Friday, July 20, 2012


I have written on the unified credit clawback issue previously, both here and here. I have had some email discussions with Professor Pennell, and wanted to share with you some of the salient points since they will be of interest to those who are involved with this issue.

If you read my larger analysis here, you will note that the key issue in this area is whether the computations for estate tax purposes that involve prior gifts require the use of the unified credit amount as it existed in the year of the applicable gift or the year of death. While it is my belief that there ultimately will be no clawback asserted, and the unified credit amount will be used in the above computation based on the date of death credit to effect that, I cannot completely eliminate the possibility of clawback being applied under the existing statute and regulations.

One aspect that some use to support the possibility of clawback are the current Form 706 instructions which if applied in their current form could allow for it. Professor Pennell is vehemently against giving any consideration to the current instructions. He wrote to me:

The instructions . . . do not and could not say anything about the problem at hand . . . because we have never been in an environment in which the exclusion amount has declined. . . . And . . . an instruction to a form is not in any sense the law.

His points are valid and should be considered in handicapping the likelihood of clawback being applied by Treasury in the future.

He also places a lot of emphasis on the Code and regulation provisions that require the use of tax rates as they exist in the year of death to support year of death applicable credit amounts as well.

…the unified credit is defined in the Code by two factors, the exclusion amount and the tax rate. And the regulations DO address those two factors . . .  by telling us which tax rate and which exclusion amount to use.

There is merit to this, too, since the tax rates do inform the unified credit computation, but as of now at least, the provisions are still too ambiguous to me to unequivocally resolve the issue.

My thanks to Prof. Pennell for taking the time to discuss these issues with me, and to allow me to share the above excerpts with our readers.

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