MSBA Probate & Trust Law Section

Federal Tax Committee Monthly Update - 2011

     November 2011

     IRS Releases Inflation Adjustments for 2012. The IRS released Rev Proc 2011-52 giving the inflation adjustment figures for 2012. Among the items related to estate and gift taxation, the Federal Estate Tax Exemption increases to $5.12 Million Dollars, the special use valuation for qualified real property cannot exceed $1.04 Million Dollars but the annual gift tax exclusion remains at $13,000. Rev. Proc. 2011-52, IRB 2011-45.

     Revised Form 706. The IRS has released the 2011 version of the Federal Estate Tax Return Form 706. Revision dated July 2011 is for 2010 tax returns and the version revised August 2011 is for 2011 decedents. According to the instructions, “if the estate chooses not to allow the surviving spouse to take into account, for estate and gift tax purposes, the decedent’s unused exclusion amount, then do one of the following: attach a statement to the Form 706 indicating that the estate is not making the election under Section 2010(c)(5) or enter “no election under Section 2010(c)(5)” across the top of the first page of Form 706”. Thus, it appears that the IRS will automatically presume a valid election to allow portability to the surviving spouse for any timely filed and complete Form 706.

     Reg. 20.2036-1 Finalized. The IRS finalized Proposed Reg. 20.2036-1 that specifies the value for estate tax purposes the retained contingent right to income in the decedent from an annuity or other trust after the death of the current income recipient. In general, the value must include the value of the assets necessary to produce the income the decedent would have received less the present value of the current income recipients’ rights. The final Reg. is revised to avoid including the value of rights under Section 2033 if a portion of the trust is included under Section 2036. The finalized Reg. is effective for decedents dying on or after November 8, 2011. T.D. 9555.

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     October 2011

     IRS Releases Initial Guidance regarding Portability Election for the Unified Credit. The IRS released Notice 2011-92 (IR-201197) discussing the requirements for the election of portability of the Unified Credit between spouses. The IRS indicated that they wanted to make the election process straight-forward to provide certainty for the surviving spouse. They indicated that the election must be made on a timely filed Federal Estate Tax return, including extensions, even if there is no estate tax liability. Instead of having special boxes to check or statements to include on the Form 706, the election will be deemed automatic on a properly filed Form 706 and the instructions for the return will now include steps to avoid making the election if the executor filing the return wishes not to allow the portability of the unused credit. By indicating that one of those ways to not allow the portability election is simply to file the Form 706 late, a trap is laid for the unwary and the unsophisticated who may not be aware of the desirability of filing the Form 706 until it is too late to file Form 4768 for an automatic six month extension of time. The IRS is requesting comments on all aspects of the portability question and specified a deadline of October 31, 2011, for their submission.

     Fiscal Year Ending 2011 Report Released. The US Treasury Department and Office of Management and Budget (OMB) released their report on October 14, 2011, regarding the federal budget for FYE 2011 (ending 09/30/2011). The budget deficit dropped minimally as compared to FYE 2010. In discussing the differences between the two years, the report notes that the revenue from estate and gift taxes were down, but nevertheless totaled roughly $7 Billion dollars. TDNR TG-1328.

     Guidance given regarding Protective Claims for Estate Tax Refund. The IRS released Rev Proc 2011-48 giving guidance on procedures and requirements for filing and resolving protective claims for refunds of federal estate tax based on IRC Code Section 2053. Reg. Sec. 20.2053-1(d)(5)(i) issued in 2009 required claims or expenses to actually be paid before they could be deducted in the calculation of the federal estate tax. Potential claims and expenses that were expected to be paid had to be claimed through a protective claim for refund filed before the close of the Statute of Limitations period under IRC Section 6511(a). The requirements for such a protective claim is set out in this revenue procedure plus, for those protective claims filed after December 31, 2011, such a claim may be made by attaching a completed Schedule PC to Form 706, filing Form 843 or by filing an amended 706. Prior to that date, such claims may only be made by filing a Form 843. Among the specifications, each potential claim must be filed separately and must be specifically identified. Once an expense or claim is paid, the estate must notify the IRS within 90 days after the payment or within 90 days after the amount of the claim becomes certain and is no longer subject to contingency.

     Form 8939 . On or about October 10, 2011, the IRS released Form 8939 and its instructions. The form may now be found on the IRS website and is seven pages long. The instructions are 10 pages and indicates that the filing date is January 17, 2012. Pursuant to previous notices, the IRS will not accept any substitute for this form, nor will it accept any late filed forms after January 17, 2012. This form is to be used to elect out of the 2010 federal estate tax and to report basis adjustments and generation-skipping tax allocations for decedents dying in 2010.

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     September 2011

     Minnesota Legislature passes Estate Tax Exemption for Qualifying Small Business and Farm Properties. House File 42 passed by the MN House of Representatives on May 17, 2011 and the Senate on May 18, 2011 included a new estate tax exemption for qualifying small business and farm properties. If claimed, the resulting estate tax reduction would be subject to recapture if the property was disposed of before the expiration of a three year holding period. The bill now goes to the governor for consideration. (This was later enacted in the Special Session as H.F. 20 and signed by the governor, effective for decedents dying after June 30, 2011.).

     Regulations for Registered Tax Return Preparers Finalized. The IRS finalized the regulations regarding registered tax return preparers and practice before the IRS under Circular 230 that were issued in August 2010. Final regulations are effective August 2, 2011. The regulations state that either preparing or filing the document constitutes practice before the IRS and finalizes the steps necessary for individuals to become a registered tax return preparer if they prepare all or substantially all of a tax return or claim for refund. An annual fee, recertification and a minimum of 15 hours of continuing education will be required for renewal of one’s license every year. Practitioner’s who fail to comply with the electronic filing requirements are guilty of disreputable conduct and will be subject to sanctions along with others who participate in unethical or unprofessional activity. T.D. 9527.

      Maine Enacts Substantive Changes in its Estate Tax Commencing January 1, 2013. Maine has enacted a new state Estate tax. New rates are $0 - $2 Million = $0; $2 Million - $5 Million = 8%; $5 Million - $8 Million = 10%; over $8 Million = 12%. L.D. 1043 (H.P. 778), Laws 2011.

     Tax Free Exchange of Annuity Contract Requirements Modified. The IRS released Rev Proc 2011-38, which first issues a temporary clarification of Rev Proc 2008-24 and then supersedes the latter as of October 24, 2011. The new requirements prohibit any distributions during the first 180 days after the exchange of annuity contracts to avoid taxation of the entire contract. The only exception is for regular annuity distributions that have been made for at least 10 years or more prior to the exchange or annuity payments made over a period of multiple lifetimes.

     Senator Conrad Proposed Federal Estate Tax Changes. Senate Budget Committee Chairman Kent Conrad (D-ND) offered an outline of his 2012 Federal Budget proposal. Among other things, Conrad’s plan would return the Federal estate tax provisions back to its 2009 levels, including a $3.5 Million exemption. It also permanently provides for Alternative Minimum Tax relief while raising taxes and closing down other loop holes and calling for other program expenditure cuts.

     Bill Introduced to Combat Offshore Tax havens. The Stop Tax Haven Abuse bill was introduced in the Senate. Previously introduced in the House as HR 2669, this bill is designed to raise nearly $100 Billion dollars annually by ending offshore tax abuse. The bill is designed to prevent the use of off shore corporations and trusts to hide assets.

     New York Estate Tax – Implementation of Marriage Equity Act. The New York Department of Taxation and Finance issued a memorandum regarding the implementation of the new Marriage Equity Act that became effective July 24, 2011. The memorandum makes clear that all spousal provisions of the estate tax now pertain regardless of whether a same sex spouse or a different sex spouse of the decedent. To file the New York estate tax return, the estate should complete a federal estate tax return as though federal law included recognition of a same sex surviving spouse. If a federal estate tax return is actually required, copies of both the actual federal estate tax return and the pro forma federal return prepared as though there was a surviving spouse should be attached to New York’s return. Taxpayer Guidance Division TSB-M 11(8)M dated July 29, 2011.

     Tax Court Thinking on Valuation Revealed. According to one author, Espen Robak, in an article appearing August 24, 2011 on the Trust and Estates website, the tax court’s current thinking on valuation issues is revealed in Estate of Louise Paxton Gallagher v. Commissioner, (T.C. Memo 2011-148). According to Robak, the court rejects the market valuation approach as well as the approach of both experts in the case and ends up discussing a “myriad” of other issues and comes up with a “smorgasbord of valuation techniques” to arrive at its decision. The article does not discuss the place of discounts, however the court does end up with a valuation lower than what was initially reported on the 706 for a minority holding in a clearly declining industry.

     Disclaimer by an Estate of Retirement Benefits Addressed in PLR. The IRS confirmed that the personal representative of an estate could disclaim certain amounts in retirement accounts even though the estate accepted RMDs. Relying on Revenue Ruling 2005-36, the IRS confirmed that the acceptance of an RMD did not constitute acceptance of benefits of the full retirement account which would disqualify a qualified disclaimer. PLR 201125009 (June 24, 2011).

     PLR Allows Tax Deferral of Income from Annuities held by Trust. In PLR 201124008 (June 17, 2011), the IRS issued a PLR allowing for the deferral of income earned on annuity contracts even though they would be owned by a trust until they are distributed to the eventual beneficiaries, who could take the distribution of the annuity in kind without recognizing taxable income until withdrawal. Specifically, the annuities were to be purchased naming the annuitant on each respective contract who would eventually receive the contract as their distribution from the trust. The trust was set up by a husband naming the wife as the successor trustee and providing that the assets of the trust be available to support the wife and her dependents during her lifetime. The wife as trustee requested the PLR and represented that it was unlikely that she would ever need to withdraw any funds from the trust. The PLR rules that this arrangement qualifies for the exception to IRC Section 72(u)(1)(B) which denies deferral to contracts held in trust in certain circumstances and it also ruled that the distribution after the wife’s death to the beneficiary-annuitants of the contract would not cause taxation under IRC Section 72 (e)(4)(C).

     Carryover Basis Guidance Released by the IRS. The IRS released notice 2011-66 announcing that the election out of federal estate tax for decedents dying in 2010 and the election into the modified carryover basis provisions of IRC Section 1022 will be made on Form 8939, which will be due on or before November 15, 2011. (Form 8939 was not immediately available, however, but will be issued “early this fall”.) There will be no extension permitted beyond November 15 and the IRS generally will not accept Form 8939 after November 15 (effectively closing the door for the opt-out from federal estate taxes for 2010). No substitute forms will be allowed and all filings prior to and not using the final version of Form 8939 must be resubmitted on the final version of Form 8939 on or before the deadline.

The IRS also released Rev. Proc. 2011-41 which details the method to allocate basis increase to assets passing from the decedent. Included in the instructions is optional safe harbor guidance for issues which may be faced by personal representatives and the beneficiaries relating to issues involving the carryover basis. Taxpayers relying on the safe harbor procedures specified therein will not be challenged by the IRS in their calculations.

     Update: further postponement. The IRS issued Notice 2011-76 and IR-2011-91 on Sept. 13, 2011, to announce that the due date for Form 8939 will now be January 17, 2012. It confirms that it will not allow any extensions of the final due date for this return, except for some very limited technical reasons. The due date for the 2010 Form 706 will not be changed, but the automatic 6 month extension is still available by timely filing Form 4768. (Thus, returns due Sept. 19th may be extended to March 19th, 2012.) No penalties will be assessed for tax paid by the extended due date, however, interest will be charged from the original September 2011 deadline. Affected 2010 individual income tax returns showing gain or loss from the disposition of inherited assets will not be subject to penalties if they must be amended after the determination of the carryover basis reported on a Form 8939.

     IRS Finalizes May 2009 Regulations regarding Actuarial Tables. IRS announced the finalization of the regs and tables that it issued on May 7, 2009. Reg. Sec. 2032-1, Life Table 2000CM and revised tables S and U(1) are finalized. T.D. 9540. These regulations apply to the valuation of annuities, life estates, remainder interest, etc., valued on or after May 1, 2009.

     2011-68 Provides Interim Guidance on Long-Term Care Insurance Riders on Annuity and Life Insurance Policies. In Notice 2011-68, the IRS provided interim guidance to amendments affecting long-term care insurance that was included in the Pension Protection Act of 2006 (P.L. 109-280). This Notice addresses cases where distributions for payment of qualified long-term care coverage is tax free. The Notice also discusses when Section 1035 tax free exchanges applies to life insurance, annuities or long-term care insurance contracts. Comments are requested on or before November 9, 2011.

     PLR: Exchange of Property between Private Foundation and former Trustee Not Self-Dealing. The IRS released PLR 201130008 (dated May 3, 2011) where it determined that an exchange of property between a foundation and one of its former trustees (not considered a grantor or creator of the foundation) was not a prohibited act of self-dealing under IRC 4941 because the trustee was no longer a disqualified person at the time of transfer and was not part of the foundation’s decision making process on this transaction.

     Rates Used in Computing Special Use Value for Estate Tax Purposes. The IRS issued Rev Rul 2011-17 listing the average annual effective interest rates that are used for computing special use value of farm land for which an election is made under Code Section 2032A. Table 1 contains rates for use in 2010 and Table 2 contains rates for use in 2011.

     Form 990 Final Regulations Issued. The IRS issued final regulations to coincide with the re-design of Form 990. A number of changes are included, including a new threshold amount for reporting compensation, the elimination of advanced ruling process for new organizations, change in the public support computation period for publicly supported organizations and other changes effective September 7, 2011. T.D. 9549.

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     May 2011

     Estate Tax Deduction Must be Reasonably Certain.    A Tax Court decision upheld Reg. Sec. 20.2053-1(b)(3) requiring that to be deductible on the estate tax return, a claim against the estate must be “ascertainable with reasonable certainty and will be paid” before it can be deducted on the estate tax return. In G. Saunders Estate, 136 TC___, No. 18, Dec. 58,610, the Tax Court limited the amount of a malpractice claim against decedent's predeceased spouse's estate to the amount paid during the administration of the estate. Although the taxpayer based the deduction ($30 Million Dollars) on the opinion of experts at the time, the claim was settled three years later for $250,000.

     Wisconsin Issues Reminder of No State Estate Tax for 2011 and 2012.   The Wisconsin Department of Revenue included a reminder that the Wisconsin estate tax does not apply for 2011 and 2012 since it is based on the federal credit for state death taxes paid. With the enactment of Public Law 111-312 on December 17, 2010, continuing the suspension of the credit in favor of a federal deduction for state death taxes through December 31, 2012, there is no Wisconsin estate tax for deaths occurring prior to that time. Wisconsin Tax Bulletin No. 171, April 2011.

     April 2011

     IRS Issues Procedures for Return Preparers.   In Notice 2011-26, the IRS announced final regulations governing required e-filing for tax return preparers. The final regulations generally follow the proposal published on December 3, 2010 (Notice 2010-85, I.R.B. 2010-51,877), however, some relief is provided from the original proposal. For those preparers who are required to file electronically and whose clients opt out in writing and specifically expressing a desire for paper filing of their return, the final regulations now permit the preparer to assist the client by providing an addressed envelope, postage estimates, stamps and/or similar acts designed to assist the taxpayer in correctly mailing or delivering their paper tax return to the IRS. (The temporary regulations prohibited these acts.) The final regulations make clear that the taxpayer actually must carry their paper returns to the mailbox, post office, authorized commercial carrier, or hand deliver the tax returns to the IRS. The final regulations further clarify that the written statement signed by the taxpayer must be retained by the tax preparer, but only the signature of one spouse is needed for jointly filed tax returns.

In Notice 2011-27, the IRS has listed administrative exemptions to the electronic filing requirement, IRC Section 2011(e)(3), to allow for the paper filing of tax returns that are rejected by the IRS from attempts to be e-filed, returns that contain forms or schedules not supported by the preparer’s software package, and other technological difficulties or returns not currently accepted by the IRS for e-filing. These exemptions are retroactive to January 1, 2011.

(The Worker, Homeownership, and Business Assistance Act of 2009 changed Internal Revenue Code Section 6011 to require electronic filing of tax returns by those preparers who prepare various tax returns for individuals, trusts and estates. Beginning January 1, 2011, tax preparers who either for themselves or who are members of a firm whose firm members in the aggregate reasonably expect to file 100 or more tax returns in calendar year 2011 must file electronically. Beginning January 1, 2012, that number deceases to 11 or more tax returns in a given calendar year.)

Rev. Proc. 2011-25 states that solely for calendar year 2011, a tax return preparer as defined in IRC Sections 7701 (a)(36) and Reg. 301.7701-15 who reasonably expects to file 100 or more tax returns may mail any paper return for a client if they have obtained and retain in their file a hand signed and dated statement by the taxpayer stating the taxpayer’s unambiguous request to have the specified tax return preparer mail the individual income tax return to the IRS. The statement must be hand-signed by either spouse if a joint return and dated by the taxpayer on or before the date the return is mailed to the IRS and must contain specified language found in said Rev. Proc. The written statement should be retained by the tax preparer and not be attached to the return as filed.

     IRS announced the due date for Form 8939.   The IRS announced on March 31, 2011 that the due date will be extended for Form 8939 (the form to report the calculations for modified carryover basis for those 2010 decedent’s estates which elect out of the federal estate tax and stepped up basis provisions as permitted by the December 2010 Tax Act). The announcement makes clear that the decedent’s final income tax return is still due April 18, 2011, however the due date for filing this form is no longer due with that return. The news release promises a reasonable period of time for preparing and filing the return after the Form itself is finalized and released to the public. Neither the finalized form nor when that due date is yet available. (No mention is made of the $10,000 penalty for late filing of the form is made in this news release.) News Release dated March 31, 2011, IR-2011-33.

     "Decanting" Issue makes IRS Untouchables List for Advanced Rulings.   The IRS updated its list of issues that it will not make advanced rulings on (issue private letter rulings) to include two issues that may be involved in distributions from one irrevocable trust to another which result in a change in beneficial interest ("decanting"). The following issues are off limits until the IRS resolves the issues through publication of regulations or other guidance:

1. whether such distribution qualifies as a deduction under Section 661 or if there is an amount that needs to included in the gross income of someone under Section 662 or if such distribution is a gift under Section 2501.
2. whether a distribution from an GST exempt trust to another trust results in the loss of the GST exemption, whether this constitutes a taxable termination or a taxable distribution under Section 2612. Rev. Proc. 2011-3 effective January 3, 2011.

     Property Inherited from a 2010 Decedent is subject of IRS Publication.   The IRS issued Publication 4895, Basis of Inherited Property Held by Decedents Who Died in 2010. Among other things, the publication discusses tax issues for beneficiaries who inherited property in 2010 and subsequently sold the same during calendar year 2010, but before the personal representative makes the election regarding the federal estate tax and basis treatment in the 2010 Tax Act and reviews their options. The Publication suggests that there will be penalty relief for those beneficiaries who guess wrong on the treatment chosen by the personal representative as long as the treatment they use to calculate their original filing is based on a reasonable interpretation of the tax law. The IRS also states that they will reissue Publication 4895 once they develop the rules governing the manner in which the personal representative may elect out of the estate tax.

     IRS Again Extends Relief Regarding Bundled Investment Management Fees.   In Notice 2011-37, 2011 Fed 46,330, the IRS again extended the time for implementation of rules it announced regarding bundled fiduciary fees. While fiduciary fees paid to third parties for expenses subject to the 2% floor must be treated separately, otherwise bundled fiduciary fees will not need to be segregated for similar treatment until tax years beginning after the date of final regulations to be issued. Notice 2010-12, IRB 2010-16,594 modified and superseded.

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     March 2011

     Proposal to extend Conservation Easement Deduction.   Senators Baucus (D-MT) and Grassley (R-IA) introduced legislation to permanently extend the conservation tax break for ranchers, farmers and other land owners who donate an easement for conservation purposes. Called the Rural Heritage Conservation Extension Bill of 2011, the bill would make permanent the current charitable tax deduction for individuals and corporations contributing real property interests for conservation purposes.

     Form 8939 Carryover Basis Reporting Form.   The IRS has posted on its website a draft of Form 8939, however, it has not yet finalized that form. This form must be filed on or before the due date for the decedent's final income tax return for those estates electing to opt out of the federal estate tax for decedents dying in 2010 and thereby accepting the modified carryover basis rules of the law as originally enacted in 2001.

     Hawaii Grants Civil Union Partners Full Spousal Rights under all Tax Provisions.   Beginning January 1, 2012, Hawaii will now grant civil union partners full spousal rights under its tax laws, including the marital deduction on its estate tax. Act 1, Laws 2011.

     Senate Passes Tax Strategy Patent Banning Legislation.   The Senate passed on March 8 the America Invents Bill (Senate File 23), which includes a provision to stop the issuance of future tax strategy patents. Tax preparation software is specifically excluded and the Bill does nothing to affect the current 130+ tax strategy patents that have already been issued.

     Decedent's Death and Documentation Delay after End of QPRT Not Fatal.   The US Tax Court rejected the IRS claim that decedent's home should have been included in the decedent's gross estate because, although decedent died after the end of the QPRT, decedent died before the title was actually transferred to the residuary beneficiaries and no lease was generated between decedent and the beneficiaries to document the terms of the continued occupancy of the decedent until her death. There appears to have been no issue that the QPRT was properly set up, the required gift tax return was filed and that the decedent outlived the retained occupancy and the QPRT's termination. Although the beneficiaries contacted the attorney to transfer title and for assistance in calculating the fair market rent on the residence, the decedent died unexpectedly before a lease was signed and rent was paid. The Tax Court found that the intention was that the decedent would pay rent and that there was no express or implied agreement that the decedent could remain in the residence rent free. Thus, the home was properly excluded from the taxable estate. In addition, the estate could deduct decedent's debt for the unpaid rent that was determined due after death; however, since there was no written lease in affect at the time of death, the estate's obligation to pay rent terminated immediately upon the decedent's passing. S. Riese Estate, TC Memo, 2011-60, Dec. 58,570(M).

     Retirement Plan's failure to adopt required Amendments results in Retroactive Revocation of Tax Exempt Status.   The Tax Court upheld the IRS' retroactive revocation of the tax exempt status of a single person profit-sharing plan after the trustee’s refusal to adopt required plan amendments even though the plan met all qualification requirements at the time it was set up, the plan had discontinued contributions for several years prior to IRS contact about the needed amendments, and the trustee's claim that the plan was "too simple to require amendment." The Court ruled that the retroactive revocation was not barred by the Statute of Limitations because it did not involve an imposition of any tax. Christy & Swan Profit Sharing Plan, TC Memo, 2011-62, Dec. 58,572(M).

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     February 2011

     Bill to Outlaw Patenting of Tax Strategies introduced.   Senators Baucus and Grassley, the top ranking members of the Senate Finance Committee, introduced a bill that would outlaw the patenting of tax strategies by expressly providing that a strategy for reducing, avoiding or deferring tax liability is not new or non-obvious. (S.F. 139) The Senate Finance Committee unanimously approved a mirror bill (S.F.23) on Feb. 3rd. During the debate, Senator Grassley reported that there are currently over 130 patents already issued, with another 150 plus applications pending.

     Second Off-shore Voluntary Disclosure Initiative Announced.   The IRS has launched a follow-up off-shore voluntary disclosure initiative to allow taxpayers with undisclosed foreign bank accounts to report their assets and pay the related tax with a reduced penalty to come into compliance. The earlier initiative in 2009 was deemed a success with more than 15,000 taxpayers coming forward and paying nearly $400 million dollars in taxes. The new program is less generous, but still offers a significant reduction from normal penalties, ranging from 25% of the largest bank balance in any given year from 2003 through 2010 down to 5% for a foreign resident who was unaware that they are a US Citizen and taxpayers who were not involved in actually setting up the account overseas. The initiative runs through August 31, 2011.

     Taxpayer Loses Charitable Deduction Due to Personal Benefit.   The taxpayer lost not only his charitable deduction to a donor advised foundation, but was hit with a negligence penalty even though the IRS recognized the foundation as a tax-exempt organization that was properly set up. The Tax Court faulted Taxpayer for believing that it was proper for the foundation to provide his family with student loans and employment doing unspecified charitable deeds because the result was "too good to be true." S.G. Viralam, 136 TC ___, No 8, Dec. 58,547.

     President’s FY 2012 Budget Proposes Permanent Federal Estate and Gift Tax Provisions.   The President released his FY 2012 Budget Proposal on Valentine’s Day. Included were:

• making permanent the estate, gift and GST tax structure after 2012 along the lines that existed for 2009.
• making permanent the portability of unused exemption between spouses.
• requiring GRATS to meet a minimum duration in order to be recognized.
• limiting the duration of GST tax exemptions.
• elimination of required minimum distributions for retirement accounts under $50,000.
• a three year “patch” for the AMT paid for with a limit on the benefit of itemized deductions.
• increased penalties to help pay for some of the changes.

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     January 2011

     TIRS Releases Notice 2011-6.   The IRS released Notice 2011-6, which states that all tax forms require a PTIN in order to be filed by a tax preparer unless they are on a limited exclusion list provided in this Notice. The excluded forms are certain basic ones such as Form SS-4, W-2, 1099s, Form 2848 (Power of Attorney), certain forms relating to representation by tax preparers during an audit and certain employee benefit plan related returns, among others. This Notice also provides that unlicensed staff working in a tax preparation firm under the supervision of a licensed preparer may now obtain a PTIN without being tested or being subject to the continuing education requirements, but only to assist licensed preparers in preparing and filing tax returns. Such staff are required to obtain a PTIN and pay the annual fee, are subject to the ethical rules under Circular 230, but may not sign tax returns as the preparer and must immediately cease all tax preparation work when no longer supervised by a licensed preparer.

     New Procedure for Requesting Exempt Organization Determinations.   The IRS issued updated procedures for the request, issuance and appeal of exempt organization determination rulings under Code Sections 501 and 521. Among other things, the new procedures direct applications to the appropriate office at the Cincinnati, Ohio Service Center, as the previous system of using key district offices is no longer used. Rev. Proc. 2011-9.

In addition, the IRS updated its procedures for rulings regarding private foundation status under Section 509 (a)(3) and Section 4947 (a)(1). See Rev. Proc. 2011-10. These procedures refer to Rev. Proc. 2011-4 for any organization that is changing its status or operations. Guidance is given for determining which procedure to use and whether a general determination letter will be issued or a private letter ruling is required.

     Illinois Legislature adopts Estate Tax Changes.   The Illinois Legislature recently passed and sent to the governor a bill which, among other things, would adopt a $2 Million Dollar exemption and allows QTIP treatment, but otherwise adopts the federal estate tax calculations as of December 31, 2001. Senate Bill 2505 passed January 12, 2011, signed by the governor January 13, 2011.

     The Tax Relief, Unemployment Insurance Re-Authorization and Job Creation Act of 2010 or Kick the Can Down the Road 2 Years Act.   The President signed the 2010 Tax Relief Act on December 17th, which basically extended most of the tax provisions for another two years that were set to expire on December 31, 2010. Sections of the Act that are of particular interest to the Probate and Trust Section are as follows:

• The Act extends the charitable rollover provision for those individuals who are over 70½ to request their retirement plan administrator to distribute up to $100,000 of their account directly to one or more charities of the taxpayer's choice. Taxpayer then will not have to report that income on their personal tax return nor do they get the tax deduction, which is generally a huge benefit to the taxpayer. This provision previously expired December 31, 2009 and the new legislation renews this provision for 2010 and 2011 (an exception to the general sunset of December 31, 2012 for most of the other provisions of this Act). These distributions may satisfy the required minimum distribution requirements for the participants. Such distributions during January 2011 can qualify as a 2010 distribution, which may be a final "out" for those elderly clients who forgot to take their 2010 distributions by the end of the year.
• The Federal Estate Tax was retroactively re-imposed back to January 1, 2010, but with a $5 Million Dollar equivalent applicable credit, a 35% tax rate and a step-up in basis. For deaths during 2010, an election may be made to be use the old law of no federal estate tax but with carryover basis. Once made, said election is irrevocable. The IRS has yet to issue appropriate forms for the election and for making the required report of the carryover basis. The federal tax return is due nine months from the later of December 17, 2010 or the date of death.
• 2010 taxable gifts are still subject to a $1 Million Dollar lifetime exemption and a top tax rate of 35%. For 2011 and 2012, the gift tax is reunited with the estate tax for a lifetime total exemption of $5 Million Dollars. Additionally, the new act repeals Section 2511(c) that made practically all gifts into a trust taxable during 2010.
• The 2010 Tax Act introduces portability of the applicable credit between spouses. Any credit not used by the first to die spouse can be carried over and used upon the death of the surviving spouse, but only if a federal estate tax return is done on the first death. Some commentators suggest that this means that there will be no closure on re-examination of the first 706 until closure of the surviving spouse's estate. A surviving spouse who later remarries loses any carryover from the first spouse upon the death of the second spouse. This provision is for 2011 and 2012, which, if not extended, would require both spouses to die within either of those two years in order to be effective. Query: does this mandate a CYA letter for your file in all estates regardless of size where there is a surviving spouse?)
• The generation skipping tax is also revived with a $5 Million Dollar lifetime exemption for 2010 through 2012. The tax rate for any GST for transfers made in 2010 is zero (0%). For the other two years it is 35%. The GST exemption is not portable between spouses.
• The 2010 Tax Act also extends and increases the AMT patch for 2010 and 2011 tax years. Without further action, the AMT exemption will fall back to what it was in 2001 and impose that tax on most moderate and high income taxpayers in 2012.

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