Federal Register (Volume 75, No. 189, pages 60316-60321, (26 CFR part 300 (TD 9503).

     An October 8th hearing on those regulations generated some criticism and disagreement over who should or might be exempted from this licensing requirement and its accompanying testing and continuing education requirements. At issue are staff, part-timers and interns working under the supervision of licensed professionals, with various professional associations arguing on different sides of the issue. The proposed regulations were also criticized for their prohibition of non-professionally licensed preparers from giving tax advice, the possible misimpression the licensee's designation might give to the public, and even the bureaucratic burden being assumed by the IRS in certification of tax courses that will satisfy the CE mandates.

     Failed Disclaimer Results in Taxable Gift.  In spite of the probate court’s approval of taxpayer's understanding that his disclaimer under the decedent's will passed the asset to the grandchildren of decedent, the federal district court agreed with the IRS that under Mississippi's law the property would then pass according to the laws of intestacy back to the taxpayer. Since taxpayer did not also disclaim his intestacy interest, the transfer of the property to the grandchildren was subject to gift tax. F. Tatum Estate, D.C. Miss., 2010-2USTC para. 60,607.

     Post Office Damage Does Not Defeat "Timely Mailed is Timely Filed" Rule.  Almost 3 months after the 90 Day deadline to file a petition in Tax Court had passed, the post office returned what was left of taxpayer's petition to taxpayer's attorney undelivered. Based upon the attorney's affidavit and other evidence, the Tax Court accepted a new copy of the petition as timely filed under the "timely mailed is timely filed" rule. M. W. VanBrunt, TC Memo 2010-220, Dec. 58,354(M).

     Watch List

• H.F. 436 (Pomeroy)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 498 (Mitchell)— nothing new reported. Referred to House Ways & Means Committee.
• S.F. 722 (Baucus)— nothing new reported. Referred to Senate Finance Committee.
• H.F. 96 (Conaway)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 3905 (Berkley, et al)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 4154 (Pomeroy)— passed the House on 12/3/2009. Placed on Senate legislative calendar under general orders (Calendar #253).
• S.F. 3773 (McConnell)— By-passed committee hearings. Placed on Senate legislative calendar under general orders (Calendar #562).

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     September 2010

     Tax Court Valuation of Qualified Conservation Easement Remanded.  The US Circuit Court of Appeals for the Fifth District remanded the Whitehouse Hotel Limited Partnership decision (CCH Dec. 57,572, 131 TC#10) back to the Tax Court for re-consideration. The appeals court found that the Tax Court did not properly consider the particular buildings' highest and best use when it declined to consider the interplay of the subject property with a neighboring property also owned by the taxpayer. The appeals court also vacated the Tax Court's imposition of the gross undervaluation penalty. The taxpayer partnership offered proof that it relied on its accountants and attorneys in valuating the donated conservation easement. The Tax Court was instructed to address what more the partnership needed to prove to show reasonable reliance. Whitehouse Hotel Limited Partnership (CA5), 2010-2 USTC Para 50,564.

     Attempt to Expand Estate Tax Credit for Prior Transfers Beyond Statutory Language Fails.   The surviving spouse passed away just three months after the first death. The second estate attempted to claim full credit for federal and state estate taxes paid by the first estate. The Tax Court rebuffed taxpayer's attempts to expand the credit to the state estate taxes paid and also rejected the alternative attempt to take a deduction in the second estate for estate taxes paid for the first. Finally, the Tax Court rejected the late QTIP election made by the second estate more than three years after the death. L.J. Le Caer Estate, 135 TC#14, Dec. 58,320.

     Accuracy Related Penalties Avoided because of reliance on Advisor.  The Tax Court reversed the IRS' imposition of negligence penalty on an estate after finding that the personal representative relied on good faith on his tax and financial advisor. While this case is fact specific, the point is that the court focused on the taxpayer's knowledge and good faith reliance on the advisor, even though it turned out that the advisor had been disbarred and the advice upon which the taxpayer relied was unquestionably inaccurate. Estate of Ralph Robinson v. Cmr., TC Memo 210-168, #20941-07.

     Charitable Contribution Deduction Fails for lack of an Appraisal.  Taxpayers donated real estate to their local fire department for training purposes. (Not specifically stated, however, it appears that the fire department was successful in burning down the building located on the property. ) Unfortunately, taxpayers failed to obtain a qualified appraisal of the property before the donation containing all of the required information and were therefore denied the contribution deduction. J. Hendrix (Dist. Ct. Ohio) 2010-2 USTC, Para 50,541.

     New License Requirement and Annual Fee for Tax Preparers.  The IRS continues to post proposed regulations and updates thereto regarding its new tax preparer licensing requirements. The rapidly expanding program now requires all tax preparers who prepare for compensation all or substantially all of any federal tax return filed after January 1, 2011, to now register with the IRS and pay an annual fee now proposed to be $64.95. Contrary to earlier announcements, all tax preparers who currently have a PTIN (preparer tax identification number) must also apply and pay their annual fee starting immediately. The IRS will re-assign their current PTIN to those who have them now. At this point, attorneys, CPAs and enrolled agents are still not expected to be subject to the testing requirements, however, all others will be. That testing program and its related fee is not expected to be announced until some time in 2011. A September 16 check of the IRS' website (www.irs.gov) notes that the sign-up system is expected to be available in "late September."

     Federal Electronic Filing Mandates.  In a letter to local tax practitioners dated September 2, 2010, the IRS not only notified practitioners of the new licensing requirements, but also of the mandatory electronic filing requirements enacted by Congress as a revenue offset to an earlier stimulus package. This requirement pertains to "individual or trust returns, " presumably income tax return filings of Forms 1040 and 1041, beginning with filings made in 2011. The mandate applies to the first tax return filed in the year, but is dependent upon the number of returns that the preparer anticipates preparing during the entire calendar year. If the anticipation for the calendar year 2011 is 100 or more returns, all returns must be filed electronically. Beginning with the 2012 calendar year, the threshold drops to 11 anticipated returns for the entire year.

     Hawaii adopts Estate Tax.  The Hawaii Department of Taxation announced that their state legislature adopted a permanent estate tax effective for individuals dying on or after May 1, 2010. The state's estate tax is what it would be under the federal estate tax legislation for the state credit as it applied on December 31, 2000, except that the applicable exclusion is increased to $3.5 Million Dollars. This tax is now independent of the federal legislation and is no longer dependent upon what may or may not happen to the federal tax in the future. Release #2010-06, HI Dept. Taxation, July 29, 2010.

     Sen. McConnell introduces Bill to make all Income Tax Cuts Permanent and provides a Flat Estate Tax Rate.   Amongst the debate in Washington over the expiring "Bush Tax Cuts," Senator Mitch McConnell (R-KY) introduced S.F. 3773 to make permanent the income tax cuts of 2001 and 2003. In addition, "Title III—Permanent Estate Tax Relief" of the bill appears to retroactively re-impose a federal estate tax as of January 1, 2010 with an applicable exclusion amount of $5 Million Dollars and a flat tax rate of 35%. Changes are made to the Gift Tax and Generation Skipping Tax as well. The bill also provides for portability of the unused credit by the estate of a deceased spouse. Decedents dying in 2010 will have the option of applying the new changes under this bill or the laws as they were on January 1, 2010. The bill was introduced September 13, 2010, read the second time on September 14, 2010 and placed on the Senate's general calendar, bypassing committee action. (Calendar #562) (Summary of bill has not yet been posted. )

     Watch List

• H.F. 436 (Pomeroy)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 498 (Mitchell)— nothing new reported. Referred to House Ways & Means Committee.
• S.F. 722 (Baucus)— nothing new reported. Referred to Senate Finance Committee.
• H.F. 96 (Conaway)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 3905 (Berkley, et al)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 4154 (Pomeroy)— passed the House on 12/3/2009. Placed on Senate legislative calendar under general orders (Calendar #253).

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     May 2010

     IRS Issued New Section 7520 Rates.   The IRS issued the May 2010 applicable federal rates. The Code Section 7520 rate for determining the present value of an annuity, etc., is 3.40%. Revenue Ruling 2010-12.

     New Rules for Supporting Organizations and Donor Advised Funds Discussed.   Treasury attorney Emily Lam and IRS attorney Philip Hackney discussed proposed reg. NPRM Reg-155929-06 (IRB 2009-47,665) and the changes to the Donor Advised Fund rules in the Pension Protection Act of 2006 at the 27th Annual Tax Exempt Organization Conference in Washington, DC, on April 22, 2010. They discussed issues that could make it difficult for the charitable organizations to meet the minimum 5% payout requirements out of hard to value assets. The IRS is working on the problem and it was noted that the requirements do not take effect until the regulations are made final. Additional items were discussed. There are no new regulations as of yet for Donor Advised Funds ("DAF"). The panel discussed whether or not a DAF could rely on the IRS Business Master File, the grantee’s IRS ruling, or on a third-party report about the status of a non-profit organization. Rev. Proc. 2009-32 allows reliance upon acceptable third-party reports, given certain conditions. The old IRS ruling may be relied upon for now as long as the DAF is not aware of any changes in the operation of the charity since its issuance.

     Treasury Department’s Green Initiative.    The US Treasury announced its “green” initiative to reduce costs, improve taxpayer’s service, and reduce environmental impact through increased reliance on electronic transactions. (Announcement TDNR TG-644). Among other things, mandatory use of electronic funds transfer system (EFTPS) will be required to make business tax deposits. Electronic fund transfers of Social Security benefits to all retirees and the elimination of the option to purchase paper US Savings Bonds through payroll deduction for Federal employees are other changes.

     Conservation Easement Fails Where Mortgage Remains Priority.   The US Tax Court upheld an IRS disallowance of a conservation easement where the taxpayer apparently failed to obtain a release from the first mortgagee for the easement. Taxpayer contributed an easement over the façade of a building to a qualified donee organization along with a cash contribution. The tax court disallowed the easement, as the first mortgagee would be entitled to all of the proceeds of the insurance should the building be destroyed, in violation of the requirement that the easement be enforceable in perpetuity under Reg. Sect. 1.170A-14(g). Although this is an income tax case, could this be an issue faced by a fiduciary in implementing a conservation easement? Gordon Kaufman v. Commissioner, 134 T.C. #9, #15997-09

     PLR Approves Correction to CRT of Scriverner’s Error.   Taxpayers set up a private foundation and later established a CRUT with income going to their child and the remainder after the child’s death to the private foundation. Taxpayers Husband and Wife reserved the right to change the charitable remainderman at any time during their lives. However, later in the trust document, it is specified that the remainderman must be qualified under Section 170(b)(1)(A), which the foundation is not. The trustee discovered the error after taxpayer Husband passed away and seeks and receives the PLR approving the change after obtaining the state court’s order modifying said CRUT. PLR 201016033, dated January 12, 2010.

     Vendor Chosen to Establish On-Line Paid Tax Return Preparer Registration System.   The IRS announced on May 3, 2010 that it has selected a vendor to develop and maintain the registration application system for registration of paid tax return preparers. The current target date for the commencement of the system is September 1, 2010. IRS Fact Sheet 2010-1.

     IRS Attempt to Impute Business Ownership Rejected.  The US Tax Court rejected the IRS attempt to include 50% ownership of a warehouse company in decedent’s estate for estate tax purposes in R.C. Fortunato Estate, T.C. Memo 2010-105, Dec. 58,216 (M). The decedent had a criminal record and numerous creditors due to a failed business. Decedent’s brothers started a warehouse company which grew over time into a large group of companies with locations throughout the country. From the beginning, decedent held a leadership role within the companies and eventually moved to California where he had "carte blanche" over the California operations. Even though decedent did not have any shares in the company and did not contribute any funds to the company when cash infusions were necessary, decedent held himself out as the owner or CEO of the companies and many of the employees and even the CFO believed this. Although the laws of the relevant states permitted ownership without actual certificates issued to the stockholder, the court found that decedent actually did not want an interest in the corporation and there was no evidence showing that his brothers wanted otherwise.

     Tax Court Applies Step Transaction and Increases Taxable Gift.  Taxpayer transferred all of her interest in an LLC to a trust for her son and another trust for her grand-daughter, partly in exchange for promissory notes executed by the trusts. Taxpayer reported taxable gifts of 9.5% of the LLC to each donee, however the tax court found that the actual intention was to transfer 50% to each trust. It applied the step transaction to value the transfer at 50% interest to each less the value of the promissory note executed by the respective trusts. In valuing the gift, the court accepted the taxpayer’s 30% marketability discount, but reduced the minority/lack of control discount from an additional 10% to 8% because of the increase found of the ownership interest actually transferred. S.J. Pierre, CCH Dec. 58,217 (M).

     IRS Releases its Statistics of Income Bulletin for Spring 2010.  The IRS released its quarterly Spring 2010 issue of the Statistics of Income Bulletin on May 14, 2010. Featured are data on high-income individual income tax returns for 2007, gift tax returns filed in 2008, and trust income from 2002 thru 2006. About 257,000 gift tax returns were filed in 2008 and only 4% were taxable. 46% of the gifts were cash, corporate stock amounted for 24% and real estate 17%. 52% of the returns were filed by female donors. IR-2010-62.

     Kyl and Lincoln work on estate tax.  Senator Jon Kyl, R-AZ, reported that he and Senator Blanche Lincoln, D-AR, have been having talks with Senators Baucus and Grassley on a bill to increase the federal estate tax exemption to C5 Million Dollars and reduce the tax rate to 35%. The problem is finding the required offsets under the PAY-GO rules. Senator Kyl claimed to have several proposed sources for the offsets and he hopes the bill will be marked up by the Senate Finance Committee this week to go along with a Senate jobs package. Senate Democratic leaders appeared skeptical.

     Growing non-compliance with IRAs.  Among the reports recently issued by the IRS, was one from the Treasury Inspector General recommending that the IRS address growing non-compliance with IRA contributions and distribution requirements. Reference No. 2010-40-043.

     Watch List

• H.F. 436 (Pomeroy)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 498 (Mitchell)— nothing new reported. Referred to House Ways & Means Committee.
• S.F. 722 (Baucus)— nothing new reported. Referred to Senate Finance Committee.
• H.F. 96 (Conaway)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 3905 (Berkley, et al)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 4154 (Pomeroy)— passed the House on 12/3/2009. Placed on Senate legislative calendar under general orders (Calendar #253).

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     April 2010

      HF 4849 Passed out of House Ways & Means Committee.   The House Ways and Means Committee passed out of Committee House File 4849, which is a tax bill for small businesses. Part of the tax breaks however are paid for various measures, including requiring a minimum 10 year term for GRATs. The bill now goes to the House for consideration.

      IRS Issues Proposed Regulation Requiring all Tax Preparers to have a PTIN.   The IRS issued a proposed regulation requiring all tax preparers to have a valid Preparer Tax Identification Number (PTIN) and to report it on all returns they prepare. After December 31, 2010, the option to use the preparer’s personal social security number or EIN will no longer be available. Tax return preparers who fail to provide a valid PTIN will be subject to penalty under IRC Section 6695(c). These new regulations are obviously connected with the IRS’ initiative to further regulate the tax preparation business. The proposed Reg. indicates that only attorneys, CPAs, enrolled agents, or registered tax return preparers may obtain a PTIN after December 31, 2010. It also permits the IRS to impose conditions on the issuance of a PTIN and leaves open the door for periodic re-application and the imposition of fees on the issuance of the PTIN. Comments are requested by April 26, 2010. Prop. Reg. 134235-08; 2010 FED, Para 49,446.

      IRS Extends Interim Rules for Estate and Trust Bundled Investment Management Fee Deduction.   The IRS issued Notice 2010-32 permitting the deduction of the full amount of the bundled fiduciary fee on returns for tax years beginning before January 1, 2010. For those years, non-grantor trusts and estates will not be required to determine the portion of their trustee’s fees that is subject to the two percent (2%) AGI exclusion. However, any payments made by the fiduciary to third-parties for expenses subject to the 2% floor must be treated separately from the otherwise bundled fiduciary fee.

      ABA Tax Section urges Congressional Action.   On April 5 the ABA Taxation Section sent a letter to congressional leaders urging Congress to address the federal estate and generation skipping transfer taxes for 2010, noting the state of uncertainty caused by the current situation. Although the House bill is on the Senate legislative calendar, the Senate has yet to take up the bill. The only activity has been several futile attempts to extend the 2009 Estate tax regime by a year by unanimous consent.

      Trust Beneficiary Allowed Mortgage Interest Deduction on 1040.   A trust beneficiary entered into an occupancy agreement with the trust to occupy trust property. Under the occupancy agreement, the beneficiary assumed the obligation of repairs, maintenance, insurance, property taxes and assessments, and had a right of first refusal to purchase the property. Although the beneficiary could not make material alterations or improvements to the property without consent from other individuals involved with the trust, was entitled to occupancy only under the terms of the agreement and did not have to exercise his right of first refusal to purchase, the Tax Court found that the beneficiary had, on balance, assumed the benefits and burdens of ownership sufficient to support his personal deduction of the mortgage interest that was paid on the mortgage secured by the trust property. A.J. Adams, TC Memo 2010-72, Dec. 58,180.

      Eighth Circuit Affirms Tax Court, Limited Discounts Given to Limited Partnership Gift.   The 8th Circuit affirmed the decision of the US Tax Court in the valuation of limited partnership interests given to the daughters of the general partners. The limited partnership agreement contained significant limitations on control and the ability to transfer the units. However, the court was not impressed with the business purposes cited for the restrictions. Taxpayers claimed a 49% discount, the IRS allowed 28% and the Tax Court allowed yet a smaller discount. A strong dissent was also generated. T. H. Holman, Jr., (CA8) 2010-1 USTC Para 60,592, affirming the Tax Court decision at 130 TC No. 12, Dec. 57,455.

     Watch List

• H.F. 436 (Pomeroy)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 498 (Mitchell)— nothing new reported. Referred to House Ways & Means Committee.
• S.F. 722 (Baucus)— nothing new reported. Referred to Senate Finance Committee.
• H.F. 96 (Conaway)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 3905 (Berkley, et al)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 4154 (Pomeroy)— passed the House on 12/3/2009. Placed on Senate legislative calendar under general orders (Calendar #253).

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     March 2010

      Trust Documents Not Protected by 5th Amendment.   The District Court for West Virginia upheld Summons issued by the IRS for trust documents and records. The taxpayer was unable to rebut the government’s prima facie case by proving an abuse of process. The court held that the trust records were relevant as the taxpayers were using trust assets to generate income but neither had filed any tax returns. The mere production of records was not self-incrimination, however the taxpayers could be protected from providing testimony under their 5th Amendment rights. G. O’Shea, D.C. WV, 2010-1 USTC Para 50,266.

      Senate Moves Forward on Extenders Bill, Pays for it with Roth 401(k) Conversion Authorization.   The Senate moved towards consideration of their second Extenders Bill after approval of several amendments extending various income tax provisions. The cost of the nearly $1 Billion Dollar bill was fully off-set by a proposal to allow workers 59 ½ years and older to convert distributions from employer-sponsored retirement plans to a Roth 401(k) plan.

(Not to be confused with the elimination of restrictions for IRA to Roth conversions that went into effect January 1, 2010. Conversions of IRA accounts to Roth IRAs in 2010 qualify for the election to defer the recognition of the income from 2010 to 50% in 2011 and 50% in 2012.)

      IRS Issues Dirty Dozen Tax Scam List.   The IRS issued its annual “Dirty Dozen” list of tax scams. Included on the list are misuse of off-shore accounts, Social Security withholding fraud, misuse of charitable donation deductions, abuse of retirement plan transactions and other schemes currently being promoted. Taxpayers are reminded that not only would they be subject to back taxes, penalties, and criminal prosecution, but informants may qualify for whistleblower rewards. IR-2010-32.

     Watch List

• H.F. 436 (Pomeroy)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 498 (Mitchell)— nothing new reported. Referred to House Ways & Means Committee.
• S.F. 722 (Baucus)— nothing new reported. Referred to Senate Finance Committee.
• H.F. 96 (Conaway)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 3905 (Berkley, et al)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 4154 (Pomeroy)— passed the House on 12/3/2009. Placed on Senate legislative calendar under general orders (Calendar #253).

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     February 2010

     Senate Completes Steps to Expedite Consideration of H.F. 4154.   Late in January, the Senate completed procedural steps for placing House File 4154 (the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Bill of 2009) directly on the Senate calendar. This step bypasses committee consideration and allows the Senate the flexibility to consider it at any time. H.F. 4154 was passed by the House without committee consideration on December 3, 2009 and would repeal carryover basis and would make permanent the federal estate tax laws that were in effect in 2009.

     Senate Leaders Commit to a “Timely” Consideration of Estate and Gift Tax Reform.   Republican negotiators agreed to the release of the jobs bill from the Senate Finance Committee after receiving a commitment from the Democratic leadership to a timely consideration of permanent bipartisan estate and gift tax reform. Specifics on this agreement were not available. (Senate Majority Leader Reid, however, only offered a small portion of that bill for full Senate consideration, which triggered loud Republican objection. No action was taken prior to the President’s Day recess. No indication is available on the impact of these developments on the reported agreement to consider the estate and gift tax issues.)

     Meanwhile, at Congressional hearings on Feb. 17, 2010, financial industry spokespeople complained about the rules and regulations requiring institutional reporting of taxpayer basis to the IRS and requested delays in the effective dates of their mandated compliance.

      FLPs with No Non-Tax Purpose Ignored.   The Tax Court concluded that a holding structure consisting of two family limited partnerships and several trusts which held all of decedent’s interest in a family business, leaving decedent insolvent, had no legitimate non-tax purpose and therefore all of the closely-held family business stock was included in decedent’s gross estate without any discounts. Estate of Roger D. Malkin, TC Memo 2009-212.

     Lapse of General Power of Appointment Subjects Exempt Trust to GST.   An Ohio US District Court follows the amended language of Reg. 26.2601-1(b)(1)(i) to hold that the transfer of assets from an otherwise exempt GST Trust to skip persons through the lapse of a general power of appointment constitutes a constructive addition to the trust subjecting the trust to the Generation Skipping Tax. The same result would have been the case had the transfer been the result of the exercise of the general power of appointment. Estate of Timken v. US, 2009 WL 1884393 (N.D. OH).

     Early Termination of NIMCRUT Approved where Remainder Beneficiary is Public Charity.   In PLR 200912036, the IRS approved the early termination of a net income with makeup unitrust through a buy-out of the remaining life beneficiary where the remainder beneficiary was a public charity. Since the remainder beneficiary was a public charity, the IRS found that the transaction did not constitute an act of self-dealing where the income beneficiary was an original grantor of the CRUT. (Contrast this ruling with PLR 200614032 and 200616035 suggesting an opposite conclusion if the remainder beneficiary was a private foundation.).

     Through Disclaimers Spouse may do Spousal Rollover.   In PLR 200938042, the IRS agreed that the surviving spouse could exercise her spousal rights to a rollover of decedent’s IRA even though she was not named beneficiary. H’s IRA listed his testamentary credit shelter trust as beneficiary. H’s Will also specified that should W disclaim any property, said property would become an asset of the credit shelter trust. As such, W was not a beneficiary and did not qualify for spousal rollover (Reg. 1.408-8, Q&A 5). W disclaimed all of her rights under the Articles in the Will regarding what happens if disclaimed and setting up the credit shelter trust, making the credit shelter trust void. Therefore, at H’s death, there was no beneficiary designation and the IRA passed to H’s estate. Under a separate Article in H’s Will, the residue of the estate passes outright to W and she becomes the sole beneficiary of the IRA, thus giving her the right to make a spousal rollover.

     Watch List

• H.F. 436 (Pomeroy)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 498 (Mitchell)— nothing new reported. Referred to House Ways & Means Committee.
• S.F. 722 (Baucus)— nothing new reported. Referred to Senate Finance Committee.
• H.F. 96 (Conaway)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 3905 (Berkley, et al)— Referred to House Ways & Means Committee.
• H.F. 4154 (Pomeroy)— passed the House on 12/3/2009. Placed on Senate legislative calendar under general orders (Calendar #253).

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     January 2010

     IRS Proposes Testing and Licensing of Tax Return Preparers.  The IRS started off the New Year with an announcement on January 4, 2010 of the results of their study into the regulation of tax preparation. Eventually the IRS is going to license all tax return preparers, both those signing returns and those involved in the preparation but not signing the returns. This appears to include all licensed professionals as well as the currently unregulated portion of the practice. However, at the present time, the IRS is not proposing to test lawyers, CPAs and enrolled agents in good standing, nor to test in the area of estate and trust taxation. IRS Fact sheet 2009-1.

     House File 4154, Federal Estate Tax and Carryover Basis.  Representative Pomeroy introduced this bill on November 19, 2009 to repeal the carryover basis rules, retain the federal estate tax with a permanent $3.5 Million Dollar exemption, a maximum tax rate of 45% and to re-institute the pay-as-you-go requirements on new tax and spending legislation (PAYGO). This bill was passed by the House on December 3, 2009 and sent to the Senate, where it was read for the first time on December 24, 2009.

     Fate of Federal Estate Tax Still in Limbo: Speculation Rampant.  The House of Representatives passed H.F. 4154, a permanent extension of the 2009 Federal Estate Tax exemption and rates and repealed the carryover basis provisions of the 2001 tax legislation (EGTRRA). The Senate, however, was unable to address the issue because of the health care legislation. With January 1, 2010, came the repeal of the Federal Estate Tax and a limited carryover basis, however, there was talk of retroactive legislation reinstating the estate tax as of that date. Questions of the constitutionality of such a measure immediately came to mind. Speculation of when the Senate would be able to act runs the gamut from January all the way to the end of 2010 in a lame duck session for many members of Congress. There is already talk about a court challenge to any kind of retroactive re-instatement of the tax. In the mean time, the certification of the new junior Senator from Massachusetts by the end of January will take away the Democrat’s supermajority in the Senate.

     IRS Gives Guidance for Military Service Survivor and Other Benefits.  The IRS issued Notice 2010-15, giving employers guidance in implementing the new employee benefit requirements for qualified reservists who are called to active duty and their beneficiaries that was enacted in the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act) (P.L. 110-245) . Estate planners and probate practitioners should be aware that there may be benefits mandated by this act for survivors of fallen service men and women.

     February AFRs announced.  Rev. Rul. 2010-06 announced the February applicable federal rates. The section 7520 rate for determining the present value of an annuity, life estate, is 3.40 percent.

     Watch List

• H.F. 436 (Pomeroy)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 498 (Mitchell)— nothing new reported. Referred to House Ways & Means Committee.
• S.F. 722 (Baucus)— nothing new reported. Referred to Senate Finance Committee.
• H.F. 96 (Conaway)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 3905 (Berkley, et al)— Referred to House Ways & Means Committee.

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