Dear Readers Who Follow Washington Developments:<\/p>\n\n\n\n
For a number of years I have been preparing a list of what appear to me to be the \u201cTop Ten\u201d developments of the year, together with observations about those developments from a variety of perspectives, with generous weight admittedly given to the perspective of federal tax law.\u00a0 I do not claim that these are the only ten developments that might be chosen, or that this is the only order in which they might be placed.\u00a0 These are simply things that happened in the past year about which some possibly helpful comments occurred to me.\u00a0 This time, I share those comments in this Capital Letter, adapted from a McGuireWoods LLP\u00a0Legal Alert\u00a0(Dec. 24, 2015, updated Jan. 4, 2016) and LISI Estate Planning Newsletter #2371 (Jan. 4, 2016, on the web at\u00a0www.leimbergservices.com<\/a>).<\/p>\n\n\n\n In 1959, to consolidate their family drive-in movie theater businesses and make it easier to obtain financing, Michael (\u201cMickey\u201d) Redstone and his two sons, Sumner and Edward, formed National Amusements, Inc. (NAI). They each contributed to NAI their stock in predecessor entities, and Mickey also contributed $3,000 in cash. Taking the stock contributions into account at their book values, the contributions totaled $33,328 (47.88%) from Mickey, $18,445 (26.49%) from Sumner, and $17,845 (25.63%) from Edward, but 100 shares of NAI common stock were issued to each of them. They all worked in NAI; Mickey was the president, Sumner was the vice president, and Edward was the secretary-treasurer. As the Tax Court described it, \u201cMickey gave Sumner, his elder son, the more public and glamorous job of working with movie studios and acquiring new theaters. Edward had principal responsibility for operational and back-office functions. His duties included maintaining existing properties and developing new properties.\u201d (Today Sumner is the executive chairman of Viacom and CBS.)<\/p>\n\n\n\n In the late 1960s, Edward began to feel marginalized within both his extended family and the business. When he and his wife concluded that it was necessary to have their son admitted to a hospital as a psychiatric patient, Mickey, Mickey\u2019s wife, and Sumner opposed that action, \u201cin part\u201d as the court put it \u201cbecause they feared it reflected badly on the Redstone family name.\u201d Edward also became dissatisfied with his role at NAI and with what he viewed as Mickey\u2019s and Sumner\u2019s disregard for his views in making certain business decisions. He quit the business, demanded possession of the 100 shares of common stock registered in his name, and threatened to sell that stock to an outsider if NAI did not redeem the shares at an appropriate price. Mickey refused to give Edward his stock certificates, contending that NAI had a right of first refusal to buy them back. Mickey also claimed that at least half of the stock registered in Edward\u2019s name was actually held under an \u201coral trust\u201d for the benefit of Edward\u2019s children, representing the \u201cextra\u201d shares he accorded to Edward in 1959 when he had contributed 48 percent of NAI\u2019s capital but received only 33.33 percent of its stock.<\/p>\n\n\n\n After the parties negotiated for six months, Edward filed suit, and the public nature of the very adversarial litigation was extremely distressing to the Redstone family. Finally, in 1972, they reached a settlement whereby Edward would separate from NAI, one-third of the stock registered in his name (33\u2153 shares) would be treated as having always been held in trust for his children, and NAI would buy his remaining 66\u2154 shares for $5 million.<\/p>\n\n\n\n As required by the settlement agreement, Edward contemporaneously executed two irrevocable declarations of trust for the benefit of each of his two children and transferred 16\u2154 shares of NAI stock to each of the trusts. Three weeks later, Sumner similarly executed irrevocable declarations of trust for the benefit of each of his two children and transferred 16\u2154 shares of NAI stock to each of the trusts. Neither Edward nor Sumner filed gift tax returns for the taxable periods (the calendar quarters) in which they made these 1972 transfers.<\/p>\n\n\n\n In 2006, Edward\u2019s son and the trustees of certain Redstone family trusts sued Sumner, Edward, and NAI in a Massachusetts court, arguing that more stock should have been transferred to the trusts in 1972 on the basis of the existence of a prior \u201coral trust.\u201d In that litigation, Edward testified that he firmly believed that he was entitled to all 100 shares of NAI stock that were originally registered in his name, but that he had accepted his lawyer\u2019s advice that it was in his best interest to agree to the oral trust for his children that Mickey had insisted on, in order to settle the earlier litigation and obtain payment for his remaining 66\u2154 shares. Sumner testified that Mickey had never asserted such an oral trust in his case and that he had placed one-third of his stock in trust for his children \u201cvoluntarily, not as the result of a lawsuit,\u201d stating that \u201cI just made an outright gift.\u201d In O\u2019Connor v. Redstone<\/em>, 896 N.E.2d 595 (Mass. 2008), the court held that the plaintiffs had failed to prove that any oral trust ever existed.<\/p>\n\n\n\n The IRS heard about the 2008 case and, in 2010, asserted two $737,625 gift tax deficiencies on the 1972 transfers, one on Edward for the transfers to trusts for his children and one on Sumner for the transfers to trusts for his children.<\/p>\n\n\n\n Edward\u2019s Gift Tax Case<\/strong><\/p>\n\n\n\n In\u00a0Estate of Edward Redstone v. Commissioner<\/em>,\u00a0145 T.C. No. 11\u00a0(Oct. 26, 2015), the Tax Court (Judge Lauber) held that Edward\u2019s 1972 transfers were not taxable gifts, but rather transfers in the ordinary course of a trade or business, because they were part of the settlement of a claim of an oral trust that \u201chad sufficient plausibility to generate a great deal of litigation over the course of many years,\u201d even though it was rejected by the Massachusetts court 37 years later.\u00a0 The Tax Court stated:<\/p>\n\n\n\n Edward\u2019s agreement to release his claim to 33 1\/3 shares of NAI stock represented a bona fide settlement of this dispute. Although Edward had a reasonable claim to all 100 shares registered in his name, Mickey had possession of these shares and refused to disgorge them, forcing Edward to commence litigation. The \u201coral trust\u201d theory on which Mickey relied was evidently a theory in which he passionately believed. And it had some link to historical fact: at NAI\u2019s inception, Edward was listed as a registered owner of 33.33% of NAI\u2019s shares even though he had contributed only 25.6% of its assets.<\/p>\n\n\n\n The Tax Court rejected the IRS argument that Edward\u2019s two children had not been parties to the litigation and that they had provided no consideration. The court noted that whether the transferees provided<\/em> consideration is not relevant under Reg. \u00a725.2511-1(g)(1), which looks instead to whether the transfer is made \u201cfor<\/em> a full and adequate consideration,\u201d which the court viewed as the same as whether the transferor received<\/em> full and adequate consideration, regardless of its source.<\/p>\n\n\n\n Sumner\u2019s Gift Tax Case<\/strong><\/p>\n\n\n\n In\u00a0Sumner Redstone v. Commissioner<\/em>,\u00a0T.C. Memo 2015-237\u00a0(Dec. 9, 2015), Sumner argued that his transfer to the trusts for his children should also escape gift tax.\u00a0 As the court put it:<\/p>\n\n\n\n In contending that this transfer should also be exempt from gift tax, Sumner seeks to portray it as part of the overall reconfiguration of stock ownership by which the parties brought Edward\u2019s litigation to a close. \u201cBut for the litigation with Edward and the settlement reached by the parties,\u201d Sumner submits that he would not have established trusts for his children in July 1972. \u201cBy creating trusts he otherwise would not have established at the time,\u201d Sumner allegedly \u201cfacilitated the settlement of his brother\u2019s litigation,\u201d \u201cappeased his father,\u201d and \u201cpoised himself to become NAI\u2019s majority shareholder.\u201d He accordingly contends that his transfer, like Edward\u2019s, was \u201cmade in the ordinary course of business\u201d and for \u201can adequate and full consideration in money or money\u2019s worth.\u201d<\/p>\n\n\n\n The Tax Court (again Judge Lauber) found Sumner\u2019s argument unpersuasive, stating:<\/p>\n\n\n\n There is no evidence that any dispute existed in 1971-1972 concerning ownership of Sumner\u2019s stock or that Mickey was determined to withhold any of Sumner\u2019s shares from him. To the contrary: the evidence showed that Mickey and Sumner were working in concert to drive Edward out of the company and that the \u201coral trust\u201d theory was a weapon they deployed against Edward in an effort to achieve that goal. Because no demand was ever placed on Sumner\u2019s shares, no negotiations ever occurred concerning his ownership of those shares. Sumner never filed a lawsuit, and he received no release of claims from Mickey (or anyone else) upon transferring his stock.<\/p>\n\n\n\n Despite the differences in motivation between Edward\u2019s and Sumner\u2019s transfers, the Tax Court found the redemption price paid to Edward for his shares in 1972 to be a reliable index of the value of the stock when Sumner made his gifts. The court also held that Sumner was not liable for the penalties the IRS had asserted.<\/p>\n\n\n\n Comment<\/strong><\/p>\n\n\n\n Edward reluctantly agreed to his children\u2019s trusts to settle litigation, and Sumner\u2019s transfers to trusts for his children were admittedly \u201cvoluntary.\u201d Nothing more is needed to justify the different outcome in their gift tax cases. But there is still something unsettling about treating these two brothers so differently. Whatever reason there was in 1972 for Edward to accede to, or even for Mickey to assert, an \u201coral trust\u201d in 1959, it seems that it would have been just as plausible a justification for Sumner to acknowledge such an \u201coral trust\u201d also, because there is no reason revealed in the Tax Court opinions to assume that in 1959<\/em> Mickey did not intend to treat all his grandchildren equally. One can only wonder if the outcome for Sumner would have been different if he had just made other gifts in the third quarter of 1972 and reported those gifts on a gift tax return.<\/p>\n\n\n\n Or one can only wonder what the result would have been if the alleged \u201coral trusts\u201d for Mickey\u2019s grandchildren had actually been formalized and funded in 1959. The best estate planning is often the planning that is done early. The book values the Tax Court appears to have given some credibility indicate a total value for NAI in 1959 of about $70,000.<\/p>\n\n\n\n In any event, these two cases illustrate the principle that intrafamily transfers that would otherwise be taxable gifts (Sumner\u2019s transfers) might not be taxable gifts if they result from an arm\u2019s-length settlement of a bona fide dispute (Edward\u2019s transfers). The Tax Court seems even to highlight that principle by making Edward\u2019s taxpayer-friendly decision a \u201cregular\u201d or \u201cpublished\u201d opinion, not a memorandum opinion like Sumner\u2019s. This in turn emphasizes the importance of careful attention to tax issues when developing and documenting the resolution or accommodation of any intrafamily differences, especially (but not only) when those differences produce litigation.<\/p>\n\n\n\n The deepest question of all may be what an ACTEC Fellow or another trusted advisor or counselor could have done to anticipate and prevent, or at least reduce, the tensions that produced these family quarrels in the first place.<\/p>\n\n\n\n In\u00a0Chief Counsel Memorandum 201208026<\/a>\u00a0(dated Sept. 28, 2011, and made public Feb. 24, 2012), the IRS Chief Counsel\u2019s office stated that the gift tax annual exclusion would not be available for contributions to \u201cCrummey trusts\u201d by reason of the beneficiaries\u2019 right to withdraw contributed amounts, because the trust document provided that questions and disputes concerning the trust had to be submitted to an \u201cOther Forum,\u201d widely assumed to be some form of arbitration, and because a beneficiary who filed or participated in a civil proceeding to enforce the trust would be excluded from any further participation in the trust under a \u201cno contest\u201d or \u201cin terrorem<\/em>\u201d clause.\u00a0 Under those circumstances, the Chief Counsel\u2019s office viewed the withdrawal rights as \u201cunenforceable and illusory.\u201d\u00a0 It turns out that this memorandum apparently was issued with respect to the facts of the\u00a0Mikel<\/em>\u00a0case, which rejected the position taken by the memorandum.<\/p>\n\n\n\n The Mikel<\/em> Case<\/strong><\/p>\n\n\n\n The opinion in\u00a0Mikel v. Commissioner<\/em>,\u00a0T.C. Memo 2015-64\u00a0(April 6, 2015), reveals that in 2007 a husband and wife jointly gave property they claimed to have a value of $3,262,000 to a trust in which 60 beneficiaries had \u201cCrummey\u201d withdrawal rights.\u00a0 If those transfers thereby qualified for 120 $12,000 gift tax annual exclusions, the taxable gifts would have been reduced to $911,000 for each spouse, less than the $1 million gift tax exemption.\u00a0 The trust agreement provided that any dispute regarding the interpretation of the agreement \u201cshall be submitted to arbitration before a panel consisting of three persons of the Orthodox Jewish faith.\u201d\u00a0 Such a panel in Hebrew is sometimes called a \u201cbeth din<\/em>\u201d (pronounced \u201cbet deen\u201d).<\/p>\n\n\n\n The Tax Court (Judge Lauber) held that the beneficiaries\u2019 withdrawal rights created present interests that qualified for the annual gift tax exclusion. The court stated that \u201cit is not obvious why the beneficiary must be able to \u2018go before a state court to enforce that right.\u2019 \u2026 A beneficiary would suffer no adverse consequences from submitting his claim to a beth din, and respondent has not explained why this is not enforcement enough.\u201d Moreover, the court held that the specific in terrorem<\/em> provision in this case would not apply to a beneficiary\u2019s withdrawal right because it applied only to actions to oppose or challenge discretionary trust distributions.<\/p>\n\n\n\n IRS Position Nevertheless \u201cSubstantially Justified\u201d<\/strong><\/p>\n\n\n\n There may be at least three more developments relating to the issues in\u00a0Mikel<\/em>.\u00a0 In the first development, Judge Lauber denied the taxpayers\u2019 request for payment of attorney\u2019s fees under section 7430, finding that the position of the IRS, although unsuccessful, was substantially justified, in that it had a reasonable basis in fact and law and was justified to a degree that could satisfy a reasonable person.\u00a0\u00a0Mikel v. Commissioner<\/em>,\u00a0T.C. Memo 2015-173\u00a0(Sept. 8, 2015).<\/p>\n\n\n\n Open Issues in Mikel<\/em><\/strong><\/p>\n\n\n\n In the second development, apparently still to come, it must be determined, either by a decision of the court or by a settlement between the Mikels and the IRS, whether the withdrawal rights of all 60 beneficiaries justify annual exclusions and whether the $3,262,000 value of the contributions to the trust is accurate.<\/p>\n\n\n\n The Administration\u2019s Legislative Proposals to Curb Crummey Powers<\/strong><\/p>\n\n\n\n And as a third possible development, although it wouldn\u2019t affect the Mikels\u2019 2007 gifts, the Administration\u2019s budget-related revenue proposals would significantly limit the effectiveness of Crummey withdrawal powers.\u00a0 The \u201cGeneral Explanations of the Administration\u2019s Fiscal Year 2015 Revenue Proposals\u201d (March 4, 2014), at pages 170-71, and the \u201cGeneral Explanations of the Administration\u2019s Fiscal Year 2016 Revenue Proposals\u201d (Feb. 2, 2015), at pages 204-05, include a proposal to \u201cSimplify Gift Tax Treatment for Annual Gifts.\u201d\u00a0 The General Explanations (popularly called \u201cGreenbooks\u201d) note the compliance costs of Crummey powers, including the costs of giving notices, keeping records, and making retroactive changes to the donor\u2019s gift tax profile if an annual exclusion is disallowed, as well as the enforcement costs to the IRS.\u00a0 They also lament the IRS\u2019s lack of success in combating the proliferation of Crummey powers, especially in the hands of persons not likely to ever receive a distribution from the trust, in\u00a0Estate of Cristofani v. Commissioner<\/em>, 97 T.C. 74 (1991), and\u00a0Kohlsaat v. Commissioner<\/em>, T.C. Memo 1997-212.\u00a0 If its 60 Crummey powers are ultimately upheld,\u00a0Mikel<\/em>\u00a0is likely to be added to that list.<\/p>\n\n\n\n Although the proposal states that it \u201cwould eliminate the present interest requirement for gifts that qualify for the gift tax annual exclusion,\u201d what it actually proposes is to limit the annual exclusion to outright gifts, gifts to \u201ctax-vested\u201d trusts exempt from GST tax under section 2642(c)(2), and \u201ca new category of transfers,\u201d up to $50,000 per donor per year, that some, including\u00a0Capital Letter Number 35<\/a>, interpreted in 2014 to be allowed without tapping into the donor\u2019s $14,000-per-donee annual exclusions.\u00a0 That interpretation was repudiated by a new sentence in the 2015 Greenbook: \u201cThis 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.\u201d\u00a0 Thus, the compliance burdens of identifying donees would not be eliminated after all.\u00a0 (The 2015 Greenbook also added that the proposed limit of $50,000 would be indexed for inflation.)<\/p>\n\n\n\n Comment<\/strong><\/p>\n\n\n\n Capital Letter Number 35 chose to interpret the 2014 Greenbook\u2019s $50,000 \u201cnew category of transfers\u201d consistently with its stated objective to \u201csimplify gift tax exclusions,\u201d and on that basis commended the proposal as a simplification.\u00a0 When the 2015 Greenbook repudiated that interpretation,\u00a0Capital Letter Number 36<\/a>\u00a0repudiated the commendation.<\/p>\n\n\n\n Although there is little reason to expect this Greenbook proposal to be enacted, particularly in its 2015 form, the proposal, along with the Mikel<\/em> decision, does illustrate the continued frustration of Treasury and the IRS with at least some uses of Crummey powers.<\/p>\n\n\n\n North Carolina<\/strong><\/p>\n\n\n\n In Kimberly Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue<\/em>, 12 CVS 8740 (N.C. Sup\u2019r Ct. April 23, 2015), the Superior Court of Wake County, North Carolina, held North Carolina\u2019s income tax on the taxable income of a trust for the benefit of a North Carolina resident unconstitutional as applied to a trust created by a New York resident for the benefit of his descendants. One of the trust beneficiaries had moved to North Carolina. But a New York resident was the trustee, all trust records were maintained in New York, the custodian of the trust investments was in Boston, the trust tax returns were prepared in New York, the trustee did not travel to North Carolina, the trustee did not make any distributions to the North Carolina beneficiary, and the beneficiary could not compel the trustee to make a distribution. The court held that the tax, as applied to this trust in which the trustee had no connections with North Carolina, violates both the due process and commerce clauses of the U.S. Constitution.<\/p>\n\n\n\n New Jersey<\/strong><\/p>\n\n\n\n In Residuary Trust A u\/w\/o Kassner v. Director, Division of Taxation<\/em>, 2015 N.J. Tax LEXIS 11, 2015 WL 2458024 (N.J. Sup\u2019r Ct. App. Div. May 28, 2015), aff\u2019g<\/em> 27 N.J. Tax 68 (N.J. Tax Ct. Jan. 3, 2013), a trust was created under the will of a New Jersey resident who died in 1998. New Jersey law defines a resident trust for income tax purposes to include \u201ca trust, or a portion of a trust, consisting of property transferred by the will of a decedent who at his death was domiciled in this state.\u201d During the tax year at issue (2006), the sole trustee resided in New York and administered the trust outside of New Jersey. The trustee filed a return and paid New Jersey tax only on income of S corporations attributable to the corporations\u2019 activities in New Jersey. The New Jersey Tax Court rejected the New Jersey Division of Taxation\u2019s contention that the trust was taxable on all undistributed income because it held assets in New Jersey, holding that the trust cannot be deemed to own assets in New Jersey merely because it was a shareholder in S corporations that own New Jersey assets.<\/p>\n\n\n\n The Appellant Division affirmed the New Jersey Tax Court, citing the New Jersey \u201csquare corners\u201d doctrine that requires the government to deal fairly with its citizens and engage in equitable practices. It noted that the Division of Taxation\u2019s official guidance in 1999 in the State Tax News <\/em>(which the court noted is a \u201cbi-monthly newsletter published by the Division itself\u201d) gave taxpayers unequivocal advice that undistributed trust income would not be taxable if the trustee was not a New Jersey resident and the trust had no New Jersey assets. In fact, the position that a trust was subject to taxation of its retained income if it had any New Jersey income had first been announced only in 2011, five years after the year at issue. The court noted that it was fundamentally unfair for the Division of Taxation to announce in its official publication that under a certain set of facts a trust\u2019s income will not be taxed, and then retroactively apply a different standard years later.<\/p>\n\n\n\n Comment<\/strong><\/p>\n\n\n\n These decisions are limited. Kaestner<\/em> is being appealed by the North Carolina Department of Revenue. Further, while the trust sought a determination that the statute is unconstitutional on its face, the court ruled only that it is unconstitutional as applied to this trust. In Kassner<\/em>, the appellate court relied as much on New Jersey\u2019s published advice as on constitutional grounds, leaving open the possibility that the result would be different if the instructions and advice had been different. But these cases still represent a continuation of, not a retreat from, the recent trend of limiting a state\u2019s power to tax nonresident trusts. See, for example, Linn v. Department of Revenue<\/em>, 2013 Ill. App. 4th 121055 (Dec. 18, 2013), and McNeil v. Commonwealth of Pennsylvania<\/em>, Pa. Comm. Court, No. 651 F.R. 2010, 173 F.R. 2011 (May 24, 2013).<\/p>\n\n\n\n Legislation:<\/strong> Protecting Americans from Tax Hikes Act of 2015<\/strong><\/p>\n\n\n\n Part of the Consolidated Appropriations Act, 2016 (Public Law 114-113) given final approval by the House and Senate and signed into law by the President on December 18, 2015, was the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). The core of the PATH Act (56 of 127 sections) was the nearly annual \u201cextenders\u201d of a variety of temporary provisions. Twenty-two of those sections made some of those temporary provisions permanent. Included were five provisions described as \u201cIncentives for Charitable Giving.\u201d These now-permanent provisions include the closely watched ability of individuals over 70\u00bd years old to make charitable distributions from individual retirement accounts (IRAs), up to $100,000 per year, without including those amounts in gross income (section 112 of the Act). Others include donor-favorable rules for contributions of real property for conservation purposes, especially for farmers and ranchers and Alaska Native Corporations (section 111), and for certain contributions of food inventory (section 113), and the special rule that the basis in an S corporation shareholder\u2019s stock is not reduced by the unrealized appreciation in property contributed to charity by the S corporation (section 115).<\/p>\n\n\n\n Continuing to react to \u201cscandals\u201d regarding IRS handling of applications for recognition of tax exemption, Congress has also included in the PATH Act requirements that the IRS allow administrative appeals of adverse exemption determinations to the Office of Appeals (section 404 of the Act); a streamlined recognition process for section 501(c)(4) social welfare organizations (section 405); extension of the availability of declaratory judgment relief under section 7428 to all organizations described in section 501(c), not just section 501(c)(3) and explicitly including section 501(c)(4) (section 406); and the exemption from gift tax of gifts to section 501(c)(4), (5), and (6) (social welfare, labor, agricultural, horticultural, business league, etc.) organizations (section 408). In related provisions of more general application, the Act codifies a \u201ctaxpayer bill of rights\u201d (section 401); allows taxpayers who have been victimized by the IRS, such as by unauthorized disclosure of private tax information, to learn the IRS\u2019s reaction, such as whether the case is being investigated or referred to the Justice Department for prosecution (section 403); and requiring the termination of an IRS employee who performs, delays, or fails to take any official action for personal gain or political purposes (section 407). It is hard to say how these changes will encourage charitable giving, but they will provide modest reassurance to some anxious taxpayers that Congress is attentive to their concerns.<\/p>\n\n\n\n Administrative Guidance:<\/strong> Notice 2015-62<\/strong><\/p>\n\n\n\n Notice 2015-62<\/a>, 2015-39 I.R.B. 411, clarifies the circumstances in which certain investments for mixed charitable and income purposes will not be treated as investments that jeopardize charitable purposes under section 4944.\u00a0 Section 4944(c) exempts \u201cprogram-related investments,\u201d defined as \u201cinvestments, the primary purpose of which is to accomplish one or more of the purposes described in section 170(c)(2)(B), and no significant purpose of which is the production of income or the appreciation of property.\u201d<\/p>\n\n\n\n Some investments, however, often called \u201cmission-related investments,\u201d are intended to produce both a social benefit and an investment return and therefore do not meet the definition of a program-related investment. Notice 2015-62 provides that such an investment will not be considered a jeopardizing investment if, in making the investment, the foundation\u2019s managers exercise ordinary business care and prudence. The notice specifically acknowledges that the managers may include in their evaluation of an investment \u201call relevant facts and circumstances, including the relationship between a particular investment and the foundation\u2019s charitable purposes.\u201d The Notice concludes that \u201ca private foundation will not be subject to tax under section 4944 if foundation managers who have exercised ordinary business care and prudence make an investment that furthers the foundation\u2019s charitable purposes at an expected rate of return that is less than what the foundation might obtain from an investment that is unrelated to its charitable purposes.\u201d<\/p>\n\n\n\n Case Law: The Green <\/em>Case<\/strong><\/p>\n\n\n\n Meanwhile, a judicial development may simplify and enhance the charitable contribution deduction for certain contributions of appreciated property by trusts. Green v. United States<\/em>, 116 AFTR 2d 2015-6668 (W.D. Okla. Nov. 4, 2015), involved charitable donations of appreciated real estate in 2004 by The David and Barbara Green 1993 Dynasty Trust, which owned a 99 percent limited partnership interest in Hob-Lob Limited Partnership, which in turn owned or operated many Hobby Lobby stores. The trust deducted the adjusted basis of the properties on its 2004 federal income return and then amended the return exactly three years later to deduct the full fair market value of the properties. The IRS disallowed the refund, stating, a bit simplistically, that \u201c[t]he charitable contribution deduction for the real property donated in 2004 is limited to the basis of the real property contributed.\u201d<\/p>\n\n\n\n The District Court (Judge DeGiusti) granted summary judgment to the trust. Citing opinions of other courts, it stated that \u201c[t]he purpose of Congress in enacting [charitable contribution provisions] was to encourage charitable gifts\u201d and that \u201cstatutes regarding charitable deductions \u2026 are not matters of legislative grace, but rather \u2018expression[s] of public policy.\u2019\u201d As such, \u201c[p]rovisions regarding charitable deductions should \u2026 be liberally construed in favor of the taxpayer.\u201d The Government argued that section 642(c) limits the deduction to \u201cany amount of the gross income \u2026 paid.\u201d The court was persuaded by the fact that the properties had been bought with gross income. The Government also argued that gross income does not include unrealized appreciation, but the court found no limitation to basis in section 642(c).<\/p>\n\n\n\n Comment<\/strong><\/p>\n\n\n\n The result in Green<\/em> might be surprising to some, because, as the Government argued, gross income indeed does not include unrealized appreciation. But allowing a deduction of fair market value puts the trust in the same position as if it had sold the property and donated the cash proceeds, while allowing a charitable donee to receive property it can use for its charitable purposes, which at least for some of the transfers was evidently the case in Green<\/em>.<\/p>\n\n\n\n Trust Decanting<\/strong><\/p>\n\n\n\n A new\u00a0Uniform Trust Decanting Act<\/a>\u00a0(UTDA) was approved by the National Conference of Commissioners on Uniform State Laws (Uniform Law Commission) at its annual conference in Williamsburg, Virginia, July 10-16, 2015.\u00a0 The Reporter was ACTEC Fellow Susan Bart of Chicago, and the Drafting Committee was chaired by ACTEC Fellow Stan Kent of Colorado Springs, Colorado.\u00a0 The Act generally allows decanting whenever the trustee has discretion to make principal distributions, or even if the trustee does not have such discretion if it is appropriate to decant into a special-needs trust.\u00a0 UTDA imposes no duty to decant, but requires that, if decanting is done, it must be done in accord with fiduciary duties.\u00a0 Decanting requires notice to beneficiaries, but not court approval, although a fiduciary or beneficiary may ask a court to provide instructions or relief.\u00a0 Generally decanting may not add beneficiaries, and it may not increase the trustee\u2019s compensation without approval of beneficiaries or a court.<\/p>\n\n\n\n Section 19 of UTDA includes extensive explicit safeguards, called \u201ctax-related limitations,\u201d to prevent decanting from jeopardizing any intended beneficial tax characteristics of the trust. The beneficial tax characteristics explicitly addressed are the marital deduction, the charitable deduction, the annual gift tax exclusion, the eligibility of the trust to hold S corporation stock, an inclusion ratio of zero for GST tax purposes, preservation of the use of the trust beneficiary\u2019s life expectancy in determining minimum required distributions from a retirement plan or IRA, and the preservation, creation, or termination of grantor trust status as the circumstances might warrant.<\/p>\n\n\n\n The 2011-2012 Treasury-IRS Priority Guidance Plan included, as item 13 under the heading of Gifts and Estates and Trusts, \u201cNotice on decanting of trusts under \u00a7\u00a72501 and 2601.\u201d\u00a0 This project was new in 2011-2012, but it had been anticipated for some time, at least since the publication at the beginning of 2011 of\u00a0Rev. Proc. 2011-3<\/a>, 2011-1 I.R.B. 111, in which new sections 5.09, 5.16, and 5.17 included decanting among the \u201careas under study in which rulings or determination letters will not be issued until the Service resolves the issue through publication of a revenue ruling, revenue procedure, regulations or otherwise.\u201d\u00a0\u00a0Rev. Proc. 2016-3<\/a>, 2016-1 I.R.B. 126, \u00a7\u00a75.01(11), (16) & (17), continues this designation.<\/p>\n\n\n\n On December 20, 2011, the IRS published\u00a0Notice 2011-101<\/a>, 2011-52 I.R.B. 932, asking for comments from the public on the tax consequences of decanting transactions.\u00a0 Notice 2011-101 also \u201cencourage[d] the public to suggest a definition for the type of transfer (\u2018decanting\u2019) this guidance is intended to address\u201d and encouraged responses to consider the contexts of domestic trusts, the domestication of foreign trusts, and transfers to foreign trusts.\u00a0 The Notice also said that the IRS \u201cgenerally will continue to issue PLRs with respect to such transfers that do not result in a change to any beneficial interests and do not result in a change in the applicable rule against perpetuities period.\u201d\u00a0 There were extensive public comments, including\u00a0Comments<\/a>\u00a0in question-and-answer form with a proposed revenue ruling submitted by ACTEC in April 2012, and there is no doubt that Treasury and the IRS have continued to study decanting.\u00a0 But decanting was omitted from the 2012-2013 Plan and has been omitted again from the 2013-2014, 2014-2015, and 2015-2016 Plans.<\/p>\n\n\n\n Comment<\/strong><\/p>\n\n\n\n UTDA in effect provides the \u201cdefinition\u201d Notice 2011-101 asked for, and its publication should now pave the way for the long-awaited tax guidance for decantings done under UTDA or substantially identical statutes. And because of the care to avoid tax problems that UTDA exhibits, that guidance should not be as hard to complete or as harsh in its application as many might have feared. Perhaps the guidance will follow the proposed revenue ruling submitted by ACTEC.<\/p>\n\n\n\n Digital Assets<\/strong><\/p>\n\n\n\n In January 2012, the Uniform Law Commission authorized the formation of a drafting committee to write model legislation authorizing fiduciaries to access, manage, copy, and delete digital assets. The committee developed a Uniform Fiduciary Access to Digital Assets Act (UFADAA), which the ULC approved at its July 2014 annual meeting in Seattle. Despite introductions and discussions of UFADAA in many states, Delaware is the only state that adopted that version of UFADAA. Indeed, the Delaware legislature had enacted the final draft version of UFADAA even before the July 2014 ULC meeting, and the Governor of Delaware signed it into law later in 2014. In other states, enactment of UFADAA was opposed and effectively blocked by a coalition of internet providers and advocates for personal rights and privacy, in many cases by the use of exaggerated horror stories of the breaches of privacy that UFADAA would allow. Some internet service providers even developed and promoted their own very harsh alternative to UFADAA, the Privacy Expectation Afterlife Choices Act (\u201cPEAC Act,\u201d pronounced \u201cpeace act\u201d).<\/p>\n\n\n\n Renewed informal discussions among members of the ULC committee, internet providers, and privacy advocates resulted in a\u00a0Revised Uniform Fiduciary Access to Digital Assets Act<\/a>\u00a0(RUFADAA), which original internet service provider opponents of UFADAA found acceptable and agreed not to oppose. \u00a0At its Williamsburg meeting in July 2015, the ULC approved RUFADAA, which generally allows a fiduciary full access to digital assets other than the\u00a0content<\/em>\u00a0of electronic communications (unless the user or the court directs otherwise).\u00a0 RUFADAA also sets forth its own recapitulation of fiduciary duties, so as to reassure, within the corners of the Act, service providers and others who might otherwise not have any reason to know or appreciate the scope and seriousness of those duties and the safeguards of privacy those duties entail.\u00a0 The Reporter for RUFADAA was Professor Naomi Cahn of the George Washington University Law School, and the Drafting Committee was chaired by ACTEC Fellow Suzy Walsh of Hartford, Connecticut.<\/p>\n\n\n\n Comment<\/strong><\/p>\n\n\n\n As RUFADAA catches on among the states, it will behoove estate planners and other advisers to structure estate plans and draft estate planning documents, as well as recommend user actions with respect to service contracts, that will be consistent with RUFADAA and will ensure the orderly transition of necessary access when a user dies or becomes incapacitated or missing.<\/p>\n\n\n\n Both of the Uniform Acts discussed here (UTDA and RUFADAA) were featured in the educational programs in the fall meeting of ACTEC in Monterey, California.<\/p>\n\n\n\n Section 303 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Public Law 111-312 (\u201cthe 2010 Tax Act\u201d), signed into law on December 17, 2010, authorized the portability of the federal estate tax and gift tax unified credit between spouses. Temporary regulations (T.D. 9593, 77 Fed. Reg. 36150 (June 18, 2012)) and identical proposed regulations (REG-141832-11, 77 Fed. Reg. 36229) were released on Friday, June 15, 2012, just barely 18 months after the enactment of the 2010 Tax Act. Section 7805(b) generally prohibits such regulations from being retroactive, with an exception, in section 7805(b)(2), for regulations issued within 18 months of the enactment of the statute to which they relate, so these temporary regulations just made it and were retroactive to January 1, 2011, when portability took effect.<\/p>\n\n\n\n Public comments on the proposed regulations were invited by September 17, 2012, and a public hearing, if requested, was scheduled for October 18, 2012, but no one asked for a hearing and the hearing was cancelled.\u00a0 ACTEC, which had supported the enactment of portability in\u00a0congressional testimony<\/a>\u00a0in April 2008, submitted comments on the enacted statute and the administration of portability in\u00a0October 2011<\/a>\u00a0and\u00a0November 2011<\/a>.<\/p>\n\n\n\n The final regulations, very similar to the temporary and proposed regulations, were released on June 12, 2015.\u00a0\u00a0T.D. 9725<\/a>, 80 Fed. Reg. 34279 (June 16, 2015).\u00a0 As discussed in\u00a0Capital Letter Number 37<\/a>, section 7805(e)(2) requires temporary regulations to expired after three years \u2013 on June 15, 2015, in this case \u2013 so again the final regulations just made it.<\/p>\n\n\n\n As a result of the perseverance of Treasury and the IRS in meeting these deadlines \u2013 it isn\u2019t always easy \u2013 a number of very favorable clarifications in the regulations are now confirmed to have been available without interruption since portability first took effect on January 1, 2011. These include confirmation that if an estate tax return is not otherwise needed for estate tax purposes (if, for example, the gross estate plus adjusted taxable gifts is less that the basic exclusion amount) but is filed solely to elect portability, a simplified method of reporting values on the return is permitted, and if such a portability-only return is not timely filed, \u201c9100 relief\u201d is available to permit a late portability election. The rules also provide, for all estates, ordering rules that permit a surviving spouse, by making gifts, to benefit from the unified credit of more than one predeceased spouse.<\/p>\n\n\n\n Comment<\/strong><\/p>\n\n\n\n It is clear that in the intended target case of a married couple with a home, modest tangible personal property, bank account, and perhaps an investment account \u2013 all possibly jointly owned \u2013 and life insurance and retirement benefits payable to the survivor, the requirements for electing portability have been made relatively manageable, especially considering that the surviving spouse is likely to be the \u201cnon-appointed executor\u201d in possession of all the property and therefore the right person to make the portability election. What may be a surprise to the original advocates of portability, including the lawmakers who voted for it, is the degree of \u201cportability planning\u201d in much larger estates.<\/p>\n\n\n\n As also discussed in Capital Letter Number 37, the regulations do not address the availability of a QTIP election on a portability-only return in light of Rev. Proc. 2001-38,\u00a02001-24 I.R.B.<\/a>\u00a01335, in which the IRS announced that it \u201cwill disregard [a QTIP] election and treat it as null and void\u201d if \u201cthe election was not necessary to reduce the estate tax liability to zero, based on values as finally determined for federal estate tax purposes.\u201d\u00a0 That issue is the subject of a pending Treasury-IRS guidance project to produce a clarifying revenue procedure (Item 4 of the 2015-2016 Priority Guidance Plan).\u00a0 It is understandable that there is concern about the validity of a QTIP election in a context in which the IRS has used the phrase \u201cnull and void.\u201d\u00a0 But the forthcoming guidance will almost certainly be favorable, although it may use the occasion to address general concerns, not unique to the portability scenario, that Rev. Proc. 2001-38 may seem to encourage an inappropriate use of \u201chindsight\u201d to effectively postpone the real QTIP election to the due date of the estate tax return of the surviving spouse.<\/p>\n\n\n\n In a 5-4 decision in\u00a0Obergefell v. Hodges<\/em>, 576 U.S. 644, 135 S. Ct. 2584 (June 26, 2015), the United States Supreme Court held that the Fourteenth Amendment protects the right of two persons of the same sex to marry, and therefore no state could refuse to allow such a marriage or to recognize such a marriage performed elsewhere.\u00a0 This came exactly two years after the Court\u2019s 5-4 decision in\u00a0United States v. Windsor<\/a><\/em>, 570 U.S. 12, 133 S. Ct. 2675 (2013), that federal law may not refuse to recognize such a marriage validly performed or recognized under the law of any state.<\/p>\n\n\n\n Comment<\/strong><\/p>\n\n\n\n The social implications of Obergefell<\/em> are greater than this short discussion and even its Number Four placement would indicate, and there are complex open issues related to the intersection of the Obergefell<\/em> result with other liberties, such as religious liberty, and also testamentary freedom. The two principal implications for estate planning are a short-term acceleration of the transitional issues, including retroactivity, that emerge whenever there is a change like this from one definition to another, and a long-term increase in uniformity and thus in simplification.<\/p>\n\n\n\n Sections 1014(f) and 6035<\/strong><\/p>\n\n\n\n On July 31, 2015, the day that funding for the Highway Trust Fund was scheduled to expire, President Obama signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act (Public Law 114-41), extending that infrastructure funding for three months, with the $8 billion cost funded by various tax compliance measures. One of those compliance measures is section 2004 of the Act, labelled \u201cConsistent Basis Reporting Between Estate and Person Acquiring Property from Decedent,\u201d which added new sections 1014(f) and 6035 to the Code.<\/p>\n\n\n\n This legislation resembles legislative proposals in the Treasury Department\u2019s annual \u201cGeneral Explanations\u201d of revenue proposals associated with the Obama Administration\u2019s budget proposals (\u201cGreenbooks\u201d), including a proposal on pages 195-96 of the 2015\u00a0Greenbook.\u00a0 Unlike the Greenbook proposals, however, what Congress enacted applies only to property acquired from a decedent, not to gifts, and, under section 1014(f)(2), applies \u201conly \u2026 to any property whose inclusion in the decedent\u2019s estate increased the liability for the tax imposed by chapter 11 (reduced by credits allowable against such tax) on such estate.\u201d\u00a0 In other words, the new consistency rule apparently does not apply in general to property specifically bequeathed to a surviving spouse or to charity, or to property that does not pass to the surviving spouse but is reported on an estate tax return filed only to elect portability.\u00a0 Thus, the consistency rule would not apply at all to the assets of an estate that is not subject to estate tax, but it would generally apply to every asset (not specifically bequeathed to the surviving spouse or charity) of an estate that is taxable because every such asset \u201cincrease[s] the liability for \u2026 tax\u201d even if by merely absorbing some of the available exclusion amount.\u00a0 (Oddly, there is no corresponding exception to the reporting requirement of section 6035.)<\/p>\n\n\n\n Notice 2015-36<\/strong><\/p>\n\n\n\n In addition, while the Greenbook proposals would have been effective for transfers \u2013 that is, for decedents dying \u2013 on or after the date of enactment, section 1014(f) as enacted is applicable to property with respect to which an estate tax return is filed after the date of enactment. This produces a significant acceleration of the application of the statute. A return filed after the date of enactment might have been due, and filed, on August 1, 2015, making the first statements under these rules due on August 31, 2015.<\/p>\n\n\n\n Apparently in recognition of that accelerated application,\u00a0Notice 2015-57<\/a>, 2015-36 I.R.B. 294, released on August 21, 2015, extended to February 29, 2016, the due date of any statements required by section 6035 that otherwise would be due before that date.\u00a0 The Notice cites section 6081(a), which allows extensions of time only for up to six months except in the case of taxpayers who are abroad.\u00a0 February 29, 2016, is the closest date the calendar allows to six months after August 31, 2015.\u00a0 So the Notice signals that this will be the only extension.<\/p>\n\n\n\n Notice 2015-57 also states that \u201c[t]he Treasury Department and the IRS expect to issue additional guidance to assist taxpayers with complying with sections 1014(f) and 6035.\u201d We should expect this guidance by February 29, 2016; it affects too many estates to be deferred beyond that date. Among the guidance that might be appropriate, certain regulations are explicitly contemplated and authorized or even directed by the statute. Section 1014(f)(4) states that \u201c[t]he Secretary may by regulations provide exceptions to the application of this subsection.\u201d And section 6035(b) states that \u201c[t]he Secretary shall prescribe such regulations as necessary to carry out this section, including regulations relating to (1) the application of this section to property with regard to which no estate tax return is required to be filed, and (2) situations in which the surviving joint tenant or other recipient may have better information than the executor regarding the basis or fair market value of the property.\u201d Guidance on other subjects will likely also be considered.<\/p>\n\n\n\n Form 8971<\/strong><\/p>\n\n\n\n A\u00a0draft<\/a>\u00a0Form 8971 for reporting the necessary information was released on December 18, 2015.\u00a0 It contains space for listing five beneficiaries and includes a Schedule A (to be given to each beneficiary, like a K-1) with space for listing six assets.\u00a0 Clearly the liberal use of continuation sheets is contemplated.<\/p>\n\n\n\n A preliminary\u00a0draft<\/a>\u00a0of Instructions has appeared on the Office of Management and Budget website. \u00a0Regarding the dilemma of how to even know 30 days after filing the estate tax return which beneficiaries will receive which property, the draft states:<\/p>\n\n\n\n All property acquired (or expected to be acquired) by a beneficiary must be listed on that beneficiary\u2019s Schedule A. If the executor has not determined which beneficiary is to receive an item of property as of the due date of the Form 8971 and Schedule(s) A, the executor must list all items of property that could be used, in whole or in part, to fund the beneficiary\u2019s distribution on that beneficiary\u2019s Schedule A. (This means that the same property may be reflected on more than one Schedule A.) A supplemental Form 8971 and corresponding Schedule(s) A should be filed once the distribution to each such beneficiary has been made.<\/p>\n\n\n\n The word \u201cinefficiency\u201d comes to mind. But this approach seems to be the best that could be done under the statute.<\/p>\n\n\n\n On Schedule A of the draft Form 8971, for each asset, the executor is to answer the question \u201cDid this asset increase estate tax liability?\u201d and is to provide the valuation date and the estate tax value. Schedule A adds the following:<\/p>\n\n\n\n Notice To Beneficiaries:<\/strong><\/p>\n\n\n\n You have received this schedule to inform you of the value of property you received from the estate of the decedent named above. Retain this schedule for tax reporting purposes. <\/strong>If the property increased the estate tax liability, Internal Revenue Code section 1014(f) applies, requiring the consistent reporting of basis information. For more information on determining basis, see IRC section 1014 and\/or consult a tax professional.<\/p>\n\n\n\n Similarly, while we wait for the more difficult substantive issues (like IRD, for example) to be addressed in IRS guidance, perhaps this month, this Notice To Beneficiaries is about the best that could be done to accommodate the blast of value information to all beneficiaries that the statute seems to require, and does its best not to unnecessarily alarm or mislead the beneficiaries. Good luck! The Forms 8971 and Schedule A are due February 29 with respect to all estate tax returns filed after July 31, 2015, and before January 31, 2016.<\/p>\n\n\n\n Comment<\/strong><\/p>\n\n\n\n It is much less likely that the contemplated guidance will or can address what many observers consider the fundamental flaw of the statute \u2013 it has the potential, especially when an estate tax return is audited, to pit family members and other beneficiaries against each other in an intolerable tension.\u00a0\u00a0Van Alen v. Commissioner<\/em>,\u00a0T.C. Memo 2013-235, discussed as Number Seven in the\u00a02013 Top Ten, describes how an estate tax audit \u201cwent back and forth\u201d and the low value of a ranch could have been a trade for higher values of three other properties.\u00a0 Indeed, the court said: \u201cThe bottom line was that the IRS got an increase in the total taxable value of the estate \u2026 and an increase in the estate tax.\u201d\u00a0 To bind heirs who do not participate in that audit seems quite unfair, and to give the heirs a role in the audit would be monstrously impractical.\u00a0 Yet, enchanted by the Siren Song of \u201cconsistency\u201d \u2013 not to mention the temptation of a conjectural revenue gain \u2013 Congress seems not to have thought this through.<\/p>\n\n\n\n The suggestion that Congress might not think some things through is a comparatively mild comment in today\u2019s political environment. Even as, from year to year, it seems that really significant federal tax developments suitable for a compilation like this are in decline, we can always count on the Washington political climate in general to be anything but dull. In addition, in 2015 and 2016, the impact of the presidential election campaign simply defies analysis.<\/p>\n\n\n\n But new leadership in the House of Representatives seems to have had at least a modest effect. The Consolidated Appropriations Act, 2016, enacted on December 18, 2015, and mentioned in the discussion of Number Seven, is an example. There seemed to be more \u201cregular order\u201d participation of lawmakers and committees than we have seen in recent years, and the spending appropriations remained on the basis of the regular fiscal year, rather than ad hoc \u201cfiscal cliffs.\u201d Perhaps as a result, the votes were more bipartisan than we are accustomed to. In the Senate, the final vote was 65-33, with 27 Republicans and 38 Democrats (including one Independent) in favor. The final vote in the House of Representatives was 316-113, with 150 Republicans and 166 Democrats in favor. The final House vote, however, included spending that some Republicans had resisted; a vote in the House the day before, focusing on the tax provisions, had been 318-109, with 241 Republicans and only 77 Democrats in support. The overall impression was one of some compromise, leaving almost everyone unenthusiastic about something. Not as robust a compromise as may have been expected a few decades ago, but providing some reason for optimism for the budget process in 2016 \u2013 possibly with a budget resolution early in the year and \u201creconciliation\u201d of the input of many committees later in the summer or early fall.<\/p>\n\n\n\n The 127 sections of the Protecting Americans from Tax Hikes Act of 2015, including the charitable and other tax-exempt provisions mentioned in the discussion of Number Seven, are not fundamental tax reform or even a reliable predictor of tax reform in the near future. But the provision-by-provision attention reflects a somewhat thoughtful and policy-based deliberation, albeit sprinkled with an ample portion of political trading. As examples, some of the expiring \u201cextender\u201d provisions were made permanent, including, in addition to the charitable provisions, both middle-class relief like the child tax credit (section 101 of the Act), American Opportunity Tax Credit (section 102), and earned income credit (section 103) and business provisions like the research and development tax credit (section 121) and the reduction from ten to five years of the period in which a newly converted S corporation\u2019s built-in gains are subject to a corporate-level tax (section 127). In addition, the Act makes permanent the option to claim an itemized deduction for state and local sales taxes rather than income taxes (section 106), which is especially important, of course, to residents of states with no income tax.<\/p>\n\n\n\n Comment<\/strong><\/p>\n\n\n\n Elements of the changes in House leadership with potential implications for tax policy include a Speaker, Congressman Paul Ryan (R-WI), who had briefly been the chair of the Ways and Means Committee, and a new chair of the Ways and Means Committee, Congressman Kevin Brady (R-TX), who has been outspoken about his opposition to the estate tax. It was Congressman Brady who had introduced the Death Tax Repeal Act of 2015 (H.R. 1105), which the House of Representatives approved by a largely party-line vote on April 16, 2015, permanently repealing the estate and GST taxes, retaining the gift tax with a 35 percent rate and an exemption of $5 million indexed for inflation, and retaining a date-of-death-value basis for transfers at death (despite the absence of an estate tax). Certainly his assumption of the chair of the committee somewhat<\/em> increases the chances of estate tax repeal, but it would be wrong to jump to conclusions about that. Estate tax repeal remains a politically complex issue, and it is not at all clear that the present or future House leadership would be willing to spend its political capital on this objective rather than others, whether in packaging a repeal to avoid a presidential veto or in positioning it to get 60 votes for a Senate cloture motion.<\/p>\n\n\n\n The Davidson<\/em> Cases<\/strong><\/p>\n\n\n\n In\u00a0Estate of William M. Davidson v. Commissioner<\/em>, Tax Court Docket No. 13748-13 (stipulated decision\u00a0entered July 6, 2015), and\u00a0Karen M. Davidson v. Commissioner<\/em>, Tax Court Docket No. 17166-13 (stipulated decision\u00a0entered July 2, 2015) the decedent William Davidson had engaged in estate planning transactions, including gifts, substitutions, a five-year GRAT, sales for five-year balloon notes at the applicable federal rate, and sales for five-year balloon self-canceling installment notes (SCINs).\u00a0 The decedent at that time was 86, and his actuarial life expectancy was about five years. He lived for 50 days after making the last transfer and received no payments on the sales.\u00a0 Addressing the sales both in\u00a0Chief Counsel Advice 201330033<\/a>\u00a0(Feb. 24, 2012) and in its answer in the Tax Court, the IRS believed the notes should be valued, not under section 7520, but under a willing-buyer-willing-seller standard that took account of the decedent\u2019s health. The IRS assessed combined gift and estate tax deficiencies and penalties of about $2.6 billion.\u00a0 As reflected in the stipulated decisions entered in early July, the case was settled for almost $400 million, plus interest.<\/p>\n\n\n\n The Woelbing <\/em>Cases<\/strong><\/p>\n\n\n\n In Estate of Donald Woelbing v. Commissioner<\/em>, Tax Court Docket No. 30261-13 (filed Dec. 26, 2013), and Estate of Marion Woelbing v. Commissioner<\/em>, Tax Court Docket No. 30260-13 (filed Dec. 26, 2013), the decedent had sold nonvoting stock for a promissory note with a principal amount of $59 million (the appraised value of the stock) and interest at the applicable federal rate (AFR). The purchaser was a trust that owned insurance policies under a split-dollar arrangement with the company. Two of the decedent\u2019s sons, who were beneficiaries of the trust, gave their personal guarantees, apparently for 10 percent of the purchase price. The sale agreement provided for the number of shares sold to be adjusted if the IRS or a court revalued the stock. In its notice of deficiency, the IRS basically ignored the note, essentially treating it as equity rather than debt, and doubled the value of the stock to about $117 million. The IRS ignored the note for estate tax purposes too, but included the value of the stock, which it asserted to then be about $162 million, in the decedent\u2019s gross estate under sections 2036 and 2038. Finally, the IRS asserted gift and estate tax negligence and substantial underpayment penalties. After a rumored settlement apparently fell through, the Tax Court rescheduled the trial for February 29, 2016. That trial date has been cancelled and now the parties are ordered to file status reports this month. If the case does not settle, the Tax Court might be obliged to address the effectiveness of the value adjustment clause, the substance of the notes, the appropriate interest rate and value for the notes, and the possible reliance on life insurance policies and\/or guarantees to provide \u201cequity\u201d in the trust to support the purchase.<\/p>\n\n\n\n Legislative Proposals<\/strong><\/p>\n\n\n\n Meanwhile, the \u201cGeneral Explanations of the Administration\u2019s Fiscal Year 2016 Revenue Proposals\u201d (Feb. 2, 2015) (\u201cGreenbook\u201d), at pages 197-99, include a legislative proposal to tighten the tax treatment of all sales to grantor trusts, as did the 2012, 2013, and 2014 Greenbooks.\u00a0 The current proposal would subject to gift or estate tax the portion of any grantor trust that is attributable to property received from a person in \u201ca sale, exchange, or comparable transaction that is disregarded for income tax purposes by reason of the person\u2019s treatment as a deemed owner of the trust.\u201d<\/p>\n\n\n\n Administrative Guidance<\/strong><\/p>\n\n\n\n Finally, the Treasury-IRS Priority Guidance Plan<\/a> for the 12 months beginning July 1, 2015 (released on July 31, 2015), contains 277 projects (down from 317 in 2014), including 12 projects under the heading of \u201cGifts and Estates and Trusts\u201d (up from 10 in 2014). Four of those 12 projects (an ambitious number) are new in 2015. Item 1 (page 13) is \u201cGuidance on qualified contingencies of charitable remainder annuity trusts under \u00a7664.\u201d Item 3 (page 13) is \u201cGuidance on basis of grantor trust assets at death under \u00a71014.\u201d Item 5 (page 13) is \u201cGuidance on the valuation of promissory notes for transfer tax purposes under \u00a7\u00a72031, 2033, 2512, and 7872.\u201d And Item 8 (page 14) is \u201cGuidance on the gift tax effect of defined value formula clauses under \u00a7\u00a72512 and 2511.\u201d The objective of Item 1, regarding charitable remainder trusts, is not clear. Items 5 and 8, regarding promissory notes and defined value clauses, sound almost tailored to the facts of Davidson<\/em> and Woelbing<\/em>.<\/p>\n\n\n\n Comment<\/strong><\/p>\n\n\n\n Item 3, regarding basis, has received a lot of attention as a vehicle by which Treasury and the IRS might address the question whether appreciated assets in a \u201cdefective\u201d grantor trust, not included in the grantor\u2019s gross estate, nevertheless receive a stepped-up basis when the grantor dies, because, after all, basis is an income tax concept and for income tax purposes the grantor trust is ignored and the \u201ctransfer\u201d from the grantor is therefore not really complete until grantor trust status ends at the grantor\u2019s death. That possible significance of the guidance project is sometimes linked to the fact that in 2015 Rev. Proc. 2015-37<\/a>, 2015-26 I.R.B. 1196, added the issue of \u201c[w]hether the assets in a grantor trust receive a section 1014 basis adjustment at the death of the deemed owner of the trust for income tax purposes when those assets are not includible in the gross estate of that owner under chapter 11 of subtitle B of the Internal Revenue Code\u201d to the list of \u201careas under study in which rulings or determination letters will not be issued until the Service resolves the issue through publication of a revenue ruling, a revenue procedure, regulations, or otherwise.\u201d This no-rule position is preserved in section 5.01(12) of Rev. Proc. 2016-3<\/a>, 2016-1 I.R.B. 126.<\/p>\n\n\n\n That might be what this guidance project is about. On the other hand, the IRS has issued rulings lately regarding the basis adjustment to assets of trusts created by non-U.S. persons. See CCA 200937028<\/a> (issued Nov. 18, 2008, released Sept. 11, 2009), Letter Ruling 201245006<\/a>, and especially Letter Ruling 201544002<\/a> (issued June 30, 2015, released Oct. 30, 2015). In Letter Ruling 201544002, the IRS ruled that the assets in a revocable<\/em> trust created by foreign grantors for their U.S. citizen children would receive a basis equal to date-of-death value under section 1014(b)(2) at the grantors\u2019 deaths. The ruling acknowledged the no-rule policy of Rev. Proc. 2015-37 (which had been published in the Internal Revenue Bulletin the day before the ruling was issued), but avoided it on the ground that the ruling request had been submitted before the no-rule policy was announced. That coincidence of timing might suggest that the focus on basis in grantor trusts that emerged in 2015 is simply a clarification of the rules for foreign trusts.<\/p>\n\n\n\n The point remains that domestic grantor trusts, including transactions with promissory notes and even defined value clauses, have received a lot of attention from the IRS in recent years, highlighted by the addition in 2015 of multiple guidance projects in the Priority Guidance Plan. On top of that, regulations under section 2704(b)(4) affecting valuation discounts for interests in closely held corporations, partnerships, and similar entities have been the subject of an unprecedented amount of attention and speculation in 2015, even though section 2704(b)(4) has been in the Code since 1990 and this regulations project has been in the Priority Guidance Plan since 2003.<\/p>\n\n\n\n No one in private practice has seen all<\/em> the variations of estate planning techniques using grantor trusts, promissory notes, and valuation formulas. But the IRS has seen many of them. And this surge of IRS interest and activity probably means the IRS sees a lot of variations it does not like.<\/p>\n\n\n\n Just in time for the audit of 2012 gift tax returns \u2013 remember the gifts made when it was thought the gift tax exemption would drop from $5.12 million to $1 million \u2013 to be in full swing.<\/p>\n\n\n\n Ronald D. Aucutt<\/p>\n\n\n\n \u00a9 2016 by Ronald D. Aucutt. All rights reserved<\/p>\n","protected":false},"excerpt":{"rendered":" “Top Ten\u201d developments of 2015, together with observations about those developments from a variety of perspectives, with generous weight admittedly given to the perspective of federal tax law.\u00a0<\/p>\n","protected":false},"featured_media":0,"template":"","meta":{"_acf_changed":false,"_tec_requires_first_save":true,"_EventAllDay":false,"_EventTimezone":"","_EventStartDate":"","_EventEndDate":"","_EventStartDateUTC":"","_EventEndDateUTC":"","_EventShowMap":false,"_EventShowMapLink":false,"_EventURL":"","_EventCost":"","_EventCostDescription":"","_EventCurrencySymbol":"","_EventCurrencyCode":"","_EventCurrencyPosition":"","_EventDateTimeSeparator":"","_EventTimeRangeSeparator":"","_EventOrganizerID":[],"_EventVenueID":[],"_OrganizerEmail":"","_OrganizerPhone":"","_OrganizerWebsite":"","_VenueAddress":"","_VenueCity":"","_VenueCountry":"","_VenueProvince":"","_VenueState":"","_VenueZip":"","_VenuePhone":"","_VenueURL":"","_VenueStateProvince":"","_VenueLat":"","_VenueLng":"","_VenueShowMap":false,"_VenueShowMapLink":false,"_tribe_blocks_recurrence_rules":"","_tribe_blocks_recurrence_description":"","_tribe_blocks_recurrence_exclusions":"","footnotes":""},"categories":[1],"class_list":["post-1604","capital-letter","type-capital-letter","status-publish","hentry","category-uncategorized"],"acf":[],"yoast_head":"\nNUMBER TEN:\u00a0REDSTONE<\/em>\u00a0CASES: THE MEDIA INDUSTRY AND FAMILY DISCORD DRAMA<\/strong><\/h2>\n\n\n\n
NUMBER NINE: DEVELOPMENTS WITH CRUMMEY POWERS<\/strong><\/h2>\n\n\n\n
NUMBER EIGHT: CONTINUED EROSION OF THE POWER OF STATES TO TAX TRUST INCOME<\/strong><\/h2>\n\n\n\n
NUMBER SEVEN: MORE FLEXIBILITY IN THE SUPPORT AND ADMINISTRATION OF CHARITIES<\/strong><\/h2>\n\n\n\n
NUMBER SIX: SIGNIFICANT NEW UNIFORM ACTS<\/strong><\/h2>\n\n\n\n
NUMBER FIVE: FINAL PORTABILITY REGULATIONS<\/strong><\/h2>\n\n\n\n
NUMBER FOUR: SAME-SEX MARRIAGE RECOGNIZED AS A CONSTITUTIONALLY PROTECTED RIGHT<\/strong><\/h2>\n\n\n\n
NUMBER THREE: CONSISTENCY-OF-BASIS LEGISLATION<\/strong><\/h2>\n\n\n\n
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NUMBER TWO: THE POLITICAL CLIMATE IN WASHINGTON<\/strong><\/h2>\n\n\n\n
NUMBER ONE: THE ADMINISTRATION\u2019S PRESENT AND FUTURE ASSAULTS ON ESTATE PLANNING TECHNIQUES<\/strong><\/h2>\n\n\n\n