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PLANNING COMMITTEE

The Vermont Tax Seminar, Inc. is an independent, non-profit organization dedicated to providing professionals current information on tax laws and regulations. Members of the Planning Committee who develop and oversee the seminar content are:

Paul P. Hanlon, Esq Chair, Vermont Tax Seminar

Ken Boyle, CPA McSoley McCoy & Co.

John F. Darcy, MBA, CPA Grippin, Donlan, Pinkham

Aaron Kaigle Vermont Department of Taxes

Ron R. Morgan, Esq. Kenlan, Schwiebert, Facey & Goss, P.C.

Brian Murphy, Esq. Dinse, Knapp & McAndrew, P.C.

Patricia A. Nowak, CLU, ChFC Nowak & Nowak Financial Services

December 3, 2015 ∙ Doubletree Hotel, Burlington & Mountain Top Inn, Chittenden

December 8, 2015 ∙ Hampton Inn, Brattleboro

2015 VERMONT TAX SEMINAR 1

SCHEDULE AT-A-GLANCE

7:00 a.m. – 8:00 a.m. Registration & Breakfast with Sponsors

8:00 a.m. – 8:15 a.m.

Welcome Remarks

Governor Peter Shumlin, (invited) State of Vermont

Paul P. Hanlon, Esq., Chair, Vermont Tax Seminar

8:15 a.m. – 9:00 a.m. Opening Keynote Speaker Sponsored by:

Michael Crook, UBS

9:00 a.m. – 10:00 a.m. Session 1: Economic Update

Jeffrey Carr, Economic & Policy Resources, Inc.

10:00 a.m. – 10:15 a.m. Refreshment Break with Sponsors

10:15 a.m. – 11:15 a.m.

Session 2: Vermont Tax Appeal Process


Mary Peterson, Vermont Department of Taxes

11:15 a.m. – 12:15 p.m.

Session 3: International Tax Rules in Vermont Practice

Ron R. Morgan, Esq., Kenlan, Schwiebert, Facey & Goss P.C. John Newman, Esq., Kenlan, Schwiebert, Facey & Goss, P.C.

12:15 p.m. – 1:45 p.m. Lunch Break


1:00 p.m. – 1:45 p.m.

Lunch Speaker Sponsored by:

David Kemps, Morgan Stanley

1:45 p.m. – 2:15 p.m. Session 4: Vermont Tax Commissioners Update


2:15 p.m. – 3:00 p.m.

Session 5: State and Federal Tax Updates

Paul P. Hanlon, Esq., Chair, Vermont Tax Seminar Molly Bachman, Vermont Department of Taxes

John F. Darcy, MBA, CPA, Grippin, Donlan, Pinkham

3:00 p.m. – 3:15 p.m. Refreshment Break with Sponsors

3:15 p.m. – 4:15 p.m.

Session 6: Charitable Gift Vehicles and Their Consequences

Ron R. Morgan, Esq., Kenlan, Schwiebert, Facey & Goss P.C.

Terrance Condren, UBS

4:15 p.m. – 5:15 p.m.

Ethics Session

Brian Murphy, Esq., Dinse, Knapp & McAndrew, P.C.

James Knapp, First American Title Insurance Company

Jeffrey Wick, Esq., Wick & Maddocks

5:15 p.m. Conference Adjourns


PRESENTER DIRECTORY

MOLY BACHMAN General Council, Vermont Department of Taxes Phone: (802) 828-3763 Email: [email protected] A native of Ohio, Molly Bachman received her J.D. in 1981 from the Ohio State University School of Law. She then moved to Montpelier and joined the law firm Gaston & Durrance, where she practiced for four years before joining the Department as an appeals attorney in 1986. Molly was appointed General Counsel in 1994.

JEFFREY CARR President & Economist, Economic & Policy Resources, Inc. Phone: (802) 878-0346 Email: [email protected] Jeff Carr has more than 30 years of experience in economic analysis, economic and fiscal impact assessment analysis, economic forecasting, regional impact analysis (including EB-5 project development-job impact analysis since 2006) tax-fiscal impact analysis, tax revenue forecasting, and preparing and presenting state economic-fiscal data to Wall Street bond rating agencies. In addition to more than 175 completed consulting assignments over the last 25 years, Mr. Carr has served as the consulting State Economist and Principal Tax Revenues Forecaster-Analyst for more than 20 years including the past four Governors of Vermont. He has been the State Economic Forecast Manager for his state for the New England Economic Partnership for the past 20 years. He is a nationally recognized expert on the EB-5 Immigrant Investor Visa Program, where he presents around the U.S. and in China on the economic impact aspects of the program. In addition, he serves as a consulting economist to a number of businesses, municipal and county governments, and business associations throughout New England and in New York state. Previous to his employment at EPR, Mr. Carr served as Legislative Director and Economist for a member of the U.S. House of Representatives. He also has served in the Executive Branch of Vermont government, as Research Director for a United States Senate campaign, and as Director of Research for a national education organization specializing in federal fiscal policy analysis. He taught economics in the Graduate School at St. Michael’s College in Winooski, Vermont. He also is a former municipal elected official and serves on the Board of several regional and quasi governmental Boards in his home state.

TERENCE CONDREN Executive Director, UBS Private Wealth Management Phone: (617) 247-6163 Email: [email protected] Terry Condren works with ultra-high net worth clients of UBS helping to coordinate their investment, estate planning and philanthropic goals. He has extensive expertise and experience with personal income, estate, gift and trust tax disciplines, advanced wealth transfer techniques, philanthropic planning, asset


protection, planning with concentrated stock positions and stock option and restricted stock issues. He also analyzes client's estate planning documents to help ensure that the plan accurately reflects the family’s philosophy, needs and objectives.

MICHAEL CROOK Head of Portfolio and Planning, Wealth Management Americas, UBS Financial Services, Inc. Phone: (212) 649-8253 Email: [email protected] Michael Crook is an Executive Director and Head of Portfolio and Planning in Wealth Management Research, where he advises investors on global investment strategy, asset allocation, and portfolio construction. Michael joined UBS in 2010. Prior to UBS, he worked as a discretionary portfolio manager and senior investment strategist at Barclays and Lehman Brothers. He is the author of numerous articles relating to investment strategy and goals-based investing, including publications in the Journal of Wealth Management, the Journal of Investing, and the Journal of Index Investing. Michael is also a former adjunct professor of economics at Marymount Manhattan College. Michael is a Chartered Alternative Investment Analyst (CAIA) and Chartered Retirement Planning Counselor (CRPC). He has appeared regularly on Fox Business News, Bloomberg, and BNN. He is also quoted widely in numerous newspaper and investment outlets. Michael earned a B.S. in consumer economics at the University of Georgia. He also earned a M.A. in economics at New York University.

JOHN DARCY, MBA, CPA Certified Public Accountant, Grippin, Donlan, Pinkham Phone: (802) 846-2000 Email: [email protected] John became a partner in 2011 when his firm, The Darcy Group, Ltd merged with GDP. He has over 35 years of tax experience, including positions with the IRS, two national CPA firms, and as a partner in one of the largest local CPA firms in Vermont. He received his MBA from St. John’s University in New York City. John is a frequent lecturer and writer on tax subjects. He has taught courses for the IRS, VT Society of CPAs, AICPA, University of North Carolina, Champlain College and UVM. He has written articles for publications such as The Greater Burlington Business Digest and the Vermont Bar Journal & Law Digest, and a series of articles on Vermont law for Lexus Nexus. John is a past president of the Vermont Society of CPA’s. He is a member of the American Institute of Certified Public Accountants, Vermont Society of CPA’s. He is also a licensed CPA in North Carolina.

PAUL P. HANLON, ESQ. Chair, Vermont Tax Seminar Phone: (802) 229-9114 Email: [email protected] Paul P. Hanlon is an attorney in practice in Montpelier and a fellow of the American College of Trust and Estate Counsel. He is former chair of the Vermont Bar Committee on Taxation, former chair and current


member of the Executive Committee of the National Association of State Bar Tax Sections, and Chair of the Planning Committee for the Vermont Tax Seminar. He has taught as an adjunct professor at Vermont Law School, was Deputy Commissioner and General Counsel of the Vermont Department of Taxes (1979-1982), and was Secretary of the Uniform Trust Code Study Committee (2007-2009). Paul is the author of the Vermont Chapters of the ABA Sales and Use Tax Desk Book and Property Tax Deskbook.

DAVID KEMPS Executive Directory, Morgan Stanley Phone: (202) 654-2050 Email: [email protected] David Kemps has more than 25 years of experience in the national policy and political arenas, with a focus primarily on tax and retirement issues. Mr. Kemps joined Morgan Stanley in May 2011 and is located in its Government Relations office in Washington, D.C. Previously, Mr. Kemps spent over 15 years in senior-level policy positions including stints at Lincoln Financial Group; the Investment Company Institute; and the U.S. Chamber of Commerce. In the early 1990’s Mr. Kemps was a practicing attorney at the Pension Benefit Guaranty Corporation. Mr. Kemps has spoken frequently at conferences on legislative and regulatory developments in Washington. He has appeared on national television and radio, and has been quoted in the Wall Street Journal, Pensions & Investments, and Defined Contribution News. In 1998 the 25th Anniversary Edition of Pensions & Investments honored him as one of the 25 individuals to watch in the field of pensions. Mr. Kemps earned his law degree from Catholic University, and undergraduate and graduate degrees from Ball State University. While at Ball State, Mr. Kemps earned seven varsity letters in track & field and cross-country, qualifying for the NCAA Division I Track & Field Championships.

JAMES KNAPP, ESQ. Vermont Underwriter, First American Title Insurance Company Phone: (800) 639-2502 Email: [email protected] James Knapp joined First American Title Insurance Company as the Vermont underwriter in May of 2015. Prior to that he served as the Interim Director of the Property Valuation and Review Division of the Vermont Department of Taxes. Mr. Knapp was formerly associated with Mickenberg, Dunn, Lachs & Smith, PLC., as counsel, where his practice focused on real estate transactions and representing non-profit entities. Mr. Knapp began his legal career in Vermont in 1981 as an attorney at Gravel and Shea. He remained with that firm for twenty-one years. He subsequently worked as the Vermont State Counsel for both the Stewart Title Guaranty Company and Chicago Title Insurance Company. Mr. Knapp served as the Practice Management Program Coordinator for the Vermont Bar Association. Attorney Knapp has held a position as an adjunct faculty member at Champlain College teaching in the Paralegal Studies Program and as an adjunct at Vermont Law School where he taught a course on Law Office Management. Mr. Knapp graduated from the University of Maine at Orono and Syracuse University’s College of Law, Magna Cum Laude.


RON MORGAN, ESQ. Attorney, Kenlan, Schwiebert, Facey and Goss, P.C. Phone: (877) 453-6526 Email: [email protected] Ron Morgan is an Attorney at Law and member of the Tax & Estate Planning Practice Group at Kenlan, Schwiebert, Facey and Goss, P.C., where he advises individuals and businesses regarding a variety of tax and business issues, including estate and business succession planning, post-mortem estate and trust administration, business taxation and taxation of trusts. Prior to joining the firm in 2001, Ron was a Member in the Kansas City office of Husch & Eppenberger, LLC. In 1979, Mr. Morgan received a B.A., Magna Cum Laude, from Vanderbilt University. He received a J.D. from the University of Houston School of Law in 1985. Prior to attending law school, Morgan was a tax auditor with the Internal Revenue Service.

BRIAN MURPHY, ESQ. Attorney, Dinse, Knapp & McAndrew, PC Phone: (802) 864-5751 Email: [email protected] Brian Murphy is a corporate and tax attorney with Dinse, Knapp & McAndrew, PC, concentrating in counseling closely-held businesses and their owners and nonprofit organizations. He is active in counseling clients on formation and structuring issues (including decisions with respect to the selection of the proper entity for effecting business and investment transactions), executive compensation, tax planning, and representing clients before the Internal Revenue Service and the United States Tax Court. Mr. Murphy served a key role in Vermont's adoption of the first L3C statute in the country, testifying before the Vermont legislature on behalf of the Vermont Bar Association concerning the legal features of the new "low profit limited liability company" model. As an experienced Delaware attorney, Mr. Murphy is also active in forming, merging, dissolving, and otherwise operating Delaware corporations, limited partnerships, limited liability companies, and business trusts.

JOHN NEWMAN. ESQ. Attorney, Kenlan Schwiebert Law Firm Phone: (877) 453-6526 Email: [email protected] John C. Newman is a lawyer practicing law with the Kenlan Schwiebert Law Firm in Rutland, Vermont. He came to the Firm with a prior background in a large French law firm in Paris and a boutique law practice specializing in international transactions in Washington, D.C. He was registered as a tax lawyer in Paris, and he has been a member of the Washington, D.C. and Virginia Bar Associations.


MARY PETERSON Tax Commissioner, Vermont Department of Taxes Phone: (802) 828-3763 Email: [email protected] Mary N. Peterson was appointed Vermont Commissioner of Taxes in 2010. Prior to her appointment, Commissioner Peterson served six years in the Vermont House of Representatives. She was clerk of the Ways & Means Committee for all three terms and was chair of the Joint Legislative Council for the 2007-2008 Session. Commissioner Peterson is a former chair of the Williston Selectboard and served on the Vermont League of Cities and Towns Board of Directors. She previously worked as an attorney, including at the Department of Public Service and the Burlington firm Spink & Miller. Commissioner Peterson holds a bachelor’s degree in Government, Phi Beta Kappa, from St. Lawrence University and a Juris Doctor from Northeastern University School of Law.

JEFFREY WICK, ESQ. Attorney, Wick & Maddocks Phone: (802) 658-3037 Email: [email protected] Jeff is a partner at Wick & Maddocks law firm in Burlington, VT. He has been practicing law in the following areas for over a dozen years: real estate transactions; wills, trusts and estates; and business/commercial law. Jeff taught Business Law at Champlain College. He also has an MBA degree and was formerly a venture capital investor in New York City.


THANK YOU TO OUR SPONSORS

MORGAN STANLEY Lucinda Bain 30 Main St, 5th Floor Burlington, VT 05401 Phone: (802) 863-7768 Email: [email protected] Website: www.morganstanleyfa.com/bainbiedermann Morgan Stanley is one of the world's largest diversified financial services companies, with a reputation for excellence in advice and execution on a global scale.

UBS FINANCIAL SERVICES Tom Cosinuke P.O. Box 600 Rutland, VT 05701 Phone: (802) 860-5742 Email: [email protected] Website: www.ubs.com UBS, a 150 year old company, is the largest asset manager worldwide. Our advice and solutions emphasize objective comprehensive wealth management. In Vermont, our 40 employees work with over 2500 families and businesses from locations in S. Burlington and Rutland. Our practice recognizes the importance of tax awareness and strong collaboration with our client's tax advisors.


The Bain Biedermann Group at Morgan Stanley is proud to sponsor the 43rd Annual Vermont Tax Seminar

Lucinda Bain Portfolio Management Director Senior Vice President Wealth Advisor

Ron Biedermann CFA®, CIMA® Senior Portfolio Manager Vice President Financial Advisor

30 Main Street, 5th FloorBurlington, VT [email protected]@morganstanley.comwww.morganstanleyfa.com/bainbiedermann

© 2015 Morgan Stanley Smith Barney LLC. Member SIPC. NY CS 7181500 SUP014 07/12 GP10-01281P-N06/10

Investment Management Consultants Association, Inc. owns the marks CIMA® SM (with graph element)® SM.



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Backed by the resources of one of the world’s largest wealth management firms, Integrity Wealth Management Group has the experience and insights needed to help you navigate today’s unpredictable markets and to help you plan for the future you deserve.

Advice you can trust starts with a conversation.

ubs.com/team/integritywealthmanagementgroup

Integrity Wealth Management Group

Jessica Anderson, CPWA®, CFP®, CIMA® Senior Vice President–Wealth Management

Thomas R. Cosinuke, ChFC® Director Financial Advisor

Margaret A. Jones, CFP® Account Vice PresidentFinancial Advisor Alicia A. Munukka Client Service Associate

UBS Financial Services Inc.38 Eastwood Drive, Suite 400 67 Merchants Row, Suite 102 South Burlington, VT 05403 Rutland, VT 05701 802-860-5742 802-772-3252 800-564-1265 toll free

SESSION 1

ECONOMIC UPDATE

Jeffrey Carr, Economic & Policy Resources, Inc.


NOTES


SESSION 2

VERMONT TAX APPEAL PROCESS




NOTES


SESSION 3

INTERNATIONAL TAX RULES IN VERMONT PRACTICE


International Tax Rules Frequently Encountered in Vermont

John C. Newman, Esq.

Kenlan, Schwiebert, Facey & Goss, PC, Rutland, VT

Why should lawyers, accountants, and certified financial planners be interested

in international tax rules in Vermont? The topic may seem quite arcane.

A substantial number of non-US citizens have moved to Vermont to appreciate

its natural beauty, relatively unencumbered housing market, its recreational activities,

and for a variety of other reasons. These non-US citizens may bring their own “tax

morality” with them. For example, some in-bound non-citizens are bringing with them

their family’s heritage of the economic and personal trauma of World War II—along

with their Swiss bank accounts and trust arrangements. Others are escaping the corrupt

and totalitarian governments in their home countries—motivating them to engage in

self-help remedies to preserve their families’ assets. Others come to the US with a

hostile and suspicious attitude toward government bureaucracies—an experience

normal for citizens of the former communist dictatorships. Whatever their background,

it can be a challenge to assist non-citizens (and more often their children) in adapting to

US tax morality with its rather complex, rigorous, and transparent banking and

regulatory environment.

Given this background, the following are the most significant issues that you

might encounter with regard to these non-US citizen clients (and their US born children).


1. FBAR Reporting

The federal requirement annually to report an ownership interest in a foreign

bank or financial account on the FBAR form has been around since its creation by the

Bank Secrecy Act of 1970 (BSA), but you would be amazed by the number of people who

will phone you and ask what to do about that UK bank account that they inherited from

their uncle 20 years ago now that the UK bank must report the income to IRS under

FATCA (No. 2, below). As the IRS Audit Manual (“IRM”) explains,

A United States person must file an FBAR (FinCEN Form 114, Report of Foreign

Bank and Financial Accounts) if that person has a financial interest in or

signature authority over any financial account(s) outside of the United States and

the aggregate maximum value of the account(s) exceeds $10,000 at any time

during the calendar year. Failure to file this form may result in civil and/or

criminal penalties. The civil penalties may be appealed.1

As the Internal Revenue Manual points out (Section 4.26.16.3.1), the Bank

Secrecy Act could have allowed a more expansive definition of “US person” than the

definition given by the FBAR instructions but the instructions used income tax concepts.

Under the Internal Revenue Manual, a US person is a citizen of the United States or a

“resident” of the United States. The Internal Revenue Manual takes the policy position

that the “plain meaning of the term ‘resident’ (in this context, someone who is living in

the United States and not planning to permanently leave the US) should be used for

FBAR examination purposes”. The FBAR regulations (Section 4.26.16.3.1.1) explicitly

will allow an individual to prove that he is not a resident for FBAR purposes based on


income tax criteria by proving: (i) that the person has not passed the” green card test”;

(ii) that the person is not a lawful permanent resident under the substantial presence

test; or (iii) that the person has not filed a first-year election on their income tax return

to be treated as a resident alien under IRC Section 7701(b)(u) for the entire calendar

year of their first year of residency.

As tax and financial professionals, the salient part of this definition to note is that

taking a treaty-based return position that the individual was not a resident of the United

States for treaty purposes does not allow the individual to avoid being a resident for

FBAR purposes. For example, a French citizen who passes the substantial presence test

with a residency start date of June 30, 2015 and who takes a treaty-based return

position that they are not a resident under the US-France Tax Treaty for 2015 must still

make an FBAR filing for the period after June 30, 2015 because s/he is considered a

resident under the substantial presence test applied by the IRM for FBAR purposes.

2. OVDP

Since 2009, the IRS Offshore Voluntary Disclosure Program has provided an

avenue for US citizens or lawful permanent residents (LPRs) who have defaulted on their

FBAR reporting and/or tax payment obligations to bring themselves into compliance in

exchange for reduced penalties. The most recent IRS explanation of the current program

can be found in IRS Notice IR-2014-73, June 18, 2014.2 This IRS document references the

various explanatory materials and forms needed to bring a client into this program.

This voluntary compliance program is doubtlessly useful for the client whose

failure to comply has been intentional, repeated, and has resulted in substantial tax


avoidance. For clients whose failures to report accounts are unintentional and whose

unpaid back taxes are rather small relative to their overall reported income, the cost in

professional fees, penalties, and interest under the voluntary compliance program is so

substantial that many such taxpayers elect to make a “quiet disclosure,” by simply filing

their back FBAR reports, back tax returns, and paying any tax, interest, and penalties

found due. In general, the open audit period for federal income taxes closes three years

after the later of the due date for the return or the actual filing of the tax return, when

an understatement of income is not more than 25%. As such, many taxpayers can file

late FBARs with an explanation showing that the failure was inadvertent and file federal

(and state) tax returns for all open years. So far, experience suggests that quiet

disclosures have not yet begun to draw the threatened audits that the Treasury and IRS

have announced in an attempt to push taxpayers into the streamlined offshore

compliance procedures. A “quiet disclosure” still appears to make sense when the

unreported income to be disclosed to IRS is rather small.

Before counseling a client on the consequences of a quiet disclosure, however,

the tax professional should notify the client in writing of the risks of prosecution and

penalties and compare them with the costs of the potentially more secure voluntary

disclosure program. The FBAR penalty for a willful failure to file is the greater of

$100,000 or 50% of the balance in the account at the time of the violation. IRS

examiners have discretion to reduce this ceiling. Penalty standards are found in the BSA

audit manual.3


3. FATCA

The Foreign Account Tax Compliance Act of 2010 (adopted as part of the HIRE

Act) has inaugurated a new era of international tax compliance throughout the world.

Under FATCA (IRS Sections 1471 to 1474), Foreign Financial Institutions (FFIs) and direct

reporting Non-US Non-Financial Entities (NFEEs) are required to identify and disclose

information regarding their account holders who are US citizens or LPRs. FFIs or direct

reporting NFEEs who fail to comply will become subject to a 30% withholding tax on

distributions by them of US-source income. To reduce a complicated topic to its simplest

expression, FFIs and NFEEs may avoid becoming subject to the 30% withholding rate by

being covered by compliance agreements with the Internal Revenue Service by which

FFIs and NFEEs agree to report to the Internal Revenue Service on income from accounts

owned by US citizens and US tax residents. Most of these agreements will take the form

of reciprocal Intergovernmental Agreements (IGAs).

Based on FATCA’s account reporting requirements, the IRS and other countries

are developing a global standard for the secure transmission of automatic exchange

data. The information exchange protocols are based on Model 1 or Model 2 IGAs.

Model 1 IGAs have been entered into with major developed countries (such as France,

Germany, Italy, Spain, and the United Kingdom) and all other countries that are willing

to participate in this model agreement. The Model 1 agreements provide for a

reporting of information by FFIs directly with their governments, which will then

transmit the information required under FATCA to the United States. Certain Model 1

IGAs are “reciprocal”, and require the United States to obtain information from US


financial institutions regarding accounts of residents of the FATCA partner. Reporting is

required only if the individual resident of the FATCA partner has an account in a US

financial institution that generates more than $10 of interest. Canada is a special case.

The IGA with Canada was broadened in 2014 to improve the transparency of

transactions between the two countries, which will be done by the adoption of

regulations and reciprocal agreements.

When the Model 1 agreements were being negotiated, Japan and Switzerland

indicated they preferred to have their foreign financial institutions report directly to the

Internal Revenue Service. As such, FFIs from these countries registered with the

Internal Revenue Service and exchange information directly. Bermuda is among those

countries that has decided to allow its financial institutions to directly register with the

Internal Revenue Service and provide the required information with regard to US

account holders.

While FATCA originally created controversy in the international financial world,

the European Union has been moving to impose a similar regime on its member states

and well-known offshore banking centers.

In the case of our hypothetical US citizen who has inherited a UK securities

account, the UK bank or financial firm holding the account commenced reporting the

income earned on such accounts for calendar year 2014 to the Internal Revenue Service.

As has notoriously been the case with Swiss banks, the UK institution likely will warn its

client of the fact that this reporting is being made. Such communications from foreign

banks may lead clients to contact you with questions about how to proceed to handle


past non-reporting of income. The task for the Vermont practitioner will be to

determine how to bring the individual into compliance before the Internal Revenue

Service contacts the taxpayer and commences an audit or other enforcement actions,

with the strong likelihood of FBAR penalties as discussed above, and possible criminal

prosecution. At a minimum, the IRS has the power to issue a proposed assessment

based upon a foreign-provided Form 1099 (which is what some UK banks are using) or

Form 8966 (which is the general FATCA report).

Please be aware that this explanation is greatly simplified. The instructions to the

2014 Form 8966 are a concise source of official information on how the reporting

system is designed to work in much more detail. As you will already be aware, if IRS

makes an adjustment (seeking income tax, interest, and penalties) from a taxpayer with

a Vermont address, periodic reports are then made by IRS to the Vermont Department

of Taxes.

4. PFICs

Passive Foreign Investment Companies were carved out of the forest of financial

products by the Tax Reform Act of 1986 and subjected to a strict compliance system

designed to collect tax at ordinary income rates. The definition of PFICs (found at IRC

section 1297) is technical, but they are most easily categorized as all non-US based

mutual funds. The ownership of such non-US mutual funds by US taxpayers is required

to be reported on IRS Form 8621, and the income from a PFIC is subject to a tax rate and

deemed interest charge that could well be higher than straightforward taxation of US


mutual fund income. In addition, a variety of rather complex elections must be made in

a timely manner or their benefits are lost.

In our experience, few Vermont tax accountants and return preparers are willing

to learn the complexities of PFIC reporting. Form 8621 has eleven pages of detailed

instructions on the eight elections that can be made and their reporting consequences.

The cost and complexity of PFIC reporting is not the only problem. An individual who

owns securities through a PFIC may well be taxed more severely in many cases than if

the stocks and bonds were owned directly by the individual. For example, PFIC rules can

make it difficult to obtain capital gains treatment for long-term capital gains that pass

through a PFIC.

Prior to FATCA, ownership of PFICs by US citizens and LPRs frequently was

ignored or simply reported using regular (non-PFIC) rules. With FATCA, the IRS will now

have foreign source reporting forms to set up automatic adjustments. Almost twenty

years after their creation, PFIC rules may now begin to really bite into a taxpayer’s

pocket bookif not in terms of tax payments, then at least in terms of compliance

costs.

5. FIRPTA, Etc.

The Foreign Investment in Real Property Tax Act created a new, rather well

understood, system for mandatory federal 10% withholding on real estate transactions

when the seller is a non-citizen non-resident of the United States. Vermont has a similar

regime for sales of Vermont real property by non-Vermont residents. A withholding

agent generally collects the FIRPTA and Vermont withholding. Internal Revenue Service


regulations (Treas. Reg. 1.1445-2(b)) exempt a closing agent from withholding liability if

the transferee (and by extension his lawyer or other agent) obtains a certificate of non-

foreign status from the seller of real property in the United States. If the transferee

relies on some other form of proof, then the transferee is subject to the withholding tax

if it is found due.

Many local practitioners seem to ignore the legal fact that their buyerand by

extension themselvesis best protected by obtaining and then maintaining for five

years the certificate of non-foreign status as a standard closing document. The “old

saw” in our law firm is that “it is amazing how well some Canadians speak American

English.” Vermont practitioners also should be aware that special withholding rules

apply to pass-thru entities (such as partnerships) with NRA partners. Partnerships with

NRAs are subject to more onerous withholding rules on income earned from real estate.

Instead of FIRPTA withholding, domestic partnerships with NRAs as partners are subject

to withholding at the partnership level at the highest federal tax rate, 39.6% for

individuals and 35% for corporations.

On the buying end of a US-foreign real estate transaction, the Vermont lawyer is

well advised to notify the acquiring NRA that the NRA will be subject to a mandatory 30

% withholding tax on gross rental income from the property unless an election to be

taxed on a “net basis” is made by a specific statement to this effect on the first year IRS

form 1040NR.4 Many Vermont real estate management and rental companies are not

aware that they are liable for the withholding tax if it is not paid by the NRA. To escape


personal liability, the Vermont rental agency should solicit proof from the NRA owning

the property that the “net basis” election has been made, such as IRS Form W-8ECI.

In terms of the NRA seller’s side of the transaction (as discussed below in more

detail), a Vermont tax practitioner may become aware of unreported US-source rental

income when the lawyer explains to the NRA the ability to file a request with the IRS and

Vermont for a reduced withholding payment on the sale. The form for the reduced

withholdings from sales proceeds asks specifically about past rental activities because

the depreciation deduction (whether taken or not) will reduce the real property’s tax

basis.

6. Withholding Tax on Rental Income; Net Income Election

Another issue tax practitioners might encounter involves responsibility for

withholding a percentage of the rental income from property owned by nonresident

aliens (NRAs). In general, the Internal Revenue Code imposes a withholding tax on

income from passive investments. An NRA who rents out his ski condominium to a US

citizen typically is in receipt of passive investment income. Unless a tax treaty applies

(which is rare to non-existent for this type of income), the tenant must withhold 30% of

each and every rental payment and pay it over to the US Treasury with a tax return.

In this circumstance, the IRS may look not only to the tenant or the NRA to

satisfy tax obligations, but also the rental agent or property manager. A real estate

agent, property management company, or even a friend who collects such income from

the renter and pays it over to the foreign national may well be a “withholding agent”


required to make this tax withholding. This is because the agent may be the last person

with control or receipt of the rental payment before the rent is paid to the foreign

person. A withholding agent is jointly and severally liable for the payment to the US

Treasury. Woe unto the real estate agent who must belatedly inform his/her client that,

by renting from a foreign person, s/he was incurring a 30% withholding liability to the

Treasury. The gross income and withheld taxes must be reported on IRS Form 1042-S

(“Foreign Persons U.S. Source Income Subject to Withholding”) to the IRS and the payee

by March 15 of the following calendar year. The payor must also submit Form 1042

(“Annual Withholding Tax Return for U.S. Source Income of Foreign Persons”), by March

15

A timely election to pay tax, not on the basis of gross rental income but on a net

income basis (hence, a “net income election”), may in some cases substantially reduce a

nonresident alien’s tax liability. Provided that the nonresident alien files a timely US

federal income tax return, the foreign individual can make a net income election for

his/her US rental income. In a “net income election,” the individual agrees to report all

of the rental income on a timely filed US income tax return and pay tax under normal

federal income tax rules for rental property. A net income election cannot be made on a

late-filed return, but a grace period may be available under some circumstances. The

explanation in Treas. Reg. 1.871-10 is rather clear.

A net income election can be very favorable. Instead of paying tax at 30% on the

gross rental income, the nonresident alien may elect to pay tax at regular federal rates

on rental income, net of depreciation, commissions, utilities, and other valid tax-


deductible expenses. Thus, it is very important that the foreign national be told of this

election for taxation on a net income basis. This is a use-it-or-lose-it rule. Many foreign

individuals fail to make a net income election because they are unaware of the election.

A foreign client might well have a valid expectation that a US real estate agent

who sold him/her real property in the US should be familiar with this rule and inform

the client of the option to avoid the 30% withholding tax. Avoid the headaches of such a

potential perceived omission by spotting this issue and alerting your clients in advance,

or urging them to seek professional legal or accountancy advice. Although there is not

much federal audit activity on this issue, the state of Vermont could get interested in

the revenue lost by adding this issue when auditing rental agencies for meals and rooms

tax purposes.

7. NRA Closer Connection Test

If you think about it from a layman’s point of view, the term non-resident alien is

rather suggestive of a science fiction creature, so we tend to use the terms “non-

resident” or “NRA” with our clients. Most lawyers and Vermont real estate agents know

that, for federal tax purposes, if an individual is physically present in the United States

for 183 days or more, he or she becomes a US tax resident. What is not well known is

that this “days of presence” calculation takes into consideration one-third of the days of

US presence in the prior year for which the measurement is made and one-sixth of the

days of presence in the second prior year. Therefore, non-US citizen individuals can

become US tax residents if they are present in the United States more than 122 days


each year over a three year period. Having a tax residence in the US can be very

significant because US tax residents are taxed here on their worldwide income.

What is even less well known is that, under federal domestic tax law, an

individual who becomes a US tax resident as a result of this particular counting rule can

claim a “closer connection” to a foreign state so as to avoid worldwide taxation here,

provided that their period of presence in the United States is less than 183 days.5 The

claim to a closer connection to another country is made on IRS Form 8840. This should

be of particular interest to Canadian “snowbirds,” who are Canadians known to cross

the US border sometime in November, not returning to Canada until sometime in May.

If Canadian snowbirds spend 150 days a year in the United States in 2013, 2014, and

2015, they are certainly tax residents of the United States in 2015 under the days of

physical presence count [150 + (150/3) + (150/6) = 225]. In those situations, the

Canadian snowbirds will have to file a timely IRS Form 8840 to avoid becoming liable for

US tax on their worldwide incomedespite the fact that Canada will also be looking for

a tax return on the basis that the snowbird remained a Canadian resident.

At the deepest level of obscure knowledge in this area, the “tiebreaker rules” in

US tax treaties may offer a separate escape hatch for Canadian snowbirds (and other

NRAs protected by a tax treaty) who may be present in the US for more than 183 days in

the calendar year. Under the model US Income Tax Treaty (latest version issued

November 15, 2006,6 if an individual is a resident of both the US and the treaty partner,

NRAs can claim that they are solely a resident of the foreign treaty partner because their

“center of vital interest” is located in the foreign country. The US-Canada treaty contains


such a provision. This Article 4 tiebreaker is designed to prevent double taxation when

our Canadian snowbird becomes a US tax resident under the days of physical presence

test. To take a treaty-based tax return position, however, the Canadian snowbird or

other NRA will be required to file IRS Form 8833. Form 8833 cannot be filed by

individuals who are not protected by general income tax treaties, such as individuals

from Bermuda, the Bahamas, etc.

To summarize, NRAs who spend under 183 days in the United States may file

Form 8840 to claim a closer connection to a foreign country regardless of the existence

of a tax treaty, and NRAs who spend more than 183 days in the United States and who

qualify for treaty protection can file IRS Form 8833 to claim a treaty-based return

position that takes them out of the US taxing jurisdiction.

8. SBJPA; Foreign Gifts and Trusts

There is folklore that the foreign trust rules in the Small Business Job Protection

Act of 1996 were passed after President Bill Clinton discovered that Ross Perot owned

property in Bermuda through an offshore grantor trust settled by a Bermuda trustee.

Whether this story is true or not, the foreign trust taxation rules in the SBJPA were

intended to prevent tax avoidance through the use of foreign trusts, in particular by

using the domestic tax rule that the grantor of a US grantor trust is taxed on the income

from the trust. The particular rules are complex, but suffice it to say that to prevent tax

avoidance that formerly was possible by having the nominal grantor of a foreign trust

being a foreign trustee, the Act imposes a broad network of reporting requirements


when the beneficiaries of a foreign trust are US tax residents. The rules impose harsh

penalties for those who fail to comply with these requirements.

Given Vermont’s demographics, it is entirely possible that you will be contacted

by a son or daughter who is the beneficiary of a trust established by a foreign parent

with regard to what the reporting rules might be for such individuals. In our experience,

many citizens of the UK, Australia, New Zealand, Bermuda, and the Bahamas with

substantial net worth and residing in Vermont are the known beneficiaries of offshore

Anglo-Saxon trusts. Given how some Anglo-Saxon trusts are settled, the client may not

even know that he or she is the beneficiary of the trust.

The manner in which US income tax is imposed on the US beneficiary of a foreign

trust is quite complex. Because of the imposition of the “throwback” rules, plus a

deemed interest charge, the tax on foreign trust income can be substantially higher than

US income tax on the same dollar distribution from a domestic trust. The penalties for a

failure to report such income can be sufficiently stiff that the tax and penalties could

absorb almost the entire trust distribution.

It bears mentioning that foreign trust reporting rules need to be considered

when establishing an estate plan for a Vermont couple, one of whom is not a citizen of

the United States. A standard device used to take advantage of the marital deduction is

the QDOT, discussed below.

IRS Form 3520 is required from any US person who receives more than $100,000

in any given calendar year from a non-resident alien individual or foreign estate. The

Form 3520 also must be filed if a US person receives more than $15,102 from a foreign


corporation or a foreign partnership that is treated as a gift. The penalty for failure to

file the Form 3520 is equal to the greater of $10,000 or 35% of the value of the property

transferred. As such, it is best to fill out this form and send it to IRS if the transaction is

even colorably covered by the filing requirement.

As with the FBAR, a claim for treaty protection against US tax residency rules will

not affect the requirement to make these filing if the person is a resident under US

domestic law.

9. QDOTs and the Gift Tax Marital Deduction

As the narrative goes in Washington, when the US Congress was trying to raise

revenue for one of its spending bills in 1988, it decided that it could get a good revenue

score by denying a marital deduction to US resident individuals who were not US

citizens. To avoid a treaty claim that the denial was discriminatory, the deduction was

granted if the marital transfer was made to a Qualifying Domestic Trust (QDOT). The

logic for giving the QDOT measure a high revenue score was that US residents who were

not US citizens could receive property at death or by gift from his US citizen spouse

without gift or estate tax and then leave the country. The unlimited marital deduction

for non-citizen spouses was perceived to deny the US Treasury the ability to impose its

estate or gift tax on such transfers of wealth. International tax practitioners will be

aware that the US Congress then proceeded to impose an estate and gift exit tax, which

is discussed below, so the QDOT measure may be overkill. In any case, Vermont

practitioners should be aware that federal and presumably Vermont law (under the

federal/state estate tax conformity rule, 32 VSA §7475) deny an unlimited estate tax


marital deduction for a transfer of wealth from a US citizen spouse to a non-citizen

spouse unless the marital transfer is structured as a QDOT. A QDOT is a trust that is

designed to capture subsequent principal distributions from the QDOT to the non-US-

citizen surviving spouse and make them subject to the federal estate tax. Because a

QDOT could become subject to some of the foreign trust reporting rules of the SBJPA,

drafters should be aware of foreign trust reporting rules when deciding how to settle

such a trust.

For federal gift tax purposes, Vermont practitioners should be aware that the

normal unlimited gift tax marital deduction is replaced by a $147,000 per calendar year

(2015) limit on such lifetime transfers. This annual limit is adjusted for inflation. Under

these rules, transfers of property from a US citizen spouse to a non-citizen spouse for

estate planning purposes will trigger a federal gift tax if the value received by the non-

US citizen spouse exceeds $147,000. A special rule applies to spousal joint tenancies: no

gift results upon creation, but on the death of the US citizen spouse, the entire value is

deemed to pass to the non-citizen spouse. This transaction may go unnoticed for a

considerable period, and the transaction may unravel at the point at which the Form

706 is audited by Vermont or the federal government. Indeed, there may be an inchoate

estate tax lien on the real property to cover the collection of the federal or Vermont

estate tax that was not paid upon the transfer.

10. Estate Tax Exemption

Vermonter tax professionals with NRAs as clients should be aware that the

Internal Revenue Code provides for only a $60,000 estate tax exemption in the absence


of a bilateral estate tax treaty. The majority of countries in the world do not have

bilateral estate tax treaties with the United States, and such treaties generally exist only

with our major trading partners, Canada, France, Italy, Germany, etc. Each treaty needs

to be examined to decide to what extent the US will accord a larger estate tax deduction

than the $60,000 provided for by the Internal Revenue Code. For this reason, the

Vermont real estate attorney who handles the acquisition of real property for an NRA

should flag this issue for the acquirer. The standard solution to a $60,000 exclusion is to

acquire the property in a foreign corporation because the transfer at death of stock in a

foreign corporation by an NRA is not subject to the US estate tax because such stock is

intangible personal property and therefore exempt. In some cases, however, the

anticipated appreciation in the property’s value (which would be taxed as corporate

income) could be more expensive than the risk of estate tax at death.

It bears mentioning that the definition of “resident” for estate and gift tax

purposes is not synonymous with the income tax definition. In addition, the estate tax

treaty tie breaker rule may require more years of residence to use the tax treaty’s

protective rules. For example, a French LPR could die within three years of establishing

residence in the US but still be subject to French succession duties because a five-out-of-

seven year tiebreaker rule could apply.7

11. Exit Tax

As is discussed in much more detail in an article on our firm website,8 IRC

Sections 877 and 887A impose an exit tax on “covered expatriates.” An LPR who gives

up his or her “green card” (properly termed USCIS Form I-551) by filing USCIS form I-407


is a covered expatriate if he or she was a long-term permanent resident, meaning that

prior to the date of expatriation the NRA was an LPR during at least eight of the last

fifteen years. A US citizen who renounces his US nationality is a covered expatriate in all

cases. Fortunately, the exit tax is designed to reach only those individuals with earnings

and net worth sufficient to allow them to engage your services to plan for this tax. The

exit tax is imposed if the departing individual (i) has an annual tax liability of about

$152,000 (2014 figures) for the five years preceding the date of expatriation, (ii) has

over $2 million in net worth, or (iii) fails to certify that he or she has complied with all US

federal tax obligations in the preceding five years.

We have been asked to handle a few expatriation cases and plan for this tax

regime. For example, many UK, French, German, or Bermudian university students

achieved US citizenship at their birth in the home country because they had a US citizen

parent. It is not unrealistic that to assume that no one in their home country has

informed them of their US income tax obligations, and they have often failed to file any

income tax returns on their worldwide income despite working abroad. Some may

discover this lapse when they are hired for a financial service job that requires their tax

returns be prepared by a US accounting firm, which then notices their US citizenship. If

this individual then files I-407 at the US consulate to renounce US citizenship, the exit

tax nevertheless applies due to the simple fact of their previous non-compliance.

12. Investment Survey, Agricultural Land Reporting

The 1976 International Investment Survey Act authorized the US government to

engage in a foreign direct investment survey. Foreign direct investment (FDI) reporting


was suspended in 2009 but reinstated by a Bureau of Economic Affairs Notice dated

November 26, 2014. This reporting requirement applies to a variety of FDIs

(acquisitions, investments, expansions). BE-13 forms are used for this report, which

exact form to use depending on the type of FDI. For example, BE-13A is used for an

acquisition. The purpose of this law is to collect information, but the penalty for a failure

to file is not less than $2,500 nor more than $32,500. This declaration must be made by

any business located in the United States when a foreign person owns or acquires at

least 10% of the voting rights in the enterprise, whether directly or indirectly, and the

total cost of the acquisition is more than $3 million.

The Agricultural Foreign Investment Disclosure Act of 1978 imposes a similar

reporting obligation on any person who acquires, sells, or holds, directly or indirectly,

agricultural land in the United States. The declaration is made on Form FSA-153, which is

sent to the Department of Agriculture’s Farm Services Agency. The triggers should be

examined by the Vermont attorney for the buyer whenever a foreign person acquires

Vermont land. For example, the form must be filed when an acquisition is made of more

than ten acres of land, within ninety days following the conclusion of the transaction

As is frequently the case in the international arena, the penalty is vastly

disproportionate to the objects sought to be attained by the legislation. The civil penalty

cannot exceed 25% of the fair market value of the land acquired on the date that the

penalty is imposed.9


13. Ownership in Foreign Corporations and Partnerships

It bears mentioning that the Internal Revenue Code contains a variety of foreign

disclosure provisions that could apply to your Vermont clients.

IRS Form 5472 must be filed by a US taxpayer that acquires or holds an interest

in a foreign company. A US person who owns 10% or more of the total value or

combined voting power of all classes of stock in a foreign corporation is required to

make an annual report on IRS Form 5471. A $10,000 penalty applies per year and per

corporation for a failure to timely file the IRS Form 5471.

IRS Form 8865 must be filed by four categories of US partners of foreign

partnership entities. Category 1 filers are those with a controlling interest in a foreign

partnership, generally measured by a 50% capital or profits interest in the partnership.

Category 2 filers own at least 10% of the capital or profits of a foreign partnership 50%

of whose capital or profits interests are held by US persons whom themselves are

category 2 filers. Category 3 filers are US persons who contributed a triggering amount

of property to the foreign partnership during the tax year. Category 4 filers had

“reportable events” during the tax year, such as a disposition of the partnership

interest. A $10,000 penalty is imposed for each tax year of each foreign partnership for

failure to furnish the required information within the time prescribed. If the information

is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S.

person, an additional $10,000 penalty (per foreign partnership) is charged for each 30-

day period, or fraction thereof, during which the failure continues after the 90-day


period has expired. The additional penalty is limited to a maximum of $50,000 for each

failure.

The entity selection rules are more complex in the international area. For

example, US tax payers (and by extension their advisors) may find that the foreign LLC

that they own is deemed to be a corporation under the “check the box” regulations in

the absence of an affirmative filing. It behooves the tax professional to check the list of

foreign entities that are deemed to be corporations contained in the Treasure

Regulations. Per se corporations are defined in Reg. 301.7701-2(b) and a list is provided

in Reg. 301.7701-2(b)(8).

14. Conclusion; US As Tax Haven

As you can gather from the above, the world’s taxing jurisdictions are becoming

more transparent in terms of the exchange of tax information. Lest you think that the

United States is a paragon of virtue when it comes to transparency, likely the contrary is

true. The Tax Justice Network, an NGO that looks at financial transparency and

information sharing in more than ninety countries, rates the United States as No. 3 on

its list of countries that are least transparent (above Singapore and Cayman). Despite

the fact that the United States has legislated, regulated, cajoled, and coerced other

countries to become more transparent, the United States is the third most secretive

jurisdiction (Hong Kong and Switzerland being No. 1 and 2 most secretive). The most

damning conclusion of the Tax Justice Network is that, “the United States is the

jurisdiction of greatest concern, having made few concessions and posing serious

threats to emerging transparency initiatives”. 10 While the United States Internal


Revenue Service is very demanding of foreign financial information, the IRS does not

supply to foreign tax administrations as much data as it demands.

1 IRM § 8.11.6.1.2 (02-02-2015). 2 Available at http://www.irs.gov/uac/Newsroom/IRS-Makes-Changes-to-Offshore-Programs;-Revisions-

Ease-Burden-and-Help-More-Taxpayers-Come-into-Compliance. 3 IRM 4.26.16. 4 Treas. Reg. 1.871-10. 5 Treas. Reg. 301.7701(b)-8. 6 Available at www.irs.gov, Article 4 (“Resident”). 7 See US-France Estate and Gift Tax Treaty, Article 4(3)(b)(i), http://franceintheus.org/IMG/pdf/french_us_ estate_tax_treaty.pdf. 8 “US Imposes Mark-to-Market Exit Tax,” at http://www.kenlanlaw.com/us-imposes-mark-to-market-exit-tax.html. 9 7 C.F.R. §781.4(b)(2). 10 Press Release, Tax Justice Network, November 2, 2015, p. 2.


http://www.irs.gov/

NOTES


SESSION 4

VERMONT TAX COMMISSIONERS UPDATE



NOTES


SESSION 5

STATE AND FEDERAL TAX UPDATES


Molly Bachman, Vermont Department of Taxes

John F. Darcy, MBA, CPA, Grippin, Donlan, Pinkham


Table of Contents

I. Tax Legislation Signed into Law ........................................................................................... 3

II. Tax Legislation with Significant Action, Not Yet Signed into Law ........................................ 9

III. Significant Proposals or Activity of Note ............................................................................... 23


I. Tax Legislation Signed into Law:

November 30, 2014 - October 1, 2015

H.R. 3614: Airport and Airway Extension Act of 2015

On September 30, 2015, President Obama signed H.R. 3614, the “Airport and Airway Extension Act of 2015.” With the president’s signature, certain taxes (and the related tax rates) dedicated to the airport and airway trust fund were extendedthrough March 31, 2016. These include:

The imposition of tax at an increased rate on certain removals, entries, andsales of aviation gasoline and kerosene used in noncommercial aviation

The tax on amounts paid for taxable transportation of persons by air The tax on amounts paid for taxable transportation of property by air The exemption for aircraft in fractional ownership aircraft programs

H.R. 719 - Continuing Appropriations Act, 2016; Internet Tax Freedom Act

On September 30, 2015, President Obama signed into law the ContinuingAppropriations Act, 2016. The bill provides a continuing resolution to fund thegovernment through December 11, 2015. Attached to the continuing resolution,Congress extended the Internet Tax Freedom Act until December 11, 2015 aswell.

The Internet Tax Freedom Act prevents state and local governments from taxinginternet access, or imposing multiple or discriminatory taxes on electroniccommerce. States and localities that had imposed and enforced taxes on internetaccess prior to October 1, 1998, may continue to do so under “grandfather provisions” (seven states impose tax on internet access). With this most recentextension, the original three-year moratorium enacted in 1998 will have beenextended a total of six times (including temporary extensions).


H.R. 3236: Surface Transportation and Veterans Health Care Choice Improvement Act of 2015

On July 31, 2015, President Obama signed H.R. 3236, Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.

H.R. 3236 provides funding and authorizes spending with respect to the highwaytrust fund through October 29, 2015. The bill includes a number of tax-relatedprovisions, as well as measures concerning Transportation SecurityAdministration (TSA) fees and veterans’ health issues.

(Text of the legislation H.R. 3236)

The bill contains provisions to raise approximately $5 billion in revenue to offsetthe cost of the additional months of spending for surface transportation. Further, itincludes tax provisions relating to (1) liquefied natural gas (LNG) and liquefiedpetroleum gas (LPG) and (2) health care of veterans.

(Joint Committee on Taxation’s revenue table for the bill).

Revenue provisions

Tax-filing deadlines - The bill generally modifies the schedule for filing taxreturns to: (1) March 15 (or two and a half months after the close of the taxyear) for partnerships; and (2) April 15 (or three and a half months after theclose of the tax year) for C corporations.In addition, the bill would direct the Secretary of Treasury to modify therules governing extensions for returns for partnerships, trusts, employeebenefit plans, tax exempt organizations, and others. The bill would alsomodify the automatic extension of filing deadlines for C corporations. Thebill also includes special rules for certain fiscal year filers. These changesgenerally apply to returns filed for tax years beginning after 2016.

Basis reported by estates - The bill requires estates with positive estatetax liability to report to both the IRS and the appropriate heirs the value, onthe owner’s death, of bequeathed property. This is intended to allow theIRS to track the basis of the inherited property more easily.

Mortgage reporting - The bill requires lenders to expand Form 1098reporting to include: (1) the origination date, (2) outstanding principal, and(3) the property address that relate to the reported mortgage interestexpense.

Statute of limitations in instances of overstatement of basis - The billprovides that an overstatement of basis is an omission of gross income forpurposes of determining whether a substantial income omission was madeon the return. Thus, an overstatement of basis that contributes to asubstantial understatement of income could trigger the extended six-yearstatute of limitation.


https://www.congress.gov/114/bills/hr3236/BILLS-114hr3236ih.pdf

https://www.jct.gov/publications.html?func=startdown&id=4804

Transfer of excess pension assets to retiree health accounts - The billextends the ability of employers to transfer excess defined benefit planassets to retiree medical accounts and retiree group-term life insurancethrough 2025. Originally enacted in 2012, the underlying provision wouldhave expired on December 31, 2021.

TSA fees - The bill makes certain budget accounting changes regardingTSA fees. The provision would not change the TSA fees paid by airlines orpassengers but would only address the budgetary treatment of the fees.

Other Changes to the Code

In addition to these revenue offsets, the bill makes the following modifications tothe Internal Revenue Code:

Decreases the excise tax on LNG and LPG to 14.1 cents per gallon (downfrom 24.3 cents) and 13.2 cents per gallon (down from 18.3 cents),respectively, for sales or use of fuel after December 31, 2015

Clarifies that, for purposes of the large employer test for the EmployerHealth Insurance Mandate, an employee would not be taken into accountduring any month for which he or she receives health coverage underTRICARE or a Veterans Administration program

Clarifies that the receipt of services from the Veterans Administration for aservice connected disability would not solely disqualify an individual fromeligibility to participate in a Health Savings Account

Observation:

With this short-term extension of the Highway Trust Fund, House leaders—particularly Ways and Means Chairman Ryan—have sought to use theopportunity created by a need to readdress highway funding again this fall topotentially develop and enact major modifications to the international provisions ofthe Internal Revenue Code. By tying together the need for additional governmentrevenue to fund highway spending with significant international tax modernizationthat could generate one-time tax revenues (such as through a tax imposed onuntaxed accumulated foreign earnings of U.S. multinational corporations—“deemed repatriation”), some members may hope to generate additional support for enacting some form of international tax modernization in 2015.

Trade Preferences Extension Act of 2015

On June 26, 2015, the President signed into law H.R. 1295, the Trade Preferences Extension Act of 2015. The legislation addresses a number of tradeitems scheduled to expire. The legislation also includes a number of tax-relatedprovisions as revenue offsets, including:


Significant increases (in many cases, doubling or tripling) in penalties forfailure to file correct information returns under section 6721

Significant increases (in many cases, doubling or tripling) in penalties forfailure to furnish correct payee statements under section 6722

Modifications to the due dates of some corporate estimated tax paymentsdue in 2020

A requirement that taxpayers claiming the American Opportunity, HopeScholarship, and Lifetime Learning education credits or deductions forQualified Tuition and related expenses receive a statement provided by theeducational institution regarding qualified expenses in order to claim thetax benefits

A new provision excluding taxpayers taking advantage of the section 911exclusions from claiming a refundable child tax credit

In addition, the bill included an extension through 2019 of the section 35 healthcoverage credit provided for recipients of a trade readjustment allowance andmade various modifications to the program, largely related to coordination with theAffordable Care Act.

H.R. 5771, Tax Increase Prevention Act of 2014

On December 19, 2014, President Obama signed H.R. 5771, Tax Increase Prevention Act of 2014.

(Text of the legislation H.R. 5771)

The bill retroactively extended most of the provisions that had expired at the endof 2013—the “tax extenders”—for one year, until the end of 2014.

The law also included measures allowing certain disabled individuals to set upsection 529 savings accounts, under provisions of the Achieving a Better Life Experience (ABLE) Act of 2014.

In addition, the law (1) increased the threshold amount for refunds requiring JointCommittee on Taxation review and approval for C corporations from $2 million to$5 million, (2) contained technical corrections, and (3) repealed certain“deadwood” provisions.

The law included several revenue raisers (which, along with other non-taxprovisions, offset the cost of the ABLE provisions).


https://www.congress.gov/113/bills/hr5771/BILLS-113hr5771enr.pdf

Tax extenders

The legislation extended most (but not all) of the provisions that expired at theend of 2013 (or during 2014) retroactively through December 31, 2014,* including:

Research and experimentation tax credit New markets tax credit Exception under subpart F for active financing income Look-through treatment of payments between related CFCs Bonus depreciation Increased expensing under section 179 15-year straight-line cost recovery for certain qualified property and

improvements 5-year section 1374 built-in gains tax recognition period Basis adjustment to stock of S corporations making charitable contributions

of property Various energy credits, including the renewable energy production tax

credit (PTC) Exclusion of gain on qualified small business stock Parity for employer-provided mass transit and parking benefits Deduction for state and local general sales taxes Special rules for contributions of capital gain real property made for

conservation purposes Enhanced charitable deduction for contributions of food inventory Tax-free distributions from individual retirement accounts (IRAs) directly to

certain charities

*See text of the law for precise dates through which particular provisions areextended and for a complete list of extended provisions.

The legislation did not extend the following expired provisions:

Credit for health insurance costs of eligible individuals (section 35(a)) Credit for two- or three-wheeled plug-in electric vehicles (section 30D(g)) Credit for energy efficient appliances (section 45M) Placed-in-service date for partial expensing of certain refinery property

(section 179C(c)(1))

It also did not address the alternative motor vehicle credit for qualified fuel cellmotor vehicles (section 30B(k)), which is scheduled to expire at the end of 2014.

ABLE provisions

The ABLE provisions in the new law allow states to set up ABLE programs underwhich section 529 savings accounts could be opened for certain individuals whobecame severely disabled prior to reaching age 26. The accounts generally may


be funded with annual contributions up to the gift tax exclusion amount.

Contributions are not deductible, but distributions for qualified expenses are nottaxable (including portions attributable to investment earnings). Distributions fromearnings used for non-qualified expenses, however, are taxable and subject to apenalty (unless distributed due to the death of the individual). Funds in, ordistributions from, the account may not be used in determining eligibility forcertain other means tested federal assistance programs.

With some exceptions, the ABLE provisions generally are effective for tax yearsbeginning after December 31, 2014.

Revenue offsets

Revenue offsets for the ABLE provisions included provisions that:

Increased the inland waterways trust fund financing rate on fuel used incommercial transportation on inland waterways (section 4042(b)(2)(A))from 20 cents per gallon to 29 cents per gallon, effective for fuel used afterMarch 31, 2015.

Indexed for inflation the amounts of certain civil penalties (including civilpenalties for failing to file returns and statements), effective for returnsrequired to be filed after December 31, 2014.

Allowed the rate of continuous levies under section 6331(h) to be up to30% of specified payments due to the taxpayer in the case of certainMedicare providers or suppliers, effective for payments made after 180days after date of enactment.

Excluded dividends received from certain foreign subsidiaries from theadditional 20% tax on personal holding company income, effective for taxyears ending on or after the date of enactment.

Allowed the IRS to certify professional employer organizations (PEOs) thatwould become solely liable for their customers’ employment taxes, withannual certification fees not to be more than $1,000. Certified PEOs wouldhave to satisfy various requirements, including posting a bond,independent financial review, and reporting obligations. This provisiongenerally is effective for wages for services performed on or after January1 of the first calendar year beginning more than 12 months after the date ofenactment.


II. Items With Significant Legislative Action,Not Yet Signed Into Law:

November 30, 2014 – October 1, 2015

Health Care-Related Provisions

On September 29, 2o15, the House Ways and Means Committee approvedlegislation by a 23-14 party-line vote that would repeal portions of the AffordableCare Act (sometimes referred to as “Obamacare”) including:

The individual and employer mandates The 2.3% medical device excise tax The so-called “Cadillac tax” on certain employer-provided health benefits Certain health benefit related reporting requirements

This legislation is part of a reconciliation process authorized in S. Con. Res. 11(the FY 2016 budget).

The legislation is expected to be combined with legislation under considerationby other House committees to form one package to later be considered by thefull House. Once the House passes the legislation and sends it to the Senatefor consideration, special procedural protections referred to as “reconciliation” are expected to apply in the Senate. Among those protections are rules limitingthe ability of senators to filibuster the legislation. As a result, the legislationcould be approved by the Senate with 51 votes—rather than the 60 votes oftenneeded to end filibusters initiated in opposition to controversial legislation.

In connection with an earlier House effort to repeal “Obamacare,” the White House indicated that the president would veto such legislation if it were to reachhis desk. Read a February 2015 Statement of Administration Policy

H.R. 2061: Equitable Access to Care and Health Act

The House on September 28, 2015, passed by voice vote, H.R. 2061, a bill"...to amend section 5000A of the Internal Revenue Code of 1986 to provide anadditional religious exemption from the individual health coverage mandate, andfor other purposes." The Senate has not scheduled action on H.R. 2061.


https://www.whitehouse.gov/sites/default/files/omb/legislative/sap/114/saphr596r_20150202.pdf

http://clerk.house.gov/floorsummary/bill-information.aspx?cong=114&num=202061

H.R. 22: Developing a Reliable and Innovative Vision for the Economy Act (Senate highway bill)

On July 30, 2015, the Senate approved a bill to fund and authorize highway andinfrastructure spending.

The bill—Developing a Reliable and Innovative Vision for the Economy Act or“DRIVE Act’’—would, as currently drafted, extend authorization for spendingfrom the highway trust fund and other related funds through 2021.

Tax provisions

The Senate bill contains tax and spending provisions to offset a portion of thecost of the highway and infrastructure expenditures.

In addition to extending through 2023 of a variety of highway-related taxes—such as the taxes imposed upon gasoline, diesel fuel and kerosene, certaintires, and heavy trucks and trailers—the Senate bill also contains taxenforcement provisions.

This version of the Senate highway bill varies significantly from the billPresident Obama signed into law (H.R. 3236, Surface Transportation and Veterans Health Care Choice Improvement Act of 2015) in a number of ways,including that H.R. 3236 only authorizes highway trust fund spending throughDecember 18, 2015.

Other provisions included in the Senate bill are measures that would:

Create a “special compliance personnel program account” to fund thehiring and training of additional IRS collections personnel

Authorize the revocation or denial of passports to certain individualswithout social security numbers or with delinquent tax debts in excessof $50,000

Require the Treasury Department to contract with qualified taxcollection agencies for the collection of certain outstanding inactivetax receivables

Provide for an annual adjustment of certain customs users fees forinflation, using a consumer price index calculation

Observation

It is possible, once current highway funding expires in December, Congress willreturn to the DRIVE Act to provide a long-term funding solution for the HighwayTrust Fund.


S. 946: Tax Relief Extension Act of 2015

On July 21, 2015, the Senate Finance Committee reported a bill to extend apackage of over 50 tax provisions that expired at the end of 2014—the “expired provisions.” The bill passed on a bi-partisan basis (23-3), with most of themembers of the Finance Committee voting in favor.

Generally, the bill would extend expired provisions for two years—retroactivelyfrom January 1, 2015, through December 31, 2016. The bill also includesmodifications to some of the expired provisions, as well as a few revenueraising provisions.

Expired provisions that would be extended

The bill addresses substantially the same expired provisions that Congressextended through 2014 in late December of that year. Thus, for example, thebill generally would extend through 2016 the following (among other) provisions:

Bonus depreciation The research credit The exception under subpart F for active financing income Look-through treatment of payments between related controlled foreign

corporations (CFCs) under foreign personal holding company incomerules

Reduced recognition period for S corporation “built-in gains” tax Basis adjustment to stock of S corporations making charitable

contributions of property Increased expensing

In addition, the bill would reinstate a 10% credit for the purchase of electricmotorcycles in 2015 and 2016. The credit, which is capped at $2,500 perqualifying vehicle, was in place prior to 2014, but was allowed to expire onDecember 31, 2013. The credit passed by the Finance Committee would applyonly to two-wheel, not three-wheel, electric vehicles.

Modifications and amendments

The chairman’s original mark of the bill included certain modifications to severalof the underlying provisions being extended (as compared to current law).These modifications that were approved by the Committee include provisionsthat would:

Allow qualified small businesses to elect to apply some of the researchcredit against payroll tax liability and to treat the research credit of eligiblesmall businesses as a specified credit (allowable against alternativeminimum tax)


Increase the total New Markets Tax Credit allocation for calendar years2015 and 2016

Provide a 4% minimum low-income housing tax credit rate for non-federally subsidized existing housing

Expand the exclusion for employer reimbursements of qualified bicyclecommuting expenses to cover certain bicycle-sharing program expenses

Make the employer wage credit for employees who are activated reservemembers of the uniformed services available to all employers (regardlessof size) and increase the credit rate

Expand the work opportunity tax credit (WOTC) to include new hires whohave exhausted unemployment benefits

Index section 179 expensing and phase-out limitations for inflation Extend the credit for nonbusiness energy property to include certain

“Energy Star” roof products and installation costs and to modify efficiencystandards

Allow tribal governments and certain non-profits to allocate the energyefficient commercial buildings deduction to the person primarilyresponsible for designing the property, in the same manner as allowedfor public property

Allow taxpayers to annually elect out of section 168(j) on a class-by-classbasis for certain Indian reservation property

Reduce the private business contribution requirement for qualified zoneacademy bonds

Expand section 181 expensing rules to include qualified live theatricalproductions

Index the teacher expense deduction for inflation and allow teacherprofessional development expenses to qualify

Make changes to railroad track maintenance credit program

The Finance Committee also approved two amendments by voice vote duringthe markup.

One amendment would convert the biodiesel fuels credit from a mixture creditto a $1-dollar-per-gallon production credit beginning January 1, 2016, for fuelproduced by the taxpayer in the United States. An eligible discretionary blenderalso could claim the $1-per-gallon-mixture credit if given appropriatedocumentation by a biodiesel producer indicating that it would forego theproduction credit. Biodiesel also would be treated as a taxable fuel in 2016, withthe excise tax paid by the taxpayer eligible to elect the credit. Other specialrules also would apply.

The second amendment would “refine” the provision for excluding from income the discharge of qualified principal residence indebtedness by providing thatmortgage debt discharged would be eligible for the exclusion as long as it waspursuant to an arrangement entered into and evidenced in writing beforeJanuary 1, 2017.


Revenue raisers

The bill would not offset the costs of extending expired provisions. However,the chairman’s mark includes three provisions that would offset the costs of modifications to the expired provisions. These provisions would:

Modify mortgage information reporting requirements to includeoutstanding principal, address of secured property, and loan originationdate

Change tax rates, alternative fuel excise tax credits, and outlay paymentprovisions for liquefied natural gas (LNG) and liquefied petroleum gas(LPG)

Provide for eligible non-corporate recipients of certain clean coal powergrants the ability to exclude such grants from income and reduce basis ofdepreciable property, subject to one-time upfront payment to federalgovernment

Because the first provision above (mortgage reporting) was included in thehighway funding bill that was signed into law in July 2015, it is no longeravailable as a revenue offset.

Provisions expiring in 2015 not addressed in extenders bill

Although over 50 provisions expired at the end of 2014, a handful of provisionsare currently scheduled to expire during 2015. The bill as passed by theFinance Committee does not address the provisions that are scheduled toexpire during 2015, relating to the following:

Multi-employer pension plan funding rules that allow such plans to takeadditional time to amortize unfunded liabilities (currently applicable forapplications submitted on or before December 31, 2015)

Special rules for three categories of severely unfunded multi-employerplans and allowance of certain multi-employer plans to start or stop usingthe shortfall funding method without Treasury approval (currentlygenerally applicable for plan years through December 31, 2015)

Sense of the Senate regarding tax reform

The bill also expresses the sense of the Senate that: (1) Congress shouldpursue comprehensive tax reform that eliminates temporary provisions from theCode and instead makes meritorious provisions permanent and allows others toexpire; and (2) a major focus of such reform should be fostering economicgrowth and lowering tax rates by broadening the tax base.


Documents and resources

The Joint Committee on Taxation (JCT) prepared the following documents withrespect to the mark up of the extenders bill by the Finance Committee:

JCT descriptions of the chairman’s mark [PDF 301 KB} and of thechairman’s modification of the mark [PDF 61 KB] for the tax extenders bill

JCT revenue estimates—chairman’s mark revenue estimate [PDF 29 KB]and chairman’s modification to the mark revenue estimate [PDF 34 KB]

The Finance Committee also provided summary descriptions of the provisionsin the extenders bill on the Finance website.

(See also, chart that lists the provisions that expired at the end of 2014, as wellas those that will expire during 2015.)

Observation

In his opening statement, Chairman Hatch spoke in favor of making a numberof the expired provisions permanent law.

… I believe we should be working to make a number of these tax extender provisions permanent. The House has passed several bills that would do just that, and I think there are enough votes here in the Senate to do the same, at least with regard to some of the more important provisions.

While this would suggest that Hatch may agree with the House in exploringpermanence for a number of extenders, he was less clear as to how or whenthat process might begin. Thus, the status of the expired provisions is largely inthe same place as it was last year, at this time. Last year (in April 2014), theSenate Finance Committee marked up a two-year, retroactive, extension ofalmost all of the expired provisions The House, however, took the sameapproach it is taking this year by passing legislation to make several expiredprovisions permanent. As noted above, in the Tax Increase Prevention Act enacted in December 2014, the House and Senate agreed on a one-yearretroactive extension of almost all the expired provisions. For most taxpayers,the expired provisions expired again shortly after that legislation was enacted—at the end of 2014.


http://www.finance.senate.gov/download/?id=11804C0F-ED40-4FC8-8883-85E17E113D85

http://www.finance.senate.gov/imo/media/doc/JCX-103-15%20%20Chairman's%20Modification.pdf

http://www.finance.senate.gov/imo/media/doc/JCX10215.pdf

http://www.finance.senate.gov/imo/media/doc/JCX10415.pdf

http://www.finance.senate.gov/hearings/hearing/?id=19ebd115-5056-a055-6476-dfa0734f0773

https://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/14702taxextenderschart.pdf

http://www.finance.senate.gov/imo/media/doc/7.21.15%20RELEASE%20Hatch%20Statement%20at%20Finance%20Markup%20of%20Bipartisan%20Tax%20Extenders%20Package.pdf

H.R. 160: Protect Medical Innovation Act

On June 18, 2015 the House voted (280-140) to approve H.R. 160, the Protect Medical Innovation Act—legislation that would repeal the medical device excisetax for sales in calendar quarters beginning after the date of enactment (i.e., thelegislation would be prospective).

The Joint Committee on Taxation estimated that the legislation would loseapproximately $24.4 billion in revenue over a 10-year period. (JCT revenue estimate).

The legislation does not include any provisions to offset the cost of repealingthe medical device excise tax.

The Senate has not yet scheduled action on similar medical device excise taxrepeal legislation.

The White House issued a Statement of Administration Policy (SAP) statingthat, if the president were presented with H.R. 160, his senior advisors wouldrecommend that he veto the bill. The SAP states that H.R. 160 “would increase the deficit to finance a permanent and costly tax break for the industry withoutimproving the health system or helping middle-class Americans.”

H.R. 235: the Permanent Internet Tax Freedom Act

On June 9, 2015 the House approved, by voice vote, H.R. 235, the Permanent Internet Tax Freedom Act.

H.R. 235 would make permanent a moratorium on state and local taxation ofinternet access and on multiple or discriminatory taxes on electronic commerce.

The House passed H.R. 235 under suspension of the rules—a procedure thatrequires the vote of at least two-thirds of voting members to pass a bill.

Background

The Internet Tax Freedom Act currently:

Prohibits state and local governments from imposing taxes on internetaccess and some taxes on electronic commerce until December 11,2015.

Contains “grandfather rules” that allow some state and local governmentsto continue taxing internet access if such tax was generally imposed andactually enforced before October 1, 1998. The grandfather rules


https://www.congress.gov/114/bills/hr160/BILLS-114hr160rh.pdf




https://www.congress.gov/bill/114th-congress/house-bill/235/text?q=%7B%22search%22%3A%5B%22%5C%22hr235%5C%22%22%5D%7D

generally apply until December 11, 2015.

H.R. 235 would make permanent the prohibition on taxes on internet accessand certain taxes on electronic commerce, but would not extend the grandfatherrules.

Further action

The Senate has not scheduled action on similar legislation, S. 431 the Internet Tax Freedom Forever Act.

H.R. 880: the American Research and Competitiveness Act of 2015

On May 20, 2015 the House passed, 274 to 145, H.R. 880, the American Research and Competitiveness Act of 2015—a bill to simplify and makepermanent the research and experimentation (R&D) credit.

House Report 114-113 describes the provisions in, and revenue effects of, thebill. Among other things:

The bill would make permanent the alternative simplified method forcalculating the R&D credit and would increase the rate to 20% (i.e., thecredit generally would equal 20% of qualified research expenses that exceed50% of the average qualified research expenses for the three preceding taxyears).

The rate would be reduced to 10% for taxpayers with no qualified researchexpenses in any of the three preceding tax years.

The “traditional” 20% credit calculation method would be repealed.

For certain eligible small businesses, R&D credits could offset both regularand alternative minimum tax (AMT) liability.

The Joint Committee on Taxation has estimated that the 10-year revenue costof the bill would be approximately $182 billion. See JCX-86-15.

If enacted, H.R. 880 generally would be effective for tax years beginning afterDecember 31, 2014.

The Senate has not indicated when it would consider this bill.

The administration issued a Statement of Administration Policy (SAP)


https://www.congress.gov/bill/114th-congress/senate-bill/431/text?q=%7B%22search%22%3A%5B%22%5C%22s431%5C%22%22%5D%7D

https://www.congress.gov/congressional-report/114th-congress/house-report/113/1



indicating that, if the president were presented with H.R. 880, his senioradvisors would recommend that he veto the bill, in large part because therevenue costs are not offset.

S. 335: A bill to amend the Internal Revenue Code of1986 to improve 529 plans

On April 29, 2015, the Senate Finance Committee approved a bill (S. 335)concerning college savings plans under section 529.

A JCT description (JCX-83-15) notes that the bill includes provisions that would,among other items, make the following changes to section 529:

Restore the 2009 and 2010 rule permitting qualified higher educationexpenses to include the purchase of any computer technology orequipment, or internet access or related services, but only if usedprimarily by the beneficiary (and not the beneficiary’s family)

Provide in the case of a designated beneficiary who receives multipledistributions from a qualified tuition program in a tax year, the portion of adistribution that represents earnings would be computed on adistribution-by-distribution basis, rather than an aggregate basis, so thatthe computation would apply to each distribution from an account

Create a new rule that provides, in the case of a designated beneficiarywho received a refund of any higher education expenses in connectionwith a withdrawal from enrollment, any distribution that was used to paysuch refunded expenses would not be subject to tax if the designatedbeneficiary were to recontribute the refunded amount to the qualifiedtuition program within 60 days of receiving the refund, to the extent thatthe recontribution is not in excess of the refund.

The proposed amendments would be generally effective on January 1, 2015,and would have a revenue cost of $51 million over 10 years, according to theJoint Committee; no revenue offsets are provided.

The bill was reported out of the Finance Committee unanimously.

The House passed its version of a substantially similar section 529 educationsavings plan bill (H.R. 529) in February 2015.



H.R. 622, State and Local Sales Tax Deduction Fairness Act of 2015

On April 16, 2015, the House passed H.R. 622 (by a vote of 272 to 152) whichwould make permanent the ability to elect to take an itemized deduction forstate and local general sales taxes in lieu of the itemized deduction for stateand local income taxes.

A version of this provision was made part of the Code on a temporary basis in2004 and has been the subject of a number of extensions since. Most recently,the provision was made applicable to taxable years beginning before January 1,2015, as part of the Tax Increase Prevention Act of 2014.

H.R. 1105, Death Tax Repeal Act of 2015

The Death Tax Repeal Act of 2015 was passed by the House on April 16, 2015with a 240-176 vote. The bill would:

Repeal the estate and generation-skipping transfer (GST) taxes fordecedents dying after or transfers made after the enactment of the bill

Not repeal the gift tax but would lower the top marginal gift tax rate to35%

The lifetime exemption would remain at $5 million (as adjusted for inflation foryears after 2011).

The bill would not change the current rules for determining tax basis of propertyreceived from a decedent or by gift; thus, the basis of property acquired from adecedent’s estate generally would continue to be stepped-up.

The Senate’s plans regarding these bills are unclear at this time.

The Administration released Statements of Administrative Policy stating thatthe administration “strongly opposes” both bills.

Other tax legislation

On April 15, 2015, the House also passed, by a voice vote, the following othertax bills:

H.R. 1058, Taxpayer Bill of Rights Act of 2015

H.R. 1152, IRS Email Transparency Act


https://www.whitehouse.gov/omb/114/legislative_sap_date_2015

H.R. 1026, Taxpayer Knowledge of IRS Investigations Act

H.R. 1314, Ensuring Tax Exempt Organizations the Right to Appeal Act

H.R. 1295, IRS Bureaucracy Reduction and Judicial Review Act

H.R. 709, Prevent Targeting at the IRS Act

H.R. 1104, Fair Treatment for All Gifts Act

H.R. 529: A bill to modify rules for education savings plans

On February 25, 2015, the House passed, by a bipartisan vote of 401-20, a bill(H.R. 529) to make modifications to 529 education savings plans.

The expansions to the plans proposed by the bill include expanding theprogram to allow 529 funds to be used for the purchase of computer equipmentand internet access and related services used primarily by the 529 beneficiarywhile the beneficiary is enrolled at an eligible institution—a similar provision hadbeen in place in 2009 and 2010.

H.R. 529 also includes modifications to the rules governing the manner in whichdistributions from multiple accounts would be treated for purposes of computingearnings, and would allow beneficiaries that withdraw from school torecontribute 529 distributions without penalty when certain conditions are met.

H.R. 636: America’s Small Business Tax Relief Act of 2015

On February 13, 2015 the House passed, 272 to 142, H.R. 636, America’s Small Business Tax Relief Act of 2015.

H.R. 636 includes permanent extensions relating to:

An increase in allowable section 179 expensing levels to an annualmaximum of $500,000 for qualifying small businesses

A reduction of the recognition period for built-in gains tax in section1374(d) to five years

Rules regarding basis adjustments to stock of S corporations makingcharitable contributions of property

The Joint Committee on Taxation released a revenue estimate of the bill(posted on the JCT website).


https://www.congress.gov/114/bills/hr529/BILLS-114hr529rh.pdf

https://www.jct.gov/

The Senate has not indicated when it would consider this bill.

Administration’s position

The administration issued a Statement of Administration Policy (SAP) statingthat the president would veto this bill, in large part because the revenue costsare not offset. (SAP concerning H.R. 636 dated February 10, 2015)

H.R. 644, Fighting Hunger Incentive Act of 2015

On February 12, 2015, the House passed H.R. 644, Fighting Hunger Incentive Act of 2015. The bill contains the following provisions:

Make permanent the section 170(b) rules for qualified conservationcontributions by individuals and certain corporations and provide specialrules for qualified conservation contributions conveyed under the AlaskaNative Claims Settlement Act (H.R. 641)

Make permanent the special rules in section 170(e)(3)(C) forcontributions of food inventory, modify the limitation on the aggregateamount of such contributions taken into account, and add rules fordetermining food basis and value in certain cases (H.R. 644)

Make permanent the rule in section 408(d)(8) allowing certain tax-freedistributions from individual retirement accounts (IRAs) for charitablepurposes (H.R. 637)

Lower the current 2% rate of excise tax on net investment income ofprivate foundations to 1% (H.R. 640)

Administration’s position

The Administration issued a Statement of Administration Policy (SAP) statingthat the president would veto this bills, in large part because the revenue costsare not offset. (SAP concerning H.R. 644 dated February 10 2015)

Finance Committee: Approves 17 “non-controversial” tax bills

On February 11, 2015` the Senate Finance Committee held a mark-up toapprove 17 “non-controversial” tax bills.

In order to be included on the agenda for today’s mark-up, a bill must have meta number of criteria (as set forth by Chairman Hatch), including having


http://www.whitehouse.gov/sites/default/files/omb/legislative/sap/114/saphr636r_20150210.pdf

http://www.whitehouse.gov/sites/default/files/omb/legislative/sap/114/saphr644r_20150210.pdf

bipartisan support and being non-controversial, having little-to-no budgetaryimpact, and generating no active opposition from either the ObamaAdministration or Republican or Democratic Senate leadership.

The bills were all positively reported on a voice vote.

It is unclear when these bills will be considered by the full Senate.

Bills approved

The bills approved by the Finance Committee include:

FIRPTA - The bill would, among other changes, allow foreign investors toown up to 10% of the outstanding shares of a publicly traded REIT or RICwith substantial U.S. real estate holdings—a significant increase from the5% maximum allowed under current law. The bill also includes a provisionto increase the generally applicable FIRPTA withholding requirements from10% to 15% on certain sales and distributions of U.S. real property interests.

Waste-heat-to-power investment credit - The bill would expand section 48to create a 10% business investment credit for qualified waste-heat-to-powerproperty. Generally, the credit would be meant to encourage taxpayers touse the heat generated as a by-product of industrial or commercialprocesses for the production of electricity. The credit would be available forproperty placed in service before January 1, 2017, and capacity could notexceed 50 megawatts to qualify.

LNG and LPG excise tax - The bill would modify the excise tax rates ofliquefied natural gas (LNG) to approximately 14.1 cents per gallon and ofliquefied petroleum gas (LPG) to approximately 13.2 cents per gallon. Theproposed changes are intended to align the excise tax rates of thesecommodities with certain other energy commodities based upon energyequivalencies.

Tax treatment of certain clean coal power grants - The bill would changethe tax treatment of certain clean coal power grants received by some non-corporate entities by clarifying that the grants are excludible from income,provided that the recipient remit an upfront payment of 1.18% of the value ofthe grant to the federal government.

Alternative tax for certain small insurance companies - The bill wouldmodify the eligibility criteria for certain small insurance companies to pay analternative tax under section 831(b).

In addition, the Finance Committee approved a number of other tax billsconcerning:


Access to and administrationof the U.S. Tax Court

Modifications to the excise taxon cider

Modifications to alcoholbonding requirements

Collection period for taxpayershospitalized for combat zoneinjuries

Charitable status ofagricultural researchorganizations

Excess business holdingsrules for certain philanthropicbusiness holdings of privatefoundations

Tax treatment of incomereceived under student work-learning-service programs

Use of specified designationby certain enrolled agents

Tax treatment of certaincompensation received bypublic safety officers and theirdependents

Requirements of the IRS tonotify exempt organizationsbefore revoking exempt statusfor failing to file

Military spouse job continuitycredit


http://www.finance.senate.gov/imo/media/doc/JCX-35-15%20%20military%20spouse%20job%20continuity%20credit.pdf

http://www.finance.senate.gov/imo/media/doc/JCX-35-15%20%20military%20spouse%20job%20continuity%20credit.pdf

III. Other Proposals or Activity of Note:

November 30, 2014 – October 1, 2015

Draft proposal for innovation box

On July 29, 2015, two senior members of the Ways and Means Committee—Rep. Charles Boustany (R-TX) and Rep. Richard Neal (D-MA), released forpublic comment a discussion draft and technical explanation of an “innovation box” proposal.

The innovation box draft proposal would substantially lower the rate of taxfor a corporation with respect to dispositions of intellectual property (IP) andproducts produced using IP. The proposal would establish a deduction forinnovation box profits equal to 71% of the lesser of the:

“Innovation box profit” of the taxpayer for the tax year, or Taxable income (determined without the 71% deduction) for the tax

year

This would result in an effective tax rate of approximately 10% on innovationbox profits.

The deduction could not be taken into account in computing any net operatingloss or the amount of any operating loss carryback or carryover, and thereforecould not create, or increase, the amount of a net operating loss deduction.

Terms defined

The “innovation box profit” of a taxpayer would be a fraction of the taxpayer’s gross receipts from the disposition of “qualified property” in the ordinary course of a trade or business.

“Qualified property” would be broadly defined as any: (1) patent, invention,formula, process, design pattern, or know-how (property described in section936(h)(3)(B)(i)); (2) motion picture film or video tape; (3) computer software;and (4) property produced using any property described in (1).

Gross receipts to which the deduction would apply include only gross receiptsfrom sales to an unrelated person, with one exception—if products produced


http://waysandmeans.house.gov/wp-content/uploads/2015/07/Innovation-Box-2015-Bill-Text.pdf

using qualified property were sold to a related person outside the UnitedStates, gross receipts from the sale would be qualified gross receipts only ifthe products were resold to an unrelated person.

From qualified gross receipts, the taxpayer would deduct its cost of goodssold allocable to the qualifying gross receipts, as well as other properlyallocable expenses, losses, or deductions, to determine its “tentative innovation profit.”

Finally, to determine the “innovation box profit” from which the deduction would be determined, the taxpayer would multiply the “tentative innovationprofit” by a fraction.

The numerator of the fraction would be the taxpayer’s expenditures forresearch and development performed in the United States for which adeduction is allowed under section 174 (determined without regard tosections 4 and 280(c)) for the five tax-year period ending with the taxyear.

The denominator would be the taxpayer’s five-year total costs for thetax year. In general, a taxpayer’s five-year total costs would be theexcess of all costs during the five-year period ending with the tax yearover the sum of (1) cost of goods sold, (2) interest, and (3) taxes.

The technical explanation of the proposal contains examples of thecalculation of the deduction.

The proposal also includes special rules for transfers of intangible propertyfrom controlled foreign corporations to U.S. shareholders.

Observations

The innovation box proposal, as currently drafted, would not apply topartnerships or S Corporations. he innovation box proposal is notaccompanied by an official estimate of the revenue cost, nor does it offer anyindication of whether or how the revenue cost might be offset. RepresentativeBoustany stated in reports that the revenue cost of the proposal is $280 billionover the 10-year budget window. Other reports have suggested that theprovision would be paid for by adopting the Camp tax reform proposal torepeal the expensing rules of Section 174.

The international tax reform working group of the Senate Finance Committee,in its final report (July 7, 2015), included among its recommendations theadoption of an innovation box regime. The working group’s report noted that some 11 countries have adopted such regimes, and that an apparentconsensus has been reached in connection with the OECD’s base erosion and profits shifting (BEPS) project around a modified nexus approach that


would permit innovation box regimes. A change to U.S. tax policy isnecessary, the authors of the working group’s report wrote, to prevent these shifts in the international landscape from leading to “…a significantdetrimental impact on the creation and maintenance of intellectual property inthe United States, as well as on the associated domestic manufacturingsector, jobs, and revenue base.” The innovation box concept was associated in the working group’s report, as it has been elsewhere, with broader reformof the international tax rules.

H.R. 2821, the Partnership Audit Simplification Act

In June 2015, two members of the House Ways and Means Committee Rep.Renacci (R-OH) and Rep. Kind (D-WI), in June 2015 introduced H.R. 2821,the Partnership Audit Simplification Act, a bill that would reform thepartnership audit rules.

Very generally, H.R. 2821 would replace the existing partnership auditprocedures established by the Tax Equity and Fiscal Responsibility Act(TEFRA) and the “electing large partnership” audit rules with a single set of rules for auditing partnerships and their partners at the partnership level.

Partnerships with 100 or fewer partners (none of which arepassthrough entities) could elect out of the new audit rules.

Any adjustments for a partnership tax year (“reviewed year”) would betaken into account by the partnership (not the individual partners) inthe year that the audit or judicial review were completed (the“adjustment year”).

The amount of tax would be computed as if all of the understatedincome should have been fully taxable at the highest individual orcorporate ordinary income tax rate.

The burden of establishing that the amount of the tax should bereduced based on the particular facts (e.g., the type of income and thecharacteristics and tax attributes of the partners) would be on thepartners in the audited year (via an amended return mechanism).

Joint and several liability for payment of the tax on both the partnershipand all of its direct and indirect partners in both the audited year andthe year in which the underpayment is finally determined.

If enacted, H.R. 2821 generally would be effective for partnership tax yearsending after 2018, with partnerships permitted to elect to apply the new rulesfor any partnership year beginning after date of enactment.

(Text of H.R. 2821)

Observation: Similarities to proposal in last year’s “Camp tax reform


https://www.congress.gov/bill/114th-congress/house-bill/2821/text

bill”

H.R. 2821 is largely similar to proposed changes to the partnership audit andadjustment rules included in the tax reform bill introduced by former Waysand Means Chairman Dave Camp (R-MI) in the last Congress (the Campproposal was introduced as H.R. 1, the Tax Reform Act of 2014).

H.R. 2821, however, includes some modifications to the proposal included inthen-Chairman Camp’s tax reform bill and also provides for a later effective date than in the Camp proposal. [The proposal in Camp’s bill generally would have been effective for partnership tax years ending after 2014.]

The proposed changes to the partnership audit and adjustment rules inCamp’s tax reform bill were estimated to raise approximately $13 billion over a 10-year period.

H.R. 2821 has been referred to the Committee on Ways and Means. Nofuture action has been officially scheduled at this time.

Although the Administration has not yet expressed an official position on H.R.2821, the administration’s budget proposals for FY 2016 also include aproposal to replace the existing TEFRA and electing large partnershipprocedures with a single system of centralized audit, adjustment, andcollection of tax for all partnerships, except eligible partnerships that elect out.Some of the concepts underlying the administration’s budget proposals are similar to those in H.R. 2821; however, there are technical differencesbetween the two proposals—including whether the burden of adjustments isborne by partners in the year adjustments are made (as in H.R. 2821) or bypartners in the year to which the adjustments relate (as in the administration’s proposal).

Because H.R. 2821 can be expected to be estimated as raising revenue,members of Congress might consider using it, or a modified version ofpartnership audit reform legislation, to offset costs of other legislation.

Recommendations for tax reform in reports of Finance Committee working groups

On July 8, 2015, the Senate Finance Committee released reports from fivebipartisan working groups, providing recommendations for tax reform. Theworking groups, assembled in January 2015, were tasked with making taxreform recommendations back to the Senate Finance Committee concerningthe following areas:


Individual income tax Business income tax Savings and investment International tax Community development and infrastructure

The working groups were given a mandate to offer policy options and recommendations for the Finance Committee to consider as part of acomprehensive tax reform.

The five reports by the tax reform working groups, were released by theFinance Committee on July 8, 2015.

Background

The Senate Finance Committee chairman and ranking member in January2015 announced the formation of bipartisan tax reform working groups.

In March, after five tax reform hearings, the Finance Committee announcedthat it would ask stakeholders and the public to submit ideas to the bipartisanworking groups. These submissions were released in April 2015. The reportsfrom the working groups had been expected in May 2015, but were delayed inorder to afford the groups additional time to develop specificrecommendations.

BEPS – Jurisdictional Matters

On June 9, 2015 the chairmen of the congressional tax-writing committeeswrote to Treasury Secretary Jack Lew, calling on Treasury to work withCongress concerning the international tax proposals being considered underthe OECD’s base erosion and profit shifting (BEPS) project and in advance of this week’s OECD International Tax Conference being convened inWashington, D.C.

Senate Finance Committee Chairman Orrin Hatch (R-UT) and House Ways &Means Committee Chairman Paul Ryan (R-WI) wrote, in part:

. . . we are troubled by some positions the Treasury Department appears to be agreeing to as part of this project. For example, we are concerned about the country-by-country (CbC) reporting standards that will contain sensitive information related to a U.S. multinational’s group operations. We are also concerned that Treasury has appeared to agree that foreign governments will be able to collect the so-called “master file” information directly from U.S. multinationals without any assurances of confidentiality or that the information


http://www.finance.senate.gov/newsroom/chairman/release/?id=e9eefc66-7e11-4276-939f-3eca6fd6d959

collection is needed….

Some recent press reports have indicated that the Treasury Department believes it currently has the authority under the Internal Revenue Code to require [country-by-country] reporting by certain U.S. companies and that Internal Revenue Service (IRS) guidance on this reporting will be released later this year. We believe the authority to request, collect, and share this information with foreign governments is questionable.

. . . we request that, before finalizing any decisions, the Treasury Department and IRS provide the tax-writing committees with a legal memorandum detailing its authority for requesting and collecting this [country-by-country] information from certain U.S. multinationals and master file information from U.S. subsidiaries of foreign multinationals.

Senate Finance release including the Hatch-Ryan letter.

Treasury has not yet provided, or indicated whether it will provide, therequested memorandum of authority to the Senate Finance and Ways andMeans Committees.


http://www.finance.senate.gov/newsroom/chairman/release/?id=ff0b1d06-c227-44be-8d5a-5f998771188b

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August 2015 ESTATE PLANNING UPDATE

By: Sanford J. Schlesinger, Esq. and Martin R. Goodman, Esq.

Schlesinger Gannon & Lazetera LLP

TABLE OF CONTENTS

Page

I. THE AMERICAN TAXPAYER RELIEF ACT OF 2012 ..................................................8A. Federal Transfer Tax Provisions ..............................................................................8B. Federal Income Tax Provisions ...............................................................................8

II. THE TAX RELIEF, UNEMPLOYMENT INSURANCE REAUTHORIZATION,AND JOB CREATION ACT OF 2010 ...............................................................................9A. Federal Transfer Tax Provisions ..............................................................................9

1. Federal Estate Tax Provisions ......................................................................92. Federal Gift Tax Provisions .......................................................................113. Federal Generation-Skipping Transfer Tax Provisions .............................124. Federal Portability Provisions ....................................................................13

(a) General ...............................................................................................13(b) Portability and the Future of Bypass Trusts .......................................16(c) Portability and Prenuptial Agreements ..............................................17

5. Other Provisions.........................................................................................176. Summary Chart ..........................................................................................187. Omitted Transfer Tax Provisions ...............................................................198. IRS Publication 950 ...................................................................................19

B. Federal Income Tax Provisions .............................................................................19C. State Transfer Tax Considerations .........................................................................19

1. New York ...................................................................................................202. Connecticut ................................................................................................213. New Jersey .................................................................................................214. Pennsylvania ..............................................................................................225. Florida ........................................................................................................226. Delaware ....................................................................................................227. Other States ................................................................................................228. State QTIP Elections ..................................................................................22

III. OBAMA ADMINISTRATION FISCAL YEAR 2016 AND CONGRESSIONAL2015 PROPOSALS ............................................................................................................23

IV. OTHER IMPORTANT FEDERAL LEGISLATION ........................................................26A. Medicare Tax on Estates, Trusts and Individuals ..................................................26B. Death Master File ...................................................................................................27


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C. Patient Protection and Affordable Care Act ..........................................................28D. Tax Increase Prevention Act of 2014.....................................................................28E. Surface Transportation and Veterans Health Care Choice Improvement

Act of 2015 ............................................................................................................28

V. IMPORTANT IRS REGULATIONS, ANNOUNCEMENTS ANDCOURT DECISIONS ........................................................................................................29A. 2015 Inflation Adjustments....................................................................................29B. Tax Returns ............................................................................................................31

1. Form 706-QDT ..........................................................................................312. Estate Tax Returns for Post-2012 Decedents.............................................313. 2014 Gift Tax Returns ...............................................................................314. Generation-Skipping Transfer Tax Forms .................................................315. Instructions for Form 1040-X ....................................................................316. Form 8690 ..................................................................................................32

C. Estate Tax, Gift Tax and Fiduciary Income Tax Audits and Collections ..............32D. Request for Discharge From Personal Liability – Form 5495 ...............................35E. Qualified Personal Residence Trusts .....................................................................35F. Private Trust Companies and Family Offices ........................................................36G. Restricted Management Accounts .........................................................................36H. Estate Tax Deductions for Claims and Expenses - Section 2053 ..........................37I. Section 6166 Court Decisions and Announcements ..............................................39J. 2% Floor for Miscellaneous Itemized Deductions .................................................43K. Alternate Valuation Date Election .........................................................................45L. Generation-Skipping Transfer Taxes .....................................................................46

1. Exercise or Lapse of Power of Appointment .............................................462. Qualified Severances .................................................................................473. Allocation of GST Tax Exemption ............................................................484. Transactions of Interest ..............................................................................495. GST Taxes and Code Section 6166 ...........................................................49

M. Intentionally Defective Grantor Trusts ..................................................................49N. GRATs and GRITs ................................................................................................52O. Gifts, Gift Tax, and Estate Tax Includibility of Gift Tax ......................................54P. Same-Sex Marriages ..............................................................................................57Q. IRAs and Qualified Retirement Plans ....................................................................58R. Special Valuation Rules – Chapter 14 ...................................................................64S. Economic Substance Doctrine ...............................................................................64T. “Dormant Commerce Clause” ...............................................................................64U. Ponzi Schemes .......................................................................................................65V. Ruling Procedures ..................................................................................................65W. No Ruling Areas ....................................................................................................65X. Priority Guidance Plan ...........................................................................................70Y. Basis Reporting Requirements ...............................................................................71Z. Change of Address Notification.............................................................................71AA. Circular 230 ...........................................................................................................71BB. Internal Revenue Bulletins and Cumulative Bulletins ...........................................71


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VI. ESTATE TAX CONSIDERATIONS VS. INCOME TAX CONSIDERATIONS ...........71

VII. DIGITAL ASSETS ............................................................................................................72

VIII. FDIC INSURANCE INCREASES ....................................................................................73

IX. SIGNIFICANT FLORIDA LEGISLATION AND CASE LAW DEVELOPMENTS .....74A. Repeal of Florida's Intangible Tax .........................................................................74B. Creation of Dynasty Trusts ....................................................................................74C. Intestate Shares ......................................................................................................74D. Separate Writings ...................................................................................................75E. Chapter 738: Principal and Income Act ................................................................75F. UTMA Transfers ....................................................................................................75G. Uniform Disclaimer of Property Interests Act .......................................................75H. Anatomical Gift Law .............................................................................................75I. Fiduciary Responsibility for Life Insurance ..........................................................76J. Creditors' Claims ....................................................................................................77K. Homestead Law .....................................................................................................78L. Attorney-Client Privilege .......................................................................................79M. Privity .....................................................................................................................79N. Reformation and Construction of Wills .................................................................79O. Powers of Attorney ................................................................................................79P. Personal Representatives, Administrators, Trustees and Guardians ......................80Q. Standing to Contest Will or Challenge Trust Distributions ...................................81R. Enforcement of Alimony and Child Support Orders .............................................82S. Waiver of Spousal Rights ......................................................................................82T. Ademption of Bequests ..........................................................................................82U. Former Spouses ......................................................................................................82V. Gifts and Bequests to Clients’ Attorneys ...............................................................83W. Disposition of Decedents’ Wills ............................................................................83X. Florida Trusts .........................................................................................................83Y. Limited Liability Companies .................................................................................84Z. Estate Tax Returns .................................................................................................84AA. InTerrorem Clauses ................................................................................................84BB. Undue Influence .....................................................................................................85CC. Exercise of Powers of Appointment ......................................................................85DD. Foreign Wills .........................................................................................................85EE. Doctrine of Renunciation .......................................................................................85FF. Attorneys’ Fees ......................................................................................................86GG. Comity Principles...................................................................................................86HH. Disposition of Decedent’s Remains .......................................................................86II. Anti-Lapse Statute .................................................................................................86JJ. Family Trust Companies ........................................................................................86

X. SIGNIFICANT NEW JERSEY LEGISLATION, REGULATIONS ANDCASE LAW DEVELOPMENTS ......................................................................................86A. Domestic Partnership Act ......................................................................................86


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B. Same-Sex Marriage and Civil Unions ...................................................................87C. Uniform Prudent Management of Institutional Funds Act ....................................88D. New Jersey Estate Tax and Inheritance Tax ..........................................................89E. New Jersey Gross Income Tax ..............................................................................89F. New Jersey Resident Trusts ...................................................................................90G. Perelman v. Cohen: Alleged Incompetence; Alleged Fraudulent

Transfers and Undue Influence; Oral Promise to Make a Will;Gifts vs. Loans; and Sanctions for Frivolous Litigation ........................................90

H. Support Trusts and Alimony ..................................................................................91I. Revised Uniform Limited Liability Company Act ................................................91J. Prenuptial Agreements ...........................................................................................92K. Digital Assets .........................................................................................................92

XI. NEW YORK STATUTORY, CASE LAW AND ADMINISTRATIVEDEVELOPMENTS ............................................................................................................92A. Powers of Attorney ................................................................................................92B. Same Sex Couples..................................................................................................94

1. General .......................................................................................................942. New York Taxes ........................................................................................943. New York Estate Tax .................................................................................954. New York Income Tax...............................................................................95

C. Other New York Estate Tax and GST Tax Changes .............................................96D. Other New York Income Tax Changes ................................................................100

1. Modified Carryover Basis ........................................................................1002. New York Source Income ........................................................................1003. Income Tax Rates ....................................................................................1014. Income Tax Return Extensions ................................................................1015. New York Residency ...............................................................................1026. New York Resident Trusts .......................................................................104

E. Statute of Limitations for Tax Collections...........................................................105F. Principal and Income Act.....................................................................................106G. Attorney Engagement Letters ..............................................................................111H. Disclosure Requirements of Attorney-Fiduciaries ...............................................113I. Relaxation of Strict Privity Doctrine ...................................................................117J. No Fault Divorce..................................................................................................118K. Decanting .............................................................................................................119L. In Terrorem Clauses .............................................................................................119M. Other Significant Legislation ...............................................................................121

1. Significant 2008 Legislation ....................................................................121(a) Small Estates ....................................................................................121(b) Revocation of Incompetent’s Will ...................................................121(c) Revocatory Effect of Divorce ..........................................................121

2. Significant 2009 Legislation ....................................................................121(a) Loss of Health Insurance Coverage in Divorce ...............................121(b) Simultaneous Deaths ........................................................................122(c) Sale of Life Insurance ......................................................................122

3. Significant 2010 Legislation ....................................................................122


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(a) Formula Bequests .............................................................................122(b) Life Sustaining Measures .................................................................122(c) Renunciations ...................................................................................123(d) Proof of Paternity .............................................................................123(e) Pet Trusts ..........................................................................................123(f) Uniform Prudent Management of Institutional Funds Act ..............123(g) Family Exemption ............................................................................124

4. Significant 2011 Legislation ....................................................................124(a) Formula Bequests .............................................................................124

5. Proposed Significant 2012 Legislation ....................................................124(a) Uniform Trust Code .........................................................................124(b) Trust Advisors and Protectors ..........................................................125

6. Significant 2013 Legislation ....................................................................125(a) Not-For-Profit Corporations .............................................................125(b) Anti-Lapse Statute ............................................................................127(c) QDOTs .............................................................................................127(d) Real Estate Tax Abatements ............................................................127(e) Informal Settlement of Fiduciary Accounts .....................................127(f) Interest on After-Discovered Assets ................................................128(g) Adult Guardianships .........................................................................128

7. Proposed Significant 2013 Legislation ....................................................128(a) “Small Estates” .................................................................................128(b) Digital Assets ...................................................................................128

8. Significant 2014 Legislation and Court Rules .........................................128(a) Posthumous Renunciations ..............................................................128(b) Availability of Sensitive Documents ...............................................129(c) Interest on Bequests .........................................................................129(d) Posthumous Reproduction ...............................................................129

9. Significant Proposed 2014 Legislation ....................................................129(a) Exculpatory Clauses .........................................................................129(b) Surviving Spouse’s Elective Share ..................................................130(c) Finder’s Agreements ........................................................................130

10. Significant Proposed 2015 Legislation ....................................................130(a) Temporary Maintenance Guidelines ................................................130

N. Other Case Law Developments ...........................................................................1301. Fiduciary Investments-Diversification and Self-Dealing ........................1302. Qualification and Removal of Fiduciaries ...............................................1353. Right of Election ......................................................................................1354. Jurisdiction and Charitable Trusts ...........................................................1365. Presumption Against Suicide ...................................................................1366. Forced Heirship and New York Property ................................................1367. Executor’s Commissions and Trustee's Commissions .............................1368. Prenuptial and Postnuptial Agreements ...................................................1379. Payment of Fiduciary's and Beneficiary’s Attorney's Fees .....................13710. Loans vs. Gifts .........................................................................................13911. Health Care Proxies .................................................................................139


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12. Statute of Limitations ...............................................................................13913. Rule Against Perpetuities .........................................................................13914. Surcharge Computations ..........................................................................13915. Exoneration of Fiduciaries .......................................................................14016. Slayer Inheritance ....................................................................................14017. Delaware Trusts .......................................................................................14018. Equitable Deviation .................................................................................14119. Discretionary Trust Distributions ............................................................14120. Incorporation By Reference .....................................................................14121. Bequests of Tangibles ..............................................................................14122. Charitable Pledges ...................................................................................14223. Inference of Due Execution .....................................................................142

O. Other Administrative Developments ...................................................................1421. Bitcoins ....................................................................................................142

XII. CONNECTICUT GIFT TAX, ESTATE TAX AND OTHER PERTINENTLEGISLATION ...............................................................................................................142

XIII. UNIFORM LAW COMMISSION PROJECTS ..............................................................143A. Digital Assets .......................................................................................................143B. Decanting .............................................................................................................143C. Trust Protectors ....................................................................................................143

EXHIBIT “A” – Reprint of “Final Regulations Regarding Portability” .....................................144

EXHIBIT “B” – State Estate Tax Chart ......................................................................................160

EXHIBIT “C” – State Death Tax Legislation Chart ....................................................................161

EXHIBIT “D” – Bases of State Income Taxation of Nongrantor Trusts ....................................178

EXHIBIT “E” – Digital Property Clauses ...................................................................................189

EXHIBIT “F” – Computation of New York State Estate Tax .....................................................191


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August 2015

ESTATE PLANNING UPDATE

By: Sanford J. Schlesinger, Esq. and Martin R. Goodman, Esq.

Schlesinger Gannon & Lazetera LLP

Preface

On January 1, 2013 Congress passed the American Taxpayer Relief Act of 2012 (the “2012 Tax Act”). President Obama signed the 2012 Tax Act into law on January 2, 2013.

The 2012 Tax Act retained the existing $5,000,000 exemption (adjusted for inflation from 2010) for estate tax, gift tax and generation-skipping transfer (“GST”) tax purposes, and increased the maximum tax rate for all such purposes from 35% to 40%. In addition, the 2012 Tax Act made “permanent” (absent any further legislation) the federal transfer tax changes made to the Internal Revenue Code1 by the Tax Relief, Unemployment Insurance Reauthorization, and the Job Creation Act of 2010 (the “2010 Tax Act”) and many of the changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”). Further, the 2012 Tax Act increased the maximum income tax rate from 35% to 39.6% for high income persons, and increased the maximum income tax rate on dividends and long-term capital gains from 15% to 20%. Part I of this outline describes the important transfer tax aspects of the 2012 Tax Act.

On December 16, 2010 Congress passed the 2010 Tax Act. President Obama signed the 2010 Tax Act into law on December 17, 2010. The 2010 Tax Act, among other things, reformed the federal estate tax, gift tax and GST tax laws for 2010 through 2012. The 2010 Tax Act also extended many of the Bush-era income tax reductions for two years. Part II of this outline describes the important transfer tax and income tax aspects of the 2010 Tax Act

1 All references to the Code are to the Internal Revenue Code of 1986, as amended. ________________________

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with Treasury Department regulations, we inform you that any U.S. federal tax advice contained in this outline (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the U.S. Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressedherein.

© 2015 Sanford J. Schlesinger, Esq. and Martin R. Goodman, Esq., All Rights Reserved


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and state transfer tax considerations resulting from certain changes in the federal transfer tax laws.

The remaining parts of this outline discuss other important federal and state tax developments, and important non-tax developments, regarding estates and trusts.

I. THE AMERICAN TAXPAYER RELIEF ACT OF 2012

A. Federal Transfer Tax Provisions

The 2012 Tax Act retained the $5,000,000 exemption, indexed for inflation since2010, for transfers occurring, and for estates of persons dying, in 2013 and thereafter, for estate tax, gift tax and GST tax purposes, and increased the maximum tax rate for all such purposes from 35% to 40%. The inflation adjusted exemption for 2015 is $5,430,000.

In addition, the 2012 Tax Act continued the “portability” provisions that allow a surviving spouse to use the unused portion of the gift tax and estate tax exemption of the last deceased spouse of the surviving spouse. The surviving spouse can use such unused portion for both gift tax and estate tax purposes, but not for GST tax purposes. The executor of the estate of the first spouse to die must elect “portability” on a timely filed federal estate tax return for such deceased spouse’s estate, for the surviving spouse to be able to use such deceased spouse’s unused estate tax exemption, even if a federal estate tax return for such deceased spouse’s estate is not otherwise required to be filed.

Very importantly, the 2012 Tax Act did not contain any so-called “sunset” provision regarding these changes. Therefore, these federal transfer tax changes are “permanent”, absent any further legislation (unlike EGTRRA and the 2010 Tax Act, both of which contained “sunset” provisions).

It also is important to note that the 2012 Tax Act did not contain any provisions requiring a minimum term for grantor retained annuity trusts (GRATs), any provisions regarding valuation discounts for gift tax and estate tax purposes (which generally would be applicable in the case of family limited partnerships), or any provisions requiring the includibility in a person’s gross estate for estate tax purposes of so-called “grantor” trusts. As a result, all of these techniques continue to be important estate planning tools, as in the past.

As a result of the 2012 Tax Act, the federal transfer tax laws for 2013 and thereafter have achieved a degree of permanence that did not previously exist.

B. Federal Income Tax Provisions

The 2012 Tax Act increased the maximum income tax rate from 35% to 39.6%for taxable income in excess $450,000 for married persons filing jointly, and $400,000 for an unmarried individual; reinstated the previously existing “phase-out” of personal exemptions (the “PEP” provision) for individuals with adjusted gross income in excess of $300,000 for married persons filing jointly, and $250,000 for an unmarried individual; reinstated the previously existing limitation on itemized deductions (the “Pease provision”) for individuals with adjusted gross income in excess of $300,000 for married persons filing jointly, and $250,000 for an


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unmarried individual; increased the maximum income tax rate for qualified dividends and long-term capital gains from 15% to 20% for married persons filing jointly having taxable income over $450,000, and for single taxpayers having taxable income over $400,000; made alternative minimum tax relief permanent; and extended the income tax deduction for state and local sales taxes only for 2012 and 2013 (which was further extended for 2014 by the Tax Increase Prevention Act of 2014, as noted below).

In addition, the 2012 Tax Act extended for 2013 the ability of a person who is older than 70-1/2 to make a direct contribution to charity of up to $100,000 from the person’s Individual Retirement Account, without the contribution being included in the person’s income. This provision of the law was further extended for 2014 by the Tax Increase Prevention Act of 2014, as noted below.

II. THE TAX RELIEF, UNEMPLOYMENT INSURANCE REAUTHORIZATION, ANDJOB CREATION ACT OF 2010

A. Federal Transfer Tax Provisions

1. Federal Estate Tax Provisions

Prior to the 2010 Tax Act, the applicable exclusion amount (i.e., the exemption) for estate tax purposes was $3,500,000 in 2009, and the maximum estate tax rate was 45% in 2009. Prior law also provided that there would be no estate tax for estates of persons dying in 2010, although such estates would be subject to a modified carryover basis regime for the decedent’s assets, rather than having an income tax cost basis for those assets equal to the federal estate tax values of such assets.

Pursuant to the 2010 Tax Act, the estate of a person dying in 2010 or thereafter would have an applicable exclusion amount of $5,000,000 (indexed for inflation from 2010, but starting in 2012) for estate tax purposes, the maximum estate tax rate would be 35% in 2010 and thereafter, and all such estates would have a basis for income tax purposes with respect to the assets acquired from the decedent equal to the federal estate tax values of such assets.

However, the 2010 Tax Act also permitted the estate of a person who died in 2010 to instead elect not to be subject to any federal estate tax, but to be subject to the modified carryover basis regime that existed under prior law. Under this modified carryover basis regime, for income tax purposes the income tax cost basis of assets that are inherited would be the lesser of the decedent’s income tax cost basis of those assets, or the value of those assets at the date of the decedent’s death, except that such estate could increase the basis of the decedent’s assets to the extent of $1,300,000, and could also increase the basis of assets bequeathed to the decedent’s surviving spouse outright, or bequeathed to a trust for the benefit of the decedent’s spouse for which the estate receives an estate tax marital deduction (i.e., generally a QTIP trust), to the extent of $3,000,000.

The estate of a person dying in 2010 who had a gross estate of less than the applicable exclusion amount of $5,000,000 would generally not opt out of the estate tax regime, since such estate would not be required to pay any estate taxes, due to the $5,000,000 applicable exclusion amount, and would obtain an income tax basis for the assets passing from the decedent


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equal to the federal estate tax values of such assets. On the other hand, the estate of a person dying in 2010 that had a value in excess of the $5,000,000 applicable exclusion amount might instead elect to not have the estate tax regime apply, and to have the modified carryover basis rules apply. However, in deciding whether or not to make such election, the executors of such estates would have to consider all the relevant factors, including the amount of income that the estate or its beneficiaries are likely to realize upon the eventual disposition of the inherited assets and when and at what rates they are likely to be required to pay income taxes on such income.

The election to opt out of the estate tax regime and to instead be subject to the modified carryover basis regime was made on Form 8939, entitled Allocation of Increase in Basis for Property Acquired From a Decedent, that was issued by the Internal Revenue Service (the “Service”).

As stated above, the estates of persons dying in 2011 and 2012 would have an applicable exclusion amount of $5,000,000 (indexed for inflation, as stated above) and would be subject to an estate tax with a maximum tax rate of 35%.

The 2010 Tax Act also restored the federal estate tax deduction (not the credit) for state death taxes paid by the estate.

THE FEDERAL ESTATE TAX DEDUCTION (NOT THE CREDIT) FOR STATE DEATH TAXES PAID BY THE ESTATE WAS MADE

PERMANENT BY THE 2012 TAX ACT.

The due date for the estate tax return and for the payment of any estate tax that may be due with respect to the estate of a person who died in 2010 and prior to the enactment of the 2010 Tax Act was extended to not earlier than nine months after the date of the enactment of such Act. As the 2010 Tax Act was enacted on December 17, 2010, the corresponding date which is nine months later was September 17, 2011. However, as September 17, 2011 was a Saturday, such due date was the next following Monday, or September 19, 2011.

The 2010 Tax Act also provided that the time within which a beneficiary of an estate of a person who died in 2010 and prior to the enactment of such Act must make a qualified disclaimer under Code Section 2518 was extended to not earlier than nine months after the date of the enactment of the 2010 Tax Act. Thus, such extended due date also was September 19, 2011. In this regard, issues may arise as to whether a beneficiary of inherited property could make a qualified disclaimer if the beneficiary already accepted benefits from such property, or if applicable state law did not similarly extend the period in which a qualified disclaimer may be made.

It is noted that Wills and other documents that serve as testamentary substitutes may utilize a formula clause for dividing a decedent’s estate between the portion of the estate that qualifies for the federal estate tax marital deduction and the balance of the estate, which may be bequeathed to or in trust for persons other than the decedent’s surviving spouse. The changes in the applicable exclusion amount could cause an unintentional shift in beneficial interests under estate planning documents.


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For example, with the advent of a $5,000,000 applicable exclusion amount for estate tax purposes, a formula clause that gives the decedent’s children the maximum amount of the estate which is exempt from the federal estate tax and leaves the remainder of the estate to the surviving spouse may result in a bequest of the first $5,000,000 ($5,430,000 for decedents dying in 2015) of the decedent’s assets to or for the benefit of persons other than the decedent’s surviving spouse, such as the decedent’s children and more remote descendants, or to a trust of which the decedent’s spouse is not the sole beneficiary. This dispositive result may be different from the disposition that the testator had intended by using such a formula clause in an instrument executed when the applicable exclusion amount for estate tax purposes was substantially less than $5,000,000.

Therefore, it is advisable to review estate planning documents to determine whether the dispositive plan in those documents, taking into account the provisions of the 2010 Tax Act, the 2012 Tax Act and applicable state laws, continue to reflect the testator’s estate planning goals.

2. Federal Gift Tax Provisions

Prior to the 2010 Tax Act, the applicable exclusion amount (i.e., the exemption) for gift tax purposes was $1,000,000 in 2010, and the maximum gift tax rate was 35% in 2010.

The 2010 Tax Act did not change the applicable exclusion amount of $1,000,000 for gift tax purposes with respect to gifts made in 2010, and such Act continued the maximum gift tax rate of 35% for gifts made in 2010 and thereafter. However, the 2010 Tax Act provided that after 2010 donors of gifts would have an applicable exclusion amount for gift tax purposes of $5,000,000 (adjusted for inflation from 2010, but commencing in 2012).

Thus, a person who made gifts in 2010 would have an applicable exclusion amount of $1,000,000 with respect to such gifts, and such person’s taxable gifts would be subject to a maximum gift tax rate of 35%. As a result, it generally would have been preferable to make gifts in excess of $1,000,000 in 2011, when the gift tax applicable exclusion amount was increased to $5,000,000, rather than in 2010, when the gift tax applicable exclusion amount was limited to $1,000,000.

It is noted that, as in the past, previously made gifts will “consume” part of this $5,000,000 applicable exclusion amount, but at gift tax rates imposed at the time of the currently made gift. Thus, if a person previously made a gift of $1,000,000 at a time when the maximum gift tax rate was 45%, rather than 35%, the person should still be able to make $4,000,000 of additional gifts after 2010 and have such additional gifts “sheltered” from gift tax by the remaining $4,000,000 of the person’s applicable exclusion amount.

It is also noted that, as of this writing, only Connecticut imposes a state gift tax, as Minnesota repealed its gift tax on March 21, 2014 effective retroactively to the date of its 2013 enactment. Tennessee enacted legislation on May 21, 2012 repealing its gift tax effective as of January 1, 2012.


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3. Federal Generation-Skipping Transfer Tax Provisions

Prior to the 2010 Tax Act, there was no GST tax imposed on generation-skipping transfers that occurred in 2010.

The 2010 Tax Act created an exemption of $5,000,000 (indexed for inflation from 2010, but commencing in 2012) for GST tax purposes, commencing in 2010; provided that the GST tax rate for generation-skipping transfers occurring in 2010 was zero; and provided that the maximum tax rate for GST tax purposes was 35% for generation-skipping transfers that occur after 2010.

The previously existing rules regarding the identification of the “transferor” of a transfer, and the automatic allocation rules regarding the allocation of the transferor’s GST tax exemption, continued to apply, with respect to transfers made in 2010 and thereafter.

The GST tax exemption of $5,000,000 (indexed for inflation, as stated above) was available for the estate of a person who died in 2010, whether or not such person’s estate elected out of the estate tax regime for estate tax purposes.

As a result of these rules, a person in 2010 could make a gift in an unlimited amount outright and free of trust to a grandchild or more remote descendant without incurring a GST tax, although the amount of the gift that exceeded the unused portion of the donor’s $1,000,000 applicable exclusion amount for gift tax purposes would be subject to the payment of gift taxes.

In addition, a person could make a gift in 2010 in trust for the benefit of the person’s grandchild and more remote descendants, and no GST tax would be immediately imposed at the time of such transfer, as the transfer was a “direct skip” for GST tax purposes but the GST tax rate with respect to such transfer was zero. After the transfer, the donor, who is the “transferor” for GST tax purposes, will be treated as “moving down” one generation, so that the generation assignment of the donor’s grandchild will only be one generation below that of the transferor. As a result, distributions by the trust to the grandchild after 2010 will not be generation-skipping transfers, and no GST tax will be payable on account of such transfers. However, if the trust also provides for the eventual distribution of the trust property to the donor’s great grandchildren, then the death of the donor’s grandchild after 2010 will be a taxable termination, and the GST tax will be due at that time, unless the value of the trust remaining at the grandchild’s death is includible in the grandchild’s estate for estate tax purposes, or if such value is not so includible, unless the trust is exempt from GST taxes as a result of the donor having allocated his or her GST tax exemption to the gift that he or she made to the trust.


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4. Federal Portability Provisions

THE PORTABILITY PROVISIONS IN THE 2010 TAX ACT WERE MADE PERMANENT BY THE 2012 TAX ACT.

(a) General

The 2010 Tax Act provided that the unused applicable exclusion amount of the last deceased spouse of a person can be used by such a person for gift tax and/or estate tax purposes. However, these portability provisions do not apply to a person’s GST tax exemption.

It is important to note that these provisions apply only if the death of the first spouse to die occurs after 2010. Thus, pursuant to the 2010 Tax Act both spouses must have died after 2010 and before 2013 for these provisions to apply to the estate of the second to die. However, pursuant to the 2012 Tax Act these provisions will apply if both spouses die at any time after 2010.

For example, if a husband died in 2011 and he and his estate have used only $3,000,000 of his $5,000,000 estate tax applicable exclusion amount, then his surviving wife will have an aggregate applicable exclusion amount of $7,000,000 (i.e., her own $5,000,000 applicable exclusion amount, plus the unused $2,000,000 of her deceased husband’s applicable exclusion amount), assuming the widow does not remarry and she died before 2013.

Importantly, the 2010 Tax Act permitted a person to use the unused portion of the applicable exclusion amount of only such person’s last deceased spouse. Thus, a person cannot accumulate the unused portion of the applicable exclusion amount of more than one deceased spouse.

However, on March 23, 2011 the Congressional Joint Committee on Taxation issued an errata to the General Explanation of the 2010 Tax Act, suggesting a technical correction to the 2010 Tax Act regarding the portability exemption that could increase the unused exclusion amount of a deceased spouse (i.e., W) that her or his surviving spouse (i.e., H-2) could use to include the portion of the exclusion amount that such deceased spouse’s (i.e.,W’s) previously deceased spouse (i.e., H-1) did not use and that the deceased spouse (i.e., W) didnot use.

THE 2012 TAX ACT INCLUDES THIS TECHNICAL CORRECTION .

In addition, the unused portion of the applicable exclusion amount of the deceased spouse that can be used by the surviving spouse is not itself indexed for inflation; only the applicable exclusion amount of the surviving spouse is indexed for inflation, as described above.

To apply such portability provisions, the estate of the first spouse to die must elect to do so on a timely filed federal estate tax return. Thus, the estate of the first spouse to die must file such return, even if that person’s gross estate is less than that person’s applicable exclusion amount, if the person’s estate wants to apply these portability provisions.


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On September 29, 2011 the Service issued News Release IR-2011-97 and Notice 2011-82 providing guidance on portability for estates of decedents dying after December 31, 2010.

The Notice stated that:

• To elect portability, the executor must file a complete estate tax return(Form 706) on a timely basis, including extensions, whether or not the value of the gross estate exceeds the exclusion amount, and whether or not the executor is otherwise obligated to file an estate tax return.

• An estate will be deemed to make the portability election by timely filinga complete estate tax return without the need to make an affirmative statement, check a box, or otherwise affirmatively elect to make the election.

• Until the Service revises Form 706 to expressly contain the computationof the deceased spousal unused exclusion amount, a complete and properly prepared Form 706 will be deemed to contain the computation of the deceased spousal unused exclusion amount. Note that the estate tax return and instructions for decedents who died in 2012 includes provisions for such computation.

• To not make the portability election:

•• The executor must follow the instructions for Form 706 describing thesteps to do so. The instructions for the 2011 Form 706 state that to opt out of the portability election, a statement should be attached to Form 706 indicating that the estate is not making the election under Code Section 2010(c)(5), or “No Election under Section 2010(c)(5)” should be entered across the top of the first page of Form 706.

•• Not timely filing a Form 706 effectively prevents making the election.

• As the portability election is not available to the estate of a decedent dyingon or before December 31, 2010, any attempt to make a portability election on a Form 706 for such estate will be ineffective.

• The Service intends to issue regulations regarding portability and invitescomments on the following issues:

•• The determination in various circumstances of the deceased spousalunused exclusion amount and the applicable exclusion amount.

•• The order in which exclusions are deemed to be used.

•• The effect of the last predeceasing spouse limitation.

•• The scope of the Service’s right to examine a return of the first spouseto die without regard to the period of the statute of limitations.

•• Any additional issues that should be considered for inclusion in theproposed regulations.

On February 18, 2012, in order to enable estates to make the portability election, the Service issued Notice 2012-21 granting a six-month extension of time to file the federal


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estate tax return for the estate of a decedent who is a United States citizen or resident and who dies after December 31, 2010 and before July 1, 2011, if the decedent is survived by a spouse, the fair market value of the decedent’s gross estate does not exceed $5,000,000, the decedent’s estate did not request a six-month extension of time to file the return by timely filing Form 4768 requesting such extension, and if the executor files such Form 4768 within 15 months after the decedent’s death (which may be filed simultaneously with the filing of the estate tax return). The Notice also stated that if, prior to the issuance of the Notice, an executor of such an estate files an estate tax return after its due date, but before 15 months after the decedent’s death, without having timely requested an automatic six- month extension of the time to file the estate tax return, the executor can file Form 4768 pursuant to the Notice and the extension will relate back to the due date of the estate tax return.

On May 11, 2013 a representative of the Service advised that it is considering granting so-called Code Section 9100 relief to estates that failed to elect portability by the required deadline. In this regard, practitioners have asked the Service to eliminate the current requirement of a private letter ruling for Code Section 9100 relief for late elections of estate tax portability.

In PLR 201338003 (2013), the Service ruled that a QTIP election made with respect to a credit shelter trust should be disregarded for federal transfer tax purposes because the election was not necessary to reduce the decedent’s estate tax liability to zero.

Members of the American College of Trust and Estate Counsel are attempting to persuade the Service to clarify that under Rev. Proc. 2001-38, which treats certain QTIP elections as a nullity if the election is not required to reduce the estate tax, estates of less than the amount of the estate tax exemption are allowed to qualify for the federal estate tax marital deduction using a QTIP trust and electing portability. On May 10, 2014 a representative of the Service’s Chief Counsel Office stated that the Service is considering addressing this issue by limiting the application of Rev. Proc. 2001-38 to instances where there is no portability election. The Service’s Priority Guidance Plan for 2015-2016 includes the preparation of a Revenue Procedure regarding this issue.2

In Rev. Proc. 2014-18, IRB 2014-7, the Service issued guidance providing a simplified procedure for estates to obtain an automatic extension of time to make a portability election. Pursuant to the Rev. Proc. if a decedent died after 2010 and before 2014 leaving a surviving spouse, the decedent was a citizen or a resident of the United States on his or her death, the decedent’s estate is not required to file an estate tax return based on the value of the estate and the amount of the decedent’s taxable gifts, and the decedent’s estate did not timely file an estate tax return to elect portability, the decedent’s estate may file an estate tax return on or before December 31, 2014, in order to elect portability, and such tax return will be deemed to be timely filed. This blanket relief permits a qualifying estate to file an estate tax return in order to elect portability without having to obtain Code Section 9100 relief to do so. In the preamble to the final regulations regarding portability, noted below, the Service stated that it is considering making this safe harbor permanent.

2 See Part V, Section X for a discussion of the Service’s Priority Guidance Plan.


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On June 12, 2015 the Service released final regulations (T.D. 9725) regarding the portability provisions in the 2010 Tax Act. A full discussion of these regulations is contained in an article written by the authors of this outline and published by Commerce Clearing House in Estate Planning Review – The Journal. A copy of that article is attached hereto as Exhibit “A”.

(b) Portability and the Future of Bypass Trusts3

Estate planning documents for spouses having combined assets of more than the basic exclusion amount of one person traditionally would commonly contain provisions under which the estate of the first spouse to die would create a so called “bypass” trust for the benefit of the surviving spouse, in order to effectively utilize the basic exclusion amount of both spouses, rather than provisions under which the first spouse to die would leave his or her entire estate to the surviving spouse, outright and free of trust. Some proponents of portability have contended that where the combined assets of a married couple are less than $10,500,000, then the necessity of the first spouse to die to create a bypass trust for the benefit of the surviving spouse is eliminated, thereby simplifying the estate planning documents for such persons. However, significant reasons continue to exist for the use of bypass trusts, even in cases where the value of the combined assets of a married couple is less than $10,500,000.

First, as noted above, the portability provisions of the 2010 Tax Act were made “permanent” by the 2012 Tax Act. However, it is always possible that portability could be repealed by future legislation.

Second, the first spouse to die, by creating a bypass trust for the surviving spouse, can ensure that the balance in such trust remaining at the death of the surviving spouse will pass to the person or persons whom the first spouse to die wants to inherit such remaining balance, rather than giving the surviving spouse the opportunity to bequeath such assets to other persons.

Third, a bypass trust affords a degree of creditor protection for the assets in the bypass trust that the surviving spouse would not have with respect such assets if they were bequeathed to the surviving spouse, outright and free to trust.

Fourth, the appreciation in value of the assets bequeathed to a bypass trust will not be subject to estate tax in the estate of the second spouse to die, whereas the appreciation in value of assets bequeathed to a surviving spouse, outright and free of trust, will be subject to estate tax on the death of the surviving spouse.

Therefore, many sound reasons exist for the continued use of bypass trusts, even where the combined wealth of a married couple is less than $10,500,000.

However, there are other tax considerations that must be taken into account in deciding whether or not to use a bypass trust.

3 This subsection of the Outline is adapted from a portion of an article that the authors of this Outline wrote and that was published in Estate Planning Review – The Journal, a Wolters Kluwer Business.


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First, the assets in a bypass trust will not receive a so called “stepped-up” basis at the death of the surviving spouse, whereas the assets that the surviving owns at his or her death will receive a “stepped-up” basis at that time.

Second, if the state in which the decedent resided at his or her death has “decoupled” its estate tax from the federal estate tax regime, and if the state estate tax exemption is less than the federal estate tax exemption, then the use of a bypass trust could result in the payment of state estate taxes, even though no federal estate taxes would be due, whereas such state estate taxes could be avoided if the estate instead elects portability and does not use a bypass trust.4

These tax considerations should be taken into account in deciding whether or not to use a bypass trust.

(c) Portability and Prenuptial Agreements5

When negotiating and drafting a prenuptial agreement, consideration should be given to the desirability of including a section in such agreement regarding portability.

Assume, for example, that one party to the intended marriage owns assets that have a value substantially in excess of the applicable exclusion amount and that the other party owns assets having a value significantly less than such amount. In such case, the wealthier party may want a provision in the agreement that requires the executor of the estate of the less wealthy party, if the wealthier party survives the less wealthy party, to timely file a federal estate tax return for the estate of the less wealthy party and to elect on that return to permit the wealthier party, as the surviving spouse, to use the unused portion of the exclusion amount of the less wealthy party. Such a provision could provide a substantial tax benefit to the wealthier party, if he or she survives the less wealthy party.

Note, however, that in such case the executor of the estate of the less wealthy party will be required to prepare and file a federal estate tax return for such estate, even though the amount of the gross estate of the less wealthy party is less than the minimum filing requirement for such tax return, in order to make the required election.

5. Other Provisions

As a result of the 2010 Tax Act, many of the other provisions of prior law would continue to be effective for 2011 and 2012, including the provisions regarding modifications for GST tax purposes, the automatic allocation of the GST tax exemption, the retroactive allocation of the GST tax exemption, qualified severances, 9100 relief for GST tax purposes, and the relaxation of the requirements for the deferral of estate tax payments under Code Section 6166.

4 See Part II, Section C, of this Outline for a fuller discussion of “decoupling”. 5 This subsection of the Outline is adapted from a portion of an article that the authors of this Outline wrote and that was published in Estate Planning Review – The Journal, a Wolters Kluwer Business.


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THESE PROVISIONS ARE MADE “PERMANENT” BY THE 2012 TAX ACT.

6. Summary Chart

The following chart summarizes the changes made by the 2010 Tax Act and the2012 Tax Act:

2010 (Pursuant to the 2010 Tax Act)



2013 and thereafter (Pursuant to the 2012 Tax Act)

Estate Tax Exemption

Election between $5,000,000 exemption, or no estate tax and modified carryover basis

$5,000,000 and portability

$5,000,000 indexed for inflation since 2010 and portability


Maximum Estate Tax Rate

35% 35% 35% 40%

Step-up in Income Tax Cost Basis at Death

Unlimited with estate tax, or modified carryover basis without estate tax

Unlimited Unlimited Unlimited

Lifetime Gift Tax Exemption

$1,000,000 $5,000,000 and portability



Maximum Gift Tax Rate

35% 35% 35% 40%

Lif etime Generation-Skipping Transfer Tax Exemption

$5,000,000 $5,000,000 and no portability

$5,000,000 indexed for inflation since 2010 and no portability

$5,000,000 indexed for inflation since 2010 and no portability

Maximum Generation-Skipping Transfer Tax Rate

-0- 35% 35% 40%


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7. Omitted Transfer Tax Provisions

The 2010 Tax Act did not contain any provisions requiring a minimum term for grantor retained annuity trusts (“GRATs”), as had been included in the President’s Budget Proposal for the prior two years and in prior legislative proposals. Thus, short term GRATs continued to be a viable estate planning tool.

In addition, the 2010 Tax Act did not contain any provisions restricting valuation discounts for transfer tax purposes. As a result, valuation discounts for family limited partnerships continued to apply for transfer tax purposes, as in the past.

THESE PROVISIONS THAT WERE OMITTED FROM THE 2010 TAX ACT WERE ALSO OMITTED FROM THE 2012 TAX ACT.

8. IRS Publication 950

In October 2011 the Service released a revised version of Publication 950, Introduction to Estate and Gift Taxes, highlighting the changes to the estate tax, gift tax and GST tax as a result of the 2010 Tax Act.

B. Federal Income Tax Provisions

The 2010 Tax Act extended many of the Bush-era income tax cuts through 2012.Thus, for two more years the maximum income tax rate on ordinary income would remain at 35%, and the maximum income tax rate on long term capital gains and qualified dividends would remain at 15%.

THE 2012 TAX ACT MADE “PERMANENT” MANY OF THE BUSH-ERA INCOME TAX CUTS, BUT INCREASED THE MAXIMUM INCOME TAX RATE FROM 35% TO 39.6% FOR HIGH INCOME PERSONS.

In addition, the 2010 Tax Act extended for 2010 and 2011 the ability of a person who is at least 70-1/2 years old to make a direct contribution to charity of up to $100,000 from the person’s Individual Retirement Account, without the contribution being included in the person’s income. Moreover, the 2010 Tax Act permitted a person to make such a contribution in January 2011 and to treat the contribution as having been made on December 31, 2010.

THE 2012 TAX ACT EXTENDED THESE PROVISIONS REGARDING DIRECT CONTRIBUTIONS TO

CHARITY ONLY FOR 2012 AND 2013, AND THE TAX INCREASE PREVENTION ACT OF 2014 EXTENDED

THESE PROVISIONS ONLY FOR 2014.

C. State Transfer Tax Considerations

EGTRRA repealed the federal estate tax credit for state death taxes paid, forestates of decedents dying after 2004, and replaced such credit with a federal estate tax deduction for state death taxes paid. However, most states and the District of Columbia previously had the


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“sop” or pick-up tax as their estate tax, although numerous states also have an inheritance tax. The estate tax in a majority of these states automatically conformed to changes in the federal estate tax, and therefore the economic effect of the elimination of the state death credit had an impact on revenue from the credit. As a result, many states enacted estate, inheritance and/or succession taxes to make up for the revenue loss due to the elimination of the credit; thus, they “decoupled” from the changes in the federal tax code. However, different states decoupled based upon different pre-EGTRRA applicable exclusion amounts, and different states have different exemption amounts. The elimination of the federal estate tax credit for state death taxes paid, the existing federal estate tax deduction for state death taxes paid, and the “decoupling” by many states of their estate tax from the federal estate tax regime, requires the consideration of the state estate tax planning implications of these changes. A discussion of actions taken by certain of these states is contained below in this Section.

1. New York

In the instance where a state statute does not automatically follow changes made to the federal estate tax, such as the New York State Tax Law, its residents may find themselves with a larger estate tax burden.

As of April 1, 2014, New York increased in stages the amount of a decedent’s taxable estate that can be exempt from New York estate tax from $1,000,000 to an amount that from and after January 1, 2019 will be equal to the federal basic exclusion amount. For a New York decedent who died after March 31, 2014 and prior to January 1, 2015 with a full federal credit shelter bequest of $5,340,000, the decedent’s estate will be required to pay New York estate taxes of $431,600 even though the estate would not have to pay any federal estate taxes. In addition, for a New York decedent who dies in 2015 with a full federal credit shelter bequest of $5,430,000, the decedent’s estate will be required to pay New York estate taxes of $442,400, even though the estate would not have to pay any federal estate taxes. Since the New York estate tax is deductible for federal estate tax purposes, the effective combined federal and New York estate tax rate for such decedents is the sum of the federal estates tax rate of 40%, plus the effective New York estate tax rate of 9.6% (i.e., 60% of the New York estate tax rate of 16%), or 49.6%. After this change is fully phased in, a credit shelter disposition upon the death of the first spouse to die of the New York estate tax basic exclusion amount (which will be the same as the federal estate tax basic exclusion amount) will not result in any New York (or federal) estate tax, as the New York taxable estate would not be more than the New York estate tax basic exclusion amount.

Possible Planning Technique: If the New York estate tax is paid from the credit shelter disposition, the amount of the New York estate tax imposed on the estate as described in the preceding paragraph will apply. However, paying the New York estate tax from the credit shelter disposition will reduce the net after-tax amount of that disposition, and correspondingly increase the amount of the marital deduction disposition, causing an increase in the amount of the federal estate tax payable on the death of the second spouse to die. Instead, practitioners should consider having the New York estate tax payable from the marital deduction disposition (which will not cause a federal estate tax to be payable, since the New York estate tax is deductible for federal estate tax purposes), in order to maximize the amount of the credit shelter disposition and avoid such increase in the amount of the federal estate tax payable on the death


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of the second spouse to die. Note, however, that paying the New York estate tax from the marital deduction disposition will cause the amount of the New York estate tax to increase from $431,600 to $490,454 for decedents dying in 2014, and to increase from $442,400 to $502,727 for decedents dying in 2015.

2. Connecticut

On May 4, 2011, as part of the budget legislation (CGA Bill No. 1239), Connecticut lowered the Connecticut estate tax and gift tax thresholds from $3,500,000 to $2,000,000 applicable retroactively to estates of decedents dying on or after January 1, 2011 and gifts made on or after January 1, 2011. The tax for estates and gifts of more than $2,000,000 will be based on graduated rates, starting at a rate of 7.2%, and the maximum tax rate will be 12% (on the excess over $10,100,000).

As a result, the estate of a person who died in 2014 a resident of Connecticut with a taxable estate of $5,340,000 would be required to pay Connecticut estate taxes of $259,800, and a person who dies in 2015 a resident of Connecticut with a taxable estate of $5,430,000 would be required to pay Connecticut estate taxes of $267,900, even though such estate would not be required to pay any federal estate taxes.

3. New Jersey

New Jersey, by affirmative legislation, on July 1, 2002 enacted an estate tax (P.L. 2002, Chapter 31) on the estate of every resident decedent dying after December 31, 2001 which would have been subject to an estate tax payable to the United States under the provisions of the Internal Revenue Code in effect on December 31, 2001. The amount of the New Jersey tax is the maximum state death tax credit that would have been allowable under the Code as in effect on December 31, 2001. For example, if the unified credit bequest equaled $1,000,000, there would be a New Jersey estate tax due of $33,200. On February 27, 2008, in the case of Oberhand v. Director, Division of Taxation, 193 N.J. 558, 9420 A.2d 1202 (2008), the Supreme Court of New Jersey found that the amendment was constitutional but that the application retroactive to December 31, 2001 violated the doctrine of “manifest injustice”. There is an alternative to this method which is the amount determined using a “simplified tax system” based on the $675,000 unified estate and gift tax applicable exclusion amount provided in the Internal Revenue Code, but the simplified method cannot be used if the taxpayer files or is required to file a Federal return. The legislation was implemented by rule amendments published on April 7, 2003. The amendment provides that a New Jersey estate tax return must be filed whenever the gross estate as determined in accordance with the provisions of the Code in effect on December 31, 2001 exceeds $675,000.

As a result, the estate of a person who died in 2014 a resident of New Jersey with a taxable estate of $5,340,000 would be required to pay New Jersey estate taxes of $431,600, and a person who dies in 2015 a resident of New Jersey with a taxable estate of $5,430,000 would be required to pay New Jersey estate taxes of $442,400, even though such estate would not be required to pay any federal estate taxes.


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In Estate of Stevenson v. Director, 008300-07 (N.J. Tax Court, 2008), the New Jersey Tax Court held that when calculating the New Jersey estate tax where a marital disposition was burdened with estate taxes, creating an interrelated computation, the marital deduction must be reduced not only by the actual New Jersey estate tax, but also by the hypothetical federal estate tax that would have been payable if the decedent had died in 2001.

4. Pennsylvania

Pennsylvania does not have an estate tax for decedents who die after December 31, 2004, due to the elimination of the credit against federal estate taxes for state death taxes paid. However, Pennsylvania still has an inheritance tax, which is independent of the federal state death tax credit and the phase-out of that credit.

5. Florida

In certain states, there are additional barriers to decoupling. For example, in Florida, a constitutional provision restricting the amount of estate tax levied would likely need to be altered. Therefore, since the complete phase-out of the state death tax credit in 2005, Florida has not been able to collect any estate tax from its residents.

Attached hereto as Exhibit “B” is a chart showing a comparison of the state estate taxes after the 2012 Tax Act of New York, New Jersey, Florida and Connecticut.

6. Delaware

Delaware reinstated its estate tax for decedents dying after June 30, 2009. The amount of the estate tax is equal to the credit against federal estate taxes for state death taxes paid by the estate, as such credit was in effect as of January 1, 2001.

7. Other States

Attached hereto as Exhibit “C” is a chart showing the effect as of January 26, 2015 of EGTRRA on the “pick-up” tax of each state and the status as of that date of any death tax legislation in each state.

8. State QTIP Elections

In states which have decoupled and which have a separate qualified terminable interest property (“QTIP”) election for state estate tax purposes, practitioners should consider drafting testamentary documents with a separate QTIP trust for that election. As of this writing, Connecticut (only if no federal QTIP election is made), Illinois, Indiana, Kansas, Kentucky, Maryland, Massachusetts, Maine, New Jersey (only if a federal estate tax return is not required to be filed), Ohio, Oregon, Pennsylvania, Rhode Island, Tennessee and Washington have such an election. On July 29, 2011 the New York State Department of Taxation and Finance issued TSB-M-11(9)M stating that if a federal estate tax return is filed solely to elect portability, any QTIP election that is made on such federal tax return must also be made for New York estate tax purposes. If a QTIP election is not made on such federal return, it may not be made for New York estate tax purposes. However, a New York state only QTIP election is permitted if no


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federal estate tax return is filed. With regard to Connecticut, the Department of Revenue Services, by special notice, has taken the position that if the federal QTIP election is made, a state election must also be made for the same amount, although this is not in accord with the underlying statute. If no federal election is made, a state-only QTIP election may be made. With regard to New Jersey, NJAC 26:18-3A.8(d) provides that the New Jersey estate tax return must be consistent with the federal return. Accordingly, if a federal QTIP election is made, it must also be made for New Jersey in the same amount. However, if a federal QTIP election would not reduce the federal estate tax liability, such an election will not be given effect for New Jersey estate tax purposes.

Since both New York and New Jersey take the position that, even if a federal estate tax return is filed solely for the purpose of electing portability, the same QTIP election that is made on such federal return must also be made for state estate tax purposes. If a QTIP election is not made on the federal estate tax return, then it may not be made for state estate tax purposes. Thus, the executors in such states may have to choose between a state QTIP election and portability.

III. OBAMA ADMINISTRATION FISCAL YEAR 2016 AND CONGRESSIONAL 2015PROPOSALS

President Obama’s February 2015 budget request for the fiscal year ending September 30, 2016 (the “Greenbook”) includes:

• A proposal to make permanent the estate tax, gift tax and GST taxexemptions and rates as they applied during 2009 (i.e., an estate tax and GST tax exemption of $3,500,000, a gift tax exemption of $1,000,000, and a maximum tax rate of 45%), effective for the estates of decedents dying, and for transfers made, after December 31, 2015.

• A proposal that would eliminate the present interest requirement for giftsthat qualify for the gift tax annual exclusion, and that would define a new category of transfers (without regard to the existence of any withdrawal or put rights), and would impose an annual limit of $50,000 (indexed for inflation after 2016) per donor on the donor’s transfers of property within this new category that will qualify for the gift tax annual exclusion. This new $50,000 per donor limit would not provide an exclusion in addition to the annual per donee exclusion; rather, it would be a further limit on those amounts that otherwise would qualify for the annual per donee exclusion. Thus, a donor’s transfers in the new category in a single year in excess of a total amount of $50,000 would be taxable, even if the total gifts to each individual donee did not exceed $14,000. The new category would include transfers in trust (other than to a trust described in Code Section 2642(c)(2)), transfers of interests in passthrough entities, transfers of interests subject to a prohibition on sale, and other transfers of property that, without regard to withdrawal, put, or other such rights in the donee, cannot immediately be liquidated by the donee.

• A proposal under which the lifetime transfer, or the transfer on death, ofappreciated property generally would be treated as a sale of the property, with certain limited exclusions.


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• A consistency requirement in the value of property for transfer tax andincome tax purposes, under which the basis of property received by reason of death under Code Section 1014 must equal the value of that property for estate tax purposes, the basis of property acquired from a decedent whose estate elected the modified carryover basis regime is the basis of that property, including any additional basis allocated to that property by the executor, as reported on Form 8939, and the basis of property received by gift during the donor’s life must equal the donor’s basis under Code Section 1015, and a reporting requirement with respect thereto.

• A requirement that a GRAT have a minimum term of 10 years and amaximum term of the life expectancy of the annuitant plus 10 years.

• A requirement that the remainder interest in a GRAT at the time theinterest is created must have a minimum value equal to the greater of 25% of the value of the assets contributed to the GRAT or $500,000, but not more than the value of the assets contributed.

• A prohibition on any decrease in a GRAT annuity during the GRAT term.

• A prohibition on the grantor of a GRAT from engaging in a tax-freeexchange of any assets held in the GRAT.

• A limitation of 90 years of the time during which a trust could be exemptfor GST tax purposes.

• As to grantor trusts, if the deemed owner of a trust engages in atransaction with that trust that constitutes a sale, exchange or comparable transaction that is disregarded for income tax purposes by reason of the grantor trust rules, a proposal that the portion of the trust attributable to the property received by the trust in that transaction generally will be subject to estate tax as a part of the deemed owner’s gross estate, will be subject to gift tax at any time during the deemed owner’s life when his or her treatment as the deemed owner of the trust is terminated, and will be treated as a gift by the deemed owner to the extent any distribution is made to another person during the deemed owner’s life. This proposal would not apply to any irrevocable trust whose only assets typically consist of one or more life insurance policies on the life of the grantor and/or the grantor’s spouse.

• If an estate elects to pay estate taxes in installments under Code Section6166, a proposal to extend the 10 year estate tax lien under Code Section 6324(a)(1) for the entire Code Section 6166 deferral period;

• A proposal to clarify that the exclusion from the definition of a generation-skipping transfer under Code Section 2611(b)(1) applies only to a payment by a donor directly to the provider of medical care or to the school in payment of tuition and not to trust distributions, even if for those same purposes.

• A proposal to empower the executor of a decedent’s estate to act on behalfof the decedent in all matters relating to the decedent’s taxes, and to grant regulatory authority to adopt rules to resolve conflicts among multiple executors.

• A proposal to increase the highest long-term capital gains and qualifieddividend tax rate from 20% to 24.2% which, together with the 3.8% net investment income tax,


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would result in a maximum total capital gains and dividend tax rate (including the net investment income tax) of 28%.

• A proposal to limit the income tax value of specified deductions orexclusions from adjusted gross income and all itemized deduction to 28% of the specified exclusions and deductions that would otherwise reduce taxable income in the 33%, 35% or 39.6% income tax brackets.

• A proposal to simplify the rules limiting income tax deductions forcharitable contributions by providing that the contribution base limit would remain at 50% for contributions of cash to public charities, that a single deduction limit of 30% of the taxpayer’s contribution base would apply for all other contributions, and that the carry-forward period for excess contributions would be extended from 5 years to 15 years.

• A new minimum tax, called the Fair Share Tax, on high income taxpayersto be phased in linearly starting at $1,000,000 of adjusted gross income, or $500,000 in the case of a married person filing a separate return, that would be fully phased in at $2,000,000 of adjusted gross income, or $1,000,000 in the case of a married person filing a separate return, and that in general would require the taxpayer to pay a minimum income tax of 30% of adjusted gross income less a credit for charitable contributions.

• A proposal to tax so-called “carried interests” as ordinary income.

• A proposal requiring non-spouse beneficiaries of retirement plans andIRAs in general to take distributions over no more than five years.

• A proposal prohibiting a participant in a tax-favored retirement systemfrom making additional contributions or receiving additional accruals under those arrangements, if the participant has accumulated amounts in such system in excess of the amount necessary to provide the maximum annuity permitted for a tax-qualified defined benefit plan under current law (which currently is an annual benefit of $210,000 payable in the form of a joint and 100% survivor benefit commencing at age 62 and continuing each year for the life of the participant and, if longer, the life of the participant’s spouse). Currently, the maximum permitted accumulation for an individual age 62 is approximately $3,400,000.

• A proposal to exempt an individual from the minimum distributionrequirements if the aggregate value of the individual’s IRA and tax-favored retirement plan accumulations does not exceed $100,000 (indexed for inflation).

• A proposal to permit a qualified retirement plan to allow participants totake a distribution of a lifetime income investment through a direct rollover to an IRA or another retirement plan if the annuity investment is no longer authorized to be held under the plan, without the distribution being subject to the 10% additional tax.

• A proposal to require employers with 10 or more employees who do notalready have a retirement plan to automatically enroll those employees in an IRA.

• A proposal to allow a non-spouse beneficiary of a tax-favored retirementplan or an IRA to move inherited plan or IRA assets to a non-spousal inherited IRA by a 60-day rollover of such assets.

• A proposal to index all civil tax penalties for inflation.


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On February 2, 2015 The Permanent IRA Charitable Contribution Act (H.R. 637), which would permanently allow tax-free distributions of up to $100,000 per year from an IRA to charities by a person age 70-1/2 or older, was introduced in the House of Representatives, and on February 4, 2015 the House Ways and Means Committee approved the proposed legislation.

On April 16, 2015 the House of Representatives passed legislation (H.R. 1105) to repeal the estate tax.

On July 15, 2015 the House of Representatives passed legislation (H.R. 3038) providing a five-month extension of the Highway Trust Fund that includes a requirement that an estate must report the value of property when an owner dies, in order to fix the property’s value on the owner’s death for use in connection with the property’s income tax cost basis for future income tax purposes, and includes a provision clarifying the six-year statute of limitations on reassessing tax returns where there is an overstatement of basis.

IV. OTHER IMPORTANT FEDERAL LEGISLATION

A. Medicare Tax on Estates, Trusts and Individuals

The Health Care and Education Reconciliation Act of 2010 enacted new CodeSection 1411, which imposes a 3.8% unearned income Medicare contribution tax, starting in 2013. As to estates and trusts, the tax is imposed on the lesser of (1) undistributed net investment income for the tax year, or (2) any excess of adjusted gross income over the dollar amount at which the highest tax bracket for estates and trusts begins for the applicable tax year, which for 2014 is $12,150, subject to inflation adjustments each year. Trusts all of the unexpired interests in which are devoted to charitable purposes are exempt from this tax. As to individuals, the tax is imposed on the lesser of (1) the taxpayer’s net investment income for the tax year, or (2) any excess of the taxpayer’s modified adjusted gross income for the tax year, over $250,000,in the case of a taxpayer filing a joint return, or over $200,000, in the case of an unmarriedtaxpayer.

On November 30, 2012 the Service issued proposed regulations regarding such tax (REG-130507-11). The proposed regulations provide that any net investment income recognized by a charitable remainder trust before the end of 2012 is not included in such trust’s accumulated net investment income when a subsequent distribution is made after 2012. Pursuant to Proposed Reg. Section 1.1411-3, the 3.8% tax on the net investment income of an individual, estate or trust pursuant to Code Section 1411 is imposed on the lesser of (1) the taxpayer’s undistributed net income, or (2) the excess, if any, of its adjusted gross income over the threshold for the highest tax bracket under Code Section 1(e), which is $12,150 in 2014 for trusts.

On November 29, 2013 the Service issued final regulations on the net investment income tax (T.D. 9645), which generally contain many of the provisions of the proposed regulations. Under the final regulations, pooled income funds are not exempt from such tax, whereas wholly charitable trusts and wholly charitable estates are exempt from such tax. However, the regulations also state that the issue of what constitutes material participation for trusts and estates should be determined in guidance under Code Section 469, thereby leaving this issue unsettled.


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On November 27, 2013 the Service updated its Questions and Answers regarding the 3.8% net investment income tax, that came into effect on January 1, 2013 and is imposed under Code Section 1411. Estates and trusts are subject to such tax if (1) they have undistributed net investment income, and (2) their adjusted gross income is greater than the dollar amount at which the highest income tax bracket for trusts and estates begins (which is $12,150 in 2014). Such tax is equal to 3.8% of the lesser of (1) the undistributed net investment income for the tax year, or (2) the excess of the gross income over the dollar amount at which the highest income tax bracket for trusts and estates begins. Such tax applies only to trusts that are subject to the fiduciary income tax under Part I of Subchapter J of Chapter 1 of Subtitle A of the Code. Trusts that are generally exempt from income tax, such as charitable trusts and qualified retirement plan trusts, are exempt from this tax. In addition, there are special rules for the calculation of the net investment income with respect to charitable remainder trusts and electing small business trusts that own interests in S corporations. Net investment income includes the various types of income and gain that are generated by investment activities, such as interest, dividends, capital gains, rental and royalty income. Individuals, estates and trusts will use Form 8960 to compute their net investment income tax and attach such form to their federal income tax returns.

At an American Law Institute Continuing Legal Education Program on February 18, 2014, an attorney with the Service’s Office of Chief Counsel stated that if a trust distributes its net investment income to a beneficiary, the income will retain its character as investment income in the beneficiary’s hands. In addition, such person stated that if there is an active business at the trust level, the business remains active for purposes of the beneficiary under the final regulations, even though there may not be a clear rule as to whether trust income retains its character in the beneficiary’s hands for purposes of Code Section 469. Further, such person stated that grantor trusts are disregarded for purposes of the net investment income tax, and the trust’s activity therefore is treated as though the grantor owned the activity directly.

In Frank Aragona Trust v. Commissioner, 142 T.C. No. 9 (2014), the Court held that the services performed by the trustees of a trust with respect to the trust’s real estate interests can be considered personal services performed by the trust, so the trust could be treated as materially participating in its real estate operations. On June 17, 2014 the Service asked the Tax Court to extend the deadline for filing computations of tax liability from June 16, 2014 to July 30, 2014.

On January 31, 2015 an attorney in the Service’s Chief Counsel’s Office advised that the Service would begin to work on guidance concerning the passive loss rules in Code Section 469 as they pertain to the net investment income tax payable by estates and trusts.

As the tax applies with respect to tax years beginning after December 31, 2012, the estate of a decedent who died in 2012 and that selected a fiscal year ending on or before November 30, 2012 would avoid such tax on the estate’s net investment income for such fiscal year and also for the next following fiscal year.

B. Death Master File

On December 26, 2013 the Continuing Appropriations Resolution, 2014, wasenacted. The resolution includes a provision that limits public access to death records held by


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the Social Security Administration, known as the Death Master File, to certified entities such as life insurers and pension funds that use the data to combat fraud and administer benefits. The limits apply for three years after an individual’s death.

C. Patient Protection and Affordable Care Act

On August 27, 2013 final regulations were issued on the “individual mandate”requirements of the Patient Protection and Affordable Care Act, which takes effect on January 1, 2014. Every non-exempt individual must have minimum essential coverage under a government sponsored program, an employee sponsored plan, a plan in the individual market, or any other health plan recognized by the United States Department of Health and Human Services. Exempt individuals include individuals who cannot afford coverage, individuals who obtain a hardship exempt certificate, non-United States citizens, and a United States citizen or resident with a tax home outside of the United States who is a bona fide resident of a foreign country during an uninterrupted period that includes an entire taxable year. Individuals who opt not to carry health coverage and who are not exempt must make a shared-responsibility payment, which for 2014 is the lesser of 1% of the individual’s modified adjusted gross income, or $95. The penalty is scheduled to increase in 2015 to $325 and 2%, and in 2016 to $695 and 2-1/2%. After 2016, the dollar limit will be indexed for inflation. The payment is made by individuals on their income tax returns.

D. Tax Increase Prevention Act of 2014

The Tax Increase Prevention Act of 2014 was enacted on December 19, 2014.The Act, among other things, extended through the end of 2014 the election to claim an itemized deduction for state and local general sales taxes in lieu of state and local income taxes, excludes from income a cancellation of mortgage debt on a principal residence of up to $2,000,000 through the end of 2014, and extended through the end of 2014 the ability of individuals who are 70-1/2 years old and older to make tax-free distributions of up to $1,000,000 from an IRA to aqualified charitable organization.

E. Surface Transportation and Veterans Health Care ChoiceImprovement Act of 2015

The Surface Transportation and Veterans Health Care Choice Improvement Actof 2015 (also known as the Highway Funding Bill) was enacted on July 31, 2015. This statute includes the following provisions:

• The income tax cost basis of any property acquired from a decedent withinthe meaning of Code Section 1014 shall not exceed the estate tax value of such property. However, this requirement only applies to property whose inclusion in the decedent’s estate increased the estate tax liability of such estate.

• The executor of an estate who is required to file a federal estate tax return,within the earlier of 30 days after the due date of such return or 30 days after such return is filed, must send a statement to the Service and to each person acquiring any interest in property that is included in the decedent’s gross estate for federal estate tax purposes identifying the value of such interest as reported on such estate tax return.


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• If there is an adjustment to the value of such interest as reported on theestate tax return, the executor, within 30 days after such adjustment is made, must send a supplemental statement to the Service and to such person advising as to such adjustment.

• The penalty under Code Section 6721 for the failure to comply with aspecified information reporting requirement applies to the failure to provide such statements.

• Generally, the accuracy-related penalty for an underpayment of taxpursuant to Code Section 6662 applies if the income tax cost basis of property claimed on a return exceeds the estate tax value of such property.

• The above provisions apply to property with respect to which a federalestate tax return is filed after July 31, 2015.

• The six-year statute of limitations in the case of a substantial omissionunder Code Section 6501 applies to an understatement of gross income by reason of an overstatement of the income tax cost basis of property. This provision is effective with respect to tax returns filed after July 31, 2015, and also with respect to tax returns filed on or before such date if the period for the assessment of taxes under Code Section 6501 has not expired as of such date.

On August 21, 2015 the Service released Notice 2015-57, which provides that the due date for such statements that are required to be filed with the Service and furnished to a beneficiary before February 29, 2016 is delayed to February 29, 2016, to allow the Service to issue guidance implementing such reporting requirements. In addition, the Notice states that executors and other persons required to file or furnish such statements should not do so until the issuance of forms or further guidance by the Service addressing such requirements. This Notice is effective on August 21, 2015, and applies to executors and other persons who are required to file a federal estate tax return if such return is filed after July 31, 2015.

V. IMPORTANT IRS REGULATIONS, ANNOUNCEMENTS AND COURT DECISIONS

A. 2015 Inflation Adjustments

In Rev. Proc. 2014-61, 2014-47 IRB (October 30, 2014), the Service releasedinflation-adjusted numbers as of January 1, 2015 as follows:

The inflation-adjusted annual gift tax exclusion is $14,000, as it was in 2014; the annual gift tax exclusion for non-citizen spouses is $147,000, increased from $145,000 in 2014; the basic exclusion amount is $5,430,000, increased from $5,340,000 in 2014, for determining the amount of the unified credit against the estate tax and gift tax; the amount used to calculate the 2% portion for purposes of Code Section 6166 is $1,470,000, increased from $1,450,000 in 2014; for executors electing to use the special use valuation method under Code Section 2032A for qualified real property, the aggregate decrease in the value of qualified real


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property resulting from electing to use Code Section 2032A that is taken into account for purposes of the estate tax may not exceed $1,100,000, increased from $1,090,000 in 2014.

Beginning in 2004, the GST tax exemption became tied to the applicable exclusion amount under Code Section 2010(c). Pursuant to the 2010 Tax Act, this exemption was increased to $5,000,000, starting in 2010. Starting in 2012, this exemption is indexed for inflation from 2010, and the inflation-adjusted amount of this exemption is $5,430,000 in 2015.

In addition, Rev. Proc. 2014-61 announced the following 2015 inflation-adjusted amounts for income tax purposes: the maximum income tax brackets starts at $464,850 for married individuals filing jointly and surviving spouses, $439,000 for heads of households, $413,200 for other unmarried individuals, $232,425 for married individuals filing separately, and $12,300 for estates and non-grantor trusts; the income tax standard deduction is $12,600 for married individuals filing jointly and surviving spouses, $9,200 for heads of households, $6,300 for other unmarried individuals, and $6,300 for married individuals filing separately; the income tax personal exemption is $4,000; the alternative minimum tax exemption is $83,400 for married individuals filing jointly and surviving spouses, $53,600 for other unmarried individuals, $41,700 for married individuals filing separately, and $23,800 for estates and trusts; the personal and dependency exemptions increase to $4,000; and the personal exemption phase-out (PEP) begins at adjusted gross income of $309,900 for married individuals filing jointly and at $258,200 for other individuals.

On October 23, 2014 the Service issued IR-2914-99, which announced cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2015. The adjustments include the following:

• The elective deferral (contribution) limit for employees who participate in401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $17,500 to $18,000.

• The catch-up contribution limit for employees aged 50 and over whoparticipate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $5,500 to $6,000.

• The limit on annual contributions to an Individual RetirementArrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

• The deduction for taxpayers making contributions to a traditional IRA isphased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $61,000 and $71,000, up from $60,000 and $70,000 in 2014. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $98,000 to $118,000, up from $96,000 to $116,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $183,000 and $193,000, up from $181,000 and


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$191,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

• The AGI phase-out range for taxpayers making contributions to a RothIRA is $183,000 to $193,000 for married couples filing jointly, up from $181,000 to $191,000 in 2014. For singles and heads of household, the income phase-out range is $116,000 to $131,000, up from $114,000 to $129,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

In addition, the Social Security Administration announced that the Social Security wage base is increased for 2015 from $117,000 to $118,500.

B. Tax Returns

1. Form 706-QDT

In August 2014 the Service released the final version of Form 706-QDT, United States Estate Tax Return for Qualified Domestic Trusts, and accompanying instructions. This form is used by the trustee or the designated filer of a Qualified Domestic Trust (“QDOT”) to calculate and report the estate tax due on certain distributions from the QDOT, the value of the property remaining in the QDOT on the date of the surviving spouse’s death, and the principal portion of certain annuity payments. This form is also used to notify the Service that the trust is exempt from future filing because the surviving spouse became a United States citizen and meets the requirements provided in Part II-Elections by the Trustee/Designated Filer, Line 4 Spousal Election of the instructions.

2. Estate Tax Returns for Post-2012 Decedents

On October 29, 2013 the Service released the estate tax and generation-skipping tax return for the estates of decedents dying after December 31, 2012.

3. 2014 Gift Tax Returns

On October 30, 2014 the Service released the gift tax return to report gifts made in 2014.

4. Generation-Skipping Transfer Tax Forms

On October 11, 2013 the Service released a revised Form 706-GS(D) to report taxable distributions made after December 31, 2010, and a revised Form 706-GS(T) to report taxable terminations that occur after December 31, 2012.

5. Instructions for Form 1040-X

On January 7, 2014 the Service issued new instructions for Form 1040-X that includes language on how taxpayers can use such form to amend a return filed before September 16, 2013 to change their filing status to a married filing status.


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6. Form 8690

On February 26, 2014 the Service issued Form 8960 regarding the 3.8% Medicare Contribution Tax on unearned income for individuals, estates and trusts under Code Section 1411.

C. Estate Tax, Gift Tax and Fiduciary Income Tax Audits and Collections

The Service recently announced on its website that it will not automatically issueclosing letters for estate tax returns filed on or after June 1, 2015, and that a taxpayer who wants an estate tax closing letter should request it in a separate letter submitted to the Service at least four months after the estate tax return is filed.

In Estate of Davidson v. Commissioner, T.C. No. 13748-13 (2015), where the Service had asserted estate tax and GST tax deficiencies totaling $2,800,000,000 in connection with transfers by the taxpayer to trusts for his grandchildren of self-cancelling installment notes in reliance on an allegedly unrealistic life expectancy, and where the taxpayer had asserted that the medical consultants retained by the parties stated that the taxpayer had a greater than 50% probability of living at least one year, but the taxpayer died only two months after the transfers, the Service stipulated to estate taxes and GST taxes totaling approximately $321,000,000.

On July 2, 2014 and September 3, 2014 the Service issued memoranda to estate tax and gift tax employees, stating that Appeals will not be able to raise new issues that have not already been dealt with on audit, that at least 270 days must remain on the statute of limitations before Appeals will accept an estate tax case and 365 days must remain on the statute of limitations before Appeals will accept a case involving gift tax or fiduciary income taxes, and that if Appeals receives a file that does not raise issues or properly develop them, then Appeals must send the case back to the examiner, rather than pursing such issues at the Appeals level.

In the ongoing litigation between the Estate of Michael Jackson and the Service regarding the estate’s estate tax liability, the Service valued the decedent’s “image and likeness” at more than $430,000,000, while the estate valued the decedent’s image and likeness at approximately $2,000

In the companion cases of Rogers v. Commissioner, 728 F.3d 673 (Ct. App. 7th Cir. 2013), and Superior Trading, LLC v. Commissioner, 728 F.3d 676 (Ct. App. 7th Cir. 2013), involving a distressed asset-debt transaction, the Court disallowed losses resulting from such transaction, charactering it as a sham, and imposed a 40% gross valuation misstatement penalty, where the aggregate tax basis of the subject receivables had been close to zero but they were valued at approximately $30,000,000, and where the taxpayers did not have reasonable cause for same.

In United States v. Mangiardi, S.D. Fla., No. 9:13-cv-80256 (July 22, 2013), the Court held that the 10-year statute of limitations under Code Section 6324, rather than the four year statute of limitations under Code Section 6901, applies to the collection of unpaid federal estate taxes from a transferee.


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In Estate of Liftin v. United States, Fed Cl No. 10-589 (2013), where the executor of the decedent’s estate, on the advice of counsel, did not file the federal estate tax return by the extended due date, in order to wait until the naturalization process for the surviving spouse was completed, to take full advantage of the estate tax marital deduction, and where the executor filed the estate tax return after the extended due date and nine months after the surviving spouse obtained her United States citizenship, the Court held that the executor’s failure to file the return until after the surviving spouse obtained her citizenship was due to a reasonable reliance of the erroneous advice of the estate’s attorney, because the advice related directly to the filing date, but that the nine month delay in filing the return after the surviving spouse obtained her citizenship was not reasonable. As a result, the Court sustained the Service’s imposition of the penalty for failure to timely file the tax return.

In Knappe v. United States, No. 10-56904 (9th Cir. 2013), cert. denied (Oct. 15, 2013) where the executor of the decedent’s estate, in reliance on the erroneous advice of the estate’s accountant, believed that the automatic six month extension of the time to file the estate tax return was a one year extension, and the executor filed the estate tax return after the six month extension period, the Court sustained the late filing penalty on the grounds that there is reasonable cause to abate a penalty resulting from a taxpayer’s erroneous advice only when the advice is in regard to a substantive tax law issue, which in effect means an issue arising from an ambiguous tax provision, but that there was no ambiguity as to the extended due date for filing the tax return.

In CCA 201249015 (August 14, 2012) the Service advised that interest is assessed on gift taxes for an unreported gift from the date on which the gift tax return should have been filed to report such gift, even though such gift was reported on the estate tax return for the decedent’s estate.

In CCA 201214031 (March 15, 2012) the Service advised that Code Section 6423(a)(2) imposed personal liability for the payment of estate taxes on the transferees of nonprobate property of the decedent, and that bringing an action under Code Section 6901 to enforce such liability would result in assessments against the transferees and liens against the transferees’ property, although the nonprobate property was not encumbered by an estate tax lien under Code Section 6423(a)(1), as the transferees did not receive such property from the decedent’s estate.

In T. Gaughen, D.C. Pa., 2012 U.S. Dist. LEXIS 11662 (January 31, 2012), the Court, denying the taxpayer’s summary judgment motion for a refund of a fraud penalty relating to the understatement of the value of real estate for gift tax purposes, found that there was sufficient evidence to find that the donor had intentionally undervalued the properties, where a large difference existed between the values claimed on the gift tax return and the values claimed by the Service at trial, a substantial difference existed between the values of the properties reported for gift tax purposes and the County tax assessments of the value of such properties, prior contracts to sell certain of the properties were for almost 10 times the reported gift tax values of such properties, and the appraisal on which the taxpayer based the gift tax values of such properties could be found to directly reflect the values suggested by the donor to the appraiser. On December 1, 2011 the Service posted on its website an amendment to the Service’s Manual regarding the treatment of the gift tax statute of limitations in estate tax and


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gift tax examinations. The provision states that if an examiner determines that a gift has not been adequately disclosed on a gift tax return prior to the expiration of the statute of limitations, examiner must obtain the taxpayer’s consent to extend the limitations period on the entire return, but that if the examiner is unable to obtain that consent, then the examiner may allow the limitations period to expire if the examiner obtains written approval of his or her manager to do so.

The Service has been searching for and examining taxpayers who have made gifts of real property to family members and who have failed to report the transfers for gift tax purposes. The Service is working with representatives in Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington and Wisconsin to locate such taxpayers. In this regard, in In re: The Tax Liabilities of John Does, E.D. Cal., No. 2:10-mc-00130-MCE-EFB (May 23, 2011)., the Court rejected the Service’s request for leave to serve a “John Doe” summons on the California Board of Equalization requiring the Board to give the Service the records of transfers of real property for little or no consideration, on the grounds that the Service failed to demonstrate that the information was not available through other sources. However, the Court thereafter allowed the Service to resubmit its petition to address its previous shortcomings, and on December 15, 2011 the Court (WL 6302284) granted a John Doe summons requiring the State of California to turn over information on property transfers in which the parties may not have paid federal gift taxes.

On January 27, 2011 the Service issued a memorandum (SBSE-04-0111-008) directing its tax examiners to refer to the Service’s Art Advisory Panel works of art with a reported value of $50,000 or more, rather than the prior threshold of $20,000 or more.

In Estate of Adelina Cheng Van v. Commissioner, T.C. Memo 2011-22 (January 26, 2011), the Court held that a residence purchased by the taxpayer was includible in her gross estate for federal estate tax purposes under Code Section 2036, where the taxpayer had purchased the residence for her daughter’s family, the taxpayer signed the purchase documents, including the sales agreement and a secured promissory note, members of the family of the taxpayer’s daughter paid the down payment for the purchase and the ongoing promissory note payments, the taxpayer subsequently conveyed the residence to a revocable trust that she created for the benefit of her daughter and grandchildren, and the taxpayer resided in the residence from the time of its purchase until her death.

In Estate of Le Caer v. Commissioner, 135 T.C. No. 14 (September 7, 2010), where a wife’s estate claimed a credit for prior transfers under Code Section 2013 for federal estate taxes and state estate taxes paid by estate of the decedent’s husband, who had predeceased the decedent by three months, the Court held that the wife’s estate can claim the credit for the federal estate taxes (but not the state estate taxes) paid by the husband’s estate, but subject to the limitations set forth in Code Sections 2013(b) and (c), and that in calculating the amount of the husband’s taxable estate for purposes of Code Section 2013(b), it is not reduced by the applicable exclusion amount.

In Estate of Thompson v. Commissioner, No. 09-3601-ag (March 17, 2010), the Court of Appeals for the Second Circuit, in an unpublished opinion, affirmed a Tax Court


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decision which declined to impose accuracy-related penalties on an estate pursuant to Code Section 6662, where the Tax Court found that the estate’s reliance on its experts was reasonable and in good faith, even though the two individual experts were inexperienced in valuing large companies.

In R. Cederloff Estate, 2010-2 USTC ¶ 60,604 (DC Md. 2010), the United States District Court in Maryland held that an estate was liable for a late filing penalty with respect to a federal estate tax return, where the executor obtained a six-month extension of time to file the return, thereafter requested a second one-month extension of time to file, the Service informed the executor that it was prohibited by law from granting an extension of time to file beyond six months, and the executor filed the return almost a year after the extended due date.

In Estate of J. Fuertes, 2009-2 USTC ¶60,581 (U.S. Dist. Ct. Tex. 2009), the Court refused to grant the estate’s request for a refund of late filing penalties and late payment penalties assessed with respect to the late filing of the federal estate tax return and the late payment of the federal estate tax, where the executrix’s counsel acknowledged responsibility for the late filing and the late payment, finding that the executrix’s reliance on her counsel to file the return and to pay the tax was a delegation of her unambiguous duty to timely file the return under Code Section 6075(a) and did not constitute reliance on legal advice.

D. Request for Discharge From Personal Liability – Form 5495

An executor of a decedent’s estate may file Form 5495, Request for DischargeFrom Personal Liability Under Internal Revenue Code Section 2204 or 6905, with the Service to be discharged from personal liability for the estate taxes payable with respect to the decedent’s estate (Code Section 2204) and for income taxes and gift taxes payable by the decedent (Code Section 6905). The Service recently requested comments regarding such Form as part of the Service’s continuing efforts to reduce paperwork.

E. Qualified Personal Residence Trusts

In Riese v. Commissioner, T.C. Memo 2011-60 (March 15 2011), where thedecedent had transferred her residence to a qualified personal residence trust (“QPRT”) and continued to reside in the residence for approximately six months after the end of the term of the QPRT until her death without paying any rent, the Tax Court found that there was an agreement among the parties that the decedent would pay rent after the end of the QPRT term, even though there was no written lease and she had not paid any rent prior to her death, and the Court therefore held that the residence was not includible in the decedent’s gross estate for estate tax purposes under Code Section 2036. The Court also held that the estate was entitled to an estate tax deduction under Code Section 2053(a)(3) for the rent due for the period from the end of the QPRT to the date of the decedent’s death as a claim against the estate.

In PLR 200920033 (February 3, 2009), the Service ruled that a “Reverse QPRT”, under which the taxpayer transferred a residence to a QPRT which gave his parents the right to use the residence for a term of years, with the son retaining the reversion interest, qualified as a QPRT under Code Section 2702. Since the taxpayer had received the residence at the expiration of a QPRT created by his father with the same residence, the ruling noted that the Service was


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not expressing any opinion as to whether the residence would be included in his father’s gross estate under Code Section 2036, reserving the right to claim that the parties had an express or implied agreement that, after the first QPRT term ended, the son would retransfer the home to the reverse QPRT so that his father could continue to use it for his life.

On May 9, 2003, the Service in Rev. Proc. 2003-42 issued a sample declaration of trust that meets the requirements of the Code for a qualified personal residence trust with one term holder and provides samples of certain alternative provisions concerning additions to the trust to purchase a personal residence and disposition of trust assets on cessation of its qualification as a QPRT.

F. Private Trust Companies and Family Offices

In Notice 2008-63, IRB 2008-31 (August 4, 2008), the Service issued a proposedrevenue ruling concerning the income, estate, gift and GST tax consequences of creating a private trust company to serve as the trustee of trusts having family members as grantors and beneficiaries. The private trust companies’ governing documents create a committee having exclusive authority regarding discretionary distributions from each trust. No member of the committee can participate in matters concerning any trust of which that member or his or her spouse is a grantor or a beneficiary or having a beneficiary to whom the member or his or her spouse who is a support obligation. Furthermore, no family member can have any express or implied reciprocal agreement with another family member regarding distributions. The Service ruled that a trust would not be includible in the grantor’s gross estate under Code Section 2036(a) or Code Section 2038(a) by reason of the trust company service as trustee, the grantor’s interest in the trust company, or the grantor’s service as an officer, director, manager, employee or member of the distribution committee of the trust company. The Service also ruled that the service by a grantor on the distribution committee would not cause the grantor to be liable for gift taxes on discretionary distributions from the trust of which such person is the grantor, since the grantor cannot participate in distribution decisions. Furthermore, the Service ruled that the trust company serving as trustee, by itself, would not cause any grantor or beneficiary of that trust to be treated as the trust’s owner for income tax purposes.

On June 22, 2011 the Securities and Exchange Commission issued its final Rule 202(a)(11)(G)-1 exempting family offices from registration requirements under the Investment Advisers Act of 1940. The Rule stated that in order to qualify for the exemption, a family office adviser must only advise “family clients” with respect to securities, be wholly-owned by “family clients” and exclusively controlled by “family members”, and not hold itself out to the public as an investment adviser.

G. Restricted Management Accounts

On October 9, 2009 the Service determined in Chief Counsel Advice 200941016that a restricted management account creates a principal/agent relationship and, therefore, that the only discount allowable for purposes of estate tax and gift tax valuation would be a discount for potential damages for breach of contract, which ordinarily would be significantly less than discounts for lack of control and lack of marketability.


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In Rev. Rul. 2008-35, IRB 2008-29 (July 21, 2008), the Service ruled that for estate and gift tax purposes, the fair market value of a restricted management account is the actual value of the cash and marketable securities in the account without any restrictions or discounts, where the account was managed by a bank which had complete discretion regarding the investments, all dividends, interest and other earned income during the five-year term of the account would be reinvested, and no distribution would be made until the end of the term, except as permitted in the agreement. After one year and pursuant to the terms of the agreement, the decedent assigned the appreciation of the account assets to a child. The Service ruled that the assets remaining in the account were includible in the decedent's gross estate under Code Section 2036(a), finding that the decedent had always retained a property interest in the account’s assets. Moreover, the Service ruled that the account restrictions did not reduce the fair market value of the account’s assets for estate tax or gift tax purposes under Code Sections 2031 and 2512.

H. Estate Tax Deductions for Claims and Expenses - Section 2053

On October 16, 2009 the Service finalized previously proposed regulationsregarding the determination of the amount deductible from a decedent’s gross estate for claims under Code Section 2053(a)(3). The final regulations generally provide that a deduction for any claim or expense described in Code Section 2053 is limited to the amount actually paid in settlement or satisfaction of the claim or expense. The final regulations provide exceptions for claims against an estate as to which there is a claim or asset includible in the gross estate that is substantially related to the claim against the estate, and for claims against the estate which in the aggregate do not exceed $500,000. These regulations generally apply to the estates of decedents dying on or after October 20, 2009.

The Service also issued Notice 2009-84, IRB 2009-44 (November 2, 2009), which provides that if an estate timely files a protective claim for refund based on a Code Section 2053 deduction, the Service will limit its review of the estate tax return to such deduction if the claim becomes ready for consideration after the expiration of the period of limitations for the assessment of additional estate taxes against the estate, rather than examining the entire estate tax return. However, this exception does not apply when the Service is considering a protective refund claim based on a Code Section 2053 deduction and, in the same estate, is considering a refund claim that is not based on a protective claim regarding a Code Section 2053 deduction. This Notice applies to protective refund claims filed on behalf of estates of decedents dying on or after October 20, 2009.

On October 17, 2011 the Service issued Rev. Proc. 2011-48, IRB 2011-42, providing guidance regarding protective estate tax refund claims under Code Section 2053, applicable with respect to protective refund claims filed on behalf of estates of decedents dying on or after October 20, 2009. The Revenue Procedure provides in part that the claim may be filed at any time before the expiration of the statute of limitations, must describe the reasons and contingencies delaying the actual payment of the claim or expense, must set forth each ground upon which the claimed refund is based and facts sufficient to apprise the Service of the exact basis of the claim, and may be filed using Form 843 (Claim for Refund and Request for Abatement). The Revenue Procedure states that filing such a claim will not cause the Service to reopen issues on the estate tax return other than those that pertain to the claimed refund.


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In J. Smith Exr., 2008-2 USTC ¶ 60,566, the Court of Appeals for the Fifth Circuit held that the Service was entitled to deduct the remaining obligation of an estate for unpaid underpayment interest against an overpayment of the estate tax and refund the balance of the overpayment to the estate.

In Estate of Malkin v. Commissioner, T.C. Memo 2009-212 (2009), the Tax Court held that the deductions claimed by the decedent’s estate under Code Section 2053 could not exceed the value of the estate property which was subject to claims.

In Estate of Black v. Commissioner, 133 T.C. No. 15 (December 14, 2009), the Tax Court held that a loan from a family limited partnership to the decedent’s estate, which the estate used to pay its tax liabilities and expenses, was not necessarily incurred by the estate and, therefore, that the interest paid by the estate in connection with the loan was not a deductible administration expense under Code Section 2053(a)(2).

In Stick v. Commissioner, T.C. Memo 2010-192 (September 1, 2010), the Tax Court held that the decedent's estate could not deduct interest for estate tax purposes as an administration expense under Code Section 2053, where the interest was incurred on a loan made by the trust which was the residuary beneficiary of the estate, and the loan was used to pay the decedent's estate taxes, where the estate failed to establish that the loan was required to enable the estate to pay such taxes.

In Keller v. United States, S.D. Tex., No.V-02-62 (September 15, 2010), the United States District Court for the Southern District of Texas held that the decedent's estate could deduct for estate tax purposes interest on a loan from an investment partnership established by the decedent's financial advisors to two trusts which the decedent controlled, disallowed the estate tax deduction of a contingency fee paid to a law firm as not necessary to the administration of the estate, and allowed the estate to deduct for estate tax purposes fees paid to only one of the four executors (but not the fees paid to the three other executors), finding that only such one person actually performed the role of the executor of the estate.

In Duncan v. Commissioner, T.C. Memo 2011-255 (October 31, 2011), where the decedent’s estate borrowed funds from a trust that was the residuary beneficiary of the estate and the assets of which were includible in the decedent’s gross estate, in order to pay federal estate taxes, the Court held that the interest payable by the estate with respect to such loan was deductible for federal estate tax purposes as an administration expense under Code Section 2053, as the Court found that the loan at issue was a bona fide debt, the interest expense was actually and necessarily incurred in the administration of the estate, and the amount of interest was ascertainable with reasonable certainty.

In Naify v. United States, No. 3:09-cv-01604 (September 8, 2010), aff'd., 9th Cir. No. 10-17358 (2012) the District Court for the Northern District of California held that the decedent's estate, which had claimed an estate tax deduction of $62,000,000 for income taxes owed by the decedent to the State of California, could only deduct $26,000,000, which is the amount for which the estate settled that claim after the decedent's death.


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In Saunders v. Commissioner, 136 T.C. No. 18 (2011) aff’d, No. 12-70323 (9th Cir. 2014), the Tax Court held that the decedent’s estate could claim an estate tax deduction under Code Section 2053 for the amount of a claim against the decedent that was actually paid during the administration of the estate, but not for the more substantial amount for which such claim was appraised as of the date of the decedent’s death because the value was not ascertainable with reasonable certainty.

In Gill v. Commissioner, T.C. Memo, 2012-7 (January 9, 2012), the Court held that an amount paid by an estate as legal fees under a settlement agreement to reimburse the decedent’s children for legal fees they incurred in an undue influence litigation regarding the decedent’s will are a deductible administration expense of the estate for federal estate tax purposes.

In Estate of Koons v. Commissioner, T.C. Memo 2013-94 (2013), where the decedent’s revocable trust owned a majority interest in a limited liability company having assets consisting largely of liquid securities, the Court denied an estate tax deduction for interest with respect to a loan from the limited liability company to such trust, noting that the loan was not necessary to the administration of the estate, as the trust could have caused the company to make a distribution of the required funds, rather than a loan.

I. Section 6166 Court Decisions and Announcements

In Adell v. Commissioner, T.C. Memo 2014-89 (2014), the Court held that anestate’s claimed overpayment of the non-deferrable portion of its estate tax liability could not be applied to a later assessed gift tax liability because the estate did not pay more than the full amount of the estate tax due and, therefore, did not leave the Service with an available overpayment to credit against the gift tax.

In Adell v. Commissioner, T.C. Memo 2013-228 (2013), the Court held that the Service appropriately terminated the estate’s Code Section 6166 deferral election where probate litigation caused the estate to miss required interest payments.

On January 25, 2013 the Service issued CCA 201304006, advising that where an estate makes a Code Section 6166 election for part of a closely held business interest, and a deficiency is subsequently assessed, the portion of the deficiency that is attributable to the business will be prorated to the installments payable pursuant to the original election, but that a deficiency that is unrelated to the value of the portion of such interest as to which the estate originally made the election cannot be used to expand such election.

In United States v. Johnson, 2012 U.S. Dist. LEXIS 72194 (D. Ct. Utah 2012), the executors of the decedent’s estate elected to pay estate taxes in installments pursuant to Code Section 6166, the decedent bequeathed the residue of her estate to an existing trust, the executors distributed such residue to that trust, and such trust distributed those assets to the trust’s beneficiaries pursuant to an agreement under which the beneficiaries agreed to pay the remaining estate tax due. The Court held that the trust’s beneficiaries were not liable for the remaining estate tax as transferees, as such beneficiaries did not receive assets directly from the decedent’s gross estate. However, the Court also held that such beneficiaries were liable for the estate tax as


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beneficiaries of life insurance policies insuring the decedent’s life, to the extent of the benefit that they received from such policies. Further, the Court held that the trustees of the trust were transferees of the estate, and that the trustees, as well as the estate’s executors, were personally liable for the estate tax.

It is noteworthy that the portion of the deferred tax that bears interest at the rate of 2% per year is currently being subjected to a higher rate of interest than the floating interest rate that generally is applicable to the underpayment of estate taxes.

In PLR 201403012, the Service ruled that a post-death reorganization that converted the ownership of interests in real estate from a general partnership to a limited liability company would not terminate the estate’s deferral of the payment of estate taxes under Code Section 6166.

On October 21, 2011 the Service issued CCA 201142024, advising that a change in the form of the business that holds the property for which the Code Section 6166 election was made would not constitute a divestment of the interest in that property for purposes of Code Section 6166(g).

On October 21, 2011 the Service issued CCA 201142025, which advised that a distribution by gift of 51% of the Code Section 6166 property to other family members was an accelerating event for purposes of Code Section 6166(g), thereby causing the Code Section 6166 election to cease to apply.

In CCA 201144027, dealing with an election to pay estate taxes in installments pursuant to Code Section 6166, and the holding company election under Code Section 6166(b)(8), the Service advised that an estate may not make a bifurcated Code Section 6166(b)(8) election with respect to the holding company stock, but that the estate may either apply Code Section 6166(b)(8) and forgo the deferral option under Code Section 6166(a)(3), or not make the Code Section 6166(b)(8) election.

In United States v. Kulhanek, 2010 U.S. Dist. LEXIS 130039 (W.D. PA., December 8, 2010), where there was an election to defer the payment of estate taxes under Code Section 6166, the Court held that the 10 year statute of limitations for the collection of unpaid estate taxes under Code Section 6324(a)(1) is suspended and does not begin to run until the disposition of the closely held stock.

In PLR 200939003 (June 23, 2009), the Service ruled that the GST tax payable on a taxable termination is not eligible to be paid in installments under Code Section 6166. Note, however, that the installment payment election is applicable to the GST tax imposed on direct skips occurring on the death of the transferor.

In Carroll v. United States, 2009-2 USTC ¶ 60,577 (N.D. Ala. July 29, 2009), the Court held that where executors are personally liable for the payment of estate taxes as a result of electing to pay such taxes in installments under Code Section 6166 and then distributing the estate assets to themselves as beneficiaries of the estate before paying all such installments, a co-executor could not discharge such liability in a bankruptcy proceeding, holding that the tax debt was excepted from discharge since the co-executor before the Court willfully evaded the


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payment of the estate tax debt, even though tax debts generally are dischargeable through bankruptcy.

In Chief Counsel Memorandum POSTS – 113182-07 (February 25, 2009), the Service advised that, in connection with an election to pay estate taxes in installments under Code Section 6166, the Service may require the estate to provide a bond or a lien in an amount including not only the deferred estate tax but also the aggregate amount of interest to be paid over the deferral period, provided that the amount of interest does not exceed the amount of the deferred tax; that the Service may accept a bond or a lien in a lesser amount on a case-by-case basis after examining all the relevant facts and circumstances; that the value of the property offered by the estate for the lien may or may not be the same as its value as reported on the federal estate tax return; that if an interest in a family limited partnership is being pledged as security, the federal estate tax discount used to value that interest should also be used in valuing it for purposes of the lien; and that if mortgaged property is used for purposes of the lien, such property should be valued based on its net equity.

On June 12, 2009 the Service issued a memorandum (SB/SE-05-0609-010) stating that, effective immediately, the Estate Tax Advisory Group of the Service will determine on a case by case basis whether a bond or the special estate tax lien under Code Section 6324A is required in all cases in which estates elect to pay estate taxes in installments pursuant to Code Section 6166 and will negotiate the bond or special lien, after the Service’s Estate and Gift Tax Section has determined that the estate qualifies for the election. The memorandum states that prior to making a determination as to whether to require a bond or a special estate tax lien, the Advisory Estate Tax Group will first request the estate to voluntarily provide a bond or special estate tax lien. If the estate declines to do so, the Advisory Estate Tax Group will make its determination based on a list of non-exclusive factors, which are the duration and stability of the business, the perceived ability to pay the installments of tax and interest on a timely basis, and the tax compliance history of the business, the estate and the decedent. After such determination, the estate will be given the right to appeal.

In CCA 200848004 (2008), the Service’s Office of Chief Counsel stated that a Code Section 6166 election can only be made by attaching a notice of election to a timely filed federal estate tax return.

In PLR 200842012, the Service ruled that the closely held company in which the decedent had an interest carried on an “active trade or business” for purposes of Code Section 6166, where the corporation owned, developed, managed and leased commercial property, the employees of the corporation were involved in all aspects of the business, and a separate facilities team was responsible for day-to-day repairs, maintenance and other tasks in connection with the properties.

In Roski v. Commissioner, 128 T.C. No. 10 (April 12, 2007), the Tax Court held that the Service does not have the authority to require a bond or a special lien for every estate that elects to defer the payment of estate taxes under Code Section 6166. Moreover, the Court stated that the Service must exercise its discretion as to whether or not to require a bond or a special lien in each case by reviewing the applicable facts and cannot arbitrarily rely on a standard which in effect precludes that exercise of discretion.


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On November 13, 2007, as a result of the Court’s decisions in Roski, the Service announced a change in its policy and provided interim guidance for estates making a Section 6166 election (Notice 2007-90). The Service will now determine on a case-by-case basis whether security is required when a qualifying estate elects under Section 6166 to pay all or part of the estate tax in installments. The Treasury Department and the Service are in the process of establishing standards to apply and until such regulations are issued, the Service will evaluate three factors to determine whether at any time and occasionally during the deferral period the government’s interest in the estate tax and the interest is sufficiently at risk to justify the requirements of a bond or special lien. The factors are (1) the duration and stability of the closely held business on which the estate tax is deferred; (2) the estate’s ability to timely pay installments of tax and interest; and (3) the estate’s compliance history.

The Chief Counsel’s office of the Service in C.C.A. 200645027 has advised that when an estate elects to pay estate taxes in installments pursuant to Code Section 6166 and gives the Service the special estate tax lien provided for in Code Section 6324A with respect to the Code Section 6166 assets of the estate, that special lien does not divest the balance of the assets of the gross estate from the estate tax lien provided for in Code Section 6324.

The Chief Counsel’s office of the Service addressed questions regarding the acceptance of stock in a closely held corporation as collateral for a lien under Section 6324A for estate tax deferred under Section 6166 (C.C.A. 200747019). The Service said that stock in a closely held corporation qualifies as “other property” acceptable as collateral for such a lien if three statutory requirements are met: (1) the stock must first be expected to survive the deferral period and retain its value, based on the Service’s valuation; (2) the stock must be identified in the written agreement described under Section 6324A(b)(1)(B) which must show all persons having an interest in the stock agree to the creation of the special lien; and (3) the value of the stock as of the agreement date must be sufficient to pay the deferred taxes plus required interest. The Service noted that the principles in the C.C.A. are equally applicable to interests in a limited liability company or a partnership. In order to secure the Service’s interest in the stock, a Notice of Federal Tax Lien should be filed and the Service may hold the stock certificates to prevent their sale to third parties.

In addition, the Chief Counsel’s office in C.C.A. 200803016 has provided advice on whether the Service is required to accept an interest in a limited liability company as collateral under Section 6324A. As with the sufficiency of stock in a closely held corporation, the Chief Counsel explained that if the three requirements [i.e., (1) the interest has to be expected to survive the deferral period; (2) the interest has to be identified in the written agreement described under Section 6324A(b)(1)(B); and (3) the value of the interest has to be sufficient to pay the deferred taxes plus required interest] under Section 6324A are met, the special lien arises and the collateral offered by the estate has to be accepted by the Service. In the case of an LLC, the Chief Counsel observed that the Service was required to file a Notice of Federal Tax Lien for the special estate tax lien against the LLC.

In Rev. Rul. 2006-34, 2006-1 Cum. Bull. 1171, the Service set forth a non-exclusive list of factors which the Service would use to determine whether a decedent’s real estate activities were sufficiently active to qualify the real estate interest as a closely held business interest for purposes of allowing the decedent’s estate to defer the payment of estate


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taxes under Code Section 6166. The Service stated that, to determine whether the decedent’s interest is an asset used in the active conduct of a trade or business, the Service will consider the amount of time the decedent devoted to the trade or business, whether an office was maintained from which the decedent’s activities were conducted or coordinated and whether the decedent maintained regular business hours for that purpose, the extent to which the decedent was actively involved in finding new tenants and negotiating and executing leases, the extent to which the decedent provided landscaping, grounds care or other services beyond the mere furnishing of leased premises, the extent to which the decedent personally made, arranged for, performed or supervised repairs and maintenance to the property, and the extent to which the decedent handled tenant repair requests and complaints. The Ruling further stated that no single factor would be determinative.

J. 2% Floor for Miscellaneous Itemized Deductions

In Rudkin v. Commissioner, sub nom, Knight v. Commissioner, 552 U.S. 181(2008), the Court unanimously held that deductions for investment advisory fees paid by a trust are subject to the 2% floor on miscellaneous itemized deductions under Code §67(a). The Court rejected the approach which asked whether the cost at issue “could” have been incurred by an individual. Instead, the Court adopted the test which asked whether the costs incurred would not “commonly” or “customarily” be incurred by individuals, holding that Code §67(e)(1) excepts from the 2% floor only those fees that would be uncommon, unusual or unlikely for such a hypothetical individual to incur.

On February 27, 2008, and in light of the U.S. Supreme Court’s decision in Knight, id., the Service issued Notice 2008-32 to provide interim guidance on the treatment under Code Section 67 of investment advisory costs and other costs subject to the 2% floor. Taxpayers will not be required to determine the portion of a bundled fiduciary fee that is subject to the 2% floor for any tax year prior to January 1, 2008. The proposed regulations from July, 2007 were based on reasoning that was specifically rejected by the Supreme Court in Knight. Accordingly, the Notice indicates that the Service will issue final regulations that conform to Knight and anticipates that final regulations under §1.67-4 will be published after the extended comment period which ends May 27, 2008. On December 11, 2008 the Service issued Notice 2008-116 extending the application of Notice 2008-32 to tax years beginning before January 1, 2009. On April 1, 2010 the Service issued Notice 2010-32, 2010-16 IRB 594, further extending the application of Notice 2008-32 to tax years beginning before January 1, 2010. On April 13, 2011 the Service issued Notice 2011-37 extending the application of Notice 2008-32 to tax years that begin before the date that final regulations regarding this issue are published in the Federal Register.

On May 9, 2014 the Service issued final regulations (Treas. Reg. Section 1.67-4) as to which expenses that are incurred by estates and trusts other than grantor trusts are subject to the two-percent floor for miscellaneous itemized deductions under Code Section 67(a). These regulations provide that:

• In general, an administration expense is subject to the two-percent floor ifthe expense would be “commonly” or “customarily” incurred by a hypothetical individual owning the same property as the property owned by the estate or the non-grantor trust.


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• In determining whether an expense is “commonly” or “customarily”incurred by a hypothetical individual owning the same property, the determining factor is the type of product or service that the estate or the non-grantor trust purchases, rather than the description of the cost of that product or service. Expenses incurred in the defense of a claim against the estate, the decedent or a non-grantor trust that are not related to the existence, validity or administration of such estate or trust are subject to such two-percent floor.

• Ownership costs that are chargeable to or incurred by an owner ofproperty merely by reason of owning such property are subject to the two-percent floor. Such costs include condominium fees, insurance premiums, maintenance and lawn services, automobile registration and insurance costs, and partnership costs that are passed through to and reportable by the estate or the trust as a partner, if these costs are defined as miscellaneous itemized deductions pursuant to Code Section 67(b).

• The cost of preparing estate tax returns, GST tax returns, fiduciary incometax returns and a decedent’s final individual income tax returns are not subject to the two-percent floor. However, the cost of preparing other tax returns are subject to the two-percent floor.

• Investment advisory fees generally are subject to the two-percent floor.However, a special, additional charge that is added solely because the investment advice is rendered to an estate or a trust rather than to an individual, or is attributable to a unusual investment objective or the need for a specialized balancing of the interests or various parties (beyond the usual balancing of the varying interests of current beneficiaries and remaindermen), such that a reasonable comparison with individual investors would be improper, is not subject to the two-percent floor.

• Appraisal fees to determine the fair market value of assets as of thedecedent's date of death or the alternate valuation date, to determine value for purposes of making estate or trust distributions, or otherwise required to properly prepare the estate's or trust's tax returns, or a GST tax return, are not subject to the two-percent floor. The cost of other appraisals for other purposes (for example, for insurance purpose) is subject to the two-percent floor.

• Certain other fiduciary expenses, including but not limited to probate courtfees and costs, fiduciary bond premiums, legal publication costs of notices to creditors or heirs, the cost of certified copies of the decedent's death certificate, and costs related to fiduciary accounts, are not subject to the two-percent floor.

• Generally, “bundled” fees must be allocated between costs that are subjectto the two-percent floor and costs that are not subject to such floor. However, if a “bundled fee” is not computed on an hourly rate basis, then only the portion of such fee that is attributable to investment advice is subject to the two-percent floor, except that payments from a “bundled” fee to third parties that would have been subject to the two-percent floor if they had been paid directly by the estate or the trust are subject to such floor, and except that any fees or expenses that are separately assessed by the fiduciary or other payee, that are in addition to the usual or basic “bundled” fee and that are “commonly” or “customarily” incurred by an individual, are subject to the two-percent floor.

• The allocation of the portion of the “bundled” fee that is subject to thetwo-percent floor may be made by any “reasonable” method.


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The regulations are effective for tax years beginning on or after January 1, 2015.

K. Alternate Valuation Date Election

In PLR 201109014 (March 4, 2011), rescinding PLR 201033023 (August 20,2010), the Service granted an estate additional time to make the alternate valuation date election for federal estate tax purposes, where the estate had timely filed a federal estate tax return valuing the decedent’s assets on the date of the decedent’s death and, more than 18 months after the due date of that return, the executors asked the Service to grant additional time to make such election.

On November 18, 2011 the Service released new proposed regulations under Code Section 2032 (REG-112196-07) regarding the alternate valuation date election and withdrew previously proposed regulations regarding that election that were released in April 2008. The new proposed regulations provide that:

• If an interest in a corporation, a partnership or any other entity that isincludible in a decedent’s gross estate is exchanged for one or more different interests in the same entity, or in an acquiring or resulting entity, the transaction will not constitute a “disposition” for purposes of such election, if, on the date of the exchange, the value of the interest surrendered equals the value of the acquired interest.

• In determining whether or not the exchanged properties have the same fairmarket value, a difference in value that is equal to or less than 5% of the value of the surrendered property as of the transaction date will be ignored.

• If the decedent’s estate receives a distribution or a disbursement from apartnership, a corporation, a trust (including an Individual Retirement Account, a Roth IRA, or other deferred compensation plans), the distribution or disbursement will not constitute a “distribution” of the asset for purposes of such election, if on the date of the distribution or disbursement the value of the decedent’s interest in such property before the distribution or disbursement equals the sum of the value of the distribution or disbursement received and the value of such property after that distribution or disbursement.

• If the estate disposes of only a portion of the decedent’s interest in an assetand retains the other portion on the six-month date, or if an estate disposes of a decedent’s entire interest in an asset in two or more transactions prior to the end of the six-month date, the value of each portion of the asset is determined by multiplying the value of the decedent’s entire interest by a fraction, the numerator of which is the portion of the interest in the asset that is disposed of, and the denominator of which is the decedent’s entire interest in the asset.

• An asset owned by the decedent at his death is not considered to be“distributed” merely because it passes directly to another person at the decedent’s death as a result of a beneficiary designation, or other contractual arrangement, or by operation of law.

• Factors such as economic or market conditions, occurrences described inSection 2054 of the Code (i.e., losses arising from fires, storms, shipwrecks, other casualties, or theft, that are not compensated for by insurance or otherwise) can be taken into account in determining the value of an asset for purposes of such election.


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• Management decisions made in the ordinary course of operating abusiness generally are taken into account as occurrences relating to economic or market conditions.

• Changes in value due to the mere lapse of time generally are not taken intoaccount in determining the value of an asset for purposes of such election.

• As to the value of a life estate, remainder interest or term interest forpurposes of such election, the value of the interest as of the alternate valuation date is determined by applying the age, at the decedent’s death, of each person whose life expectancy may affect the value of that interest, and the value of the property and the applicable interest rate under Section 7520 of the Code shall be determined using values that apply on the alternate valuation date.

L. Generation-Skipping Transfer Taxes

1. Exercise or Lapse of Power of Appointment

Conflict continues among the Courts in regard to the “grandfather” exception to GST taxes for trusts that were irrevocable before September 25, 1985 where a general power of appointment is not exercised. The issue is whether the lapse of the general power of appointment is an “addition” to the corpus of a trust which thereby subjects the trust to the GST tax even though it would otherwise not be subject to the GST tax because of the “grandfather” exception.

In Peterson Marital Trust v. Commissioner, 78 F.3d 795 (2d Cir. 1996), the Court held that (1) the lapse of the surviving spouse’s general power of appointment was a “constructive addition” to the marital trust under Temporary Regulation Section 26.2601-1(b), and (2) since the lapse occurred after 1985, the entire trust, which was payable to the settlor’s grandchildren, was subject to the GST tax.

However, in Simpson v. United States, 183 F.3d 812 (8th Cir. 1999), the Court held that the 1993 transfer of trust corpus to the settlor’s widow’s grandchildren, pursuant to the widow’s failure to exercise a general power of appointment under the settlor’s testamentary trust, which became irrevocable upon his death in 1966, came within the “grandfather” provision, making the GST tax inapplicable to any generation skipping transfer under the trust.

In the Estate of Gerson, 2007-2 USTC ¶ 60,551 (6th Cir. 2007), the Sixth Circuit Court of Appeals affirmed the Tax Court finding that a decedent’s exercise of her testamentary general power of appointment in favor of her grandchildren with respect to an irrevocable trust created by her deceased husband prior to September 25, 1985, was subject to the GST tax under Reg. Section 26.2601-1(b)(1)(i). The Court of Appeals found that the regulation was a valid interpretation of language in the effective date rule of Section 1433(b)(2)(A) of the Tax Reform Act of 1986 (which provided a grandfather exception for trusts that were irrevocable before September 25, 1985 but only to the extent that such transfer is not made out of corpus added to the trust after that date). The Tax Court’s opinion agreed with the Second Circuit’s ruling in Peterson Marital Trust v. Commissioner, supra., that the words of TRA ‘86 Section 1433(b)(2)(A) can only be given meaning in a particular context. The Tax Court’s ruling was at odds with decisions from the Eighth and Ninth Circuits (see, Simpson, supra., and R. Belcher, 281 F.3d 1078 (9th Cir. 2002)), which have allowed such transfers. On May 27, 2008 the United


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States Supreme Court denied certiorari in Gerson (sub nom Kleinman v. Commissioner, No. 07-1064).

In Estate of Timken v. United States, 630 F. Supp. 2d 823 (U.S. Dist. Ct., N.D. Ohio 2009), the Court held that a lapse of a general power of appointment under a trust is a constructive addition to the trust for GST tax purposes, finding that Treas. Reg. Section 26.2601-1(b)(1)(v)(A) which, so provides, is valid as a permissible construction of the effective date provisions of the GST tax. The Court of Appeals for the Sixth Circuit (Case No. 09-3650, April 2, 2010) affirmed the District Court decision. On January 10, 2011 the United States Supreme Court (U.S. No. 10-363) denied a petition for certiorari.

2. Qualified Severances

Final regulations (NPRM-REG-128843-05) with regard to a qualified severance for GST tax purposes were effective on August 2, 2007. For severances made after December 31, 2000 and before August 2, 2007, taxpayers may rely on any reasonable interpretation of Sec. 2642(a)(3), provided that reasonable notice of the severance has been given to the Service. Although the proposed regulations posited that the severance rules of Reg. Section 26.2654-1(b) were superseded by Sec. 2642(a)(3), the final regulations note that the provisions address different circumstances. Therefore, Reg. Section 26.2654-1(b) is not superseded by the final regulations. While the non pro rata funding of trusts resulting from a qualified severance is still permitted, the final regulations provide that such funding must be achieved by applying the appropriate fraction or percentage to the total value of the trust assets as of the “date of severance”. The “date of severance” is defined as the date selected for determining the value of trust assets, either on a discretionary basis or by court order, so long as funding is begun immediately and occurs within a reasonable time (not more than 90 days) after the selected date of severance.

In addition, the final regulations also address the qualified severance of a trust that was irrevocable prior to September 25, 1985, but to which an addition was made after that date. The regulations explain that, while the reporting provision of the regulations is not a requirement for qualified severance status, a severance should be reported to the Service to ensure the proper application of the GST tax. Notification of a qualified severance must be made by marking “Qualified Severance” at the top of Form 706-GS(T) and attaching a “Notice of Qualified Severance” to the return.

Proposed amendments to Reg. Sections 26.2642-6 and 26.2654-1 were issued contemporaneously with the final regulations (T.D. 9348 (FEGT ¶43,113)) and address the situation where the trusts resulting from a severance do not meet the requirements of a qualified severance. In such case, the new trusts will be treated as separate trusts for GST tax purposes as long as the resulting trusts are recognized under applicable state law. However, each trust will have the same inclusion ratio immediately after the severance as the original trust had prior to the severance. In addition, an additional type of qualified severance is proposed (as authorized by Section 2642(a)(3)(B)(ii)): the severance of a trust with an inclusion ratio between zero and one into two or more new trusts. The proposed regulations clarify Reg. Section 26.2642-6(d)(4) by providing that no discount or reduction from value of an asset owned by the original trust arising as a result of the division of the original trust’s interest in the assets between the resulting trusts


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is allowed in funding the new trusts. This clarification is proposed to be effective with respect to severances occurring on or after August 2, 2007.

Effective July 31, 2008, the Service published final rules (T.D. 9421) regarding qualified severances of trusts for GST tax purposes. The final rules rejected a recommendation of an alternative funding rule for qualified severances of trusts in relation to the GST tax and clarified that, for the requirements of a qualified severance, regardless of whether the funding is done on a pro rata basis, the cumulative value of the resulting trusts equals the value of the original trust. The Service stated that "this funding rule produces a bright line test, the same result whether or not the trust assets are divided on a pro rata basis, and recognizes that in many circumstances, where a trust is severed for tax purposes into two identical trusts with the same or related beneficiaries, any closely held stock or partnership units divided between the two resulting trusts are likely to be sold as a unit without any actual reduction in value that may be reflected in the claimed discounts." In addition, the final rules added cautionary language to Example 3 of Reg. Section 26.2642-6(j) to the effect that a GST taxable event will result as a consequence of a nonqualified severance and added a new example to confirm that a trust resulting from a nonqualified severance may subsequently be severed in a qualified severance.

On January 31, 2014 the Treasury Department published a notice in the Federal Register asking the Office of Management and Budget to review the Service’s regulations requiring taxpayers to report a qualified severance by filing a Generation-Skipping Transfer Tax Return for Terminations (Form 706-GS (T)) to report qualified severances.

3. Allocation of GST Tax Exemption

On April 16, 2008, the Service issued proposed regulations (REG-147775-06) that describe the circumstances and procedures under which an extension of time will be granted to make a late allocation of a GST tax exemption to a transfer, to make a late election out of an automatic allocation of that exemption to a transfer, and to elect to have the deemed allocation of a GST exemption apply to a direct skip. The proposed regulations would replace Treas. Regs. Section 301.9100-3 regarding relief under Code Section 2642(g)(1).

Requests for relief under Code Section 2642 will be granted when the taxpayer establishes to the Service’s satisfaction that the taxpayer acted reasonably and in good faith and that the grant of relief will not prejudice the interests of the government. Factors such as the intent of the transferor to timely allocate the GST tax exemption or to timely make an election under Code Section 2632 will be used to determine whether the taxpayer acted reasonably and in good faith.

In the event an extension of time to allocate a GST tax exemption is granted under Code Section 2642, the allocation will be considered effective as of the date of the transfer and the value of the property transferred will determine the amount of the GST tax exemption allocated. If an extension of time to elect out of the automatic allocation of the GST tax exemption is granted under Code Section 2632, the election will be considered effective as of the date of the transfer. In the event an extension of time to treat any trust as a GST trust under Code Section 2632 is granted, the election will be considered effective as of the first (or each) transfer covered by the election. If an extension is granted under Code Section 2642, the amount of the


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exemption is limited to the amount of the transferor’s unused GST tax exemption under Code Section 2631. If an amount of the GST tax exemption has increased since the date of the transfer, no portion of the increased amount can be applied because the grant of relief is to a transfer taking place in an earlier year and prior to the effective date of that increase. The proposed regulations apply to requests for relief filed on or after the date of publication of the Treasury decision adopting these rules as final regulations.

4. Transactions of Interest

On November 14, 2011 the Service published final regulations (T.D. 9556) containing rules giving material advisors to reportable tax shelter transactions involving GST taxes 30 days to prepare a list of advisees that must be disclosed to the Service.

On September 11, 2009 the Service issued Proposed Reg. Section 26.6011-4 (REG-136563-07), which would require the disclosure under Code Section 6011 of certain listed transactions and transactions of interest regarding the GST tax. However, the Service has not yet identified any such transactions, pending the proposal of the relevant regulations.

5. GST Taxes and Code Section 6166

In PLR 200939003 (June 23, 2009), the Service ruled that the GST tax payable on a taxable termination is not eligible to be paid in installments under Code Section 6166. Note, however, that the installment payment election is applicable to the GST tax imposed on direct skips occurring on the death of the transferor.

M. Intentionally Defective Grantor Trusts

In Woelbing v. Commissioner, T.C. No. 30260-13, petitioned filed December 26,2013, and Woelbing v. Commissioner, T.C. No. 30261-13, petitioned filed December 26, 2013, where the decedent sold stock to an insurance trust pursuant to an installment sale agreement, and the trust owned life insurance policies insuring the lives of the decedent and his wife, and the trust and the wife were parties to a split-dollar insurance agreement that required the wife to pay a portion of the premiums and the trust to reimburse her for such premiums following the death of the survivor of the husband and wife, the taxpayers claimed that the Service erroneously determined that the value of the stock should be treated as a taxable gift notwithstanding that the stock was sold for a promissory note bearing interest at the applicable federal rate with a principal amount equal to the appraised fair market value of the stock sold, and that the Service erroneously determined that the stock sold should be includable in the husband’s estate under Code Sections 2036 and 2038, instead of including the promissory note as an asset owned by the husband at his death.

In Adams v. Commissioner, T.C. Memo 2010-72 (April 13, 2010), the Tax Court held that a beneficiary of a grantor trust that owned real property was entitled to claim a mortgage interest deduction on the trust property where the beneficiary had the duty to maintain and repair the property, the beneficiary paid the taxes attributable to the property and the beneficiary had a right of first refusal to purchase the property.


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In Rev. Rul. 2011-28, IRB 2011-49 (Dec. 5, 2011), the Service ruled that the retention by a trust’s grantor of a non-fiduciary power to acquire an insurance policy held in the trust by substituting other assets of equivalent value will not, by itself, cause the value of the policy to be includible in the grantor’s gross estate under Code Section 2042 if the trustee has a fiduciary obligation (either under applicable local law or in the trust instrument) to ensure that the substitute property is of equivalent value and the substitution power cannot be exercised in a manner that shifts benefits among trust beneficiaries.

In Rev. Rul. 2008-22, 2008-16 IRB 796 (April 21, 2008), the Service ruled that an inter vivos trust will not be included in a grantor's taxable estate under Code Sections 2036 or 2038 solely because the grantor retains a nonfiduciary power to substitute property of equivalent value. The Service was presented with a trust instrument where the grantor had created and funded an irrevocable inter vivos trust for the benefit of his descendants. The trust instrument prohibited the grantor from serving as a trustee but provided the grantor with the power, exercisable in a nonfiduciary capacity, at any time, to reacquire trust property by substituting other property of equivalent value. Approval of such action was not required by any third party. The grantor was required to certify in writing that the original and substituted properties were of equivalent value. Under local law, a trustee had the obligation to ensure that the original and substituted properties were of equivalent value. Based on these facts, the Service concluded that as long as the trust instrument or local law provide that the trustee has a fiduciary obligation to ensure that the original and substituted properties are of equivalent property, then such a retained power exercisable in a nonfiduciary capacity will not cause the trust corpus to be included in the grantor's gross taxable estate under either Code Section 2036 or Section 2038, "provided that the power is not exercised in a manner that can shift benefits if (a) the trustee has both the power (under local law or the trust instrument) to reinvest the trust corpus and a duty of impartiality with respect to trust beneficiaries or (b) the nature of the trust investments or the level of income produced by any or all of the trust's investments does not impact the respective interests of the beneficiaries, such as when the trust is administered as a unitrust …or when distributions from the trust are limited to discretionary distributions of principal and income."

In PLR 200944002 the Service ruled that the retention by the grantor of an irrevocable trust of the power to substitute trust assets with other property of equal value did not cause the trust property to be included in the grantor’s gross estate for estate tax purposes, where the trustee was prohibited from distributing trust funds to the grantor or the grantor’s estate to satisfy the grantor’s income tax liabilities.

In PLR 200848006, PLR 200848015, PLR 200848016 and PLR 200848017, the Service refused to rule as to whether a plan to modify a trust to give the grantor the power, exercisable solely in a non-fiduciary, to reacquire trust property by substituting other property of equivalent value would cause the trust to be treated as a grantor trust for income tax purposes, advising that this is a fact question to be determined after the federal income tax returns for the relevant parties have been filed and examined.

In Karmazin v. Commissioner, Tax Court Docket No. 2127-03 (2003), in a gift tax audit resulting in the taxpayer filing a petition in Tax Court, the Service issued an unagreed report and a 90-day tax deficiency letter in which the Service viewed an installment note, issued by an intentionally defective grantor trust in exchange for the assets, as equity rather than debt.


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If this characterization was sustained, it would result in the note having a value of zero (pursuant to the rules of Code Chapter 14) and the taxpayer being burdened with a sizable gift tax obligation. The Service claimed that the notes, as equity, constitute an “applicable retained interest” and must be valued at zero for gift tax purposes. The Service’s conclusion that the notes constitute equity was based on a number of factors, including a low equity-to-debt ratio (which nevertheless was in excess of the 10% equity requirement often cited as sufficient), the fact that the only assets supporting the “debt” were the FLP interests transferred to the family trusts and the fact that the debt was non-recourse as to the trust beneficiaries. In the alternative, the Service also took the position that the FLP should be disregarded for transfer tax purposes because it lacked economic substance and had no valid business purposes, or Code Section 2703(a)(2) applies to disregard the FLP for transfer tax purposes, since the limited partnership form itself constitutes a restriction on the right to sell or use the underlying assets. The Service stated that although no discount was applicable, if one was determined to apply it should be limited to 3% and no annual exclusions may be claimed, citing Hackl v. Commr.. The Service is reported to have withdrawn its position that the sale of limited partnership interests to an intentionally defective grantor trust in exchange for a note was not a bona fide transaction under Code Sections 2701 and 2702.

In Rev. Rul. 2004-64, 2004-2 Cum. Bull. 7, the Service addressed the gift and estate tax issues involved in a grantor trust where neither applicable state law nor the trust instrument contains any provision requiring or permitting the trustee to reimburse the grantor for income taxes payable by the grantor with respect to trust income, or where applicable state law or the governing instrument requires the trustee to do so, or where applicable state law or the governing instrument merely gives the trustee discretion to do so. As to the gift tax consequences, the Service held that the grantor’s payment of those income taxes does not constitute a gift by the grantor to the trust beneficiaries in any of those situations because the grantor, rather than the trust, is liable for the payment of the taxes. In addition, the Service held that the trust’s reimbursement of the grantor for the payment of those taxes, whether that reimbursement is permitted or required, is not a gift by the trust beneficiaries to the grantor.

As to the estate tax consequences, the Service held that no portion of the trust is includible in grantor’s gross estate under Code Section 2036 where neither applicable state law nor the trust instrument contains any provision requiring or permitting the trustee to reimburse the grantor, since the grantor did not retain the right to have the trust property used to discharge his legal obligation to pay the income tax. However, where the trust instrument requires the trustee to reimburse the grantor, or where state law requires the trustee to reimburse the grantor (unless the trust instrument provides otherwise), the full value of the trust’s assets will be includible in the grantor’s gross estate under Code Section 2036(a)(1), but the Service will not adversely apply this estate tax holding to a grantor’s estate with respect to any trust that was created prior to October 4, 2004. As to a trust instrument which gives the trustee discretion to reimburse the grantor, the Service held that this discretionary reimbursement power (whether granted in the trust instrument or under state law), by itself, will not cause the trust assets to be includible in the grantor’s gross estate, whether or not the trustee actually reimburses the grantor. However, the Service noted that the trustee’s discretion combined with other facts such as an expressed or implied understanding between the grantor and the trustee regarding the trustee’s exercise of that discretion could cause inclusion of the trust assets in the grantor’s gross estate tax purposes.


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N. GRATs and GRITs

On November 7, 2011 the Service issued final regulations under Code Section2036 regarding the value of property transferred in trust that is includable in the transferor’s gross estate for estate tax purposes where the transferor retained an interest in such property. The regulations provide that: If the decedent and another individual were joint income beneficiaries of the trust, the decedent’s estate includes (a) one-half of the value of the trust property, plus (b) the value of the other half of the trust property reduced by the value, as of the decedent’s death, of the present value of the survivor’s interest. Where the grantor’s beneficial interest succeeds another individual’s interest, the includable amount is the value of the trust property necessary to produce the grantor’s annuity or unitrust payment had he survived the current recipient, less the present value of the current recipient’s remaining interest, except that the includable amount cannot be less than the amount of the trust property required to produce the annuity or unitrust payment to which the decedent was entitled in the year of his death. Where the decedent is entitled to increasing payments, the includable amount is (a) the value of the trust property necessary to produce the decedent’s annuity or unitrust payment for the year of death, plus the value of the trust necessary to produce the incremental amount resulting from the increased annuity in each of the future years, discounted to reflect the delay in the decedent receiving this additional amount. The regulations also provide that if Code Section 2036 applies to include the value of trust property in the decedent’s estate, any payments payable to such estate after the decedent’s death will not also be includable under Code Section 2033.

On July 14, 2008, the Service adopted amendments and revisions to Treas. Reg. Sections 20.2036-1 and 20.2039-1 relating to a grantor's retained interest in a trust. The final regulations incorporate guidance provided in Rev. Rul. 82-105, 1982-1 C.B. 133 and Rev. Rul. 76-273, 1976-2 C.B. 268 regarding the portion of a trust which is includible in a grantor's grossestate under Code Section 2036 if the grantor retained the right to use trust property or the rightto receive an annuity, unitrust, or other income payment for the grantor's life, for any period notascertainable without reference to the grantor's death or for any period that does not end beforethe grantor's death. The covered trusts include grantor retained annuity trusts, charitableremainder trusts and qualified personal residence trusts, among others. Pursuant to amendedTreas. Reg. Section 20.2036-1, if a grantor retained the right to use the trust property, the portionof the trust corpus includible in the grantor's gross estate is that portion of corpus, valued as ofthe grantor's date of death or alternate valuation date, necessary to yield the annual paymentusing the then applicable Code Section 7520 rate. In addition, as to pooled income funds, theretained interest is the right to all the income. Thus, the entire share of the fund's corpusattributable to the transferor is includible in the transferor's gross estate. The amendments clarifythat although Code Section 2039 may also have implications on the issue of includibility in thegrantor's gross estate, only Code Section 2036 will apply to an annuity, unitrust or other paymentretained by a deceased grantor in a CRT or GRAT. The amended regulations are effective withrespect of decedents for which the valuation date of the gross estate is on or after July 14, 2008.

In Walton v. Commissioner, 115 T.C. No. 41 (Dec. 22, 2000), the grantor funded two substantially identical GRATs with common stock worth approximately $100 million. Each GRAT had a term of two years and, in the event of the grantor’s death, the annuity amounts were to be paid to her estate. At the end of the two year term, the remaining value of each trust was to be distributed to the grantor’s daughters. The Tax Court determined that for purposes of valuing


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the gift to the grantor’s daughters upon the creation of the GRATs under Code Section 2702, the retained qualified annuity should have been valued as an annuity for a specified term of years, rather than as an annuity for the shorter of a term certain or the period ending upon the grantor’s death. The Court also determined that the grantor retained all interests in the annuities set forth in the GRATs because she could not, as a matter of law, make a gift of the property to herself or her estate. Finally, the Court reviewed Example (5) of Treasury Regulation Section 25.2702-3(e) which the Service relied upon in arguing that the value of the annuity payable for the shorter of two years or the period ending upon the grantor’s death could be subtracted from the fair market value of the gifted stock. The Court rejected the Service’s argument and held that Example 5 was an invalid interpretation of Code Section 2702 because it was inconsistent with the statutory text, the policy objectives which motivated the statute’s enactment, and the approach taken in the comparable context of valuing split-interest gifts to charities. The Service in Notice 2003-72 announced its acquiescence in the Court’s decision. In that Notice, the Service also announced that it would change the regulations to allow treatment of a retained unitrust interest payable to a donor or his or her estate as a qualified interest. On July 23, 2004, the Service issued those Proposed Regulations (Reg-163679-02) which clarify that a unitrust amount or annuity payable to a grantor, or the grantor’s estate if the grantor dies prior to the expiration of the term, is a qualified interest for the specified term. On February 24, 2005, the Service adopted the proposed regulations.

In Cook v. Commissioner, 269 F.3d 854 (7th Cir. Oct. 22, 2001), the Seventh Circuit affirmed the Tax Court’s holding that a husband and wife who each created two GRATs must determine the value of the remainder interest in the GRATs using the factor for single-life annuities not a dual-life annuity, because the spousal interests in each trust were not fixed and ascertainable and because the retained interests in each GRAT may extend beyond the shorter of a term of years or the period ending upon the death of the grantor. The couple were co-trustees for each GRAT and funded them with shares of stock in their closely-held family company. The grantors each transferred the shares into a retained annuity for a fixed number of years or until the grantor’s death; if the grantor died prior to the expiration of the annuity, the annuity would be paid to the surviving grantor until the earliest of the death of the surviving grantor or an additional specified term and each grantor retained the right to revoke the other grantor’s interest.

In Schott v. Commissioner, T.C. Memo 2001-110 (2001), a case with nearly identical facts as Cook v. Commissioner, the Tax Court held that a successor annuity interest of a spouse in a retained two-life annuity is not a qualified interest that is subject to valuation under Code Section 2702. Under the terms of the GRAT, the grantor retained an annuity interest for 15 years or, if sooner, until the grantor’s death. If the grantor died prior to the expiration of the annuity term, the annuity was to be paid to the spouse. If the spouse did not survive the grantor or the grantor revoked the interest, the annuity payments ceased. The Court held that this contingent spousal interest was distinguishable from the fixed, noncontingent spousal interest for a fixed term of years in both Example (6) and Example (7) of Treasury Regulation Section 25.2702-2(d)(1). Finally, the Court noted that the legislative intent to conform qualified interests in valuing GRATs with charitable split interest trusts did not include dual-life annuities. Accord: Tech. Adv. Mem. 200230003 (July 26, 2002), where the spousal interests were nearly the same as those in Cook and Schott, as the spousal interests were contingent, rather than fixed and ascertainable, because it was possible that they would never vest. The Service concluded that the


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spousal interests were not qualified interests and were valued at zero in determining the value of the grantors’ gifts to the GRATs. The Service rejected the grantors’ argument that the GRATs were of the “fixed” term variety considered in A. Walton, supra. The Service further determined that the fact that the spousal interests were payable to the spouse’s estate if the spouse died before the end of the annuity term did not alter the contingent nature of the spousal interests. The Ninth Circuit reversed the Tax Court’s judgment in Schott v. Commissioner, 81 TCM (CCH) 600, rev’d 319 F.3d 1203 (9th Cir. 2003) and distinguished the Seventh Circuit Cook decision (Cook v. Commissioner, 269 F.3d 854 (7th Cir. 2001). The Ninth Circuit held that the two-life annuity retained by the Schotts in their GRATs is an interest which is qualified under Code Section 2702 and therefore is to be subtracted from the value of the gift. The Court stated that the Commissioner’s interpretation of Example 7 in 20 CFR Sec. 25.2702-2(d) to exclude the contingency of the spouse being alive at the time her annuity begins is unreasonable and invalid; the annuity created by each Schott trust for the lives of the grantor and spouse or 15 years is as qualified as the annuity in Example 7 paying a fixed amount for 10 years to the grantor, then to the spouse if living. The Court held that a two-life annuity, based on the lives of the grantor and spouse with a limit of 15 years, falls within the class of easily valued rights that Congress meant to qualify under Code Section 2702. The Ninth Circuit distinguished Cook on the basis of the requirement in Cook that the parties be married at the date the survivor annuity begins.

In response to the decision in Schott, on July 23, 2004 the Service issued Proposed Regulations (REG -163679-02) that clarify when a revocable spousal interest is a qualified interest. The Proposed Regulations provide that the qualified interest must be for a fixed term and payment cannot be contingent on an event other than survival of the term holder (subject to the transferor’s retained right of revocation). A revocable spousal interest is contingent, and therefore not a qualified interest, if the spouse will not receive any payments if the transferor survives the fixed term during which the transferor is the holder. These regulations clarify that the revocable spousal interest is a qualified interest only if the spouse’s interest, standing alone, would constitute a qualified interest but for the grantor’s revocation power. On February 24, 2005 the Service adopted the proposed regulations and added new Example 8 in Reg. §25.2702-3(e) to clarify that the grantor makes a completed gift to the spouse when the revocation right lapses on the expiration of the grantor’s retained term.

The final regulations amending Reg. §2702-2 and Reg. §2702-3 apply to trusts created on after July 26, 2004, but the Service will not challenge any prior application of the changes to Example 5 and Example 6 in Reg. §25.2702-3(e).

O. Gifts, Gift Tax, and Estate Tax Includibility of Gift Tax

In Cavallaro v. Commissioner, T.C. Memo 2014-189, where a company whichwas owned by the senior generation and which manufactured certain equipment, and a company owned by the junior generation which sold that equipment, merged, the Court held that the allocation of value between the two generations’ ownership of the post-merger company was inconsistent with the pre-merger value of each company, and that the senior generation therefore made a $30,000,000 gift to the junior generation as a result of the merger.

In V. Kite Estate, TCM 2013-43, the decedent appointed her children as trustees of certain trusts, including QTIP trusts. The children then terminated such trusts, with the assets


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passing to the decedent’s revocable trust. The assets consisted entirely of interests in a family limited partnership, and the decedent’s revocable trust then sold its interest in the partnership to the decedent’s children in exchange for deferred private annuities. The Tax Court held that the sale was for full and adequate consideration and, therefore, not subject to gift tax. However, the Court also held that the termination of the QTIP trusts and the sale of the decedent’s interest in the partnership disregarded the Code Section 2519 QTIP rules and, therefore, was subject to gift tax, noting that the disposition of the QTIP trusts was part of a prearranged and simultaneous transfer. In addition, the Court held that where the income beneficiary of a QTIP trust is deemed to have made a gift of the remainder interest in the trust pursuant to Code Section 2519, any consideration that such beneficiary receives in the transaction cannot reduce the amount of the gift for gift tax purposes, since the trust’s income beneficiary did not own such remainder interest and, therefore, cannot technically receive any consideration in exchange for it.

In Sommers v Commissioner, T.C. No. 9305-07, T.C. Memo 2013-8 (January 10, 2013), where the decedent transferred his art collection during his life to a limited liability company and made gifts of units in the company to his nieces, and where state court cases held that such gifts were valid and complete, the Tax Court held that the estate was collaterally estopped by such state court decisions from arguing that the gifts were not gifts for federal gift tax purposes, and from arguing that the decedent retained a power to alter, amend, revoke or terminate the gifts.

In PLR 201310002 (2013) and PLR 201310006 (2013) the Service ruled with respect to Delaware incomplete non-grantor trusts (i.e., so-called “DING” trusts), where there was a corporate trustee that was required to distribute income or principal to the grantor or his issue at the direction of a distribution committee consisting of the grantor and his four children, or must make distributions of principal to the grantor’s issue at the grantor’s direction pursuant to an ascertainable standard, the Service ruled that the trusts are not grantor trusts, that the grantor did not make completed gifts on the creation of the trusts, and that the distribution committee members did not make completed gifts upon making distributions to the grantor or to persons other than the grantor.

In CCA 201208026 dated September 28, 2011 the Service advised that a transfer to an irrevocable trust as to which the donor retains a testamentary limited power of appointment is a completed gift of the term interest in the trust, and the value of the term interest for gift tax purposes is 100% of the amount transferred to the trust due to the application of Chapter 14 of the Code. On August 21, 2012 officials of Bessemer Trust Company advised the Real Property, Trust and Estate Law Section of the American Bar Association that using a retained testamentary limited power of appointment is no longer an absolute way of avoiding having a transfer to a trust treated as a completed gift if the grantor is not the sole beneficiary of the trust.

On June 18, 2010 the Service issued a Chief Counsel Advice Memorandum (CCA 201024059) advising that the gift tax imposed on the transfer of closely held stock could be assessed at any time where the donor failed to disclose on the gift tax return the method used to value the stock and a description of the discounts taken in valuing the stocks, thereby failing to comply with the requirement that the transfer must be “adequately disclosed” for the statute of limitations to begin to run.


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On May 21, 2010 the Service issued a Chief Counsel Advice Memorandum (CCA 201020009), advising that Code Section 2035(b), which includes in the gross estate of a decedent the amount of any gift tax paid on gifts made within three years of death, does not apply to the payment of gift tax made by a non-resident non-U.S. citizen.

In Estate of Morgens v. Commissioner, 133 T.C. No. 17 (December 21, 2009), where the income beneficiary of QTIP trusts, within three years of her death, made a gift of her income interests in the trusts to the remainder beneficiaries of the trusts, thereby causing a gift of the trusts’ remainder interests under Code Section 2519, the Tax Court held that the income beneficiary was liable for the payment of the gift tax, resulting in the includibility of that gift tax in the income beneficiary’s gross estate for estate tax purposes pursuant to Code Section 2035(b), even though the remainder beneficiaries had agreed to indemnify the income beneficiary for any gift tax payable by reason of the gift. On May 3, 2012 the Court of Appeals affirmed the Tax Court decision (109 AFTR2d 2006, 9th Cir. 2012), and held that the gift taxes paid must be included in the transferor’s gross estate under Code Section 2035(b).

In E. Barnett, Admr., 2009-2 USTC ¶ 60,576, the District Court in Pennsylvania held that checks issued by the decedent’s agent to make gifts pursuant to a power of attorney which did not specifically authorize the agent to make gifts were not valid gifts and were includible in the decedent’s gross estate for estate tax purposes.

On September 9, 2009 the Service issued final regulations under Code Section 7477 (Treas. Reg. §301.7477-1) as to when a donor may file a Tax Court petition seeking a declaratory judgment as to the gift tax value of a gift. The regulations provide that a donor may file such a petition if (1) the transfer is shown or disclosed on a gift tax return, (2) the Service has made a determination regarding the gift tax treatment of the transfer that results in an “actual controversy”, (3) the donor has exhausted all available administrative remedies, and (4) the donor files the Tax Court petition requesting a declaratory judgment under Code Section 7477 within 91 days of the Service’s notice of proposed adjustment. The final regulations apply to civil proceedings described in Code Section 7477 which are filed in the Tax Court on or after September 9, 2009.

In CCA 201330033 (February 24, 2012) the Service advised as to the gift tax and estate tax consequences of transfers of stock to grantor trusts in exchange for self-cancelling notes that provided only for the payment of interest during their term, with a balloon payment of principal at the end of the term, where the transferor died in the year after the transfer and before the notes matured. The Service stated that the fair market value of the notes is to be determined pursuant to the willing buyer, willing seller standard in Treas. Reg. Section 25.2512-8, rather than based on the Code Section 7520 mortality tables, and that if the value of the notes is less than the value of the stock, measured at the time of the transfer, then there is a deemed gift by the transferor of the difference. The Service stated that in the instant case the notes lacked the indicia of genuine debt, which requires a reasonable expectation of payment, since it was unclear as to whether or not the trusts were adequately funded to be able to pay the notes. As a result, the Service concluded that notes were worth significantly less than the value of the stock and that the difference was a gift. The Service also advised that there were no estate tax consequences as a result of the cancellation of the notes at the transferor’s death.


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P. Same-Sex Marriages

In Obergefell v. Hodges, U.S. No. 14-556 (June 26, 2015), the United StatesSupreme Court held that the equal protection clause of the Fourteenth Amendment to the United States Constitution prohibits states from banning same-sex marriages.

As a result of the United States Supreme Court’s decision in Obergefell, tax officials in states that did not provide marriage related tax benefits to same-sex married couples before such decision have begun the process of adjusting their tax benefits to provide equal tax treatment.

In United States v. Windsor, 570 U.S. ____ (2013), the United States Supreme Court held that Section 3 of the Defense of Marriage Act was unconstitutional and that the estate of a same-sex spouse was entitled to a federal estate tax marital deduction for the bequest to the surviving same-sex spouse.

In Hollingsworth v. Perry, 570 U.S. _______ (2013), the United States Supreme Court also held that the proponents of Proposition 8, which was California’s ban of same-sex marriage, lacked standing to appeal a Federal District Judge’s ruling that Proposition 8 violated the Constitution.

In Cozen O’Connor, P.C. v.Tobits, E.D. Pa., No. 2:11-cv-00045-CDJ (2013), the Court held that the same-sex spouse of a deceased participant in a profit sharing plan, which provided that death benefits would be paid to the participant’s surviving spouse, was entitled to the spousal death benefits under the plan and under the Employee Retirement Income Security Act (“ERISA”).

In Rev. Rul. 2013-17, IRB 2013-38, the Service ruled that a same-sex couple that is legally married in a jurisdiction that recognizes such marriages will be treated as married for federal tax purposes, whether or not the couple resides in a jurisdiction that recognizes same-sex marriages.

On August 29, 2013 the Service issued a FAQs on same-sex marriage. For tax year 2013 and thereafter, same-sex spouses generally must file using a married filing separately or jointly filing status. For tax years 2012 and earlier, same-sex spouses who file an original tax return on or after September 16, 2013 generally must file using a married filing separately or jointly filing status. Same-sex spouses who file their 2012 tax year return before September 16, 2013 may choose, but are not required, to amend their federal tax returns to file using a married filing status.

On November 26, 2013 the Service issued new draft instructions for Form 1040-X that includes language on how taxpayers can use such form to amend a return filed before September 16, 2013 to change their filing status to a married filing status.

The Service in its FAQs on registered domestic partnerships stated that such partners are not considered as married or spouses for federal tax purposes, as such partners are not married under state law. Thus, domestic partners cannot file federal returns using a married filing status, and a taxpayer cannot file as head of household if the taxpayer’s only dependent is


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his or her registered domestic partner. In addition, a registered domestic partner can itemize his or her deductions whether or not his or her partner itemizes or claims the standard deduction.

Q. IRAs and Qualified Retirement Plans

In Running v. Miller, 778 F.3d 711 (Ct. App. 8th Cir., 2015), the Court held thatan annuity purchased through a direct rollover from a tax-exempt IRA is exempt from the debtor’s Chapter 7 estate.

On July 2, 2014 the Service published final regulations (T.D. 9673) under Code Sections 401, 403 408, 408A and 6047 regarding qualifying longevity annuity contracts (“QLACs”), which allow a participant in a retirement plan or a person who has an IRA to use a portion of his or her plan or IRA account balance to purchase an annuity that will begin to pay benefits at an advanced age (up to a maximum of age 85), and that will continue to pay benefits for the life of the plan participant or IRA owner. The regulations also allow the plan participant or IRA owner to deduct the cost of the QLAC from the account balance for purposes of determining the required minimum distribution that must be paid from the plan to the participant or from the IRA to its owner. In addition, the regulations require that a company that issues a QLAC must send a report to the plan participant or IRA owner annually regarding that contract, and the Service has issued Form 1098-Q for that purpose

On July 1, 2014 the Service issued final regulations (T.D. 9673) modifying the required minimum distribution rules to allow for the purchase of deferred annuities that start at an advanced age, such as 80 or 85. The regulations provide that the maximum permitted investment that individuals can use to purchase qualifying longevity annuity contracts regardless on non-compliance with the age 70-1/2 minimum distribution requirements is 25% of their account balance or $125,000, whichever is less. The $125,000 limitation will be inflation adjusted. The final regulations apply to plans covered by Code Section 401(a), Code Section 403(b), and individual retirement annuities and IRAs under Code Section 408, and eligible governmental plans under Code Section 457(b).

In Bobrow v. Commissioner, T.C. Memo 2014-21, the Court held that a taxpayer who maintained multiple individual retirement accounts could not make a rollover contribution for more than one IRA in a one-year period. As a result of this decision, on July 10, 2014 the Service stated that it would withdraw its proposed changes to Treas. Reg. Section 1.408-4(b)(4)(ii) and IRS Publication 590, providing that this limitation is applied on an IRA-by-IRA basis, and would issue revised guidance to clarify that rules limiting IRA rollovers to one per year apply on an aggregate basis. On November 24, 2014 the Service published Announcement 2014-32, clarifying that a 2014 transfer of a distribution from one IRA to another IRA will not have an impact on the new rule only allowing one IRA-to-IRA transfer per year beginning in 2015.

In Notice 2014-19, the Service stated that qualified retirement plans must reflect the outcome of United States v. Windsor as of June 26, 2013, the date of the United States Supreme Court’s decision in that case, but need not reflect that outcome prior to such date in order to continue to be qualified.


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In Clark v. Rameker, the United States Supreme Court (No. 13-299, June 12, 2014), held that an inherited IRA does not represent "retirement funds" and is therefore not an exempt asset in connection with a debtor's bankruptcy filing.

In PLR 201125009 (June 24, 2011), the Service ruled that the executor of the estate of a surviving spouse could disclaim the undistributed portion in a retirement account, even though required minimum distributions had already been made from such account to the estate’s account.

In Rev. Rul. 2005-36, 2005-1 Cum. Bull. 1368, the Service ruled that a beneficiary’s receipt from a decedent’s individual retirement account of the required minimum distribution for the year of the decedent’s death does not prevent the beneficiary from making a qualified disclaimer of her beneficial interest in the IRA.

In In re Wachovia Corp. ERISA Litigation, W.D.N.C., No. 3:09-cv-00262-MR (October 24, 2011), the Court approved a settlement of $12,350,000, plus attorney’s fees, in an action by Code Section 401(k) plan participants against Wachovia Corp., where Wachovia allegedly breached its fiduciary duties by permitting substantial investment of the plan assets in Wachovia’s common stock when it was not prudent to do so.

ROTH IRA CONVERSIONS: For tax years beginning after 2009, an individual can convert a traditional IRA into a Roth IRA without regard to the amount of the individual’s adjusted gross income, thereby avoiding income tax on all future income and appreciation in the IRA, whereas prior to 2010 an individual could do so only if his or her modified adjusted gross income was not more than $100,000. A taxpayer who made such a conversion in 2010 can elect to recognize the conversion ratably in 2011 and 2012.

On September 18, 2014 the Service issued proposed regulations (REG-105739-11) and Notice 2014-54, clarifying that plan participants who receive a distribution from aretirement account can roll over the after-tax funds to a Roth IRA.

In Notice 2009-75, IRB 2009-39 (September 28, 2009), the Service stated that a Roth IRA conversion made directly from a non-IRA account will be treated as though it first passed through a traditional IRA, so that special tax rules, such as those applicable to net unrealized depreciation on employer securities, which otherwise would require the payment of current income tax only on the amount of the stock’s cost basis until the participant later sells the stock, would not be applicable, with the result that the participant will be required to pay income tax on the entire amount.

In Paschall v. Commissioner, 137 T.C. No. 2 (2011), and Swanson v. Commissioner, T.C. Memo 2011-156 (2011), the Tax Court held that taxpayers who utilized a Roth IRA conversion tax shelter were liable for excise taxes due to excess contributions to the Roth IRA and were liable failure to file penalties for relying on the tax advice of the tax shelter promoter.

In Strong v. Dubin, NY Slip Op 04121 (May 13, 2010), the Appellate Division, First Department, held that a prenuptial waiver of equitable distribution rights to retirement


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assets is valid, distinguishing the requirement under ERISA that a waiver of survivorship rights to retirement assets can only be validly accomplished by a spouse.

In Hess v. Wojcik-Hess, 1:08-cv-789 (January 26, 2010), the District Court for the Northern District of New York held that the decedent’s employee benefit plans were governed by ERISA, which required that the Court must apply the terms of the plans in determining the eligible beneficiary, thereby entitling the decedent’s separated spouse to the benefits under those plans, notwithstanding a separation agreement between the decedent and his spouse in which the spouse waived any claim which she may have in those plans.

In Diversified Investment Advisors Inc. v. Baruch, N.Y.L.J. June 30, 2011, the United States District Court for the Eastern District of New York held that the waiver by the surviving spouse of the decedent’s pension benefits or non-wage compensation benefits during his years of employment for the New York State Teachers Retirement System was an enforceable waiver with respect to the decedent’s participation in an annuity pension plan regulated by state and federal law, as the waiver was explicit, voluntary and made in good faith.

In Kesinger v. URL Pharma Inc., No. 09-cv-06510 (D. Ct. New Jersey, March 20, 2012), where the decedent’s wife waived her right to the proceeds of the decedent’s 401(k) plan as part of their divorce decree, but the decedent failed to change the designated beneficiary of his plan benefits prior to his death, the Court held that the plan administrator is obligated to pay the plan proceeds to the decedent’s former wife, as the designated beneficiary, but that the decedent’s estate could sue the decedent’s former wife to enforce her waiver of her right to receive the plan proceeds and to recover such proceeds for the decedent’s estate.

In Charles Schwab & Co. v. Debickero, 593 F.3d 916 (January 22, 2010), the Ninth Circuit Court of Appeals affirmed a District Court decision that automatic protections provided by ERISA for a surviving spouse which are applicable to pension plans do not apply to IRAs, even though some of the funds in the IRA originated in an ERISA-protected pension plan before being rolled over to the IRA.

In Prudential Insurance Co. of America v. Glacobbe, No. 3:07-cv-04113-AET-TJB (October 30, 2009), the District Court in New Jersey, in an unpublished decision, held that, where the decedent attempted to change the beneficiary designation of a life insurance policy held in a welfare benefit plan which was governed by ERISA, but omitted the Social Security numbers of the new beneficiaries, the plan was required to be administered in accordance with the plan documents and that the decedent had failed to “substantially comply” with the plan’s requirements by not including those Social Security numbers on the beneficiary designation form.

In PLR 200944059 (August 3, 2009), the Service ruled that where the decedent named a trust as the beneficiary of his IRA and the lifetime beneficiary of the trust was the decedent's wife and the remainderman was his son, the wife was not treated as the payee of the IRA and, therefore, she could not roll the decedent's IRA into an IRA in her own name.

In PLR 201011036 (December 14, 2009), the Service ruled that a taxpayer who suffered from multiple sclerosis and was unable to engage in any substantial gainful employment


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by reason of his illness was disabled and, therefore, was not subject to the 10% early distribution penalty for early distributions from his IRA.

The Department of Labor in Advisory Opinion 2009-02A (September 28, 2009) stated that benefit distributions from an IRA to a trust, when the IRA’s owner’s grandson is the sole beneficiary, the IRA owner is the trustee and the owner’s son is the designated successor trustee, would not constitute a prohibited transaction for purposes of Code Section 4975, even though the trust is a “disqualified person” under Code Section 4975, since ordinary benefit distributions are not prohibited transactions if the benefit is computed and paid on a basis consistent with the terms of the plan and is applied to all other participants and beneficiaries.

In Hallingby v. Hallingby, No. 08-1866-cv (2009), the United States Court of Appeals for the Second Circuit held that commercial annuities purchased for retirement plan participants in connection with the termination of such plan are not subject to ERISA, since ERISA allows an employee benefit plan to be terminated under stated conditions, including by the purchase of commercial annuities for the plan participants, notwithstanding that ERISA requires a pension plan to prohibit the assignment of plan benefits. The Court of Appeals remanded the case to the District Court for the Southern District of New York to decide in accordance with state law whether the decedent’s final wife is entitled to the survivor benefit payments under the annuity contract, or whether a prior wife of the decedent who had waived all rights to any retirement benefits in her divorce settlement with the decedent was entitled to such survivor benefit payments.

In McCauley v New York State and Local Employees’ Retirement System, 2012 N.Y. Slip Op 22283 (Sup. Ct. August 13, 2012), the Court held that the dissolution of the plan participant’s marriage revoked his beneficiary designation that he executed prior to his death.

In In re Estate of Sauers, 971 A.2d 1265 (Pa. Super. Ct. 2009), the Superior Court of Pennsylvania held that the decedent’s ex-wife, who received the death benefit payable under a life insurance policy insuring the decedent’s life as the policy’s beneficiary, where the policy was part of an employee benefit plan subject to ERISA and the insured did not change the policy beneficiary after his divorce, was required to transfer the policy proceeds to the contingent beneficiary under the policy, on the grounds that the Pennsylvania revocation-on-divorce statute did not affect the administration of the Plan and, therefore, ERISA did not preempt such Pennsylvania statute.

In Kennedy v. Plan Administrator for Dupont Savings and Investment Plan, 129 S. Ct. 865 (2009), the United States Supreme Court held that the Plan Administrator properlypaid the death benefit payable under the company’s savings and investment plan to thedecedent’s former wife, whom the decedent had properly designated as the beneficiary of thatbenefit when the decedent was married to her, even though the decree divorcing the decedent andhis former wife divested her of her rights under that plan, since the decedent had not executedanother beneficiary designation form after his divorce, where the plan required that beneficiarydesignations must be made as required by the Plan Administrator using the specific forms theAdministrator had created for that purpose. However, the Court expressly refused to decidewhether the decedent’s estate (to whom the plan benefit would have been payable in the absence


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of a valid beneficiary designation) would have a valid federal or state contract claim against the decedent’s former spouse and whether federal law would preempt any such state law claim.

In Egelhoff v. Egelhoff, 532 U.S. 141, 121 S. Ct. 1322 (2001) the United States Supreme Court held that ERISA preempts state laws that automatically revoke group-term life insurance and pension plan beneficiary designations upon the participant’s divorce because such state laws directly relate to the administration of ERISA plans. A decedent’s children sought to have the decedent’s group-term life insurance proceeds and pension benefits paid to them under Washington state law rather than the decedent’s ex-wife who was still the named beneficiary for the plans. Under Washington law, and many other state laws, beneficiary designations for nonprobate assets are automatically revoked upon divorce as a matter of law. The Court reasoned that ERISA’s broad preemption clause was intended to ensure uniform administration of employee benefit plans. The Supreme Court decision does not, however, preclude plan sponsors from choosing to include automatic beneficiary designation revocation as part of the plan design to the extent permitted under the Code and ERISA.

In McGowan v. NJR Service Corp., 423 F.3d 241 (3d Cir. 2005), a divided panel of the United States Court of Appeals for the Third Circuit held that, in the absence of a qualified domestic relations order, an Employee Retirement Income Security Act benefits plan administrator is not required to recognize a non-participant beneficiary’s waiver of benefits. The Court stated that the explicit prohibition against alienation or assignment of benefits in ERISA Section 206(d) applies to invalidate the waiver by the participant’s former spouse in a divorce settlement.

In Silber v. Silber, 99 N.Y.2d 395 (Ct. App. 2003), the New York Court of Appeals held that a qualified domestic relations order (“QDRO”) may serve as a qualified deferred compensation plan document that changes the beneficiary designation of a plan governed by ERISA in the absence of the filing of a plan beneficiary designation form, even though the QDRO in question only constituted a waiver of the claimant’s rights to the plan benefit and did not specifically designate a beneficiary of that benefit.

In a PLR 200826008 (June 30, 2008), the Service considered the income tax consequences of a sale of an IRA to a trust created for the benefit of the IRA's beneficiary. A decedent left his IRA to his two children, one of whom was a minor. The minor child's conservator proposed to create a trust for the sole benefit of the child, from which the child could withdraw increasing portions as he attained certain ages, eventually having the power to withdraw the trust's entire balance. At the child's death, any remaining property would pass as he designates under a general power of appointment. Code Section 691(a)(1) generally provides that when a person inherits a right to income in respect of a decedent (such as an IRA) and then transfer this right, that person must include in gross income the fair market value of this right at the time of transfer, plus any amount by which any consideration for the transfer exceeds the fair market value. Citing Rev. Rul. 85-13, 1985-1 C.B. 184, the Service concluded that, because the proposed trust would be a grantor trust to the beneficiary, a sale of the IRA would be disregarded for income tax purposes, and assuming the transfer would not constitute a completed gift by the beneficiary, the transfer of the IRA would not be a sale or disposition of the IRA for federal income tax purposes or a transfer for purposes of Code Section 691(a)(2).


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In Tech. Adv. Memo 2002-47-001, the National Office ruled that the value of decedent’s IRAs holding marketable securities should not be discounted for estate tax purposes to reflect income taxes that will be payable by the beneficiaries upon receipt of distributions from the IRAs, or for lack of marketability. The ruling follows the rationale in Estate of Robinson v. Commissioner, 69 T.C. 222 (1977), which held that the fact that the assets are subject to income tax on distribution should not impact on the application of the “willing buyer - willing seller” standard because the IRA distributee can sell the underlying assets at market price without any discount. With respect to the lack of marketability, the ruling stated that “while § 408(e) imposes penalties on the transfer or assignment of the IRA there are no restrictions preventing the distribution of assets to the beneficiaries after the decedent’s death and short administrative delays in processing the beneficiaries’ request for distribution should not warrant a discount.” The Service declined to treat an IRA as a separate entity like a corporation, viewing it as merely a custodial arrangement with the assets held in the IRA as being no different from securities held in a brokerage account. The Service also noted that the Code provides for an income tax deduction for the estate tax attributable to the income tax inherent in the IRA and that this deduction is intended to operate in lieu of a valuation discount for estate tax purposes.

In L. Smith Est., 300 F. Supp. 2d 474 (D. Ct. Texas 2004), the Court held that the value of a decedent's retirement accounts for estate tax purposes could not be discounted to reflect the income tax liability to be incurred by the accounts' beneficiaries when the accounts are distributed and noted that Congress alleviated the impact of the double taxation of income in respect of a decedent by allowing the recipient of that income to deduct the estate tax attributable to it pursuant to Code Section 691(c) . On November 15, 2004, the Court of Appeals for the Fifth Circuit (391 F.3d 621) affirmed the District Court decision.

Furthermore, on June 21, 2004 the National Office ruled in Tech. Adv. Memo 2004-44-021 that income taxes paid by a decedent’s estate on distributions from IRAs were not deductible for federal estate tax purposes under Code Sec. 2053 as administration expenses or as claims against the estate.

In Estate of Kahn v. Commissioner, 125 T.C. No.11 (2005), the Tax Court held that the decedent’s estate could not reduce the value of the decedent’s individual retirement accounts owned at her death by the anticipated amount of federal income taxes which the beneficiaries of the accounts would pay when they received distributions from the accounts. Instead, the Court held that the estate had to report the accounts for estate tax purposes at the net aggregate value of the assets in the accounts. On April 4, 2005, the United States Supreme Court in Rousey v. Jacoway, 544 U.S. 320, held that an IRA is exempt from the reach of creditors in bankruptcy pursuant to §522(d)(10)(E) of the Bankruptcy Code, which exempts certain assets from the debtor’s bankruptcy estate. The Court stated that the 10% penalty imposed on withdrawals from an IRA before the accountholder is 59-1/2 years old, and the elimination of this penalty for withdrawals after the accountholder attains that age, indicates that the accountholder’s right to receive payments from the IRA is a right to payment "on account of age" for purposes of that section of the Bankruptcy Code, which exempts payments under certain types of plans on account of age, as well as on account of other specified factors.


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R. Special Valuation Rules – Chapter 14

At the May 2015 meeting of the American Bar Association Section of Taxation,Treasury Estate and Gift Tax Attorney-Advisor Cathy Hughes stated that the Service may issue regulations adding an additional category of restrictions that may be disregarded for purposes of determining the value under Code Section 2704 of interests in family-controlled entities where there is a transfer to family members, if the restrictions have the effect of reducing the value of the transferred interest, but do not ultimately reduce the value of that interest to the transferee.

In St. Laurent v. Commissioner, T.C. Nos. 24963-13 through 24970-13 (2013), the petitioners challenged the Service’s assessment of gift tax deficiencies regarding gifts of membership interest in limited liability companies, claiming that the Service erroneously valued the gifts under Code Section 2703 without regard to any options, agreements, rights to acquire or use such property, or restrictions on the right to sell or use such property, and without regard to Code Section 2704 by determining the value without consideration of any lapse in voting or liquidation rights.

In Rankin v. Smith, 109 A.F.T.R.2d 987 (Fed. Ct. Cl. 2012), where the decedent owned stock that was required to be converted at his death into another class of stock that would have fewer voting rights than the original stock, the Court held that Code Section 2704 required the lapsed voting rights of the pre-converted stock to be disregarded in determining the estate tax value of such stock, as the decedent and his family controlled the corporation both before and after the conversion.

S. Economic Substance Doctrine

On October 9, 2014 the Service issued Notice 2014-58 amplifying the Service’sNotice 2010-62, regarding the economic substance doctrine. The 2010 Notice stated that a transaction would not be accorded the expected tax benefits if it lacked economic substance or a business purpose. The 2014 Notice clarified both the definition of a “transaction” in applying the economic substance doctrine, and the meaning of the term “similar rule of law” in applying the accuracy-related penalties. The 2014 Notice stated that a transactions includes all of the factual elements relevant to the expected tax treatment of any investment, entity, plan or arrangement, and any or all of the steps that are carried out as part of a plan; and that a “similar rule of law” means a rule or doctrine that disallows tax benefits because the transaction does not change a taxpayer’s economic position in a meaningful way, apart from federal income tax effects, and the taxpayer did not have a substantial purpose for entering into the transaction aside from the federal income tax effects.

T. “Dormant Commerce Clause”

In Comptroller of the Treasury of Maryland v. Wynne, No. 13-485 (May 18,2015), the United States Supreme Court held that Maryland’s income tax structure was unconstitutional, as it violated the so-called “dormant Commerce Clause”, which is a doctrine that allows courts to invalidate laws having the effect of hindering interstate commerce, since Maryland’s tax structure subjected earnings that were already taxed outside of Maryland to a second layer of taxation within Maryland.


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U. Ponzi Schemes

On October 22, 2013 the Service posted program manager technical advicememorandum 2013-03, stating that a taxpayer may amend tax returns for open years to eliminate from income amounts that were falsely reported to the taxpayer as income, may they also deduct on open year tax returns amounts falsely reported as income in closed years as losses from a fraudulent investment scheme under Code Section 165(c)(2).

V. Ruling Procedures

On January 2, 2015 the Service issued Rev. Proc. 2015-1, IRB 2015-1, updatingthe Service’s procedures for the issuance of private letter rulings and similar taxpayer requested guidance. On the same date, the Service issued Rev. Proc. 2015-5, IRB 2015-1, updating the process for the Service’s issuance of determination letters regarding a Code Section 501(c)(3) exemption for organizations that submit the Form 1023-EZ (Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code).

On January 12, 2015 the Service issued Rev. Proc. 2015-9, IRB 2015-2, updating its procedures for the issuance of determination letters and rulings on the tax exempt status of organizations. On the same date, the Service issued Rev. Proc. 2015-10, IRB 2015-2, updating its procedures for the issuance of rulings and determination letters regarding the tax status of private foundation and private operating foundations.

W. No Ruling Areas

On January 2, 2015 the Service published Rev. Proc. 2015-3, IRB 2015-1,containing a revised list of areas in which the Service will not, or ordinarily will not, issue letter rulings or determination letters. The areas in which the Service will not issue letter rulings include:

1. Whether there has been a transfer for value for purposes of Code Section101(a) in situations involving a grantor and a trust when (i) substantially all of the trust corpus consists or will consist of insurance policies on the life of the grantor or the grantor’s spouse, (ii) the trustee or any other person has a power to apply the trust’s income or corpus to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse, (iii) the trustee or any other person has a power to use the trust’s assets to make loans to the grantor’s estate or to purchase assets from the grantor’s estate, and (iv) there is a right or power in any person that would cause the grantor to be treated as the owner of all or a portion of the trust under Code Sections 673 to 677.

2. Whether a transfer is a gift within the meaning of Code Section 102(a).

3. Whether property qualifies as a taxpayer’s principal residence forpurposes of Code Section 121.

4. Whether a charitable contribution deduction under Code Section 170 isallowed for a transfer of an interest in a limited partnership or a limited liability company taxed as a partnership to an organization described in Code Section 170(c).


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5. Whether a taxpayer who advances funds to a charitable organization andreceives therefor a promissory note may deduct as contributions, in one taxable year or in each of several years, amounts forgiven by the taxpayer in each of several years by endorsement on the note.

6. Whether the period of administration or settlement of an estate or a trust(other than a trust described in Code Section 664) is reasonable or unduly prolonged.

7. Allowance of an unlimited deduction under Code Section 642(c) foramounts set aside by a trust or estate for charitable purposes when there is a possibility that the corpus of the trust or estate may be invaded.

8. Whether the settlement of a charitable remainder trust upon thetermination of the noncharitable interest is made within a reasonable period of time.

9. Whether the grantor will be considered the owner of any portion of a trustwhen (i) substantially all of the trust corpus consists or will consist of insurance policies on the life of the grantor or the grantor’s spouse, (ii) the trustee or any other person has a power to apply the trust’s income or corpus to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse, (iii) the trustee or any other person has a power to use the trust’s assets to make loans to the grantor’s estate or to purchase assets from the grantor’s estate, and (iv) there is a right or power in any person that would cause the grantor to be treated as the owner of all or a portion of the trust under Code Sections 673 to 677.

10. Matters relating to the validity of a family partnership when capital is nota material income producing factor.

11. Whether the termination of a charitable remainder trust before the end ofthe trust term as a defined in the trust’s governing instrument, in a transaction in which the trust beneficiaries receive their actuarial shares of the value of the trust assets, is treated as a sale or other disposition by the beneficiaries of their interests in the trust.

12. Whether the termination of a charitable remainder trust before the end ofthe trust term as defined in the trust’s governing instrument, in a transaction in which the trust beneficiaries receive their actuarial shares of the value of the trust assets, is treated as a sale or exchange of a capital asset by the beneficiaries.

13. Actuarial factors for valuing interests in the prospective gross estate of aliving person.

14. Whether a charitable contribution deduction under Code Section 2055 isallowed for the transfer of an interest in a limited partnership or a limited liability company taxed as a partnership to an organization described in Code Section 2055(a).

15. Actuarial factors for valuing prospective or hypothetical gifts of a donor.


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16. Whether a charitable contribution deduction under Code Section 2522 isallowable for a transfer of an interest in a limited partnership or a limited liability company taxed as a partnership to an organization described in Code Section 2522(a)

17. Whether a trust exempt from GST tax under Section 26.2601-1(b)(1),(2),or (3) of the GST tax regulations will retain its GST tax exempt status when there is a modification of a trust, a change in the administration of a trust, or a distribution from a trust in a factual scenario that is similar to a factual scenario set forth in one or more of the examples contained in Section 26.2601-1(b)(4)(i)(E).

18. Requests involving Code Section 6166 where there is no decedent.

19. Whether a taxpayer is liable for tax as a transferee.

In addition, the areas in which the Service ordinarily will not issue letter rulings or determination letters include:

1. Whether a transfer to a pooled income fund described in Code Section642(c)(5) qualifies for a charitable contribution deduction under Code Section 170(f)(2)(A).

2. Whether a taxpayer who transfers property to a charitable organization andthereafter leases back all or a portion of the transferred property may deduct the fair market value of the property transferred and leased back as a charitable contribution.

3. Whether a transfer to a charitable remainder trust described in CodeSection 664 that provides for annuity or unitrust payments for one or two measuring lives qualifies for a charitable deduction under Code Section 170(f)(2)(A).

4. Whether a pooled income fund satisfies the requirements described inCode Section 642(c)(5).

5. Whether a charitable remainder trust that provides for annuity or unitrustpayments for one or two measuring lives or for annuity or unitrust payments for a term of years satisfies the requirements described in Code Section 664.

6. Whether a trust that will calculate the unitrust amount under Code Section664(d)(3) qualifies as a Code Section 664 charitable remainder trust when a grantor, a trustee, a beneficiary, or a person related or subordinate to a grantor, a trustee, or a beneficiary can control the timing of the trust’s receipt of trust income from a partnership or a deferred annuity contract to take advantages of the difference between trust income under Code Section 643(b) and income for federal income tax purposes for the benefit of the unitrust recipient.

7. Whether a person will be treated as the owner of any portion of a trustover which that person has a power to withdraw the trust property (or had such power prior to a release or modification, but retains other powers which would cause that person to be the owner of the trust under Code Section 671 if the person were the grantor), other than a power which would constitute a general power of appointment within the meaning of Code Section 2041, if the trust purchases the property from that person with a note and the value of the assets with


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which the trust was funded by the grantor is nominal compared to the value of the property purchased.

8. Whether trust assets are includible in a trust beneficiary’s gross estateunder Code Sections 2035, 2036, 2037, 2038 or 2042 if the beneficiary sells property (including insurance policies) to the trust or dies within three years of selling such property to the trust, and (i) the beneficiary has a power to withdraw the trust property (or had such power prior to arelease or modification, but retains other powers which would cause that person to be the ownerif the person were the grantor), other than a power which would constitute a general power ofappointment within the meaning of Code Section 2041, (ii) the trust purchases the property witha note, and (iii) the value of the assets with which the trust was funded by the grantor is nominalcompared to the value of the property purchased.

9. Whether a transfer to a pooled income fund described in Code Section642(c)(5) qualifies for a charitable deduction under Code Section 2055(e)(2)(A).

10. Whether a transfer to a charitable remainder trust described in CodeSection 644 that provides for annuity or unitrust payments for one or two measuring lives or a term of years qualifies for a charitable deduction under Code Section 2055(e)(2)(A).

11. Whether the sale of property (including insurance policies) to a trust by atrust beneficiary will be treated as a gift for purposes of Code Section 2501 if (i) the beneficiary has a power to withdraw the trust property (or had such power prior to a release or modification, but retains other powers which would cause that person to be the owner if the person were the grantor), other than a power which would constitute a general power of appointment within the meaning of Code Section 2041, (ii) the trust purchases the property with a note, and (iii) the value of the assets with which the trust was funded by the grantor is nominal compared to the value of the property purchased.

12. Whether the transfer of property to a trust will be a gift of a presentinterest in property when (i) the trust corpus consists or will consist substantially of insurance policies on the life of the grantor or the grantor’s spouse, (ii) the trustee or any other person has a power to apply the trust’s income or corpus to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse, (iii) the trustee or any other person has a power to use the trust’s assets to make loans to the grantor’s estate or to purchase assets from the grantor’s estate, (iv) the trust beneficiaries have the power to withdraw, on demand, any additional transfers made to the trust, and (v) there is a right or power in any person that would cause the grantor to be treated as the owner of all or a portion of the trust under Code Sections 673 to 677.

13. If the beneficiaries of a trust permit a power of withdrawal to lapse,whether Code Section 2514(e) will be applicable to each beneficiary in regard to the power when (i) the trust corpus consists or will consist substantially of insurance policies on the life of thegrantor or the grantor’s spouse, (ii) the trustee or any other person has a power to apply thetrust’s income or corpus to the payment of premiums on policies of insurance on the life of thegrantor or the grantor’s spouse, (iii) the trustee or any other person has a power to use the trust’sassets to make loans to the grantor’s estate or to purchase assets from the grantor’s estate, (iv) the


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trust beneficiaries have the power to withdraw, on demand, any additional transfers made to the trust, and (v) there is right or power in any person that would cause the grantor to be treated as the owner of all or a portion of the trust under Code Sections 673 to 677.

14. Whether a transfer to a pooled income fund described in Code Section642(c)(5) qualifies for a charitable deduction under Code Section 2522 (c)(2)(A).

15. Whether a transfer to a charitable remainder trust described in CodeSection 664 that provides for annuity or unitrust payments for one or two measuring lives or a term of years qualifies for a charitable deduction under Code Section 2522(c)(2)(A).

16. Whether a trust that is exempt from the application of the generation-skipping transfer tax because it was irrevocable on September 25, 1985, will lose its exempt status if the situs of the trust is changed from the United States to a situs outside of the United States.

17. Whether annuity interests are qualified annuity interests under CodeSection 2702 if the amount of the annuity payable annually is more than 50 percent of the initial net fair market value of the property transferred to the trust, or if the value of the remainder interest is less than 10 percent of the initial net fair market value of the property transferred to the trust. For purposes of the 10 percent test, the value of the remainder interest is the present value determined under Code Section 7520 of the right to receive the trust corpus at the expiration of the term of the trust. The possibility that the grantor may die prior to the expiration of the specified term is not taken into account, nor is the value of any reversion retained by the grantor or the grantor’s estate.

18. Whether a trust with one term holder satisfies the requirements of CodeSection 2702(a)(3)(A) and Treas. Reg. Section 25.2702-5(c) to be a qualified personal residence trust.

19. Whether the sale of property (including insurance policies) to a trust by atrust beneficiary is subject to Code Section 2702 if (i) the beneficiary has a power to withdraw the trust property (or had such power prior to a release or modification, but retains other powers which would cause that person to be the owner if the person were the grantor), other than a power which would constitute a general power of appointment within the meaning of Code Section 2041, (ii) the trust purchases the property with a note, and (iii) the value of the assets with which the trust was funded by the grantor is nominal compared to the value of the property purchased.

Rev. Proc. 2015-3 also states that the Service will not issue letter rulings or determination letters as to the following issues until the Service resolves the issues through the publication of a revenue ruling, a revenue procedure, regulations or otherwise:

1. Whether the corpus of a trust will be included in a grantor’s estate underany of Code Sections 2036, 2038 or 2041 when the trustee of the trust is a private trust company owned partially or entirely by members of the grantor’s family.


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2. Certain income tax, gift tax and GST tax aspects of the distribution fromone irrevocable trust to another irrevocable trust (i.e., "decanting").

In Rev. Proc. 2015-37, IRB 2015-26, the Service announced that it will no longer issue private letter rulings on basis adjustments pursuant to Code Section 1014 with respect to assets in grantor trusts where such assets are not includable in the gross estate of the deemed owner of such assets for estate tax purposes.

X. Priority Guidance Plan

On July 31, 2015 the Service issued its 2015-2016 Priority Guidance Plan. Theproposed projects include Revenue Procedures updating grantor and contributor reliance criteria under Code Sections 170 and 509; proposed regulations under Code Section 501(c) relating to political campaign intervention; final regulations and additional guidance on Code Section 509(a)(3) supporting organizations; guidance under Code Section 4941 regarding a private foundation's investment in a partnership in which disqualified persons are also partners; final regulations under Code Sections 4942 and 4945 on reliance standards for making good faith determinations; final regulations under Code Section 4944 on program-related investments and other related guidance; guidance regarding the excise taxes on donor advised funds and fund management; guidance under Code Section 6033 relating to the reporting of charitable contributions; guidance relating to Obergefell v. Hodges; final regulations under Code Section 170 regarding charitable contributions; regulations under Code Section 170(f)(8) regarding donee substantiation of charitable contributions; guidance under Code Section 170(e)(3) regarding charitable contributions of inventory; guidance regarding material participation by trusts and estates for purposes of Code Section 469; guidance on qualified contingencies of charitable remainder annuity trusts under Code Section 664; final regulations under Code Section 1014 regarding uniform basis of charitable remainder trusts; guidance on basis of grantor trust assets at death under Code Section 1014; Revenue Procedure under Code Section 2010(c) regarding the validity of a QTIP election on an estate tax return filed only to elect portability; guidance on the valuation of promissory notes for transfer tax purposes under Code Sections 2031, 2033, 2512 and 7872; final regulations under Code Section 2032(a) regarding imposition of restrictions on estate assets during the six month alternate valuation period; guidance under Code Section 2053 regarding personal guarantees and the application of present value concepts in determining the deductible amount of expenses and claims against the estate; guidance on the gift tax effect of defined value formula clauses under Code Sections 2512 and 2511; regulations under Code Section 2642 regarding available GST tax exemption and the allocation of GST tax exemption to a pour-over trust at the end of an ETIP; final regulations under Code Section 2642(g) regarding extensions of time to make allocations of the GST tax exemption; regulations under Code Section 2704 regarding restrictions on the liquidation of an interest in certain corporations and partnerships; guidance under Code Section 2801 regarding the tax imposed on U.S. citizens and residents who receive gifts or bequests from certain expatriates; regulations under Code Section 6166 regarding the furnishing of security in connection with an election to pay the estate tax in installments; and guidance under Treas. Reg. Section 301.9100. Projects to adjust the charitable remainder sample trust forms and to issue guidance on private trust companies were not included in this Priority Guidance Plan, due to the Service’s need to apply its resources to other projects.


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Y. Basis Reporting Requirements

On February 1, 2010 the Service issued proposed regulations (REG-101896-09)requiring brokers, mutual funds and others to report the basis of stock and to classify capital gains and losses as long-term or short-term, explaining how to compute average stock basis, and requiring stock issuers to report corporate actions that affect stock basis. Brokers reporting gross proceeds from the sale of a security will be required to report the adjusted basis and type of gain for most stock acquired on or after January 1, 2011, for stock in a mutual fund or a dividend reinvestment plan acquired on or after January 1, 2010, and for other securities and options acquired on or after January 1, 2013.

Z. Change of Address Notification

In Rev. Proc. 2010-16, IRB 2010-19 (May 10, 2010), the Service updated itsprocedures for taxpayers to notify the Service of a change of address. Generally, the Service uses the address on a taxpayer’s most recently filed and properly processed return as the taxpayer’s address of record. In addition, a taxpayer can file Form 8822, Change of Address, to properly notify the Service of the taxpayer’s change of address. The Revenue Procedure noted that a taxpayer’s new address listed on an application (Form 4868) for an automatic extension of time to file the taxpayer’s income tax return, or a power of attorney and declaration of representative (Form 2848), will not be used by the Service to automatically update a taxpayer’s address.

AA. Circular 230

On September 14, 2012 the Service issued proposed regulations (REG-138367-06) regarding Circular 230 that would eliminate the current requirements under Section 10.35 ofCircular 230 governing “covered opinions” that are provided to clients. The proposedregulations eliminate the requirement that practitioners fully describe the relevant facts and theapplication of the law to the facts in the written advice itself, and the use of the Circular 230disclaimers in documents and transmissions, including emails. Section 10.35 of Circular 230would be replaced with a proposed Section 10.37 that would require only that practitioners baseall written advice on factual and legal assumptions, exercise reasonable reliance, and consider allrelevant facts that the practitioner knows or should know. On June 9, 2014 the Service issuedfinal regulations (T.D. 9668) governing the Circular 230 Rules of Practice that, among otherchanges, remove the so-called covered opinion rules and replace them with a single, expandedset of rules for all written tax advice. The amended rules governing written tax advice apply tosuch advice rendered on or after June 12, 2014.

BB. Internal Revenue Bulletins and Cumulative Bulletins

In Ann. 2013-12, the Service announced that it will cut costs by suspending the printing of paper copies of the Internal Revenue Bulletin and that it has eliminated the Cumulative Bulletin for editions after the 2008-2 edition.

VI. ESTATE TAX CONSIDERATIONS VS. INCOME TAX CONSIDERATIONS

As noted above, the federal estate tax exclusion amount for the estates of persons dying in 2015 is $5,430,000. Thus, a married couple having combined assets of $10,860,000,


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with proper planning, will not be required to pay any federal estate taxes. As a result, a very small percentage of the entire population of the country is required to pay federal estate taxes. In addition, the federal estate tax exclusion amount is indexed for inflation from 2010, and is projected to be approximately $6,000,000 by 2020.

Due to the continuously increasing amount of the federal estate tax exclusion, and the corresponding reduction in the number of people whose estates will be required to pay federal estate taxes, consideration must be given to not using estate planning techniques that would cause appreciated assets to be excluded from a person’s gross estate at death, in order to cause such assets to obtain a so-called “stepped up” income tax cost basis at the person’s death, thereby reducing the amount of income taxes that will be payable on the eventual sale of such assets. For example, a lifetime gift of an appreciated asset may cause such asset to be excluded from the donor’s estate tax base at the donor’s death, but the donee’s income tax cost basis for such asset will generally be the same as the donor’s income tax cost basis in that asset. On the other hand, by not making such lifetime gift, such asset will be includable in the donor’s gross estate at his or her death, but the estate and its transferees generally will have an income tax cost basis in such asset equal to the estate tax value of such asset.

Estate planning for persons whose estates will not be subject to the payment of federal estate taxes may still include the use of testamentary trusts for non-tax reasons. In the case of a testamentary trust that receives all or part of the residue of the decedent’s estate, the trust’s income tax cost basis for the assets that it receives from the estate will generally be the same as the estate’s income tax cost basis for such assets. Therefore, it may be important to consider not only the federal income tax regime, but also the state income tax regime, that would be applicable to the sale of those assets by such trusts, in order to compare the possible estate tax savings that would result from making lifetime gifts with the possible income tax savings that would result from not making such gifts. In this regard, on April 21, 2015 the California Franchise Tax Board issued an information letter stating that a trust with one California resident trustee would be required to file a California income tax return and that its income would be subject to California income tax based on the proportion of California resident trustees to California non-resident trustees (other than its California source income, which would all be subject to California income tax).

Attached hereto as Exhibit “D” is a chart entitled “Bases of State Income Taxation of Nongrantor Trusts” and dated March 31, 2015 that describes the manner in which each state in the United States and the District of Columbia would tax such trusts.

In addition, it may also be important to consider any applicable state estate tax or inheritance tax in making this analysis.

VII. DIGITAL ASSETS

As a result of the advent of the technology age, estate planning documents should expressly provide for the marshaling, access, administration and disposition of a person’s technological assets, which are commonly referred to as “digital assets”.


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Digital assets include tangible digital devices, such as a computer, an Ipod, an Ipad and a blackberry; digital information, such as email, which may be stored in a tangible digital device, on a service provider’s platform, or generally on the internet; on-line accounts, including social media accounts, such as Facebook and Twitter; and “clouds”, which generally refer to the storage of digital information on the internet. Estate planning documents, such as a Will and a Power of Attorney, should provide specific authority regarding the digital assets of the decedent or principal. In addition, consideration should be given to the appointment by Will of a “Digital Executor”, who would have the authority to deal with digital assets.

Accessing a person’s digital assets after the person becomes incompetent, or after the person dies, may require applicable passwords. Thus, clients should be encouraged to prepare and maintain a current inventory of digital assets, including applicable passwords, so that such assets can be readily identified and accessed as needed. In addition, digital service providers may have policies and contractual provisions regarding the accessibility of the digital information that they provide. Accordingly, a person’s designated agent pursuant to a Power of Attorney, or the Executor of an estate of a deceased person, may be required to review and comply with such policies and contractual provisions in order to access digital information.

Delaware has adopted the model Uniform Fiduciary Access to Digital Assets Act, effective January 1, 2015, which gives fiduciaries the right to obtain user name and password information required to access digital assets of the decedent, unless the decedent has expressly barred fiduciary access.

A few other states, including Connecticut, Idaho, Indiana, Oklahoma and Rhode Island, also have enacted legislation specifically authorizing the personal representative of a decedent’s estate to obtain the decedent’s digital information.

Attached hereto as Exhibit “E” are sample Will provisions regarding the appointment of a Digital Executor, the definition of digital assets, and the administration and disposition of such assets in a decedent’s estate, and sample provisions for a Power of Attorney authorizing the principal’s agent to act with respect to the principal’s digital assets.

VIII. FDIC INSURANCE INCREASES

The Federal Deposit Insurance Corporation (“FDIC”) has increased its insurance coverage for deposits from the existing limit of $100,000. The new coverage limitation for single accounts owned by one person is $250,000 per owner; for joint accounts owned by two or more persons is $250,000 for each co-owner; for IRAs and certain other retirement accounts is $250,000 per owner; for revocable trust accounts is $250,000 per owner per beneficiary, up to five beneficiaries; for corporations, partnerships and unincorporated associations is $250,000 per entity; for irrevocable trusts is $250,000 for the non-contingent, ascertainable interest of each trust beneficiary; for employee benefit plan accounts is $250,000 for the non-contingent, ascertainable interest of each plan participant; and for government accounts is $250,000 per official custodian. The increased coverage was scheduled to expire on December 31, 2009, after which the standard coverage limit would return to $100,000 for all deposit categories except IRAs and certain other retirement accounts, which would continue to be insured up to $250,000


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EXHIBIT “A”

FINAL REGULATIONS REGARDING PORTABILITY

By Sanford J. Schlesinger, Esq. and Martin R. Goodman, Esq.

Mr . Schlesinger is a Founding Partner and Mr. Goodman is a Partner at Schlesinger Gannon & Lazetera LLP, New York, New York. Mr. Schlesinger is a member of the CCH Financial and Estate Planning Advisory Board.

On June 12, 2015, the Internal Revenue Service (the IRS) released final regulations (T.D. 9725) (the final regulations) regarding the portability provisions in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312)(the 2010 Act), which provisions were amended and made permanent by the American Taxpayer Relief Act of 2012 (P.L. 112-240)(the 2012 Act). The final regulations also removed the proposed temporary regulations (the proposed regulations) regarding portability that were issued on June 15, 2012 (after the enactment of the 2010 Act, but before the enactment of the 2012 Act), and that would have expired on June 15, 2015. This analysis will review and discuss the final regulations and the IRS’s supplementary information (the supplementary information) provided in the preamble that accompanied the final regulations, and, where applicable, will compare the final regulations to the proposed regulations.

Preliminarily, it is important to note that portability applies for estate and gift tax purposes, but it does not apply for generation-skipping transfer tax purposes.

The final regulations consist of estate tax regulations and gift tax regulations, which are largely the same as the proposed regulations, with certain important differences that are discussed below. The estate tax regulations are contained in Reg. §20.2001-2, which states that the final regulations provide additional rules regarding the IRS’s authority to examine tax returns, even if the time in which the tax may be assessed has expired, for the purpose of determining the deceased spousal unused exclusion (DSUE, described below) amount, Reg. §20.2010-1, which sets forth definitions and general rules regarding the unified credit against theestate tax, Reg. §20.2010-2, which contains portability provisions that are applicable to the estateof a decedent who is survived by a spouse, and Reg. §20.2010-3, which contains portabilityprovisions that are applicable to the estate of the surviving spouse. The gift tax regulationsconsist of Reg. §25.2505-1, which sets forth general rules regarding the unified credit against thegift tax, and Reg. §25.2505-2, which contains provisions regarding lifetime gifts made by asurviving spouse who has a DSUE amount available.

In general, the final regulations are effective on June 12, 2015.


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Estate Tax Regulations

Reg. §20.2001-2 states that Reg. §§20.2001-1(b), 20.2010-2(d) and 20.2010-3(d), all of which are discussed below, provide additional rules regarding the IRS’s authority to examine any gift tax return or other tax returns, even if the statute of limitations for assessments has expired, for the purpose of determining the DSUE amount that is available to the surviving spouse.

Reg. §20.2010-1 defines certain relevant terms and sets forth general rules regarding the unified credit against the estate tax.

This regulation begins by stating that the estate of every decedent is allowed a credit under Code Sec. 2010(a) of the Internal Revenue Code of 1986, as amended (the Code), of the “applicable credit amount” (which sometimes is referred to as the “unified credit”). The applicable credit amount is the amount of the tentative tax that would be determined under Code Sec. 2001(c) if the amount on which the tentative tax is computed were equal to the “applicable exclusion amount” (which credit is determined by applying the tax rate schedule to the applicable exclusion amount). The regulation then defines the term applicable exclusion amount to be equal to the sum of the “basic exclusion amount” (defined below) and, with respect to the estate of a surviving spouse, the DSUE amount (also defined below). The basic exclusion amount (which is commonly referred to as the estate tax exemption) is defined as $5,000,000 for the estate of a decedent dying in 2011, and $5,000,000, adjusted for inflation from 2010, for the estate of a decedent dying after 2011. The inflation adjusted basic exclusion amount is $5,430,000 for the estate of a person who dies in 2015. Thus, the amount of this credit for the estate of a decedent who dies in 2015 without any DSUE amount is $2,117,800, as determined from a basic exclusion amount of $5,430,000. The amount of this credit for the estate of a decedent who dies after 2015 is determined based on the applicable exclusion amount, consisting of the sum of the decedent’s basic exclusion amount of $5,000,000, as adjusted for inflation from 2010, and the decedent’s DSUE amount, if any. This credit is reduced by 20 percent of the portion of the gift tax exemption of $30,000 that was allowable prior to 1977 and that the decedent used with respect to gifts made after September 8, 1976, and before January 1, 1977, but in any case the amount of this credit is not more than the amount of the tentative estate tax determined under Code Sec. 2001(c).

The regulation states that the DSUE amount generally is the unused portion of a decedent’s applicable exclusion amount to the extent that such amount does not exceed the basic exclusion amount in effect in the year of the decedent’s death.

Finally, the regulation defines the term “last deceased spouse” as the most recently deceased individual who, at that individual’s death after December 31, 2010, was married to the surviving spouse.

Portability Election Requirements

Reg. §20.2010-2(a) sets forth the requirements for a valid portability election.

The regulation states that the executor of a decedent’s estate must elect portability of the DSUE amount on a timely filed federal estate tax return (Form 706) to allow the decedent’s


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surviving spouse to take into account the decedent’s DSUE amount. The regulation provides that an estate that elects portability will be treated as an estate that is required to file an estate tax return under Code Sec. 6018(a), even if the estate otherwise would not be required to do so. Therefore, the due date of an estate tax return that is filed to elect portability is nine months after the date of the decedent’s (not the surviving spouse’s) death, subject to any allowed extension of time to file such tax return, even if an estate tax return is not otherwise required to be filed for the estate.

Importantly, this regulation (unlike the temporary regulations) clarifies circumstances under which an extension of time to elect portability will or will not be granted under Reg. §301.9100-3. The regulation states that such an extension to elect portability is not available toestates that are required to file an estate tax return based on the applicable exclusion amount,since in such case the due date for the portability election is prescribed by statute and Reg.§301.9100-3 applies only to an election whose due date is prescribed by regulation. However, anextension of time under Reg. §301.9100-3 to elect portability may be available to an estate that isunder the value threshold for being required to file an estate tax return, as in such case the duedate for the portability election is prescribed by regulation, rather than by statute.

In this regard, note that Rev. Proc. 2014-18, IRB 2014-7, 513, provided that if a United States citizen or resident died after December 31, 2010, and on or before December 31, 2013, and had a surviving spouse, and if the decedent’s estate was below the threshold for filing an estate tax return, and if such estate did not timely file an estate tax return, then such estate will be deemed to meet the requirements for relief under Reg. §301.9100-3, and is granted relief under such regulation to extend the time to elect portability, if such estate files a complete and properly prepared estate tax return on or before December 31, 2014. It is important to note that the IRS’s supplementary information stated that the IRS is continuing to consider permanently extending the type of relief granted in such revenue procedure, although such relief is not included in the final regulations.

The regulation further states that if an estate tax return is complete and properly prepared (as discussed below) and is timely filed, the executor of the estate of a decedent who is survived by a spouse will be treated as having elected portability of the decedent’s DSUE amount, unless the executor affirmatively chooses not to elect portability. An executor will not be considered to have elected portability if the executor states on a timely filed estate tax return, or in an attachment to that return, that the executor is not electing portability under Code Sec. 2010(c)(5), or if the executor does not timely file an estate tax return. The regulation states that the manner in which the executor may make the above-described affirmative statement on the estate tax return is as set forth in the instructions issued for that tax return.

The regulation then states that the portability election, once made, becomes irrevocable after the due date of the estate tax return, including extensions actually granted. However, before a portability election, or an election to not have portability apply, becomes irrevocable, an executor may make a portability election or may supersede a portability election previously made by timely filing another estate tax return making a portability election or reporting the decision not to make a previously made portability election. The regulation provides that an executor of the estate of a decedent who is survived by a spouse may elect portability on behalf of the estate if the decedent dies on or after January 1, 2011. However, the regulation also


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provides that the executor of the estate of a nonresident decedent who was not a citizen of the United States at the time of his or her death may not elect portability on behalf of that decedent, and that the timely filing of an estate tax return for such decedent will not be deemed to make the portability election.

The regulation states that a duly appointed executor or administrator of the estate of a decedent, who is appointed, qualified and acting within the United States, can file the estate tax return for the decedent’s estate and elect portability, or elect not to have portability apply. Such regulation also provides that if no executor or administrator has been appointed for a decedent’s estate, then any person in actual or constructive possession of any property of the decedent (a non-appointed executor) can file the estate tax return for the decedent’s estate and elect portability, or can elect not to have portability apply. Such regulation further provides that an election to allow portability made by a non-appointed executor cannot be superseded by a contrary election to have portability not apply made by another non-appointed executor of that estate, unless such other non-appointed executor is the successor of the non-appointed executor who made the portability election. However, the regulation also states that a portability election made by a non-appointed executor when there is no appointed executor for that decedent’s estate can be superseded by a subsequent contrary election made by an appointed executor of such estate on an estate tax return that is timely filed.

In this regard, it is noted that circumstances may exist which cause the executor to be unwilling to elect portability. For example, the executor may be a child of the decedent from a former marriage who, due to animus, may not want to confer a tax benefit on the decedent’s surviving spouse by electing portability. However, the state in which the decedent’s Will is probated may authorize the appointment of an executor for a limited purpose. For example, the State of New York provides such pursuant to the Section 702 of the New York Surrogate’s Court Procedure Act. In such a case, it may be possible for the surviving spouse to be appointed as the executor of the estate for the limited purpose of filing the estate tax return and making the portability election.

The IRS, in the supplementary information, stated that several persons who submitted comments with regard to the proposed regulations requested that the final regulations allow a surviving spouse who is not an executor of the deceased spouse’s estate to file an estate tax return and make the portability election in various circumstances, including where the surviving spouse is given the right to file the estate tax return in a premarital agreement, or the surviving spouse has petitioned the appropriate local court for his or her appointment as an executor solely for the limited purpose of filing the estate tax return in order to make the portability election. However, the IRS concluded that any consideration of what, if any, state law action might bring the surviving spouse within the definition of executor under Code Sec. 2203 is outside of the scope of these regulations, and the final regulations do not include any of such changes requested by those commentators.

The regulation then sets forth the requirements for a complete and properly prepared estate tax return pursuant to which the executor may elect portability. The regulation provides that, in general, an estate tax return will be considered complete and properly prepared if it is prepared in accordance with the instructions issued by the IRS for the preparation of an estate tax return and if the requirements of Reg. §20.6018-2 (which, in general, contains additional


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provisions as to the person or persons required to file an estate tax return), Reg. §20.6018-3 (which sets forth the requirements for the contents of an estate tax return) and Reg. §20.6018-4 (which sets forth certain requirements as to documents that must be filed with an estate tax return) are satisfied.

The IRS in its supplementary information stated that a person who submitted comments after the publication of the proposed regulations suggested that the final regulations elaborate on the circumstances under which a timely filed estate tax return may be considered insufficient as to render the estate tax return incomplete for purposes of electing portability. However, the IRS considered the issue of whether or not an estate tax return is complete and properly prepared to be an issue that must be determined on a case-by-case basis by applying standards as prescribed in current law. Therefore, the final regulations did not adopt this suggestion.

The regulation also sets forth a special rule regarding the reporting of the value of certain property of estates as to which the executor is not required to file an estate tax return other than for the purpose of making the portability election (i.e., an estate of a decedent whose gross estate and adjusted taxable gifts do not exceed the filing requirement threshold for the year of the decedent’s death). Pursuant to this special rule, an executor is not required to report a value for property that is includible in the decedent’s gross estate and that qualifies for either the estate tax marital deduction or the estate tax charitable deduction. Instead, the executor will only be required to report the description, ownership and/or beneficiary of such property, and all other information necessary to establish the right of the estate to the estate tax marital deduction or the estate tax charitable deduction for such property.

However, this special rule does not apply if:

(a) the value of such property relates to, affects or is needed to determine the value passing fromthe decedent to another recipient;

(b) the value of such property is needed to determine the estate’s eligibility for the provisions ofCode Sec. 2032 (regarding the alternate valuation date election), Code Sec. 2032A (regarding thevaluation of qualified real property), or another estate tax or generation-skipping transfer taxprovision of the Code for which the value of such property or the value of the gross estate or theadjusted gross estate must be known (not including Code Sec. 1014, which sets forth the rules fordetermining the income tax cost basis of property acquired from a decedent), such as Code Sec.6166 (regarding the election to pay the portion of the estate tax that is attributable to an interestin a closely held business in installments);

(c) less than the entire value of an interest in property that is includible in the decedent’s grossestate qualifies for the estate tax marital deduction or the estate tax charitable deduction; or

(d) a partial disclaimer or a partial qualified terminable interest property (QTIP) election is madewith respect to property that is includible in the decedent’s gross estate, part of which qualifiesfor the estate tax marital deduction or the estate tax charitable deduction. Thus, in any of theseinstances, an estate tax return that is filed solely to make the portability election, and that wouldnot otherwise be required to be filed, will require all of the information and relateddocumentation that would be required for an estate tax return for the estate of a decedent whose


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gross estate and adjusted taxable gifts exceeds the filing threshold, in order to be considered a complete and properly prepared estate tax return.

This special rule reducing the requirements for reporting the value of certain property that is includible in the decedent’s gross estate will apply only if the executor exercises due diligence to estimate the fair market value of the decedent’s gross estate, including the property that is includible in the decedent’s gross estate and that qualifies for the estate tax marital deduction or the estate tax charitable deduction. The regulation states that the executor, using his, her or its best estimate of the value of the properties that qualify for the estate tax marital deduction or the estate tax charitable deduction must report on the estate tax return, under penalties of perjury, the amount corresponding to the particular range within which the executor’s best estimate of the total gross estate falls, in accordance with the instructions for Form 706. In this regard, it is noted that such instructions contain a Table of Estimated Values for such assets, in increments of $250,000, and state that the amount reported on Form 706 for such assets should correspond to the applicable range of dollar values for such assets.

This regulation contains examples illustrating the operation of this special rule.

In Example 1, the gross estate of the first spouse to die consisted solely of assets owned jointly with the decedent’s surviving spouse, with right of survivorship, a life insurance policy payable to the surviving spouse, and a survivor annuity payable to the surviving spouse for her life. The decedent made no taxable gifts during his lifetime. The example states that an estate tax return that identifies these assets on the proper schedules, but provides no information with regard to the date of death value of such assets, that includes evidence verifying the title of each jointly held asset, confirming that the surviving spouse is the sole beneficiary of both the life insurance policy and the survivor annuity, and verifying that the annuity is exclusively for the surviving spouse’s life, and that reports the executor’s best estimate, determined by exercising due diligence, of the fair market value of the decedent’s gross estate, is considered a complete and properly prepared estate tax return in which the executor has elected portability.

In Example 2, the decedent died testate, leaving a will in which he bequeaths his entire estate to his surviving wife, outright and free of trust. The decedent also had non-probate assets that are includible in his gross estate, consisting of a life insurance policy payable to his children and an individual retirement account (IRA) payable to his wife. The decedent made no taxable gifts during his lifetime. The executor of the decedent’s estate filed an estate tax return in which all of the assets that are includible in the decedent’s gross estate are identified on the proper schedule. As to the decedent’s probate assets and the IRA, no information is provided regarding the date of death value of such assets. The executor attaches a copy of the decedent’s will, and describes each such asset and its ownership to establish the estate’s entitlement to the estate tax marital deduction for such assets. With respect to the life insurance policy payable to the decedent’s children, all of the regular estate tax return requirements apply, including reporting and establishing the fair market value of such asset. The executor also reports the executor’s best estimate, determined by exercising due diligence, of the fair market value of the decedent’s gross estate. This example states that the estate tax return is considered to be complete and properly prepared, and that the executor has elected portability.


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In Example 3, the decedent died testate, and his will bequeathed 50 percent of his probate assets to a marital trust for the benefit of the decedent’s wife and the other 50 percent thereof to a trust for the benefit of the decedent’s wife and their descendants. This example states that, as the amount passing to the non-marital trust cannot be verified without knowledge of the full value of the property passing under the decedent’s will, the value of the property of the marital trust relates to or affects the value of the property passing to the non-marital trust, so that the general return requirements apply to all of the property includible in the decedent’s gross estate. Thus, in this example, the special rule described above waiving such requirements does not apply.

The IRS in its supplementary information stated that a person who submitted comments after the proposed regulations were issued suggested that the IRS prepare a shorter version of the estate tax return to be used by estates that are not otherwise required to file an estate tax return, but do so only to elect portability. The IRS concluded that a timely filed, complete and properly prepared estate tax return affords the most efficient and administrable method of obtaining the information necessary to compute and verify the DSUE amount, and that the alleged benefits to taxpayers from an abbreviated form is far outweighed by the anticipated administrative difficulties in administering the estate tax that would occur from the use of a short version of such tax return. Thus, the IRS did not adopt this suggestion.

In this regard, it should be noted that Rev. Proc. 2001-38, IRB 2001-24, 1335, states that the IRS will disregard for federal estate tax, gift tax, and generation-skipping transfer tax purposes, a QTIP election that is made under Code Sec. 2056(b)(7) where the election was not necessary to reduce the estate tax liability to zero. The IRS, in the supplementary information, stated that multiple commentators have requested guidance on the application of such revenue procedure when an estate that is below the filing threshold files an estate tax return and makes the portability election and a QTIP election on such tax return. The commentators have noted that, with the introduction of portability, an executor may purposefully file an estate tax return in such a case in order to elect both portability and QTIP treatment, and that the rationale for the rule voiding the QTIP election (that such election was of no benefit to the taxpayer) is no longer applicable. However, the IRS declined to provide such guidance in the final regulations, and stated that it intends to provide such guidance by publication in the Internal Revenue Bulletin to clarify whether a QTIP election that is made for estate tax purposes may be disregarded when the executor has elected portability.

It also is noted that the IRS recently announced on its website that it will not automatically issue closing letters for estate tax returns filed on or after June 1, 2015, and that a taxpayer who wants a closing letter should request it in a separate letter submitted to the IRS at least four months after the estate tax return is filed. This departure from the IRS’s long-standing practice of issuing estate tax closing letters may be due to the IRS’s belief that if it issues an estate tax closing letter for an estate that elects portability, then the IRS could be “prejudiced” in any effort that it may make to subsequently review such estate tax return in order to determine the amount of the decedent’s DSUE amount, even though Code Sec. 2010(c)(5)(B) grants the IRS such examination authority whether or not the statute of limitation for assessments has expired with respect to such tax return. In addition, it is possible that with the advent of portability, the number of estate tax returns that are being filed and will be filed may far exceed the number of estate tax returns that were filed before portability was enacted, and the IRS may believe that it would be overly burdensome to issue estate tax closing letters as a matter of course


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for each such tax return. However, if the IRS’s new policy regarding the issuance of estate tax closing letters is based on this administrative concern, the IRS could simply limit the application of this new policy to the estates of decedents that are below the filing threshold. Regardless of the rationale for this change in policy, it may be desirable for executors to routinely request estate tax closing letters approximately four months after filing estate tax returns, especially with respect to estates that have a low risk or no risk of adjustments on audit.

DSUE Computation

Reg. §20.2010-2(b) provides that the executor of a decedent’s estate must include a computation of the DSUE amount on the decedent’s estate tax return to elect portability, and that this requirement is satisfied by the timely filing of a complete and properly prepared estate tax return, as long as the executor has not elected out of portability.

Reg. §20.2010-2(c) contains provisions regarding the computation of the DSUE amount. This regulation provides that such amount generally is the lesser of the basic exclusion amount in effect for the year of the decedent’s death (i.e., $5,000,000, adjusted for inflation, as noted above), or the excess of the decedent’s applicable exclusion amount over the sum of the decedent’s taxable estate and the amount of the decedent’s adjusted taxable gifts as to which gift taxes were not paid.

In this regard, it is noted that the 2010 Act defined the DSUE amount as the lesser of (a) the basic exclusion amount, or (b) the excess of the basic exclusion amount (rather than the applicable exclusion amount) of the last deceased spouse of the surviving spouse over the amount with respect to which the tentative tax is determined under Code Sec. 2001(b)(1) on the estate of such deceased spouse. However, the proposed regulations, which as noted above, were issued after the enactment of the 2010 Act but before the enactment of the 2012 Act, defined the DSUE amount as the lesser of (a) the basic exclusion amount, or (b) the excess of the applicable exclusion amount (rather than the basic exclusion amount) of the last deceased spouse of the surviving spouse over the amount with respect to which the tentative tax on the estate of such deceased spouse is so determined.

The effect of such statutory formulation in the 2010 Act, and the effect of the regulatory interpretation of it in the proposed regulations, can be illustrated by the following example:

Assume that H-1 dies in 2011, having made taxable gifts during his life of $3,000,000 and having no taxable estate, that the executor of H-1’s estate files an estate tax return electing portability, that H-1’s surviving spouse, W, makes no taxable gifts during her life, and that W remarries H-2 and W predeceases H-2. Pursuant to the statutory formulation in the 2010 Act, after H-1’s death, W’s applicable exclusion amount is $7,000,000 (i.e., her $5,000,000 basic exclusion amount, plus the DSUE amount of $2,000,000 from H-1). W has a taxable estate of $3,000,000 at her death, and the executor of W’s estate files an estate tax return electing portability. Pursuant to the statutory formulation, W’s DSUE amount is the lesser of (a) W’s basic exclusion amount of $5,000,000, or (b) the excess of W’s basic exclusion amount of $5,000,000, over her taxable estate of $3,000,000, or $2,000,000. Thus, W’s DSUE amount is $2,000,000. Therefore, H- 2’s applicable exclusion amount would be the sum of his own basic exclusion amount of $5,000,000, plus W’s DSUE amount of $2,000,000, or $7,000,000.


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However, pursuant to the proposed regulation, W’s DSUE amount is the lesser of (a) W’s basic exclusion amount (i.e., $5,000,000), or the (b) excess of W’s applicable exclusion amount, which is $7,000,000 (i.e., W’s $5,000,000 basic exclusion amount, plus the $2,000,000 DSUE amount from H-1), over the amount of W’s taxable estate of $3,000,000, for an excess amount of $4,000,000. Thus, pursuant to the proposed regulations, W’s DSUE amount is $4,000,000, and the applicable exclusion amount of H-2 is $9,000,000 (i.e., H-2’s basic exclusion amount of $5,000,000, plus W’s DSUE amount of $4,000,000).

Consequently, such regulatory interpretation of the statute increased the applicable exclusion amount of H-2 by $2,000,000.

Interestingly, the technical explanation of the 2010 Act prepared by the Joint Congressional Committee on Taxation (JCX-55-10, December 10, 2010, Footnote 57), in its discussion regarding the portability provisions of the 2010 Act, included an example (Example 3), which in effect adopted the view regarding the computation of the DSUE amount that is set forth in the proposed regulations. In addition, on March 23, 2011, the same Committee issued an errata to its general explanation of the 2010 Act (JCX-20-11) stating that the intent of the 2010 Act was to compute the DSUE amount of the wife in the above example in the same manner as it is computed pursuant to the proposed regulations, and further stating that a technical correction of the 2010 Act may be necessary to replace the statutory reference to the “basic exclusion amount of the last such deceased spouse of such surviving spouse” with a statutory reference to the “applicable exclusion amount of the last such deceased spouse of such surviving spouse” to reflect this intent. In fact, the 2012 Act included such technical correction of the 2010 Act. As a result, there was no need for a reference to this issue in the final regulations, and there was none.

The regulation also states that the amount of the adjusted taxable gifts of a decedent is reduced by the amount on which gift taxes were paid, in order to compute the decedent’s DSUE amount.

It should be noted that the temporary regulations did not provide guidance, and reserved a section thereof for future provision, on the impact of the estate tax credits under Code Secs. 2012 through 2015 (the credit for gift taxes, the credit for tax on prior transfers, the credit for foreign death taxes, and the credit for death taxes on remainders, respectively). The IRS, in the supplementary information, stated that it concluded that the amount of such allowable credits can be determined only after subtracting the applicable credit amount determined under Code Sec. 2010 from the tax imposed by Code Sec. 2001. Thus, to the extent that the applicable credit amount is applied to reduce the tax imposed by Code Sec. 2001 to zero, the credits allowable in Code Secs. 2012 through 2015 are not available. In addition, the IRS stated that the computation of the DSUE amount does not take into account any unused credits arising under Code Secs. 2012 through 2015. For these reasons, the IRS concluded that no adjustment to the computation of the DSUE amount to account for any such unused credits is warranted, and the final regulations so state.

The regulation also sets forth a special rule regarding portability in the case of property passing to a qualified domestic trust (QDOT). Pursuant to Code Sec. 2056(d), the estate of a decedent is not allowed an estate tax marital deduction for property passing from the decedent to a surviving spouse who is not a United States citizen, unless the property passes to a QDOT.


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Pursuant to Code Sec. 2056A, in general, a QDOT is a trust that requires that at least one trustee shall be an individual who is a United States citizen or a domestic corporation, who or which will pay the estate tax with respect to such trust from any principal distribution of the trust before the death of the surviving spouse, and from the value of the trust that is remaining on the death of the surviving spouse. The regulation provides that in such case the DSUE amount of the decedent is computed on the decedent’s estate tax return for the purpose of electing portability in the same manner as such amount would otherwise be computed, but the decedent’s DSUE amount is subject to subsequent adjustments. The regulation states that the DSUE amount of the decedent must be redetermined upon the occurrence of the final distribution or other event (generally, the death of the surviving spouse or the earlier termination of all QDOTs for that surviving spouse) on which the estate tax is imposed. Thus, a surviving spouse generally cannot use any of the DSUE amount received from the deceased spouse while a QDOT for the benefit of the surviving spouse remains in effect. As a result of this rule, a non-citizen surviving spouse will generally not be able to use the deceased spouse’s DSUE amount to make lifetime gifts.

In this regard, it is noted that the proposed regulations provided that in the case of a decedent’s estate claiming a marital deduction for property received through a QDOT, the earliest date on which a decedent’s DSUE amount could be included in determining the applicable exclusion amount available to the surviving spouse or the surviving spouse’s estate is the date of the event that triggers the final estate tax liability of the first spouse to die under Code Sec. 2056A. However, the IRS stated in the supplementary information that a person who submitted comments regarding such regulations challenged this delay in the surviving spouse’s ability to use the decedent’s DSUE amount if the surviving spouse becomes a United States citizen after the decedent’s estate tax return is filed and after the property passes to a QDOT for the benefit of such surviving spouse. The IRS stated that it concluded that in such a case the tax imposed by Code Sec. 2056A(b)(1) would no longer apply, and the decedent’s DSUE amount would no longer be subject to adjustment and would become available for transfers by the surviving spouse as of the day the surviving spouse becomes a United States citizen. Accordingly, the final regulations included this change, by providing that if the surviving spouse becomes a United States citizen after the death of the first spouse to die, in general no estate tax will be imposed under Code Sec. 2056(a) either on subsequent QDOT distributions or on the property remaining in the QDOT on the surviving spouse’s death, and the decedent’s DSUE amount is no longer subject to adjustment.

The regulation contains four examples illustrating its application:

In Example 1, H and W are United States citizens. H makes a taxable gift of $1,000,000 in 2002, pays no gift tax due to the applicable exclusion amount available to H of $1,000,000 in 2002, and dies in 2015 survived by W. H’s taxable estate is $1,000,000, and the executor of H’s estate timely files an estate tax return electing portability. The example states that H’s DSUE amount is $3,430,000 (the lesser of (a) the $5,430,000 basic exclusion amount in 2015, or (b) the excess of H’s $5,430,000 applicable exclusion amount over the sum of H’s $1,000,000 taxable estate and the $1,000,000 amount of adjusted taxable gifts that H made).

In Example 2, the facts are the same as in Example 1, except that the value of H’s taxable gift in 2002 is $2,000,000, as to which H paid a gift tax on $1,000,000. This example states that H’s DSUE amount is $3,430,000 (the lesser of (a) the $5,430,000 basic exclusion amount in


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2015, or (b) the excess of H’s $5,430,000 applicable exclusion amount over the sum of the $1,000,000 taxable estate of H and the $1,000,000 of adjusted taxable gift made by H as to which gift taxes were not paid).

In Example 3, H, a United States citizen, made a taxable gift of $1,000,000 in 2002 as to which no gift taxes were due. H dies in 2015 with a gross estate of $2,000,000 survived by W, who is a United States resident but not a United States citizen. H bequeathed the sum of $1,500,000 to a QDOT for the benefit of W. H’s executor timely filed an estate tax return making the QDOT election and electing portability. H’s taxable estate, after the marital deduction of $1,500,000, is $500,000. The preliminary DSUE amount of H is $3,930,000 (the lesser of (a) the $5,430,000 basic exclusion amount in 2015, or (b) the excess of H’s $5,430,000 applicable exclusion amount over the sum of H’s $500,000 taxable estate and the $1,000,000 adjusted taxable gift made by H). At W’s death in 2017, the value of the assets of the QDOT is $1,800,000. The example states that the DSUE amount is redetermined to be $2,130,000 (the lesser of (a) the $5,430,000 basic exclusion amount in 2015, or (b) the excess of H’s $5,430,000 applicable exclusion amount over $3,300,000 (the sum of the $500,000 taxable estate of H augmented by the $1,800,000 of QDOT assets and the $1,000,000 of adjusted taxable gifts)).

In Example 4, the facts are the same as in Example 3, except that W becomes a United States citizen in 2016 and dies in 2018. The example states that pursuant to Code Sec. 2056A(b)(12), the estate tax under Code Sec. 2056A no longer applies to the QDOT property. The example further states that because H’s DSUE amount is no longer subject to adjustment once W becomes a United States citizen, H’s DSUE amount is $3,930,000, as it was preliminarily determined as of H’s death, and that on W’s death in 2018, the value of the QDOT property is includible in W’s gross estate.

The regulation also states that the IRS may examine the tax returns of a decedent to determine the decedent’s DSUE amount, regardless of whether or not the period of limitations on the assessment of additional taxes has expired for such tax return. However, as noted below regarding the gift tax regulations, the IRS cannot assess any additional taxes with respect to any such tax return after the expiration of the statute of limitations for such assessment.

In this regard, the IRS in the supplementary information stated that a person who submitted comments concerning the proposed regulations requested that such examination authority of the IRS be limited to issues of the reporting and valuation of assets, and not extend to other legal issues that may impact on the availability of the DSUE amount to the surviving spouse. The IRS stated that such limited authority would be inconsistent with the statute, which grants broad authority to the IRS to examine the correctness of any return, without regard to the statute of limitations on assessments, to make determinations with respect to the allowable DSUE amount. In addition, another commentator requested confirmation that, in the examination of a tax return for the purpose of determining the allowable DSUE amount that takes place after the expiration of the statute of limitations, the valuation of assets may be increased or decreased, with a possible result that the allowable DSUE amount may decrease or increase. The IRS stated that no clarification or change in the regulations was required for this purpose. Further, another commentator suggested that the final regulations consider whether, in the case of such an examination, an adjustment to the value of an asset reported on the estate tax return affects the income tax cost basis of such asset under Code Sec. 1014. The IRS stated that


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the basis of property acquired from a decedent is determined in accordance with the existing principles of Code Sec. 1014, and that the scope of such examination authority is sufficiently clear and therefore no change need be made in this regard in the final regulations. Moreover, another commentator suggested that the final regulations clarify the deductibility of administration expenses associated with such an examination. The IRS stated that any such expenses should be treated as any other expense associated with preparation of the surviving spouse’s tax returns, that the standards for deducting such expenses for estate tax and gift tax purposes are sufficiently clear, and that no change to the temporary regulation in this regard is necessary. Finally, another commentator suggested clarifying who may participate in such an examination. The IRS stated that each taxpayer has the authority to participate in the resolution of issues raised in the audit of his or her tax return, and that addressing this issue is outside the scope of the final regulations.

Portability Provisions Applicable to the Surviving Spouse’s Estate

Reg. §20.2010-3 provides that the DSUE amount of a decedent is included in determining the applicable exclusion amount of the decedent’s surviving spouse for estate tax purposes only if such decedent is the last deceased spouse of such surviving spouse on the date of the death of such surviving spouse, and only if the executor of the estate of such last deceased spouse elected portability. This regulation further states that the surviving spouse’s estate has no DSUE amount available if the last deceased spouse of such surviving spouse had no DSUE amount, or if the executor of the last deceased spouse’s estate did not make a portability election, even if the surviving spouse previously had a DSUE amount available from another decedent who, prior to the death of the last deceased spouse, was the last deceased spouse of such surviving spouse. For example, if H-1 and W are married, and if H-1 dies having a DSUE amount and the executor of his estate makes the portability election, but thereafter W marries H-2 who then dies having no DSUE amount, then on W’s death the DSUE amount from H-1 would not be available to the estate of W.

In addition, this regulation states that a decedent is the last deceased spouse of a surviving spouse even if, on the date of the death of such surviving spouse, the surviving spouse is married to another then living individual. Further, the regulation states that if a surviving spouse remarries and that marriage ends in a divorce or an annulment, the subsequent death of the divorced spouse does not end the status of the prior deceased spouse as the last deceased spouse of the surviving spouse. Since the divorced spouse, at his or her death, is not married to the surviving spouse, such divorced spouse is not the last deceased spouse of the surviving spouse.

The regulation provides a special rule to compute the DSUE amount of a surviving spouse for estate tax purposes where the surviving spouse previously applied the DSUE amount of one or more deceased spouses to lifetime taxable gifts. This rule states that if a surviving spouse has applied the DSUE amount of one or more last deceased spouses to the surviving spouse’s lifetime gifts, and if any of those last deceased spouses is not the surviving spouse’s last deceased spouse at the death of the surviving spouse, then the DSUE amount to be included in determining the applicable exclusion amount of the surviving spouse at the time of the surviving spouse’s death is the sum of the DSUE amount of the surviving spouse’s last deceased spouse, and the DSUE amount of each other deceased spouse of the surviving spouse, to the extent that such DSUE amount was applied to one or more taxable gifts of the surviving spouse.


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This regulation contains the following example to illustrate the operation of this provision:

H-1 dies in 2011, survived by W, and neither of them has made any taxable gifts duringH-1’s life. H-1’s executor elects portability of H-1’s DSUE amount, which is $5,000,000. In2012 W makes taxable gifts of $2,000,000, and W is considered to have applied $2,000,000 ofH-1’s DSUE amount to the taxable gifts. Thereafter, W has a remaining applicable exclusionamount of $8,120,000, consisting of H-1’s $3,000,000 remaining DSUE amount, plus W’s own$5,120,000 basic exclusion amount. After H-1’s death, W marries H-2 in 2013. H-2 dies in2014. H-2’s executor elects portability of H-2’s DSUE amount, which is $2,000,000. W dies in2015. The example states that the DSUE amount to be included in determining the applicableexclusion amount available to W’s estate is $4,000,000, which is determined by adding the$2,000,000 DSUE amount of H-2 and the $2,000,000 DSUE amount of H-1 that was applied byW to W’s 2012 taxable gifts. Thus, W’s applicable exclusion amount is the sum of her ownbasic exclusion amount of $5,430,000, plus such DSUE amount of $4,000,000, for a total of$9,430,000.

Therefore, this special rule effectively permits a wealthy person to make a very large aggregate amount of lifetime gifts on a tax-free basis, as long as portability remains in effect, by having serial marriages to individuals, each of whom predeceases such person and has a DSUE amount, and whose executors elect portability, and by such person making a lifetime gift equal to such DSUE amount of each such deceased individual before such person remarries.

The regulation provides rules regarding the date as of which a decedent’s DSUE amount is to be taken into consideration by the surviving spouse. This regulation states that in general a portability election applies as of the date of the death of the person with respect to whom such election is made. Therefore, a decedent’s DSUE amount is included in the applicable exclusion amount of the decedent’s surviving spouse and will be applicable to transfers made by the surviving spouse after the death of the decedent. However, this regulation also states that even if the surviving spouse made a transfer in reliance on the availability or computation of the decedent’s DSUE amount, such DSUE amount will not be included in the applicable exclusion amount of the surviving spouse (a) if the executor of the decedent’s estate supersedes the portability election by timely filing a subsequent estate tax return in which no such election is made, or (b) to the extent that the DSUE amount is subsequently reduced by a valuation adjustment or a correction of an error in the computation of such amount, or (c) to the extent that the surviving spouse cannot substantiate the DSUE amount that is claimed on the surviving spouse’s tax return.

This regulation also provides a special rule when property passes from a decedent for the benefit of a surviving spouse in one or more QDOTs and the decedent’s executor elects portability. The regulation states that in such case the DSUE amount that is available to be included in the applicable exclusion amount of the surviving spouse is the DSUE amount of the decedent as redetermined (see earlier description). Thus, the earliest date on which the decedent’s DSUE amount can be included in the applicable exclusion amount of the surviving spouse is the date of the occurrence of the final QDOT distribution or other final event (generally, the death of the surviving spouse or the earlier termination of all QDOTs for that


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surviving spouse) on which the estate tax is imposed. Thereafter, however, the decedent’s DSUE amount as so redetermined may be applied to taxable gifts of the surviving spouse.

The regulation provides that for the purpose of determining the DSUE amount that is included in the applicable exclusion amount of the surviving spouse, the IRS may examine the tax returns of each of the surviving spouse’s deceased spouses whose DSUE amount is claimed to be included in the surviving spouse’s applicable exclusion amount, whether or not the statute of limitations for the assessment of additional taxes has expired for any such tax return. In this regard, the regulation also states that IRS’s authority to examine returns of a deceased spouse applies with respect to each transfer by the surviving spouse to which a DSUE amount is or has been applied. This regulation further states that the IRS, upon such examination, may adjust or even eliminate the DSUE amount reported on such a return, but that the IRS can assess additional taxes on that return only if that tax is assessed within the applicable period of limitations regarding assessments.

The regulation provides that the estate of a nonresident surviving spouse who is not a United States citizen at the time of his or her death cannot take into account the DSUE amount of any deceased spouse of such surviving spouse, except to the extent allowed under any applicable treaty obligation of the United States.

Gift Tax Regulations

Reg. §25.2505-1 provides general rules regarding the application of the unified credit against the gift tax. First, these provisions refer to the general rules and definitions in the estate tax regulations described above regarding such rules and definitions concerning the application of the unified credit against the estate tax. Second, as in the estate tax regulations, this regulation also provides that the applicable credit must be reduced by 20 percent of the amount allowed as a specific exemption for gifts made by the decedent after September 8, 1976 and before January 1, 1977. Third, similar to the estate tax regulations, this regulation provides that the applicable credit shall not exceed the amount of the gift tax that is otherwise imposed.

Reg. §25.2505-2 sets forth rules regarding lifetime gifts made by a surviving spouse who has a DSUE amount available.

This regulation provides that a DSUE amount of a decedent is included in determining the surviving spouse’s applicable exclusion amount if (a) such decedent is the last deceased spouse of the surviving spouse at the time of the surviving spouse’s taxable gift, and (b) the executor of the decedent’s estate elected portability. In addition, this regulation provides that if, on the date that the surviving spouse makes a taxable gift, the last deceased spouse of the surviving spouse had no DSUE amount, or if the executor of the estate of such last deceased spouse did not elect portability, then the surviving spouse has no DSUE amount available to determine his or her applicable exclusion amount, even if the surviving spouse previously had a DSUE amount available from another decedent who, prior to the death of the last deceased spouse, was the last deceased spouse of such surviving spouse (except as provided below).

Further, this regulation provides that a decedent is the last deceased spouse of a surviving spouse even if, on the date of the surviving spouse’s taxable gift, the surviving spouse is married


{00065462.DOC /} 158 of 191

to another individual who is then living. Moreover, if a surviving spouse remarries and that marriage ends in divorce or an annulment, the subsequent death of the divorced spouse does not end the status of the prior deceased spouse as the last deceased spouse of the surviving spouse, as the divorced spouse, at his or her death, was not married to the surviving spouse.

As in the proposed regulations, this regulation contains a much needed ordering rule that provides that if a surviving spouse makes a taxable gift and has a DSUE amount that is included in determining the surviving spouse’s applicable exclusion amount, then the surviving spouse will be treated as applying such DSUE amount to the taxable gift before applying the surviving spouse’s own basic exclusion amount to such gift.

Very importantly, also as provided in the proposed regulations, this regulation contains a special rule regarding multiple deceased spouses and a previously used DSUE amount that is available to a surviving spouse. This rule states, in general, that if a surviving spouse applied the DSUE amount of one or more last deceased spouses to the surviving spouse’s prior lifetime gifts, and, if any of those last deceased spouses is different from the surviving spouse’s last deceased spouse at the time of the surviving spouse’s current taxable gift, then the DSUE amount to be included in determining the applicable exclusion amount of the surviving spouse that will apply at the time of the current taxable gift is the sum of (a) the DSUE amount of the surviving spouse’s last deceased spouse, and (b) the DSUE amount of each of the other deceased spouses of the surviving spouse to the extent that such amount was applied to one or more previous taxable gifts of the surviving spouse.

This regulation contains the following example to illustrate the operation of this special rule: H-1 dies in 2011, survived by W, and neither of them made any taxable gifts during H-1’s life. H-1’s executor elects portability, and the DSUE amount of H-1 is $5,000,000. In 2012 W makes taxable gifts of $2,000,000. W is treated as having applied $2,000,000 of H-1’s DSUE amount to such gifts. Thereafter, W is considered to have a remaining applicable exclusion amount of $8,120,000, consisting of H-1’s $3,000,000 remaining DSUE amount, plus W’s own $5,120,000 basic exclusion amount. In 2013 W marries H-2, and H-2 dies on June 30, 2015. H-2’s executor elects portability, and H-2’s DSUE amount is $2,000,000. The DSUE amount tobe included in determining the applicable exclusion amount available to W for gifts that shemakes from July 1, 2015 through December 31, 2015 is $4,000,000, determined by adding the$2,000,000 DSUE amount of H-2 and the $2,000,000 DSUE amount of H-1 that was applied byW to W’s 2012 taxable gifts. Thus, W’s applicable exclusion amount for the second half of 2015is $9,430,000, consisting of the sum of the two $2,000,000 DSUE amounts described above, plusW’s own basic exclusion amount of $5,430,000 for 2015. Since the gift tax on any gifts that Wmakes during the second half of 2015 will be computed on both the amount of such gifts and the$2,000,000 of taxable gifts that W made in 2015, W in effect can make additional gifts of$7,430,000 during the second half of 2015 without having to pay any gift tax on account of suchgifts.

As in the estate tax regulations, this regulation also provides that a portability election that is made by an executor of a decedent’s estate generally applies as of the date of such decedent’s death. Thus, a decedent’s DSUE amount will be included in the applicable exclusion amount of the decedent’s surviving spouse and will be applicable to transfers made by the surviving spouse after the decedent’s death. However, this regulation also provides that such


{00065462.DOC /} 159 of 191

decedent’s DSUE amount will not be included in the applicable exclusion amount of the surviving spouse, even if the surviving spouse has made a taxable gift in reliance on the availability or computation of the decedent’s DSUE amount, (a) if the executor of the decedent’s estate supersedes the portability election by timely filing a subsequent estate tax return negating such election, (b) to the extent that the DSUE amount is subsequently reduced by a valuation adjustment or the correction of an error in calculation, or (c) to the extent that the DSUE amount claimed on the decedent’s return cannot be determined.

As in the estate tax regulations, this regulation also states that if a surviving spouse for whom property has passed from a decedent to a QDOT becomes a United States citizen, then the date on which such decedent’s DSUE amount will be included in the surviving spouse’s applicable exclusion amount is the date on which the surviving spouse becomes a United States citizen.

This regulation contains a special rule regarding the computation and redetermination of the DSUE amount for property passing to a QDOT for the benefit of a surviving spouse where the decedent’s executor elects portability that is similar to the comparable rule in the estate tax regulations discussed above. However, this regulation further states that the decedent’s DSUE amount as so redetermined may be applied to the surviving spouse’s taxable gifts that are made in the year of the surviving spouse’s death, or if the terminating event occurs prior to the surviving spouse’s death, then in the year of that terminating event and/or in any subsequent year of the surviving spouse’s life.

This regulation also contains provisions regarding the authority of the IRS to examine the tax returns of each of the surviving spouse’s deceased spouses whose DSUE amount is claimed to be included in the surviving spouse’s applicable exclusion amount, that are similar to the comparable rules in the estate tax regulations discussed above.

Finally, this regulation also contains rules that are similar to the comparable rules in the estate tax regulations discussed above regarding the inability of a non-resident surviving spouse who was not a citizen of the United States at the time he or she makes a gift that is subject to gift taxes to take into account the DSUE amount of any deceased spouse.

Conclusion

These final regulations provide comprehensive guidance regarding the complex portability provisions set forth in the 2010 Act and that were made permanent by the 2012 Act. As noted above, in certain important respects these regulations are very favorable to the taxpayer and clarify areas of uncertainty that were in the proposed regulations, but there still remain areas that need clarification.


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0.

Iow

a S

enat

e F

ile 2

380,

re

ena

ctin

g IA

ST

§45

1.2.

Iow

a ha

s se

para

te in

herit

ance

tax

on tr

ansf

ers

to

rem

ote

rela

tives

and

thir

d pa

rtie

s.

Kan

sas

Non

e.

For

de

cede

nts

dyi

ng

on o

r af

ter

Janu

ary

1, 2

007

and

thro

ugh

De

cem

ber

31,

200

9, K

ansa

s ha

d en

acte

d a

sepa

rate

sta

nd a

lone

est

ate

tax.

KS

ST

§

79-1

5, 2

03K

entu

cky

Inh

erita

nce

T

ax

Pic

k-up

tax

is ti

ed to

fede

ral s

tate

dea

th ta

x cr

edit.

K

T S

T §

140

.130

.

Ken

tuck

y ha

s no

t de

coup

led

but h

as a

sep

ara

te

inhe

ritan

ce ta

x an

d re

cogn

izes

by

adm

inis

trat

ive

pron

ounc

emen

t a s

epar

ate

stat

e Q

TIP

ele

ctio

n.

Loui

sian

a

Non

e

Pic

k-up

tax

is ti

ed to

fede

ral s

tate

dea

th ta

x cr

edit.

LA R

.S. §

§ 47

:243

1; 4

7:24

32; 4

7:24

34.

Mai

ne

Pic

k-up

Onl

y F

or d

ece

dent

s d

yin

g a

fter

Dec

emb

er 3

1, 2

002,

pi

ck-u

p ta

x is

froz

en a

t pre

-EG

TR

RA

fed

eral

$2

,000

,000

2015

VE

RM

ON

T TA

X S

EM

INA

R16

8

{00

0654

62.D

OC

/}

165

of 1

91

Stat

e T

ype

of T

ax

Effe

ct o

f EG

TR

RA

on

Pic

k-up

Tax

and

Siz

e of

G

ross

Est

ate

Legi

slat

ion

Affe

ctin

g S

tate

D

eath

Tax

20

15 S

tate

D

eath

Tax

T

hres

hold

st

ate

deat

h ta

x cr

edit,

and

impo

sed

on e

stat

es

exce

edin

g ap

plic

able

exc

lusi

on a

mou

nt in

effe

ct

on D

ecem

ber

31,

200

0 (i

nclu

ding

sch

edul

ed

incr

ease

s un

der

pre-

EG

TR

RA

law

) (L

.D. 1

319;

M

arch

27,

200

3).

On

June

20,

201

1, M

aine

’s g

over

nor

sign

ed

Pub

lic L

aw C

hapt

er 3

80 in

to la

w, w

hich

will

in

crea

se th

e M

aine

est

ate

tax

exem

ptio

n to

$2

mill

ion

in 2

013

and

beyo

nd.

The

rat

es a

re a

lso

chan

ged,

eff

ectiv

e Ja

nuar

y 1,

201

3, to

0%

for

Mai

ne e

stat

es u

p to

$2

mill

ion,

8%

for

Mai

ne

esta

tes

betw

een

$2

mill

ion

and

$5 m

illio

n, 1

0%

betw

een

$5 m

illio

n an

d $

8 m

illio

n an

d 12

% fo

r th

e ex

cess

ove

r $8

mill

ion.

F

or e

stat

es o

f de

cede

nts

dyi

ng

afte

r D

ecem

ber

31,

20

02, S

ec. 2

058

dedu

ctio

n is

igno

red

in

com

putin

g M

aine

tax

and

a se

para

te s

tate

QT

IP

elec

tion

is p

erm

itted

. M.R

.S. T

itle

36, S

ec. 4

062.

A 2

010

Tax

Ale

rt is

sued

by

the

Mai

ne R

even

ue

Ser

vice

s de

par

tmen

t lim

its th

e am

ount

of t

he s

tate

Q

TIP

to $

2,50

0,00

0 (t

he

diffe

ren

ce b

etw

een

Mai

ne’s

$1,

000,

000

thre

shol

d an

d th

e $3

,500

,000

fe

dera

l exe

mpt

ion

Mai

ne r

eco

gniz

es in

201

0).

Mai

ne a

lso

subj

ects

re

al o

r ta

ngib

le p

rope

rty

loca

ted

in M

aine

that

is tr

ansf

err

ed to

a t

rust

, lim

ited

liabi

lity

com

pan

y or

oth

er p

ass-

thro

ugh

en

tity

to ta

x in

a n

on r

esid

ent’s

est

ate.

M.R

.S.

Titl

e 36

, Sec

. 406

4.

Mar

ylan

d

Pic

k-up

Tax

Inh

erita

nce

On

Ma

y 15

, 201

4, G

over

nor

O’M

alle

y si

gned

HB

73

9 w

hich

rep

eale

d an

d re

ena

cted

MD

TA

X

GE

NE

RA

L §§

7-3

05, 7

-309

(a),

and

7-3

09(b

) to

$1,5

00,0

00

2015

VE

RM

ON

T TA

X S

EM

INA

R16

9

{00

0654

62.D

OC

/}

166

of 1

91

S tat

e T

ype

of T

ax

Effe

ct o

f EG

TR

RA

on

Pic

k-up

Tax

and

Siz

e of

G

ross

Est

ate

Legi

slat

ion

Affe

ctin

g S

tate

D

eath

Tax

20

15 S

tate

D

eath

Tax

T

hres

hold

T

ax

do th

e fo

llow

ing.

1.In

cre

ase

the

thre

shol

d fo

r th

e M

aryl

and

esta

teta

x to

$1.

5 m

illio

n in

201

5, $

2 m

illio

n in

2016

, $3

mill

ion

in 2

017,

and

$4

mill

ion

in20

18.

For

201

9 an

d b

eyo

nd, t

he M

aryl

and

thre

shol

d w

ill e

qual

the

fede

ral a

pplic

able

excl

usio

n am

ount

.

2.C

ontin

ues

to li

mit

the

amou

nt o

f the

fed

eral

cred

it us

ed to

cal

cula

te th

e M

aryl

and

esta

teta

x to

16%

of t

he a

mou

nt b

y w

hich

the

dece

den

t’s ta

xabl

e es

tate

exc

eeds

the

Mar

ylan

d th

resh

old

unle

ss th

e S

ectio

n 20

11fe

dera

l sta

te ta

x cr

edit

is th

en in

effe

ct.

3.C

ontin

ues

to ig

nore

the

fede

ral d

edu

ctio

n fo

rst

ate

deat

h ta

xes

unde

r S

ec. 2

058

inco

mpu

ting

Mar

ylan

d es

tate

tax,

thus

elim

inat

ing

a ci

rcul

ar c

om

puta

tion.

4.P

erm

its a

sta

te Q

TIP

ele

ctio

n.M

assa

chus

etts

P

ick-

up O

nly

For

de

cede

nts

dyi

ng

in 2

002,

pic

k-up

tax

is ti

ed

to fe

dera

l sta

te d

eath

tax

cred

it.

MA

ST

65C

§§

2A.

For

de

cede

nts

dyi

ng

on o

r af

ter

Janu

ary

1, 2

003,

pi

ck-u

p ta

x is

froz

en a

t fed

eral

sta

te d

eath

tax

cred

it in

eff

ect o

n D

ecem

ber

31, 2

000.

MA

ST

65

C §

§ 2A

(a),

as

amen

ded

July

200

2.

Tax

impo

sed

on e

stat

es e

xcee

ding

app

licab

le

excl

usio

n am

ount

in e

ffect

on

Dec

embe

r 31

, 200

0

(incl

udin

g sc

hed

uled

incr

ease

s un

der

pre

-

$1,0

00,0

00

2015

VE

RM

ON

T TA

X S

EM

INA

R17

0

{00

0654

62.D

OC

/}

167

of 1

91

Stat

e T

ype

of T

ax

Effe

ct o

f EG

TR

RA

on

Pic

k-up

Tax

and

Siz

e of

G

ross

Est

ate

Legi

slat

ion

Affe

ctin

g S

tate

D

eath

Tax

20

15 S

tate

D

eath

Tax

T

hres

hold

E

GT

RR

A la

w),

eve

n if

that

am

ount

is b

elow

E

GT

RR

A a

pplic

able

exc

lusi

on a

mou

nt.

See

, Tax

paye

r A

dvis

ory

Bul

letin

(D

ec.

200

2),

DO

R D

irect

ive

03-0

2, M

ass.

Gui

de to

Est

ate

Tax

es (

2003

) an

d T

IR 0

2-1

8 pu

blis

hed

by

Mas

s.

Dep

t. of

Rev

.

Mas

sach

uset

ts D

epar

tme

nt o

f Rev

enue

has

issu

ed

dire

ctiv

e, p

ursu

ant t

o w

hich

sep

arat

e M

assa

chus

etts

QT

IP e

lect

ion

can

be m

ade

whe

n ap

plyi

ng

stat

e’s

new

est

ate

tax

base

d up

on p

re-

EG

TR

RA

fede

ral s

tate

dea

th ta

x cr

edit.

M

ichi

gan

N

one

T

ax w

as ti

ed to

fede

ral s

tate

dea

th ta

x cr

edit.

MI S

T §

§ 20

5.23

2; 2

05.2

56

Min

neso

ta

Pic

k-up

Onl

y T

ax fr

ozen

at f

eder

al s

tate

dea

th ta

x cr

edit

in

effe

ct o

n D

ece

mbe

r 31

, 200

0, c

larif

yin

g st

atut

e pa

ssed

Ma

y 20

02.

Tax

impo

sed

on e

stat

es e

xcee

ding

fed

eral

ap

plic

able

exc

lusi

on a

mou

nt in

effe

ct o

n D

ecem

ber

31,

200

0 (in

clud

ing

sch

edul

ed

incr

ease

s un

der

pre-

EG

TR

RA

law

), e

ven

if th

at

amou

nt is

bel

ow E

GT

RR

A a

pplic

able

exc

lusi

on

amou

nt.

MN

ST

§§

291.

005;

291

.03;

inst

ruct

ions

for

MN

E

stat

e T

ax R

etur

n; M

N R

even

ue N

otic

e 02

-16.

Sep

arat

e st

ate

QT

IP e

lect

ion

perm

itted

.

On

Mar

ch 2

1, 2

014,

the

Min

neso

ta G

over

nor

sign

ed

HF

177

7, w

hich

ret

roa

ctiv

ely

repe

aled

Min

neso

ta’s

gift

tax

(whi

ch w

as e

nact

ed in

201

3).

With

res

pect

to th

e es

tate

tax,

th

e ne

w la

w in

crea

ses

the

ex

empt

ion

to $

1,20

0,00

0 fo

r 20

14 a

nd th

ere

afte

r in

an

nual

$2

00,0

00 in

crem

ents

unt

il it

reac

hes

$2,

000,

000

in 2

018

. It

also

mod

ifies

the

com

puta

tion

of th

e es

tate

tax

so th

at th

e fir

st

dolla

rs a

re ta

xed

at a

9%

rat

e w

hich

incr

eas

es to

16%

.

The

new

law

per

mits

a

sepa

rate

sta

te Q

TIP

ele

ctio

n. $1

,400

,000

2015

VE

RM

ON

T TA

X S

EM

INA

R17

1

{00

0654

62.D

OC

/}

168

of 1

91

Stat

e T

ype

of T

ax

Effe

ct o

f EG

TR

RA

on

Pic

k-up

Tax

and

Siz

e of

G

ross

Est

ate

Legi

slat

ion

Affe

ctin

g S

tate

D

eath

Tax

20

15 S

tate

D

eath

Tax

T

hres

hold

The

pro

visi

on e

nact

ed in

201

3 to

impo

se a

n es

tate

tax

on n

on-

resi

dent

s w

ho o

wn

an in

tere

st

in a

pas

s-th

rou

gh e

ntity

whi

ch

in tu

rn o

wne

d re

al o

r pe

rson

al

prop

erty

in M

inne

sota

ha

s be

en a

men

ded

to e

xclu

de

cert

ain

publ

icly

trad

ed e

ntit

ies.

It

still

app

lies

to e

ntiti

es ta

xed

as p

artn

ersh

ips

or S

C

orpo

ratio

ns th

at o

wn

clos

ely

held

bus

ines

ses,

farm

s, a

nd

cabi

ns.

Mis

siss

ippi

N

one

T

ax is

tied

to fe

dera

l sta

te d

eath

tax

cred

it.

MS

ST

§ 2

7-9-

5.

Mis

sour

i N

one

T

ax is

tied

to fe

dera

l sta

te d

eath

tax

cred

it.

MO

ST

§§

145.

011;

145

.091

. M

onta

na

Non

e

Tax

is ti

ed to

fede

ral s

tate

dea

th ta

x cr

edit.

MT

St §

72-

16-9

04; 7

2-16

-905

. N

ebra

ska

C

ount

y In

her

itanc

e T

ax

Neb

rask

a th

rou

gh 2

006

impo

sed

a pi

ck-u

p ta

x at

th

e st

ate

leve

l. C

ount

ies

impo

se a

nd c

olle

ct a

se

para

te in

herit

ance

tax.

NE

B R

EV

ST

. § 7

7-21

01.

01(1

).

Nev

ada

N

one

T

ax is

tied

to fe

dera

l sta

te d

eath

tax

cred

it.

NV

ST

§§

375A

.025

; 375

A.1

00.

2015

VE

RM

ON

T TA

X S

EM

INA

R17

2

{00

0654

62.D

OC

/}

169

of 1

91

Stat

e T

ype

of T

ax

Effe

ct o

f EG

TR

RA

on

Pic

k-up

Tax

and

Siz

e of

G

ross

Est

ate

Legi

slat

ion

Affe

ctin

g S

tate

D

eath

Tax

20

15 S

tate

D

eath

Tax

T

hres

hold

N

ew

Ham

pshi

re

Non

e

Tax

is ti

ed to

fede

ral s

tate

dea

th ta

x cr

edit.

NH

ST

§§

87:1

; 87:

7.

New

Jer

sey

Pic

k-up

Tax

Inh

erita

nce

Tax

For

de

cede

nts

dyi

ng

afte

r D

ecem

ber

31,

200

2,

pick

-up

tax

froz

en a

t fed

eral

sta

te d

eath

tax

cred

it in

effe

ct o

n D

ecem

ber

31, 2

001.

N

J S

T §

§ 54

:38-

1

Pic

k-up

tax

impo

sed

on e

stat

es e

xcee

din

g fe

der

al

appl

icab

le e

xclu

sion

am

ount

in e

ffect

Dec

embe

r 31

, 200

1 ($

675,

000)

, not

incl

udin

g sc

hedu

led

incr

ease

s un

der

pre-

EG

TR

RA

law

, eve

n th

ough

th

at a

mou

nt is

bel

ow th

e lo

wes

t EG

TR

RA

ap

plic

able

exc

lusi

on a

mou

nt.

The

exe

cuto

r ha

s th

e op

tion

of p

ayi

ng

the

abov

e pi

ck-u

p ta

x or

a s

imila

r ta

x pr

escr

ibed

by

the

NJ

Dir.

Of D

iv. o

f Tax

n. N

J S

t §§

54:3

8-1;

app

rove

d on

Jul

y 1,

200

2.

In O

berh

and

v. D

irect

or,

Div

. of T

ax, 1

93 N

.J.

558

(200

8), t

he r

etro

activ

e ap

plic

atio

n of

New

Je

rse

y's

deco

uple

d es

tate

tax

to th

e es

tate

of a

de

ced

ent d

yin

g pr

ior

to th

e en

act

men

t of t

he ta

x w

as d

ecla

red

"man

ifest

ly u

njus

t", w

here

the

will

in

clud

ed m

arita

l for

mul

a pr

ovis

ions

.

In E

stat

e of

Ste

vens

on v

. D

irect

or, 0

0830

0-0

7 (N

.J.T

ax 2

-19-

2008

) th

e N

J T

ax C

ourt

hel

d th

at

in c

alcu

latin

g th

e N

ew

Jer

sey

esta

te ta

x w

here

a

mar

ital d

ispo

sitio

n w

as b

urde

ned

with

est

ate

tax,

cr

eatin

g an

inte

rrel

ated

com

puta

tion,

the

mar

ital

dedu

ctio

n m

ust b

e re

duce

d no

t onl

y b

y th

e ac

tual

N

J es

tate

tax,

but

als

o b

y th

e h

ypot

hetic

al fe

der

al

$675

,000

2015

VE

RM

ON

T TA

X S

EM

INA

R17

3

{00

0654

62.D

OC

/}

170

of 1

91

Sta

te

Typ

e of

Tax

E

ffect

of E

GT

RR

A o

n P

ick-

up T

ax a

nd S

ize

of

Gro

ss E

stat

e Le

gisl

atio

n A

ffect

ing

Sta

te

Dea

th T

ax

2015

Sta

te

Dea

th T

ax

Thr

esho

ld

esta

te ta

x th

at w

ould

hav

e be

en p

aya

ble

if th

e de

ced

ent h

ad d

ied

in 2

001.

New

Jer

sey

allo

ws

a se

para

te s

tate

QT

IP e

lect

ion

whe

n a

fede

ral e

stat

e ta

x re

turn

is n

ot fi

led

and

is

not r

equi

red

to b

e fil

ed.

The

New

Jer

sey

Adm

inis

trat

ion

Cod

e al

so

requ

ires

that

if th

e fe

dera

l and

sta

te Q

TIP

ele

ctio

n is

mad

e, th

ey

mus

t be

cons

iste

nt.

NJA

C 1

8:26

-3A

.8(d

) N

ew M

exic

o N

one

T

ax is

tied

to fe

dera

l sta

te d

eath

tax

cred

it.

NM

ST

§§

7-7-

2; 7

-7-3

. N

ew Y

ork

Pic

k-up

Onl

y T

ax fr

ozen

at f

eder

al s

tate

dea

th ta

x cr

edit

in

effe

ct o

n Ju

ly 2

2, 1

998.

N

Y T

AX

§ 9

51.

Gov

erno

r si

gned

S. 6

060

in 2

004

whi

ch a

pplie

s N

ew Y

ork

Est

ate

Tax

on

a pro

rata bas

is to

non

-re

side

nt d

eced

ents

with

pro

pert

y su

bjec

t to

Ne

w

Yor

k E

stat

e T

ax.

On

Mar

ch 1

6, 2

010,

the

New

Yor

k O

ffice

of T

ax

Pol

icy

Ana

lysi

s, T

axpa

yer

Gui

danc

e D

ivis

ion

issu

ed a

not

ice

perm

ittin

g a

sepa

rate

sta

te Q

TIP

el

ectio

n w

hen

no f

ede

ral e

stat

e ta

x re

turn

is

requ

ired

to b

e fil

ed s

uch

as in

201

0 w

hen

ther

e is

no

est

ate

tax

or w

hen

the

valu

e of

the

gros

s es

tate

is

too

low

to r

equi

re th

e fil

ing

of a

fed

eral

ret

urn.

S

ee T

SB

-M-1

0(1

)M.

Adv

isor

y O

pini

on (

TS

B-A

-08(

1)M

(O

ctob

er 2

4,

2008

) pr

ovid

es th

at a

n in

tere

st in

an

S

The

Exe

cutiv

e B

udge

t of

2014

-201

5 w

hich

was

sig

ned

by

Gov

erno

r C

uom

o on

Mar

ch

31, 2

014

mad

e su

bsta

ntia

l ch

ange

s to

Ne

w Y

ork’

s e

stat

e ta

x.

The

New

Yor

k es

tate

tax

exem

ptio

n w

hich

was

$1

,000

,000

thro

ugh

Ma

rch

31,

2014

has

bee

n in

crea

sed

as

follo

ws:

Apr

il 1,

201

4 to

Mar

ch 3

1,

2015

--

$2,0

62,5

00

Apr

il 1,

201

5 to

Mar

ch 3

1,

2016

--

$3,1

25,0

00

$2,0

62,5

00

(as

of A

pril

1, 2

014

and

thro

ugh

Mar

ch 3

1,

2015

).

2015

VE

RM

ON

T TA

X S

EM

INA

R17

4

{00

0654

62.D

OC

/}

171

of 1

91

Stat

e T

ype

of T

ax

Effe

ct o

f EG

TR

RA

on

Pic

k-up

Tax

and

Siz

e of

G

ross

Est

ate

Legi

slat

ion

Affe

ctin

g S

tate

D

eath

Tax

20

15 S

tate

D

eath

Tax

T

hres

hold

C

orpo

ratio

n ow

ned

by

a no

n-re

side

nt a

nd

cont

aini

ng a

con

dom

iniu

m in

New

Yor

k is

an

inta

ngib

le a

sset

as

long

as

the

S C

orpo

ratio

n ha

s a

re

al b

usin

ess

purp

ose.

If

the

S C

orpo

ratio

n ha

s no

bu

sine

ss p

urpo

se, i

t app

ear

s th

at N

ew Y

ork

wou

ld lo

ok th

roug

h th

e S

Cor

pora

tion

and

subj

ect

the

cond

omin

ium

to N

ew Y

ork

esta

te ta

x in

the

esta

te o

f the

non

-res

iden

t. T

here

wou

ld li

kely

be

no b

usin

ess

purp

ose

if th

e so

le r

eas

on fo

r fo

rmin

g th

e S

Cor

pora

tion

was

to o

wn

asse

ts.

Apr

il 1,

201

6 to

Mar

ch 3

1,

2017

--

$4,1

87,5

00

Apr

il 1,

201

7 to

Dec

emb

er 3

1,

2018

--

$5,2

50,0

00

As

of J

anua

ry 1

, 20

19 t

he

New

Y

ork

esta

te

tax

exem

ptio

n am

ount

will

be

the

sam

e as

the

fe

dera

l es

tate

ta

x ap

plic

able

ex

clus

ion

amou

nt.

The

max

imum

rat

e of

tax

will

co

ntin

ue to

be

16%

.

Tax

able

gift

s w

ithin

thre

e ye

ars

of d

eath

bet

wee

n A

pril

1,

2014

and

Dec

embe

r 31

, 20

18

will

be

adde

d ba

ck to

a

dece

den

t’s e

stat

e fo

r pu

rpos

es

of c

alcu

latin

g th

e N

ew Y

ork

tax.

The

New

Yor

k es

tate

tax

will

be

a c

liff t

ax.

If th

e va

lue

of

the

esta

te is

mor

e th

an 1

05%

of

the

then

cur

rent

exe

mpt

ion,

th

e ex

empt

ion

will

not

be

avai

labl

e.

Nor

th C

arol

ina

Non

e

On

July

23,

201

3, th

e G

over

nor

sign

ed H

B 9

98

whi

ch r

epe

aled

the

No

rth

C

arol

ine

esta

te ta

x

2015

VE

RM

ON

T TA

X S

EM

INA

R17

5

{00

0654

62.D

OC

/}

172

of 1

91

Stat

e T

ype

of T

ax

Effe

ct o

f EG

TR

RA

on

Pic

k-up

Tax

and

Siz

e of

G

ross

Est

ate

Legi

slat

ion

Affe

ctin

g S

tate

D

eath

Tax

20

15 S

tate

D

eath

Tax

T

hres

hold

re

troa

ctiv

ely

to J

anua

ry 1

, 20

13

Nor

th D

akot

a

Non

e

Tax

is ti

ed to

fede

ral s

tate

dea

th ta

x cr

edit.

ND

ST

§ 5

7-37

.1-0

4

Ohi

o N

one

G

over

nor

Taf

t sig

ned

the

bud

get b

ill, 2

005

HB

66

, rep

ealin

g th

e O

hio

esta

te (

spon

ge)

tax

pros

pect

ivel

y an

d gr

antin

g cr

edit

for

it re

troa

ctiv

ely.

Thi

s w

as e

ffec

tive

June

30,

200

5 an

d ki

lled

the

spon

ge ta

x.

On

June

30,

201

1, G

over

nor

Kas

ich

sign

ed H

B

153,

the

bian

nual

bud

get

bill,

whi

ch c

onta

ins

a re

peal

of t

he O

hio

stat

e e

stat

e ta

x ef

fect

ive

Janu

ary

1, 2

013.

Okl

ahom

a

Non

e

Tax

is ti

ed to

fede

ral s

tate

dea

th ta

x cr

edit.

O

K S

T T

itle

68 §

804

The

sep

arat

e es

tate

tax

was

pha

sed

out a

s of

Ja

nuar

y 1,

201

0.

Ore

gon

S

epar

ate

Est

ate

Tax

O

n Ju

ne 2

8, 2

011,

Ore

gon’

s go

vern

or s

igne

d H

B

2541

whi

ch r

epla

ces

Ore

gon’

s pi

ck-u

p ta

x w

ith a

st

and-

alon

e es

tate

tax

effe

ctiv

e Ja

nuar

y 1,

201

2.

The

new

tax

has

a $1

mill

ion

thre

shol

d w

ith r

ates

in

crea

sin

g fr

om te

n pe

rce

nt to

six

teen

per

cent

be

twee

n $1

mill

ion

and

$9.

5 m

illio

n.

Det

erm

inat

ion

of th

e es

tate

for

Ore

gon

esta

te t

ax

purp

oses

is b

ased

upo

n th

e fe

dera

l tax

able

est

ate

with

adj

ustm

ents

.

$1,0

00,0

00

Pen

nsyl

vani

a

Inh

erita

nce

T

ax

Tax

is ti

ed to

the

fede

ral s

tate

dea

th ta

x cr

edit

to

the

exte

nt th

at th

e av

aila

ble

fede

ral s

tate

de

ath

tax

cred

it ex

ceed

s th

e st

ate

inhe

ritan

ce t

ax.

2015

VE

RM

ON

T TA

X S

EM

INA

R17

6

{00

0654

62.D

OC

/}

173

of 1

91

Stat

e T

ype

of T

ax

Effe

ct o

f EG

TR

RA

on

Pic

k-up

Tax

and

Siz

e of

G

ross

Est

ate

Legi

slat

ion

Affe

ctin

g S

tate

D

eath

Tax

20

15 S

tate

D

eath

Tax

T

hres

hold

P

enns

ylva

nia

had

dec

oup

led

its p

ick-

up ta

x in

20

02, b

ut h

as n

ow r

ecou

pled

ret

roa

ctiv

ely.

The

re

coup

ling

does

not

aff

ect

the

Pen

nsyl

vani

a in

herit

ance

tax

whi

ch is

inde

pend

ent o

f the

fe

dera

l sta

te d

eat

h ta

x cr

edi

t.

Pen

nsyl

vani

a re

cogn

izes

a s

tate

QT

IP e

lect

ion.

R

hode

Isla

nd

Pic

k-up

Onl

y T

ax fr

ozen

at f

eder

al s

tate

dea

th ta

x cr

edit

in

effe

ct o

n Ja

nuar

y 1,

200

1, w

ith c

erta

in

adju

stm

ents

(se

e be

low

).

RI S

T §

44-

22-1

.

Rho

de Is

land

re

cogn

ized

a s

epar

ate

stat

e Q

TIP

el

ectio

n in

the

Sta

te’s

Ta

x D

ivis

ion

Rul

ing

Req

uest

No.

200

3-03

.

Rho

de Is

land

’s G

ove

rnor

sig

ned

in to

law

on

June

30

, 200

9, e

ffect

ive

for

de

aths

occ

urrin

g on

or

afte

r Ja

nuar

y 1,

201

0, a

n in

crea

se in

the

amou

nt

exem

pt fr

om R

hode

Isla

nd

esta

te ta

x fr

om

$675

,000

, to

$850

,000

, with

ann

ual a

djus

tmen

ts

begi

nnin

g fo

r de

aths

occ

urrin

g on

or

afte

r Ja

nuar

y 1,

201

1 ba

sed

on “

the

per

cent

age

of i

ncre

ase

in

the

Con

sum

er P

rice

Inde

x fo

r al

l Urb

an

Con

sum

ers

(CP

I-U

)…. r

ound

ed u

p to

the

near

est

five

dolla

r ($

5.00

) in

cre

men

t.”

RI S

T §

44-

22-1

.1.

On

June

19,

201

4, th

e R

hode

Is

land

Gov

erno

r ap

prov

ed

chan

ges

to th

e R

hode

Isla

nd

Est

ate

Tax

by

incr

easi

ng

the

exem

ptio

n to

$1,

500,

000

inde

xed

for

infla

tion

in 2

015

and

elim

inat

ing

the

cliff

tax.

$1,5

00,0

00

Sou

th C

arol

ina

Non

e

Tax

is ti

ed to

fede

ral s

tate

dea

th ta

x cr

edit.

SC

ST

§§

12-1

6-51

0; 1

2-16

-20

and

12-6

-40,

am

ende

d in

200

2.

Sou

th D

akot

a N

one

T

ax is

tied

to fe

dera

l sta

te d

eath

tax

cred

it.

2015

VE

RM

ON

T TA

X S

EM

INA

R17

7

{00

0654

62.D

OC

/}

174

of 1

91

Stat

e T

ype

of T

ax

Effe

ct o

f EG

TR

RA

on

Pic

k-up

Tax

and

Siz

e of

G

ross

Est

ate

Legi

slat

ion

Affe

ctin

g S

tate

D

eath

Tax

20

15 S

tate

D

eath

Tax

T

hres

hold

S

D S

T §

§ 10

-40A

-3; 1

0-40

A-1

(as

am

ende

d F

eb.

2002

).

Ten

ness

ee

Inh

erita

nce

Tax

P

ick-

up ta

x is

tied

to fe

dera

l sta

te d

eath

tax

cred

it.

TN

ST

§§

67-8

-202

; 67-

8-20

3.

Ten

ness

ee h

as n

ot d

ecou

pled

, but

has

a s

epa

rate

in

herit

ance

tax

and

reco

gniz

es b

y ad

min

istr

ativ

e pr

onou

ncem

ent a

sep

arat

e st

ate

QT

IP e

lect

ion.

On

Ma

y 2,

201

2, th

e T

enne

ssee

legi

slat

ure

pass

ed

HB

376

0/S

B 3

762

whi

ch

phas

es o

ut th

e T

enne

ssee

in

herit

ance

Tax

as

of J

anua

ry

1, 2

016.

The

Ten

ness

ee

inhe

ritan

ce T

ax E

xem

ptio

n is

in

crea

sed

to $

1.25

mill

ion

in

2013

, $2

mill

ion

in 2

014,

and

$5

mill

ion

in 2

015.

On

Ma

y 2,

201

2, th

e T

enne

ssee

legi

slat

ure

also

pa

ssed

HB

284

0/S

B 2

777

whi

ch r

epe

als

the

Ten

nes

see

stat

e gi

ft ta

x re

tro

activ

e to

Ja

nuar

y 1,

201

2.

$5,0

00,0

00

Tex

as

Non

e

Tax

is ti

ed to

fede

ral s

tate

dea

th ta

x cr

edit.

T

X T

AX

§§

211.

001;

21

1.00

3; 2

11.0

51

Uta

h N

one

T

ax is

tied

to fe

dera

l sta

te d

eath

tax

cred

it.

UT

ST

§ 5

9-11

-102

; 59-

11-1

03.

Ver

mon

t M

odifi

ed

Pic

k-up

In

201

0, V

erm

ont i

ncre

ased

the

esta

te ta

x ex

empt

ion

thre

shol

d fr

om $

2,00

0,00

0 to

$2

,750

,000

for

dece

dent

s d

yin

g Ja

nuar

y 1,

201

1.

As

of J

anua

ry 1

, 201

2 th

e ex

clus

ion

is s

ched

uled

to

equ

al th

e fe

der

al e

stat

e ta

x ap

plic

able

ex

clus

ion,

so

long

as

the

FE

T e

xclu

sion

is n

ot

less

than

$2,

000,

000

and

not m

ore

than

$3

,500

,000

. V

T S

T T

. 32

§ 74

42a.

Pre

viou

sly

the

esta

te ta

x w

as fr

ozen

at f

eder

al

$2,7

50,0

00

2015

VE

RM

ON

T TA

X S

EM

INA

R17

8

{00

0654

62.D

OC

/}

175

of 1

91

Stat

e T

ype

of T

ax

Effe

ct o

f EG

TR

RA

on

Pic

k-up

Tax

and

Siz

e of

G

ross

Est

ate

Legi

slat

ion

Affe

ctin

g S

tate

D

eath

Tax

20

15 S

tate

D

eath

Tax

T

hres

hold

st

ate

deat

h ta

x cr

edit

in e

ffect

on

Janu

ary

1, 2

001.

V

T S

T T

. 32

§§ 7

402(

8),

7442

a, 7

475,

am

ende

d on

Jun

e 21

, 200

2.

Thr

esho

ld w

as li

mite

d to

$2,

000,

000

in 2

009

whe

n th

e le

gisl

atur

e ov

erro

de th

e G

ove

rnor

’s

veto

of H

. 442

.

No

sepa

rate

sta

te Q

TIP

ele

ctio

n pe

rmitt

ed

Virg

inia

N

one

T

ax is

tied

to fe

dera

l sta

te d

eath

tax

cred

it.

VA

ST

§§

58.1

-901

; 58.

1-90

2.

The

Vir

gini

a ta

x w

as te

mpo

raril

y re

pea

led

effe

ctiv

e Ju

ly 1

, 200

7.

Pre

viou

sly,

the

tax

was

fr

ozen

at f

eder

al s

tate

de

ath

tax

cred

it in

effe

ct o

n Ja

nuar

y 1,

197

8. T

ax w

as im

pose

d on

ly o

n es

tate

s ex

ceed

ing

EG

TR

RA

fede

ral a

pplic

able

ex

clus

ion

amou

nt.

V

A S

T §

§ 58

.1-9

01; 5

8.1-

902.

W

ashi

ngto

n S

epar

ate

Est

ate

Tax

O

n F

ebru

ary

3, 2

005,

Wa

shin

gton

Sta

te S

upre

me

Cou

rt u

nani

mou

sly

hel

d th

at W

ashi

ngto

n’s

stat

e de

ath

tax

was

unc

onst

itutio

nal.

The

tax

was

tied

to

the

curr

ent f

ede

ral s

tate

dea

th ta

x cr

edit,

thus

re

duci

ng

the

tax

for

the

year

s 20

02 -

200

4 an

d el

imin

atin

g it

for

the

year

s 20

05 -

201

0.

Hem

phill

v. S

tate

Dep

artm

ent o

f Rev

enue

200

5 W

L 24

0940

(W

ash.

200

5).

In r

espo

nse

to H

emph

ill, t

he W

ashi

ngto

n S

tate

S

enat

e on

Apr

il 19

and

the

Was

hing

ton

Hou

se o

n

Apr

il 22

, 200

5, b

y n

arro

w m

ajor

ities

, pas

sed

a st

and-

alon

e st

ate

esta

te ta

x w

ith r

ates

ran

gin

g fr

om 1

0% to

19%

, a $

1.5

mill

ion

exem

ptio

n in

20

05 a

nd $

2 m

illio

n th

erea

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{00065462.DOC /} 189 of 191

EXHIBIT “E”

DIGITAL PROPERTY

A. WILL CLAUSES

1) Tangible Personal Property and Definition of Digital Property

I give and bequeath all of my jewelry, clothing, books, silverware, glassware, works ofart, antiques, all other personal and household effects, furniture, furnishings, automobiles, digital devices of every nature and kind, including, but not limited to, computers, laptops, notebooks, and smartphones and similar devices that now exist or may exist in the future, and "digital assets", hereinafter defined, of every nature and kind (except for any digital financial accounts or digital business accounts such as on-line banking or brokerage accounts, which digital financial accounts and digital business accounts shall be disposed of as a part of my "Residuary Estate", as hereinafter defined, to the extent that such accounts are testamentary assets) to my wife, ______________, if she shall survive me. For all purposes of this my Last Will and Testament, the term "digital assets" shall include, but not be limited to, all of my files stored on my digital devices and backup systems, including but not limited to, files stored on desktops, laptops, tablets, peripherals, storage devices, mobile telephones, smartphones, and any similar digital device which currently exists or may exist as technology develops, and all emails received by me, my email accounts such as any and all Gmail, Yahoo, America on Line (AOL) accounts, my digital music, digital photographs, digital videos, and digital games, my software licenses, my social network accounts such as any Facebook, Twitter, LinkedIn, Flickr, Shutterfly and YouTube accounts, my file sharing accounts, my domain registrations and domain name system (DNS) service accounts, my web hosting accounts, my tax preparation service accounts, and my online stores, affiliate programs, other online accounts and similar digital items which currently exist or may exist as technology develops or such comparable items as technology develops regardless of the ownership of the physical device upon which the digital item is stored.

2) Digital Executor - (A) I hereby nominate, constitute and appoint _____________as theDigital Executor of this my Last Will and Testament in connection with the administration of allof my "digital assets", as hereinbefore defined. If __________shall die or shall be or becomeunwilling or unable to qualify and/or act or continue to act as Digital Executor, I herebynominate, constitute and appoint __________to be Digital Executor in his/her place and stead.

(B) I hereby nominate, constitute and appoint _____________as theExecutor of this my Last Will and Testament in connection with the administration of all of my assets, except for my "digital assets". If __________shall die or shall be or become unwilling or unable to qualify and/or act or continue to act as Executor, I hereby nominate, constitute and appoint __________to be Executor in his/her place and stead.

3) Powers Clause re Digital Assets - My Executors (or my Digital Executors) shall have fullauthority granted to them under applicable law to administer all of my "digital assets", as


{00065462.DOC /} 190 of 191

hereinbefore defined, including, but not limited to: (i) the power to access, use, control, transfer and dispose of my digital devices, including but not limited to, desktops, laptops, tablets, peripherals, storage devices, mobile telephones, smartphones, and any similar digital device which currently exists or may exist as technology develops or such comparable items as technology develops for the purpose of accessing, using, modifying, deleting, controlling, transferring or disposing of my "digital assets", as hereinbefore defined, and (ii) the power to access, use, modify, delete, control, transfer and dispose of all of my "digital assets", as hereinbefore defined.

B. POWER OF ATTORNEY

My agent, to the extent permissible under applicable law, shall have the same powers and rights that I possess over all of my "digital assets", as hereinafter defined, including, but not limited to: (i) the power to access, use, control, transfer and dispose of my digital devices, including but not limited to, desktops, laptops, tablets, peripherals, storage devices, mobile telephones, smartphones, and any similar digital device which currently exists or may exist as technology develops or such comparable items as technology develops for the purpose of accessing, using, modifying, deleting, controlling, transferring or disposing of my digital assets, as hereafter defined, and (ii) the power to access, use, modify, delete, control, transfer and dispose of my "digital assets" as hereafter defined. For all purposes of this Power of Attorney, the term "digital assets" shall include, but not be limited to, all of my files stored on my digital devices and backup systems, including but not limited to, desktops, laptops, tablets, peripherals, storage devices, mobile telephones, smartphones, and any similar digital device which currently exists or may exist as technology develops, and all emails received by me, my email accounts such as any and all Gmail, Yahoo, America on Line (AOL) accounts, my digital music, digital photographs, digital videos, and digital games, my software licenses, my social network accounts such as any Facebook, Twitter, LinkedIn, Flickr, Shutterfly and YouTube accounts, my file sharing accounts, my domain registrations and domain name system (DNS) service accounts, my web hosting accounts, my tax preparation service accounts, and my online stores, affiliate programs, other online accounts and similar digital items which currently exist or may exist as technology develops or such comparable items as technology develops regardless of the ownership of the physical device upon which the digital item is stored.


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1

HIGHLIGHTS OF 2015 TAX LEGISLATION

Administrative Provisions

Unless a statute specifies otherwise, semiweekly will mean twice per week. The semiweekly filing status

is not affected by this provision. Effective upon passage. Act 57, Sec. 34. 1 V.S.A. § 149.

Quarterly prize limit for charitable gaming is increased from $20,000 to $50,000. Effective upon passage.

Act 57, Sec. 38. 13 V.S.A. § 2143(e).

PVR may certify presenters for list training. Effective upon passage. Act 57, Sec. 39. 32 V.S.A. § 3436(a).

The Joint Fiscal Office must develop a strategy to evaluate the “effectiveness” of each Vermont tax

expenditure in the Tax Expenditure Report. The Joint Fiscal Office will need to establish a schedule and

approach for evaluating tax expenditures, specific metrics, sources of data, etc. and present its findings

on January 15, 2016. Act 33. Session law.

Cigarette and Tobacco Taxes

The tax on cigarettes is increased from 137.5 to 154 mills per cigarette or little cigar ($0.33 on a 20-pack

from $2.75 to $3.08) effective July 1, 2015. Act 54, Sec. 49. 32 V.S.A. § 7771(d).

The tax on snuff is increased from $2.29 to $2.57 per ounce. The tax on new smokeless tobacco is

increased from $2.29 to $2.57 per ounce or if the new smokeless tobacco is packaged for sale to a

consumer in a package that contains less than 1.2 ounces the tax is increased from $2.75 to $3.08. These

increases are also effective July 1, 2015. Act 54, Sec. 50. 32 V.S.A. § 7811.

Floor stock taxes are imposed on retail dealers that hold $500 or more in wholesale value of snuff, more

than 10,000 cigarettes or little cigars and on each cigarette stamp in the possession or control of the

wholesaler on July 1, 2015. Act 54, Sec. 51. 32 V.S.A. § 7814.

Changes were made to tobacco and cigarette statutes in Titles 32 and 33 to conform to 2013 Acts and

Resolves No. 14, which made definitional changes, eliminated redundant terms, and made numerous

other technical changes to the cigarette and tobacco tax statutes, and required certain nonparticipating

manufacturers to post bond. These amendments are all in the nature of housekeeping changes. Act 57,

Sec. 73-86.

Compliance and Collections

The Tax Department may use administrative garnishment and attachment to collect delinquent debt.

The Department cannot initiate garnishment or attachment until 90 days after the end of the appeal

period for underlying debt. After that time, the Department must provide a 30 day notice and then a 15-

day notice of limited appeal. Garnishment and attachment is suspended during the appeals period. The

Department is required to apply most state and federal exemptions for wages and property, except the

Department must exempt the greater of 80% of wages or 40 times federal minimum wage. The


2

Department must communicate to taxpayers opportunities for resolving tax disputes, including payment

plans, offer in compromise, etc. The Department must also contract with an independent advocate and

discuss details with banks and credit unions prior to start of program. Effective July 1, 2015, as long as

Tax contracts for independent advocate services and consults with banks and credit unions. Act 57, Sec.

41-44. 32 V.S.A. §§ 3201(a), 3207, 3208, 3101(b).

The Department of Taxes must establish a collections unit and enact rules for uniform collection of state

debt. Agencies may have the Department collect their debts on their behalf. Effective July 1, 2016. Act

57, Sec. 45-46. 32 V.S.A. §§ 3301-3303.

Medicaid providers will be treated as contractors with the state and will have their payments offset to

pay delinquent taxes. Effective July 1, 2015. Act 57, Sec. 47. 32 V.S.A. § 3113(d).

Corporation Taxes

Clarifies that the Tax Department administrative provisions and income tax provisions on interest and

penalty, appeal, and collection process apply to various franchise taxes, including insurance and

telephone taxes. Act 57, Sec. 87. 32 V.S.A. § 8146

Current Use

There have been several changes with the Land Use Change Tax:

The Land Use Change Tax (LUCT) is changing from 20%/10% of the land withdrawn from the

program based on a pro-rated value per acre to 10% of the fair market value of the actual parcel

removed. Effective date of October 2, 2015. Act 57, Sec. 48 and 50. 32 V.S.A. § 3757.

Municipal listers will set the value on the withdrawn land and will receive 50% of the Land Use

Change Tax up to $2,000. Effective date of October 2, 2015. Act 57, Sec. 48. 32 V.S.A. § 3757.

There will be an “easy out” with the first $50,000 in LUCT waived for landowners who withdraw

any part of their undeveloped parcel between July 1, 2015 and October 1, 2015. Owners of the

withdrawn land will pay the full amount of property taxes for the 2015 tax year on the

withdrawn land. As a result, the towns will need to re-send bills for the withdrawn land during

the “easy out.” Withdrawn land may not be re-enrolled in the program for five years. Act 57,

Sec. 53. Session Law.

Currently all of the revenue from the LUCT goes into the general fund; starting on July 1, 2016,

the revenue will go into the general fund and education fund at the same ratio as the property

tax. Act 57, Sec. 49 and Sec. 99, Effective Dates. 32 V.S.A. § 3757(d).

It has been clarified that the State lien against land enrolled in current use that is filed in the land

records will be a separate document rather than the entire current use application as in the past. Act 57,

Sec. 48. 32 V.S.A. § 3757(f).

The Department of Taxes/Director of PVR is no longer required to provide the assessing officials with a

list of farm sales. Act 57, Sec. 51. 32 V.S.A. § 3752(12).


3

The Department of Taxes/Director of PVR will provide 30 days’ notice when removing forestland from

the current use program due to receiving an adverse inspection report or failure to receive a required

managed activity report. Prior law required removal upon notice. Act 57, Sec. 52. 32 V.S.A. § 3756(i).

There will be a Use Value Appraisal Municipal Reimbursement Study Committee to examine existing

formula for municipal reimbursement payments and report by January 1, 2016. Act 57, Sec. 54.

The Department of Taxes/Director of PVR shall publish guidance for local assessing officials concerning

how to assess lands under conservation easement and in current use in a consistent manner across the

state. Effective date July 1, 2015. Guidance must be published by April 15, 2016. Act 57, Sec. 55.

Annually, the Department of Taxes/PVR shall audit 3 towns to ensure that parcels in current use are

valued consistently. If , as a result of an audit, PVR determines that the town’s appraisal of a property is

over or understated by more than 10%, the Department/PVR will substitute its appraisal for that of the

local assessing official. Act 57, Sec. 56. 32 V.S.A. § 3760a.

By September 1 every year, the owner of agricultural lands or buildings in current use shall certify they

continue to meet requirements for current use. Act 57, Sec. 57. Session Law.

If, after a due process hearing, a landowner enrolled in the current use program is not compliant with

water quality requirements, the agricultural land and farm buildings may be removed from the current

use program. Act 64, Sec. 23. 32 V.S.A. § 3756(i).

By January 15, 2016, the Department of Forests, Parks and Recreation will report whether land used for

maple syrup production on forestland should be enrolled in the current use program as managed

forestland and not agricultural land. Act 64, Sec. 50. Session law.

Economic Development

Effective July 1, 2015, out-of-state businesses coming into Vermont during a disaster response period of

10 days prior to and 60 days after declaration of a State disaster or emergency will not be considered as

having established a nexus for state tax purposes. Out-of-state businesses must still register, collect, and

remit sales tax if making retail sales of tangible personal property. Out-of-state businesses are also

subject to fuel tax, sales and use, meals and room, and car rental taxes. Act 51, Sec. A.1. Title 11, chapter

16.

For tax years 2014 and 2015, a payment in the amount of two percent of the wages paid by an employer

for services performed in designated counties associated with the manufacture of finished wood

products is available to the employer in the year the county qualifies and for one year after the

qualification ends. The counties will be designated by the Secretary of Commerce and Community

Development annually based on high rates of unemployment. Act 51, Sec. G.9. Session law amending

2014 Acts and Resolves No. 179, Sec. G. 100(b).


4

Limited use/limited application elevators are eligible for a downtown and village center tax credit up to

$40,000 as a “qualified code of technology improvement project.” Act 57, Sec. 71-72. 32 V.S.A. §§

5930aa(3) and 5930cc(c).

The total cap for the downtown and village center tax credit for improvement credits is increased from

$25,000 to $50,000. Act 57, Sec. 72. 32 V.S.A. § 5930cc(c).

A number of changes were made to the Vermont Employment Growth Incentive (VEGI) program that

will apply to the 2015 tax year:

Employers must provide at least three of the following benefits:

o Health care benefits with 50 percent or more of the premium paid by the employer

o Dental assistance

o Paid holidays

o Child care

o Retirement benefits

o Other paid time off, including sick days

o Other extraordinary employee benefits

Decreases wage threshold from 60 to 40 percent above minimum wage (but not less than

$13/hour) for areas where the average annual unemployment rate is higher than State average.

The Vermont Economic Progress Council must receive authorization from the Emergency Board

before exceeding the $1 million cap for awards.

The Vermont Economic Progress Council must receive authorization from the Emergency Board

before exceeding the $10 million aggregate program cap.

Businesses that cannot meet targets due to circumstances beyond their control may make a

request to the VEPC Board to extend their award periods. Award Period One may be extended

for an additional two reporting periods (meaning that the total grace period could be four

reporting periods) Award Period Two may be extended for one additional reporting period

(meaning that the total grace period could be three reporting periods).

Creates an enhanced training incentive for businesses that work with the Vermont Training

Program or a Workforce Education and Training Fund program.

Act 51, Sec. G.1-G.4. 32 V.S.A. § 5930a-b, 10 V.S.A. § 531(d), and session law.

Education Property Tax

The fiscal year 2016 education property tax rates are $0.99 for homesteads and $1.535 for

nonresidential property. The percentage of household used to calculate the property tax adjustment is

1.80 and the base education amount is $9,459.00. Act 46, Sec. 35-36. Session Law.

Effective upon passage, the definition of “homestead” is amended to clarify that residents who own

property but lease it on April 1 may still claim it as a homestead as long as it is leased for 182 days or

less. Act 57, Sec. 59. 32 V.S.A. § 5401(7).


5

Effective retroactively to January 1, 2014, the property tax exemption certificate for VHFA qualified

rental units may be renewed once after 10 years if VHFA finds that the property meets all requirements.

Act 57, Sec. 60. 32 V.S.A. § 5404a(a)(6).

TIF annual reporting requirements apply to municipalities that use CPAs as well as those who have a

town auditor. Date change for report from January 15 to February 15 of each year. Act 57, Sec. 62. 24

V.S.A. § 1901(3).

Under TIF, special assessments will not be considered property taxes if used exclusively for operating

expenses and not improvements within the district. Effective July 1, 2015 and applied to special

assessments enacted after that date. Act 57, Sec. 63. 24 V.S.A. § 1896(c).

Gasoline Tax

The motor fuel transportation infrastructure assessment will have a floor of $0.0396. Act 40, Sec. 23. 23

V.S.A. § 3106.

Income Tax

For tax year 2015, the state and local income tax deduction is eliminated. All state and local income

taxes deducted from federal adjusted gross income will be considered taxable income. Act 57, Sec. 64.

32 V.S.A. § 5811(21).

For tax year 2015, all deductions, except for charitable and medical deductions, are limited to two and

one half time the standard deduction for state income tax purposes. Act 57, Sec. 64. 32 V.S.A. §

5811(21).

For tax year 2015, if federal adjusted gross income exceeds $150,000, then the taxpayer will pay the

greater of state income tax or three percent of federal adjusted gross income. Act 57, Sec. 65 §

5822(a)(6).

As of July 1, 2015, employers must provide the total cost of employer-sponsored health care coverage

on box 12 of W-2s. Act 57, Sec. 67. 32 V.S.A. § 5841(c).

As of July 1, 2015, employers who are required to withhold on a semiweekly basis for federal purposes

will now be required to withhold on a semiweekly basis for state taxes. This replaces the $9,000

threshold. Employers who need to set up this payment can call Business Tax at 802-828-2551, option 3.

Act 57, Sec. 68. 32 V.S.A. § 6842(a)(2).

For tax year 2016, trusts and estates are required to make estimated payments of income tax liability in

the same manner as individuals. Act 57, Sec. 69. 32 V.S.A. § 5852(a).

Publicly-traded partnerships are not liable for withholding and paying income taxes for their

shareholders if the partnership provides detailed information about its partners in an electronic format


6

to the Department. The Department will publish guidelines for the reporting requirements. Act 57, Sec.

70. 32 V.S.A. § 5920(h).

Local Option Tax

As of October 1, the Town of Colchester will have a one percent sales tax, one percent rooms tax, and

one percent meals and alcoholic beverage tax. Act M-10. 24 App. V.S.A. § 703.

Meals and Rooms Tax

As of July 1, 2015, the meals tax applies to food or beverage sold through a vending machine. A vending

machine is defined as a machine that dispenses food or beverages and is operated by coin, currency,

credit card, slug, token, coupon, or similar device. An operator who sells taxable meals through a

vending machine is not required to hold a license for each individual machine. Act 57, Sec. 88-89. 32

V.S.A. §§ 9202 and 9271.

Interest paid on a meals and rooms tax refund shall begin to run from 45 days after the refund request

was made. This conforms to the calculation of both income tax and sales tax refunds. Act 57, Sec. 90. 32

V.S.A. § 9245.

Property Tax Adjustments

See change to definition of homestead above in Education Property Tax.

Property Transfer Tax and Land Gains Tax

Effective June 17, 2015, there will be a surcharge of 0.2 percent added to the 1.25 percent rate, except

for the first $200,000 for a principal residence purchased with a mortgage through VHFA or the USDA.

This surcharge will sunset on July 1, 2018. Act 64, Sec. 38-39. 32 V.S.A. § 9602a.

Land transferred for highway purposes is exempt from the property transfer tax if the consideration for

the transfer is $10,000 or less. Act 40, Sec. 32. 32 V.S.A. § 9606(d).

A transfer of land to the State of Vermont or a municipality for a project under the Transportation

Program or for an emergency project is not subject to the land gains tax, regardless of whether the State

or municipality has started condemnation proceedings. Act 40, Sec. 33. 32 V.S.A. § 1002(q).

Sales and Use Tax

As of July 1, 2015, the sales and use tax includes soft drinks. Soft drinks are beverages that contain

natural or artificial sweeteners but do not contain milk, milk substitute, or over 50 percent vegetable or

fruit juice. Soft drinks purchased through the SNAP program (food stamps) are not taxable. Act 57, Sec.

91-92. 32 V.S.A. §§ 9701 and 9741.

On January 15, 2016, the Department of Taxes will report on extending the sales and use tax to

consumer services most commonly taxed in other states for two scenarios: raising $15 million and $30


7

million in revenue on an annual basis. State economists will analyze the fiscal impact of extending

Vermont’s sales and use tax to a broader range of consumer services. Act 57, Sec. 94. Session law.

For tax year 2015, the percentage of adjusted gross income a taxpayer may elect to report as use tax on

the taxpayer’s income tax return in lieu of attesting to actual use tax is increased from 0.10 to 0.15

percent of adjusted gross income. Act 57, Sec. 95. 32 V.S.A. § 5870.

For tax year 2016, the percentage of adjusted gross income a taxpayer may elect to report as use tax on

the taxpayer’s income tax return in lieu of attesting to actual use tax is increased from 0.15 to 0.20 and

will be indexed annually based on the Consumer Price Index after 2016. Act 57, Sec. 96. 32 V.S.A. § 5870.

Effective July 1, charges for the right to access remotely accessed prewritten software shall not be

considered charges for tangible personal property. This legislation reflects the evolution of the market

and legal principles to the point that transactions involving charges for access over the cloud are more

accurately characterized as transactions involving services or intangibles for purposes of Vermont

taxation at this time and are not subject to the sales tax. The new legislation addresses only software

accessed remotely. Prewritten software in other forms, including download, would continue to fall

within the Section 9701(1) definition of tangible personal property. Specified digital products also

remain taxable. Vermont specifically imposes the sales tax on digital audio-visual works, digital audio

works, digital books and ringtones that are transferred electronically. Act 51, Sec. G.8.


NOTES


SESSION 6 CHARITABLE GIFT VEHICLES AND THEIR CONSEQUENCES Ron R. Morgan, Esq., Kenlan, Schwiebert, Facey & Goss P.C.

Terrance Condren, UBS


Two CRUTs and a CLAT:

Using Split Interest Charitable Trusts to Defer Gain and Eliminate Estate Taxes

Terence Condren & Thomas Cosinuke

December 3, 2015

1. Framing the Discussion

a. "True charity is the desire to be useful to others with no thought of recompense." –

Emanuel Swedenborg

b. "But it never hurts to get a nice tax deduction at the same time." – Condren & Cosinuke

c. Although the tax tail should never wag the charitable goal dog, it is our duty as advisors

to help our clients accomplish their charitable goals in the most tax efficient manner

possible. With that in mind, here are three case studies that illustrate how our clients

can do well while doing good.

2. Although there are a large number of ways for clients to pursue their charitable goals, today we

will discuss just two of them: Charitable Remainder Unitrusts and Charitable Lead Annuity

Trusts.

a. Charitable Remainder Unitrust Trust (CRUT): A Brief Overview1

i. A CRUT is a tax-exempt irrevocable trust authorized under I.R.C. Section 664. It

is a creative way for a client to provide a benefit to charity at death while

creating an income stream, deferring capital gain taxes and capturing an income

tax deduction during life. A CRUT has three main components: the term, the

payout rate and the remainder.

ii. Term

1. A CRUT can run for a fixed term of years (up to a maximum of 20 years),

for one or more measuring lives or for a combination of a fixed term

and measuring lives.2

2. A fixed term of years can be attractive if there is a concern that a

measuring life may end prematurely.

3. Linking the term to the lives of the donor and the donor's spouse

integrates the CRUT into the client's retirement plan by creating an

income stream that will last for life and that may rise over time.

iii. Payout rate

1. A CRUT pays a fixed percentage of its fair market value (as measured

each year) to one or more individuals during the term of the CRUT.3 If

the value of the CRUT grows over time, then the annual payout will

increase proportionately, but the payout will also decline in the same

manner if the value of the CRUT drops.

1 For a more detailed overview, see Charitable Remainder Trusts, http://pwrrss.she.pwj.com/PWERRSS/report?id=786733 2 Treas. Regs. §1.664-3(a)(5)(i). 3 I.R.C. §664(d)(2)(A).


http://pwrrss.she.pwj.com/PWERRSS/report?id=786733

2. The rate must be between 5% and 50%, inclusive.4 Typically, the rate is

between 5% and 8%.

3. A high payout rate captures more of the financial benefit for the family

and reduces the ultimate distribution to charity, but a high payout rate

also increases the risk of a declining income stream for the family.

iv. Remainder

1. At the end of the CRUT's term, whatever is left in the CRUT is

distributed to one or more charities. These charities can be public

charities (e.g., a donor advised fund, the United Way, a college, a

religious organization, etc.) or private foundations (e.g., a charitable

corporation created by the donor).

2. The donor can reserve the right to change the charities as often as

he/she wishes. Retaining this right causes the CRUT's value to be

included in the donor's estate,5 but that inclusion is offset in its entirety

by a charitable estate tax deduction,6 so there's no drawback to

retaining this power.

3. At the time the CRUT is funded, the present value of the remainder

must be equal to at least 10% of the initial fair market value of the

CRUT.7 This is a one-time test. A higher payout rate will reduce the

present value of the remainder interest, so a CRUT that runs for the

lives of the donor and the donor's spouse has a maximum allowable

payout rate that is far less than the stated maximum limit of 50%. For

example, a CRUT than runs for the lives of two 40 year olds has a

maximum allowable payout rate of just 5.250%, whereas a CRUT than

runs for the lives of two 60 year olds can have a payout rate of 9.316%.8

4. The donor receives a current income tax deduction equal to the fair

market value of the remainder interest,9 so a CRUT will always generate

an income deduction equal to at least 10% of its initial fair market

value.10

v. Taxation of payments – worst in, first out

1. Although a CRUT is a tax-exempt entity, the income beneficiary is taxed

on the payments that he/she receives from the CRUT.11

4 Ibid. 5 I.R.C. §2036(a)(2); §2038. 6 I.R.C. §2055. 7 I.R.C. §664(d)(2)(D). 8 These examples assume funding in October 2015. The remainder interest is valued using the highest Section 7520 rate in effect for the month of the transfer and for the preceding two months. Treas. Regs. §1.7520-2. A higher Section 7520 rate is advantageous, but not significantly so. 9 I.R.C. §170(f)(2)(A). 10 The deduction applies both to federal income taxes and to Vermont income taxes. 11 I.R.C. §664(b).


2. Inside the CRUT, all income items retain their character. For example,

long-term capital gains realized by selling appreciated property inside of

the CRUT retain that character when such gains are paid out to the

income beneficiary. CRUTs can generate different types of income

including tax-free interest income from municipal bonds, taxable

interest income from government and corporate bonds, qualified

dividends from public traded stocks and short-term and long-term

capital gains.

3. Each payment from the CRUT to the income beneficiary is taxable based

on the amount and type of income "trapped" inside the CRUT, but such

income is not recognized proportionally. Instead, the worst income

(from the taxpayer's point of view) is distributed first until that that

"bucket" of income is exhausted and then the next least favorable

bucket of income is distributed until its drained, and so forth.12

a. Bucket 1: Ordinary income

i. Ordinary income other than qualified dividends

ii. Qualified dividends

b. Bucket 2: Capital gain income

i. Short-term gains

ii. Long-term gains

c. Bucket 3: Tax-exempt income

d. Bucket 4: Tax-free return of principal

e. Example: Assume Client contributes $1,000,000 of a long-term

single stock position with a zero basis on January 1, 2015 to a

CRUT that pays 5% a year to him at the end of each year. The

CRUT immediately sells the property and invests the proceeds in

a diversified portfolio. During 2015, the CRUT earns $10,000 of

U.S. government bond interest, receives $20,000 of qualified

dividend income and realizes $5,000 of short-term capital gains.

On December 31, Client receives a $50,000 payment from the

CRUT. Client recognizes the following income on the

payment:13

i. $10,000 of ordinary income

ii. $20,000 of qualified dividend income

iii. $5,000 of short-term capital gains

iv. $15,000 of long-term capital gains (relating to the sale

of the contributed property)

b. Charitable Lead Annuity Trust (CLAT): A Brief Overview

12 I.R.C. §664(b). 13 This is a simplified example that does not take any deductions into account. The rules for how deductions are allocated among the various buckets of income are beyond the scope of this presentation. See Treas. Regs. §1.664-1(d)(2) for more information.


i. A CLAT is a non-tax-exempt irrevocable trust that meets the requirements of

I.R.C. Section 2522(c)(2)(B) (for gift tax purposes) or Section 2055(e)(2)(B) (for

estate tax purposes). A CLAT is the opposite of a CRUT in almost every way.

The income stream goes to a charity rather than to an individual, the remainder

goes to one or more individuals rather than to charity, the payout is a fixed

dollar amount rather than a percentage of the trust's value as measured each

year and a CLAT is not a tax-exempt entity.

ii. Term

1. A CLAT can run for one or more measuring lives, for a term of years or a

combination of those factors. Unlike a CRUT, a fixed-term CLAT can run

for more than 20 years.14

2. If the term of a CLAT is based on a measuring life, the measuring life

must be related to the donor of the CLAT or to one of the noncharitable

remaindermen.15 This rule evolved in response to the use of "Ghoul

CLATs" where the measuring life was a person with a low life

expectancy who was completely unrelated to the donor or to the

remainderman and who was selected as the measuring life solely due to

poor health. A CLAT that terminates early due to a premature death

can create significant estate tax savings.16

iii. Payout rate

1. A CLAT distributes a defined fixed dollar amount at least annually to one

or more charitable organizations. Unlike a CRUT, the payout amount

does not vary with the value of the CLAT.

2. The payout rate can change over time, so long as the changes are

mapped out in the governing instrument. A backloaded CLAT where the

annuity increases at 20% per year is permissible, but it is also possible to

have a significant non-linear increase in the payout amount towards the

end of the CLAT (a so-called "shark fin CLAT"), although this technique

may carry significant audit risk.17 Backloading a CLAT increases the

chances of property being left in the CLAT at the end of the term

because smaller payments are made up front, thereby allowing more

growth to accumulate inside the CLAT.

iv. Remainder

14 Estates, Gifts and Trusts Portfolios > Charitable Contributions > Portfolio 866-2nd: Charitable Lead Trusts > Detailed Analysis > II. Basic Requirements for Charitable Deduction — Qualifying Nongrantor Charitable Lead Trust and Grantor Charitable Lead Trust > B. Guaranteed Annuity or Unitrust > 1. Guaranteed Annuity> a. Payment 15 Treas. Regs. §25.2522(c)-3(c)(2)(vi)(A), (vii)(A) 16 For a detailed discussion of how CLATs and other planning techniques can be used in the context of a low life expectancy, see http://pwrrss.she.pwj.com/PWERRSS/report?id=780547. 17 Estates, Gifts and Trusts Portfolios > Charitable Contributions > Portfolio 866-2nd: Charitable Lead Trusts > Detailed Analysis > IV. Additional Considerations for Qualifying Nongrantor Charitable Lead Trusts > Varying the Amount of the Guaranteed Annuity


http://pwrrss.she.pwj.com/PWERRSS/report?id=780547

1. At the end of the term, a CLAT distributes to one or more noncharitable

beneficiaries, typically the donor's children or a trust for their benefit. If

the CLAT's growth during the term exceeds the Section 7520 rate in

effect when the CLAT was created, then there will be assets left over for

grantor's children even though the grantor did not make a taxable gift

when funding the CLAT. The math in terms of trying to beat the Section

7520 rate in order to leave a benefit to the family is identical to using a

grantor retained annuity trust (GRAT).

2. CLATs can be used in conjunction with generation-skipping transfers

(GSTs), but it is impossible to predict the inclusion ratio at the end of the

CLAT, so a CLAT is not a good choice for making GSTs.

3. Unlike a CRUT, the donor cannot retain the right to change the identity

of the remaindermen.

v. Grantor CLAT v. non-grantor CLAT

1. Unlike a CRUT, a CLAT may or may not create a charitable income tax

deduction for the grantor when it is funded. A grantor CLAT does create

a deduction whereas a nongrantor CLAT does not.18

2. A grantor CLAT is a CLAT where the grantor reserves certain powers

(e.g., the right to reacquire trust assets in exchange for property of

equivalent value) sufficient to invoke the grantor trust rules. A grantor

CLAT generates an income tax deduction in the year of funding equal to

the present value of the annuity interest that will be paid to charity.

Two drawbacks are that (1) the donor must recognize all of the CLAT's

income going forward and (2) the CLAT's annual distributions to charity

do not generate additional income tax deductions for either the CLAT or

the donor. A grantor CLAT is sometimes used when the donor

experiences a spike in taxable income that is not likely to be repeated in

the future, such as an executive who retires and receives a lump sum

distribution from a nonqualified deferred compensation plan.

3. A nongrantor CLAT is its own taxpayer, and it does not generate a

charitable income tax deduction for the grantor. This can be a good

approach for a donor who wants to benefit charity but who is unable to

benefit from additional charitable income tax deductions due to

adjusted gross income (AGI) limitations.

3. Case Studies

a. Using a Charitable Remainder Unitrust in conjunction with an Employee Stock

Ownership Plan

i. Client

1. A client owned a closely-held business and was looking to retire.

18 I.R.C. §170(f)(2)(B); Treas. Reg. §1.170A-6(c).


2. The client wanted the employees to benefit from the transition, but

none of them could afford to buy the business from the client.

3. The client was interested in providing a benefit to charity at the end of

his life.

ii. Technique

1. The client created an Employee Stock Ownership Plan (ESOP) and sold

the business to the ESOP, which got a loan from a bank to pay for the

business. An ESOP is a qualified retirement plan for employees that

invests primarily in the corporation's own securities.19

2. The client reinvested the sales proceeds in qualified replacement

property (QRP) in order to defer recognizing a gain. QRP is defined as

the securities (equity and debt) of domestic operating corporations.20

3. The client wanted to diversify the portfolio outside the bounds of the

QRP rules, generate an income stream for his retirement and benefit

charity upon his death. He contributed the QRP to a CRUT, which then

sold the QRP and invested the proceeds in a much more broadly

diversified portfolio, including international stocks, emerging market

debt and private equity partnerships.

iii. Results

1. The client received an immediate income tax deduction equal to the

present value of the charity's remainder interest based on the fair

market value of the QRP contributed to the CRUT.

2. The client achieved better diversification than what was allowed by the

QRP rules.

3. Client created an income stream which will last until the death of

himself and his wife, and established a charitable financial legacy that

will distribute to the family's donor-advised fund, which will be the

primary charitable vehicle for the client's family.

b. Using a Charitable Remainder Unitrust in conjunction with a 1031 exchange to defer

gain on the sale of NYC co-op apartment

i. Client

1. The client owned a co-op in NYC valued at $1.8 million and had rented it

out for the past eight years.

2. The client wanted to sell the co-op and invest in new income-producing

real estate worth $1.2 million without paying a capital gains tax.

3. The client was interested in providing a benefit to charity.

ii. Technique

19 For a thorough discussion of ESOPs, see U.S. Income Portfolios: Compensation Planning > Portfolio 354-8th: ESOPs. 20 I.R.C. §1042(c)(4).


1. Client contributed 1/3 of the co-op to a FLIP CRUT so that he owned the

co-op as tenants-in-common with the CRUT.

a. A FLIP CRUT is a CRUT that pays the lesser of its net income and

the stated percentage of its fair market value to the grantor

each year until a triggering event, such as the sale of an asset

held in the CRUT, at which point the CRUT pays out the stated

percentage of its fair market value each year to the grantor

without regard to net income.21

2. Client then sold the co-op to a qualified intermediary and reinvested his

2/3 of the proceeds into new income-producing real estate via a Section

1031 exchange. The 1/3 interest held in the CRUT was sold for cash,

and the cash was invested in a broadly diversified portfolio.

a. A Section 1031 exchange allows a taxpayer to exchange one

income-producing property for another without recognizing a

gain.

b. A Qualified Intermediary is a company that acquires the

property from the taxpayer, transfers the property to third-

party buyer, acquires a replacement property for the taxpayer

and then transfers the replacement property to the taxpayer.22

iii. Results

1. The client avoided recognizing gain on 2/3 of the co-op because he

reinvested that portion of the co-op in like-kind property under

Section 1031.

2. The client diversified away from real estate inside the CRUT, created an

income stream from the proceeds of the sale of the 1/3 interest, and

will provide a benefit to charity at his death.

3. The client received an income tax deduction when he funded the CRUT.

The deduction was equal to the fair market value of the present value of

the remainder interest.

c. Using a zeroed out Charitable Lead Annuity Trust to eliminate estate taxes

i. Client

1. The client insisted on paying no estate taxes at death, despite the

likelihood of having a $50 million estate.

2. The client had established significant irrevocable trusts during life for his

children, but did not want to leave everything to charity.

ii. Technique

1. During life, the client created an unfunded backloaded zeroed out CLAT.

a. The CLAT provided that the annuity rate would be equal to the

minimum rate necessary to produce a remainder interest of $1

21 Treas. Regs. §1.664-3(a)(1)(i)(c). 22 Treas. Regs. §1.1031(k)-1(g)(4).


based on the applicable Section 7520 rate as of the client's

death.

b. The annuity was set to increase by 20% a year, starting the year

after the client's death. The annuity was to be paid to the

client's private foundation.

c. The annuity was set to terminate ten years after the client's

death and any property remaining in the CLAT would then

distribute to a non-GST trust for the benefit of the client's

children.

2. The client revised his estate plan to leave an amount equal to his

available federal estate tax exemption (the client was a New Hampshire

resident, so there was no state estate tax) to his children's trusts with

the excess to flow to the CLAT.

iii. Results

1. No estate tax will be paid at the client's death because the CLAT will

create an estate tax deduction sufficient to reduce the client's taxable

estate to an amount equal to the client's available estate tax exemption.

2. The children's trusts may receive an extra contribution when the CLAT

ends if the CLAT beats the Section 7520 rate in effect at the time of the

client's death.

3. The CLAT will pay a ten year rising annuity to the family foundation and

then distribute the remainder (if any) after ten years to the children's

trusts.

4. Conclusion: As advisors, we can use split interest charitable trusts to help our clients accomplish

their goals in the most tax-efficient way possible by building integrated wealth management

plans that combine asset diversification, income tax planning, estate tax planning and charitable

planning.

IMPORTANT UBS INFORMATION REGARDING THIS PRESENTATION

This presentation is provided for informational and educational purposes only. This presentation provides general information

on the topic discussed and is not intended as a basis for decisions in specific situations. Because of the complexities involved

with developing tax planning strategies, experienced legal and tax counsel should be consulted before implementing a strategy.

The views expressed herein are those of the author in his personal/individual capacity, and may not necessarily reflect the

views of UBS Financial Services Inc.


NOTES


ETHICS SESSION Brian Murphy, Esq., Dinse, Knapp & McAndrew, P.C.

James Knapp, First American Title Insurance Company

Jeffrey Wick, Esq. Wick & Maddocks


NOTES
