HOLIDAY GIFT FROM THE IRS - NO CLAWBACK WORRIES

Similar to concerns in 2012 when there were concerns about a reduction in the unified credit, the 2026 sunset of the $5 million increase in the unified credit basic exclusion amount for gift and estate taxes under the 2017 Tax Cuts and Jobs Act (TCJA) has created concerns about what happens to taxpayers who use all or part of the $5 million increase in the period after the 2026 sunset. In a holiday gift to taxpayers, the Treasury Department has issued a notice of proposed rulemaking that should ameliorate most, if not all, concerns of clawback and related adverse impacts on gift and estate tax computations and amounts.

The Treasury Department announcement indicates four areas of concern. It then notes that three of these areas are nonissues under current law requiring no regulatory attention, and then provides proposed modifications to the regulations to address the fourth area.

First Area - If Pre-2018 Gift Tax Was Paid, Will Those Gifts Absorb Some or All of the 2018-2025 Available Increase in the Basic Exclusion Amount So As To Reduce the Amount of Credit Available for Offsetting Gift Taxes on Gifts Between 2018 and 2025 (i.e., applying the increase to prior gifts on which gift tax was paid)? The Treasury Department’s analysis is that this does not occur under current law, and no regulatory fix is thus needed to avoid such a reduction. Readers interested in the technical reasons why this is the case should review the notice - this posting will be long enough without covering those details (this also applies to the other 3 areas of concern below).

Second Area - The Same as Area One, But as to Estate Taxes on Persons Dying Between 2018 and 2025? The same conclusion here - pre-2018 gift taxes do not act to reduce the Basic Exclusion Amount increase available for estate tax purposes between 2018 and 2015, without the need for a regulatory fix.

Third Area - Will Gift Tax on Gifts Made After 2025 Be Increased By Including in the Tax Computation a Tax on Gifts Made Between 2018 and 2025 that Were Sheltered When Made by the Increase in the Basic Exclusion Amount? The Treasury Department’s analysis is that this does not occur under current law, and no regulatory fix is thus needed to avoid such a threated result.

Fourth Area -  Will Gifts Made Between 2018 and 2025 that are Sheltered by the Increased Basic Exclusion Amount Be Subject to Estate Tax for Decedents Dying in 2026 and After When the Increase Disappears? Treasury determined that this increase in estate tax will occur under current law. Deeming this to be inappropriate, new proposed regulations will amend Treas. Regs. §20.2010-1 to avoid this result. More particularly, the revisions will allow for a basic exclusion amount at death available to be applied against the hypothetical gift tax portion of the estate tax computation equal to the higher of (a) the otherwise applicable basic exclusion amount, and (b) the basic exclusion amount applied against prior gifts.

These new provisions should remove a cloud hovering over taxpayers that desire to use the increased exemption before it disappears in 2026. So the general planning advice to use those increases before 2026 before they are lost (if otherwise practical in a given taxpayer’s situation) remains in effect. At first reading, it would appear that if there is a political change in Washington D.C. that reduces the exemption before 2026, the new regulations would also cover that situation. Of course, if such a change was made, Congress could also write the change in a manner that revises the methods of computation so as to void the foregoing conclusions and changes or to create other problems.

Regarding questions whether Treasury has the authority to make these changes, the announcement points to Code §2001(g)(2) which was added in the TCJA and authorizes regulations in this area.

Of course, these regulations are only proposed, so cautious taxpayers may want to wait until they are actually adopted before relying on them.

It would have been nice if the announcement had also addressed the GST exemption and its temporary increase and 2026 rollback to confirm no adverse consequences from the rollback after it occurs.

REG-106706-18, Notice of Proposed Rulemaking

LL.M. Degree Not Deductible

A taxpayer went to law school in Spain and practiced law there for several years as an international attorney. He then moved to New York City and enrolled in an LL.M. program at NYU. He paid tuition expenses of $27,435. After obtaining his degree, he obtained a visiting attorney position in the U.S. at an international law firm, doing similar work to what he did in Spain. He then  took and passed the New York State bar exam - he was eligible because of his LL.M. degree. He passed and was admitted to practice in New York and continued working at the law firm.

The issue is whether he could deduct his tuition expenses. Code §162(a) allows a deduction for education expenses if (1) made by a taxpayer to maintain or improve skills required in the taxpayer's business or employment, or (2) to meet the express requirements of the taxpayer's employer, or the requirements of law or regulations, imposed as a condition to retaining his or her salary, status or employment. See also Treas. Regs. §1.162-5. However, no deductions are allowed if the education is part of a program of study that will lead to qualifying the individual in a new trade or business, or are needed to meet the minimum education requirements for qualification in the taxpayer’s employment. Treas. Regs.§ 1.162-5(b)(3)(i).

The Tax Court ruled that the deductions were nondeductible. While the taxpayer did perform similar job functions before and after the LL.M., and the LL.M. related to those functions, that the LL.M. allowed him to seek admission to the New York Bar sunk his boat by leading to qualifying him in a new trade or business. Also relevant was that he did not need the degree for his visiting attorney job.

Note that under the 2017 Tax Act, unreimbursed education expenses of employees are miscellaneous itemized deductions that are presently suspended through 2025.

Enrique Fernando Dancausa Valle, TC Summary Opinion 2018-51

Filing a Claim against Estate Grants IRS More Than 10 Years to Collect

Code §6502(a)(1) provides a 10 year collection period to the IRS, measured from the assessment date. The particular language reads: “Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun. . . (1) within 10 years after the assessment of the tax. . .”

In U.S. v. Estate of Albert Chicorel, 122 AFTR 2d 2018-XXXX (CA6 2018), the IRS sought to collect on an income tax assessment more than 10 years old. The Estate sought to bar the collection under the above language. The IRS countered that since it had timely filed a claim in the probate proceedings against the Estate, then it had begun a “proceeding” within the above statute within 10 years and thus could complete the collection process outside the 10 year period. The Sixth Circuit Court of Appeals sided with the IRS.

The court found a claim filing constituted a proceeding because filing a proof of claim in Michigan has significant legal consequences for the creditor, the estate, and for Michigan law generally. For example, if the estate does not provide notice that a claim is not allowed, it is automatically allowed. Further, Michigan law specifically equates presentation of the claim with a proceeding. The court noted that the Code §6502(a)(1) extension does not require a “judgment” to be reached in the applicable proceeding.

Once the timely proceeding is undertaken, the collection period does not expire until the liability for the tax (or a judgment against the taxpayer arising from such liability) is satisfied or becomes unenforceable. Code §6502(a) [flush language]. However, the government doesn’t have forever - the court notes that “the statute does not permit the government to allow an assessment to lie dormant and then to attempt collection long after the assessment has passed from reasonable memory.”

Would this case apply in Florida? I could not locate similar language in the Florida Probate Code that equates presentation of a claim with a proceeding. However, the effect of filing a claim and the procedures for the estate to object or be bound by the claim are substantially similar to the Michigan effect, so I would speculate that is enough for the same principles to apply in Florida.

Note the claim here was timely filed in the estate proceeding. The flush language in Code §6502(a) describes a “timely proceeding in court for the collection of a tax...” The appellate court expressly declined to rule on what would happen if the claim had been untimely. I would speculate that a different result may arise, per the statutory use of the word “timely.”

An unrelated issue is whether the personal representative/executor of the estate has personal liability for the unpaid income tax. Code §6905(a) provides a procedure for an executor to make application for a discharge of personal liability (which does not impact estate liability).

Another unrelated issue is whether the IRS is barred by state law limitations periods if they do not timely file a claim against the estate. The answer to this is no.  Board of Comm'rs of Jackson County v. United States, 308 US 343 (1939) ; United States v. Summerlin, 310 US 414 (1940) .

U.S. v. Estate of Albert Chicorel, 122 AFTR 2d 2018-XXXX (CA6 2018)