Wednesday, January 18, 2017

IRS Formalizes Transcripts as Substitute for Estate Tax Closing Letters

In 2005, I discussed here how the IRS had posted information on its website that an account transcript notation bearing transaction code “421” could be used to determine that the IRS had concluded its review of a filed estate tax return and has accepted the return as filed (or after an adjustment by the IRS to which the estate agreed to), in lieu of obtaining a closing letter. The IRS indicated that closing letters would no longer be automatically issued, but could be requested 4 months or later after the return was filed.

The IRS has now formalized this information into a Notice. The Notice is helpful, and presumably was promulgated, to educate probate courts that have relied on closing letters in the probate process that they can now rely on an IRS estate tax transcript if it bears the ‘421’ transaction code.

The Revenue Procedure indicates that the estate tax closing letters can still be requested. It also notes that an account transcript can be obtained by estates and their authorized representatives by filing Form 4506-Request for Transcript of Tax Return with the IRS via mail or fax.

It would seem that the transcript request process can be more cumbersome than a request for a closing letter, since if the closing code is not shown on the transcript then the request process will need to be repeated until the IRS concludes its review and enters the closing code on its computer system.

The Revenue Procedure points out that after such a closing of review, the IRS can still reopen the review if there is (1) evidence of fraud, malfeasance, collusion, concealment, or misrepresentation of a material fact, (2) a clearly-defined, substantial error based upon an established IRS position, or (3) another circumstance indicating that a failure to reopen the case would be a serious administrative omission. Further, if portability of a decedent’s DSUE (deceased spousal unused exclusion) amount is elected on the estate tax return, the IRS may later review the return as to whether a proper DSUE amount was reported.

Notice 2017-12

Monday, January 16, 2017

Grant to Public Charity Qualifies as “Unusual Grant” for Public Support Test

Publicly supported charities provide favorable benefits under the Code for both the organization and donors, in contrast with non-publicly supported private foundations. To qualify, the organization must receive a substantial part of its support from either governmental bodies or from direct or indirect contributions from the public. The regulations provide tests for public support (the 1/3-of-support test and the 10% facts and circumstances test (Treas. Regs. §1.170A-9(f)). Under these tests, large grants from any individual (namely, grants exceeding 2% of the organization’s total support), can make it difficult to pass these tests. However, if a greater than 2% grant qualifies as an “unusual grant” under Treas. Regs. §1.170a-9(f)(6)(i), they are disregarded under the tests.

A recent private letter ruling determined that a large grant at the time a new organization had begun operations qualified as an unusual grant. The contributor was a foundation that was informed about the organization through a mutual acquaintance, and had no prior affiliation with the organization. The following facts and circumstances are the types of things the IRS likes to see in testing for an unusual grant, and were present here:

The contributor did not create the recipient organization;

The contributor has not previously contributed to the recipient organization;

The contributor does not stand in a position of authority with respect to the recipient organization;

The contributor does not directly or indirectly exercise control over the recipient organization;

The contributor was not in a relationship described in Code Sec. 4946(a)(1)(C) through Code Sec. 4946(a)(1)(G) with someone listed in the above items;

The contribution was in the form of cash, or equivalent, which furthers the recipient organization’s exempt purposes;

The recipient organization is a new organization and has been actively engaged in seeking sources of public support and funding in order to implement the recipient organization’s charitable programs;

The recipient organization reasonably expects to attract a significant amount of public support after the grant;

The recipient organization has a representative governing body as described in Reg. § 1.509(a)-3(d)(3)(i); and

The contributor imposed no material restrictions or conditions within the meaning of Reg. § 1.507-2(a)(7).

PLR 201701023

Monday, January 09, 2017

Treasury Department Unofficial Statements on Proposed Section 2704 Regulations

There is a lot of uncertainty whether the Section 2704 proposed regulations will ever be finalized, either due to policy to be set by President-elect Trump, and/or Congressional efforts to block those regulations. Nonetheless, practitioners still need to keep an eye on this project in the event they are finalized.

Kathy Veihmeyer Hughes of the Treasury Department’s Office of Tax Policy, provided some information on the project and what was intended by the proposed regulations in speaking to the Heckerling Institute on Estate Planning today in Orlando, Florida. Some key points (some of which have been previously put out there at other conferences) include:

a. Treasury is working on digesting the comments received at the December hearing on the regulations, and will be revising the regulations. There will not be an attempt to revise them and finalize them before President-elect Trump’s election, as some have feared.

b. The regulations are not intended to do away with minority interest discounts.

c. The regulations do not require valuations always be made in conformity with a deemed put right.

d. The three year rule as to including transfers occurring within 3 years of death in estate tax valuation adjustments will NOT be retroactive to transfers made before the effective date of the final regulations.

e. The regulations will not have an effective date prior to the date of issuance of the final regulations, and for some, prior to 30 days after issuance of the final regulations.