Well, Fall has arrived, and hopefully with it, the fire danger in the Western U.S. will be over, until next year! Of course, the rain along the East Coast has been dangerous and amazing. This Newsletter covers some Gift Tax and other developments, reminding us that tax outcomes largely depend on careful transactional documentation and tax reporting by taxpayers and their advisors.
Estate and Succession Planning Memo Available
The readers of this Newsletter will remember my discussion in the August 6, 2015 Newsletter of the importance of estate and succession planning, even though most U.S. families no longer will be facing any Federal estate tax liability. Having no estate tax exposure merely means that there are more assets to be passed down to successive generations, for better or for worse! I have a short, 3-page memo about the imperative of estate and succession planning for all of our clients - if you would like a copy, just email me to email@example.com, and I will send a copy of the memo promptly.
Section 2704 Valuation Treasury Regulations
The long-awaited new Regs on IRC Sec. 2704, one of the 1990-enacted "Special Valuation Rules", were not issued after all in September, but are still expected. It seems the IRS and Treasury are adamant in trying to cut back long available valuation discounts via the regulatory process - we must wait and see!
Income Tax Basis Reminder
Steve Leimberg, in his LISI Estate Planning Email Newsletter #2333 (8/13/15), reminds us of the importance of income tax basis changes per IRC Sec. 1014, and the need to report estate tax values and income tax basis following the owner's death on a consistent basis. See this LISI article, co-authored by Andy Katzenstein and Michael Rosenblum - "Drive Carefully, the Highway Bill Enacts New Consistent Basis Reporting Rules". The Highway Bill (short name) actually is the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (signed into law by President Obama on July 31, 2015). Essentially, this new law states taxpayers acquiring property from a decedent to use the value as finally determined for Federal estate tax purposes as their new basis for income tax purposes. This long has been on the Treasury Department's "hit list"!
The decedent's executor now must notify the IRS and the estate beneficiaries as to the property's estate tax return (Form 706) value AND the beneficiaries must use that value for purposes of reporting gain or loss (or depreciating/amortizing asset values) on the beneficiaries' income tax returns. See Highway Bill Sec. 2004(d) amending Code Sec. 1014(f). If there is no "finally determined value", the value per the required statement to beneficiaries and the Treasury (IRC Sec. 6035(a)) is to be used. A sample form is provided by Treasury, but a number of open issues remain - such as, to which beneficiaries must the notification be given, and, of course, note the new rules on notification do not apply where no 706 is required to be filed.
But remember that the proper FMV at death of a decedent where hard-to-value assets are involved always is important (including appropriate discounts), since generally income tax basis used by estate beneficiaries must conform to the FMV at death.
Now to Gift Tax Developments
Again, LISI gives us good information on new developments - In LISI Estate Planning Email Newsletter #2350 (10/1/15), commentator Paul Hood reviews an IRS Field Attorney Advice, 20152201F - reminding us that to run the 3-year Gift Tax Statute of Limitations upon filing the Form 709, there must be "adequate disclosure" on the Gift Tax Return both of the nature of the property gifted and the Fair Market Value determination thereof, usually by appraisal. Tax return preparers should review this IRS advice to see that failure to properly identify partnerships on which interests were gifted and failure to provide a complete and adequate appraisal report will leave the Statute of Limitations perpetually open - and this may allow IRS to challenge gift tax values even in the estate of the donor!
Then I call your attention to my recent commentary posted as LISI Estate Planning Email Newsletter #2349, namely, "Owen Fiore on Steinberg v. Commissioner: Agreement to Assume Potential Estate Tax Liability Considered in Determining Fair Market Value of a Gift" - posted September 29, 2015. Jean Steinberg, at age 89, in 2007 entered into an enforceable, binding "net, net gift" agreement with her four daughters. This meant that first, the donees agreed to pay the gift tax liability due upon the gift, and, second, also agreed to pay the potential estate tax liability under IRC Sec. 2035(b) in the event the donor died within 3 years after making the gift transfers (she did not die within 3 years as it turned out). IRS failed to successfully argue its motion for summary judgment in "Steinberg I" (141 T.C. 258 (2013)), and following the trial of the case the Tax Court issued its opinion on September 16, 2015, agreeing with the donor taxpayer that both the gift tax liability assumed and paid by the donees and appraiser-determined "discount" for the potential 2035(b) estate tax liability (which never was triggered!) reduced the net value of the gift. This is an excellent case opinion reviewing the required gift tax analysis of net gifts, and also the opinion analogizes to the potential built-in capital gains tax liability discount decisions of the courts. Nationally known and quite effective tax litigator John Porter was lead counsel in the Steinberg case. Of note is the IRS error in failing to provide at trial in Steinberg II any appraisal evidence of its own!
More of Owen's CPE Webcasts Coming
I will be finishing out this year's CPE webcasts for CPAs and other tax professionals with October 9, October 16, October 30, and November 6 webinars for CPE Credit (www.cprecredit.com); for CPE Link (www.cpelink.com) I have webcasts on October 14, November 4, November 11, and December 22; and, finally, my "Estate & Succession Planning for the 99%" 2-hour webcast is being presented later this month by Western CPE (www.westerncpe.com). Tax practitioners are invited to check out these webcasting events.
I hope you enjoy this Newsletter! Owen Fiore, JD