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Sunday, September 20, 2020

Applicable Federal Rates - October 2020

For the applicable federal rates for the above month, preceding months, and a data table that visually shows trends, click here

Sunday, August 30, 2020

Assignment of Homestead Insurance Proceeds Allowed


In a recent case, an owner of homestead property assigned post-loss insurance benefits to a third-party contractor. The  insurance company challenged the assignment, asserting it was not allowed by Article X, section 4(c) of the Florida Constitution - apparently not an authorized alienation of a homestead interest by mortgage, sale or gift. Reversing the trial court on a motion for summary judgment, the Fifth District Court of Appeal held that the Florida Constitution does not bar such an assignment.


Article X, section 4(c) provides in relevant part that "[t]he owner of homestead real estate, joined by the spouse if married, may alienate the homestead by mortgage, sale or gift." The appellate court appears to base its holding on an assignment of post-loss insurance benefits not constituting an "alienation" of the homestead - as such, section (4)(c) does not apply and there is no prohibition. Under Black's Law Dictionary, alienation is defined as the conveyance or transfer of property to another. Since the assignment here was not a transfer of real property, then there was not a transfer of title to real property  - thus, there is no alienation subject to section 4(c).


This seems off the mark to me. Insurance benefits relating to damage to a homestead are recognized as protected homestead property. Orange Brevard Plumbing & Heating Co. v. La Croix, 137 So. 2d 201 (Fla. 1962); Quiroga v. Citizens Prop. Ins. Corp., 34 So. 3d 101 (3rd DCA. 2010). Black's says that an alienation is the transfer of property. Clearly, the insurance proceeds are property. Are they being transferred? That would appear to be the case, as there was an assignment of the proceeds. Thus, there is an alienation of homestead property and the limitations of section 4(c) should apply.


While not focused on in the opinion, section 4(c) of Article X does use the terminology "homestead real estate" (emphasis added), and not just the single work "homestead" as used elsewhere in section 4. Perhaps this is the basis of the court's reading that section (4)(c) only applies to a transfer of title to real property, notwithstanding case law that treats insurance proceeds from the damage of homestead real property as being homestead property. However, note that section 4(c) also uses the shorthand phrase "homestead" without "real estate" four times, including in the sentence addressing alienation by mortgage, sale or gift - so it is uncertain if the alienation provision relates only to real estate. Even if the intent was to describe real estate alienations in that provision, the equating of damage insurance proceeds to the homestead property itself (which is of course real estate) would mean that the alienation restriction should likewise apply to the insurance proceeds. Thus, we have here both an alienation (i.e., transfer of property) and the transfer being of constitutionally protected property.


Note that the appellate court did not believe Article X, section 4(a) of the Florida Constitution to be involved. That provision prohibits a lien from being imposed against homestead property except in the circumstances listed therein (as well as protecting from forced sale). The court did not interpret the assignment as creating a lien. Note that section 4(a) and section 4(c) do interrelate - while section 4(a) prohibits a lien, section 4(c) authorizes a mortgage. Thus, section 4(c) operates in part as an exception to section 4(a), at least if one reads a mortgage as imposing a lien. Section 4(a) also does not allow its prohibitions to be waived through an unsecured agreement.  While at first glance one might believe the cases of Chames v. DeMayo, 972 So. 2d 850 (Fla. 2007) and  Quiroga to have direct relevance to this case, the appellate court noted that those cases relate to liens under section (4)(a).


The appellate court appears to have some doubt on the issue, since it certified the following question to the Florida Supreme Court as one of great public importance:


Does Article X, section 4(c) of the Florida Constitution allow the owner of homestead real property, joined by the spouse, if married, to assign post-loss insurance benefits to a third-party contractor contracted to make repairs to the homestead property?


Sunday, August 09, 2020



The income tax treatment of annuities is provided for under Code § 72. That section provides various rules, including extra income tax for some distributions to younger taxpayers and limits on deferral for entity  owners. The provisions can be difficult to interpret when the owner of the annuity is a grantor trust, and the annuitant and current beneficiary of the trust is not the grantor. A recent private letter ruling gives the IRS’ take on some of these issues. The following conclusions are based on the above scenario – a grantor trust is the owner of the annuity, and there is a current beneficiary that is not the grantor and whose life is the measuring life for the annuity.

  1. Code § 72(q) 10% additional tax on early distributions. This provision imposes a 10% addition to tax if a distribution from the annuity is made on or after the taxpayer attains age 59 ½ , but with exceptions for a disabled taxpayer, or if the distribution is part of a series of substantially equal periodic payments made for the life of the taxpayer or the taxpayer and his or her designated beneficiary. The PLR provides that the grantor, since the grantor is treated as owner of the trust under the grantor trust rules, is the “taxpayer” for purposes of the foregoing age, disability, and equal periodic payment exceptions to the 10% addition to tax rules under Code § 72(q).
  2. Code § 72(q)(2)(B) exception to 10% additional tax for death. This provision provides an exception to the 10% additional tax if the distribution is made on or after the death of the “holder” or, when the “holder” is not an individual, the death of the primary annuitant. The PLR provides that the “holder” is the grantor trust. Since it is not an individual, this exception applies to distributions after the death of the primary annuitant. That primary annuitant is the individual beneficiary (not the grantor), so distributions after the death of that beneficiary are not subject to the 10% addition to tax.
  3. Code § 72(u)(1) nondeferral to trust owners. This provision denies tax deferral for an annuity contract that is not owned by a natural person, although it does allow for a trust or other entity to hold the annuity as an agent for a natural person without running afoul of the loss of deferral. The PLR concludes that this provision does not apply where the grantor is a natural person. The reasoning is somewhat strained, but taxpayer friendly. It reads the exception to the rule to apply to a trust for a natural person (without regard to the “as an agent” language since that language only applies to entities other than a trust). Since the grantor is treated as owning the trust assets, it is treated as the owner of the contract. The grantor trust is holding the contract (as holder) for the grantor, who is a natural person. Thus, income tax deferral is allowed. The PLR notes that Code § 72(u) was adopted to encourage employers to offer benefits to employees under qualified plans (by stripping corporate nonqualified annuity plans of income tax deferral). So for private trust arrangements not in the employment context, there is no policy reason to deny deferral.

PLR 202031008, July 31, 2020

Sunday, July 19, 2020

Applicable Federal Rates - August 2020

For the applicable federal rates for the above month, preceding months, and a data table that visually shows trends, click here.

Sunday, July 05, 2020


The FBAR rules require the filing of a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR) to report for accounts of U.S. persons aggregating $10,000 or more. For a non-willful failure to disclose, the maximum penalty imposed is $10,000.

Since one FBAR is used to report multiple accounts, a basic question is whether the non-willful failure to report several accounts gives rise to only one $10,000 penalty (based on one return), or $10,000 multiplied by the number of unreported accounts. This can make a big difference for taxpayers with multiple unreported accounts. This was especially important to the taxpayer in a recent case, where the number of unreported accounts ranged from 41 to 51 for 4 different tax years. If the penalty is calculated on a per return basis, then the penalty for the taxpayer is $40,000. On a per account basis, the penalty is $1,770,000. Luckily for the taxpayer, the District Court held that the penalty is imposed only per return, not per account.

In U.S. v. Boyd, 123 AFTR 2d 2019-1651 (C.D. Cal. 4/23/19), a different District Court previously held that the penalty is imposed on a per account basis. Here, the court rejected Boyd as precedent, largely because no rationale was stated for the court's conclusion, and thus the current court could not determine why its contrary analysis was incorrect. Instead, the court here noted that while the statutory language for the willful failure to file penalty specifically relates to accounts, the non-willful failure penalty language does not. Reasoning that if Congress wanted to impose the non-willful failure penalty based on the number of accounts, it showed it knew how to do so by doing so in the willful failure statutory language. Thus, by not using that language for non-willful failures, Congress did not intend to compute the penalty for non-willful failures based on the number of accounts.

Both Boyd and this case are only District Court cases, which limits their precedential authority. That, along with such courts being in different Circuit Courts of Appeal, means there is substantial uncertainty on how this issue will eventually play out and that there will likely be more cases to come.

U.S. v. Bittner, 126 AFTR 2d 2020-XXXX (DC TAX 6/29/20)

Tuesday, June 30, 2020

Applicable Federal Rates - July 2020

For the applicable federal rates for the above month, preceding months, and a data table that visually shows trends, click here.

Saturday, June 20, 2020

Formula Clauses Bolstered by Case That Rules Against the Taxpayer

Formula clauses are used when property with uncertain value is transferred by gift or sale. The objective is to set the amount that is transferred for gift tax purposes, even if the IRS later is successful in asserting that what was transferred was worth more than what was reported. This can avoid gift tax by keeping the value below available exemption amounts.

The use of formula clauses received a boost in Wandry v. Commissioner, T.C. Memo. 2012-88. There, the Tax Court held that a clause which defined the amount being transferred as a portion of the property equal to a specific value as the value of the property is finally determined for gift tax purposes, would limit the transfer to such portion of the property, as finally valued for gift tax purposes after IRS review and court determination, as equal in value to the stated dollar amount.

In a recent Tax Court case, the taxpayer sought a similar result but was denied. In the case, in lieu of defining the transfer in the manner of  "$x of Property Y as its value is finally determined for gift tax purposes," the formula clause read:"[a transfer of] a limited partner interest having a fair market value of TWO MILLION NINETY-SIX THOUSAND AND NO/100THS DOLLARS ($2,096,000.00) as of December 31, 2008 . . ., as determined by a qualified appraiser within ninety (90) days of the effective date of this Assignment." That is, the value was not based on finally determined gift tax value, but on the value determined by a qualified appraiser within 90 days of the transfer.

Since the value was tied to the appraised value, the appraised value would need to be used to set how much of a limited partner interest was transferred to meet the $2,096,000.00 target.That is, the percentage share of the partnership being transferred was locked in at that point. If, as occurred here, the IRS finally determined that the value of the partnership interest, based on the size determination using the appraiser's value, was greater than $2,096,000.00, the taxpayer was not entitled to reduce the percentage partnership interest transferred to meet the $2,096,000.00 amount. The taxable gift would be increased to reflect the finally determined value.

While not good for the taxpayer, the Tax Court's decision is good for other taxpayers, by indirectly ratifying Wandry-type clauses. The Tax Court noted the success of similar clauses in limiting the size of the transfer in Succession of McCord, Estate of Petter, and Wandry. Helpful to taxpayers is that it did not dispute the effectiveness of those clauses, but instead noted that the clause used here was not properly drawn to be consistent with the terms and effect of the clauses used in those cases, and thus ruled against the taxpayer. 

James C. Nelson, TC Memo 2020-81 

Sunday, June 07, 2020

Court Retains Ability to Remove Trustee Regardless of the Terms of the Trust [Florida]

An irrevocable trust included provisions for the removal of a trustee by reason of the trustee's disability. A beneficiary brought an action to remove the trustee, but not based on the specific definition and removal provisions of the trust. Could the beneficiary use Trust Code provisions to remove the trustee when the trust instrument had different provisions? In a recent case, the trial court held that the terms of the trust required that removal could be based only on the terms of the trust.

While under the Trust Code the terms of a trust may prevail over the terms of the Trust Code, an exception to this rule exists under Fla.Stats. § 736.0105(2)(e) which provides that the provisions the trust instrument cannot override "the power of the court to take such action and exercise such jurisdiction as may be necessary in the interests of justice." The Trust Code also includes other provisions specifically granting powers of removal to the court. The 3rd DCA, in reviewing the question, reversed the trial court decision based on these statutory provisions and existing case law and concluded:
. . .while the trust document may contain other and supplemental methods to remove a trustee, it cannot eliminate or curtail the probate court's power and responsibility under the Trust Code to remove a trustee when necessary in the interests of justice to protect the interests of the beneficiaries.
The 3rd DCA also noted that the standard for removal due to disability was NOT the same as the standard for imposing a guardian. The court noted:
[t]he standard for removal of a trustee under section 736.0706 of the Trust Code is less exacting than the standard for imposing a guardianship under section 744.331 of the Guardianship Code. Persons may lack the accounting, business, legal, or mental acumen to serve as trustees regarding the property of others even when their condition would not justify the imposition of a guardianship over them regarding their own property.
Wallace v. Comprehensive Personal Care Services, Inc., 45 Fla.L.Weekly D1318a, 3rd DCA (June 3, 2020)

Tuesday, May 26, 2020


A number of measures have cleared the Florida legislature that may be of interest. These are awaiting the signature of the Governor. It is likely that most, if not all of these will be signed into law. This is not an exhaustive list.

  1.  CS/HB 505.
    1. Precious metals, such as bullion or coins, are tangible personal property under the Probate Code.  Fla.Stats. § 731.1065.
    2. "Property" is defined under the Probate Code to include causes of action. Fla.Stats. § 731.201(32).
    3. The service of formal notice in a probate proceeding does not give the court personal jurisdiction over the person served. Fla.Stats. § 731.301(2).
    4. Requires a Notice of Administration in probate to include a warning that under certain circumstances and by failing to contest a will, the recipient of the notice may be waiving his or her right to contest the validity of a trust or other writing incorporated by reference into a will (addressing the Pasquale problem). Fla.Stats. § 733.212(2)(f).
    5. Expands the list of transactions that may be a conflict of interest for a personal representative. Fla.Stats. § 733.610.
    6. Requires a testator to sign a written statement that certain representations were made to the testator, as a prerequisite to an attorney serving as personal representative or a person related to the attorney receiving compensation for serving as a personal representative if the attorney prepared or supervised the execution of the will nominating such person (unless the attorney or person nominated is related to the testator). A form of the statement is included in the statute. Fla.Stats. § 733.617(8).
    7. Similar provisions for an attorney to be compensated for serving as a trustee. Fla.Stats. § 736.0708(4).
  2. CS/HB 886.
    1. Allows for the filing of a curative notice in the public records as a method of correcting a single error in the legal description of property in a deed, and giving legal effect to such notice. Fla.Stats. § 689.041.
  3. CS/HB 1089.
    1. Grants a trustee of a grantor trust discretion to make payment to the taxable grantor of federal, estate, or other income tax liability attributable to the grantor's taxability on trust income and gains (unless the trust provides otherwise). Such reimbursement may not be paid from the cash value of a trust-owned life insurance policy or the proceeds of any loan secured by such a policy, if the taxable grantor is an insured. The provision will apply to existing trusts absent an election out by the trustee after notice to the taxable grantor and all persons who may remove and replace the trustee. There are listed circumstances when the power will be inoperable, and prohibitions on the exercise by certain trustees (i.e., the trustee is the taxable grantor, a trust beneficiary, or a related or subordinate party). Fla.Stats. § 736.08145.
  4. CS/HB 1439.
    1. Authorizes financial institutions to make account disclosures involving the account of a decedent to certain interested persons. Fla.Stats. § 655.059(2)(b).
    2. Authorizes a financial institution to pay the balance of an account of a decedent to family members without probate when the combined funds in such accounts are $1,000 or less. Fla.Stats. § 735.303.
    3. Allows for the disposition of small intestate estates without administration. A small intestate estate is an estate leaving only exempt personal property, personal property exempt from creditor claims under the Florida Constitution, and other personal property which does not exceed the sum of $10,000, preferred funeral expenses, and final medical expenses of the last illness. However, the decedent has to have been deceased for more than 1 year and no administration is pending in the state. Fla.Stats. § 735.304.

Monday, May 25, 2020

Applicable Federal Rates - June 2020

For the applicable federal rates for the above month, preceding months, and a data table that visually shows trends, click here.

Wednesday, May 20, 2020

CORRECTION - Summary Table for Estate and Trust Deduction Limitations

When I posted the table on Sunday, the link went to a prior version of the table, not my final table. I have updated the link to the final version. The prior version's description of the treatment of NOL carryovers and capital loss carryovers was not correct. If you downloaded the table, you can download the correct version here. Apologies - and thanks to those who noted the problem!

Sunday, May 17, 2020

Summary Table for Estate and Trust Deduction Limitations

In the 2017 Tax Cuts and Jobs Act, new Code §67(g) was added to prohibit individual taxpayers from claiming miscellaneous itemized deductions through 2026. Questions have arisen as to what deductions of non-grantor trusts and estates come under this provision, including deductions that carry out to beneficiaries in the year of termination of the estate or trust. Notice 2018-61 provided some guidance, and now the IRS has issued proposed regulations to provide guidance.

The final treatment of these items is not the easiest thing to follow, as it gets caught up in definitions of adjusted gross income, miscellaneous itemized deductions, and other related provisions. I thought a table that breaks the various deductions into categories and the treatment of the category would be a helpful tool. You can download it here. Questions/comments/corrections - please email me at

Proposed Treas. Regs. §1.67-4; Proposed Treas. Regs. §1.642(h)-2

Wednesday, April 22, 2020


Nonresident alien individuals present in the U.S. for too many days in a calendar year may be classified as residents for federal income tax purposes under the substantial presence test. If such individuals are stuck in the U.S. due to medical conditions, those days of presence may be excluded in making the days computations pursuant to statutory provisions.

There are nonresident alien individuals who are in the U.S. during the current COVID-19 crises who are unable to leave due to travel bans and similar limitations, but not due to their own illness. It is uncertain whether the medical exception applies to them.

As a relief measure, the IRS has issued a Revenue Procedure that allows qualified individuals to exclude a single consecutive period of presence in the U.S. starting on or after February 1, 2020 and ending on or before April 1, 2020 from their days present under the substantial presence test. Such individuals do not have to show they are actually stuck here due to COVID-19 - that is presumed.

Eligible persons do not include persons who were a U.S. resident for federal income tax purposes at the close of the 2019 tax year, or who are a lawful permanent resident at any point in time in 2020.

To obtain the exclusion, eligible individuals who need to file a Form 1040-NR for 2020 must include a Form 8843 to their timely filed return, which includes the information described in the Revenue Procedure. If the individual does not need to file a Form 1040-NR for 2020, then no Form 8843 is required, but such individuals are advised to retain documentation establishing their qualification for the exclusion of days.

Perhaps the April 1, 2020 ending date may be extended through April or beyond, based on events occurring subsequent to the date of the Revenue Procedure.

If an individual uses the procedure, they can also exclude other days if eligible under the medical exception or other exceptions if they qualify for them.

The consecutive days of presence requirement appears to prevent aggregating multiple stays in the U.S. during the exclusion period if the individual is in the U.S., leaves, and then returns.

On a related note, the U.S. Citizenship and Immigration Services is also providing relief relating to COVID-19, including for extensions of stay under visas (which may need to be applied for). See information on that here.

Revenue Procedure 2020-20 (April 21, 2020)

Saturday, April 18, 2020

Surviving Spouse Homestead Limitations Struck Down as Unconstitutional [Florida]

Article VII, Section 6(f)(1) of the Florida Constitution provides ad valorem tax relief to surviving spouses of veterans who died from service-connected causes while on active duty. The provision specifically provides the relief to homestead property of:

“[t]he surviving spouse of a veteran who died from service-connected causes while on active duty as a member of the United States Armed Forces.”

In implementing this provision, Fla.Stats. §196.081(4) was enacted to provide:

“Any real estate that is owned and used as a homestead by the surviving spouse of a veteran who died from service connected causes while on active duty as a member of the United States Armed Forces and for whom a letter from the United States Government or United States Department of Veterans Affairs or its predecessor has been issued certifying that the veteran who died from service-connected causes while on active duty is exempt from taxation if the veteran was a permanent resident of this state on January 1 of the year in which the veteran died.” (emphasis added)

In 2013, Teri Ann Bell filed for ad valorem tax relief in Hillsborough County, Florida on her homestead property. She was married to a member of the U.S. Army who was killed in action in Iraq in March, 2007. Her application for the tax exemption was denied by the Hillsborough County Property Appraiser solely on the basis that Ms. Bell's husband was not a Florida resident as of January 1, 2007, the year he was killed in action, as required by the language of the implementing statute.

After administrative appeals provided no relief, Ms. Bell appealed to the 2nd DCA.

The 2nd DCA determined that the Florida Constitution provision did not have a residency restriction, and thus the insertion of such a restriction in the statute was invalid and unenforceable. The 2nd DCA concluded that the legislature could not substantively alter or materially limit the class of individuals eligible for the exemption under the plain language of the constitution.

Department of Revenue v. Bell, 2020 WL 808178 (2nd DCA)

Sunday, April 12, 2020

IRS Provides Transfer Tax Extensions

Over the past few weeks, the IRS has provided numerous extensions due to the Covid-19 virus outrbreak. These included Notice 2020-17, Notice 2020-18, and Notice 2020-20. Some relief was provided for gift and generation-skipping transfer tax return filings and payments under Notice 2020-20.

Late last week, additional extensions were granted in Notice 2020-23 aimed at estate and generation-skipping tax returns and payments (and certain gift tax payments and returns) due on or after April 1, 2020 and before July 15, 2020 - these extensions are to July 15, 2020:

  • Estate and generation-skipping transfer tax payments and return filings on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return, 706-A, United States Additional Estate Tax Return, 706-QDT, U.S. Estate Tax Return for Qualified Domestic Trusts, 706-GS(T), Generation-Skipping Transfer Tax Return for Terminations, 706-GS(D), Generation-Skipping Transfer Tax Return for Distributions, and 706-GS(D-1), Notification of Distribution from a Generation Skipping Trust (including the due date for providing such form to a beneficiary).
  • Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, filed pursuant to Revenue Procedure 2017-34.
  • Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent and any supplemental Form 8971, including all requirements contained in section 6035(a) of the Code.
  • Gift and generation-skipping transfer tax payments and return filings on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return that are due on the date an estate is required to file Form 706 or Form 706-NA.
  • Estate tax payments of principal or interest due as a result of an election made under sections 6166, 6161, or 6163 and annual recertification requirements under section 6166 of the Code.

The notice also address other returns and payments, including various Forms 1040, Forms 1120, Form 1065, Forms 1041, Forms 990-T, and estimated taxes.

Notice 2020-23

Monday, April 06, 2020

A Short Summary of the Key Tax Provision of the CARES Act

Follow this link to our firm’s summary of the Act, which contains some unprecedent tax relief to address the economic harm arising from the Covid-19 crisis.

Saturday, March 21, 2020

Procrastinators Rejoice - Income Tax Deadlines Extended to July 15, 2020

Recently, income tax return payment deadlines were extended under Notice 2020-17, subject to dollar limitations. This notice has now been superseded by Notice 2020-18. This Notice now extends both income tax payments due, as well as return filings due, on April 15 to July 15. The dollar limitations provided in Notice 2020-17 no longer apply.

Keep in mind this is for income tax relief only, and extends to individuals, trusts, estates, partnerships, associations, companies, and corporations with an April 15, 2020 return filing due date or payment due date.

Now you can keep your tax dollars invested for an additional two months and rack up those stock market gains - if the market will only stop falling, that is.

the extension only applies to federal taxes - states and other localities may be offering their own relief separately.

Stay safe!

Notice 2020-18

Tuesday, March 17, 2020

Coronavirus Update: 90 Day Extension to Pay Federal Taxes

In a press briefing, Treasury Secretary Steven Mnuchin announced that the April 15 due date for payment of federal income taxes has been pushed back 90 days. Individuals can defer up to $1 million of tax liability, and corporations can defer $10 million, without being subject to interest nor penalties for late filing.

Some observations:

  • This is an extension to pay, not to file. So taxpayers still need to file on time.
  • However, individuals can get an automatic extension to file for six months if they file an extension request, so the lack of an extension by Treasury for filing should not be troublesome.
  • It remains to be seen whether state and local governments will follow suit.

Presumably, written guidance will be forthcoming that may bring more details.

Saturday, March 14, 2020

Will the Income Tax Return Filing Deadline be Extended Due to the Coronavirus?

It seems likely. It would be unprecedented (to my knowledge) for there to be a national extension, but of course such extensions are regularly granted to regions afflicted by disasters from time to time.

President Trump indicated last week that he was instructing Treasury to allow for deferral of tax payment deadlines, but what I have read on that only mentioned payments and not filing due dates. There are also a number of members of Congress calling for an extension. And President Trump has now declared a national emergency. So things do seem to be lining up for a gift to procrastinators everywhere.

Saturday, March 07, 2020

Tax Court Rejects IRS Valuation Theory Aimed at Reducing Nonvoting Interest Discounts

In a recent Tax Court Memorandum decision, the taxpayer undertook two inter vivos gifting transactions - one to a GRAT, and one to an irrevocable trust. The latter was a part sale/part gift transaction. The transferred items were LLCs holding securities, limited partnership interests, and promissory notes. The taxpayer’s transferred interests were 99.8% nonvoting class B member interests, with 0.2% of the member interests being voting class A interests retained by a management entity owned and controlled by the taxpayer’s daughter.

Traditional appraisal methodologies were applied to yield lack of control discounts in the 13-14% range, and lack of marketability discounts at 25%.

Rather than engage in a direct attack on these discounts, the IRS’ primary approach was to say that the nonvoting members in selling their interests would seek to buy the voting member interests so as to be able to sell their nonvoting interests along with control and receive a much higher purchase price. The IRS calculated the additional premium that the nonvoting members would need to pay to the class A 0.2% voting member to buy the voting interests. The net value of the nonvoting member interests that were gifted were determined to be 99.8% of the undiscounted net asset value of the subject LLC, less the premium required to purchase the 0.2% voting member interest. Compared to the values computed under the taxpayer’s traditional appraisals, the IRS’ discount for the nonvoting member was close to de minimis.

In reviewing the IRS’ methodology, the Tax Court noted that as a factual matter, the taxpayer’s daughter had no intention of selling the class A voting units controlled by her. She also testified that if she did, the premium would be much higher than the IRS estimate.

The Tax Court was concerned about assuming a subsequent event into the valuation process on the date of the gift (i.e., the sale of the class A voting units to the class B members). It noted:

“We are looking at the value of the class B units on the date of the gifts and not the value of the class B units on the basis of subsequent events. . .”

It did note that events affecting value that depend upon events within the realm of possibility can be applied, but only if they are “reasonably probable.” It found such reasonable probability absent:

“The facts do not show that it is reasonably probable that a willing seller or a willing buyer of the class B units would also buy the class A units and that the class A units would be available to purchase. To determine the fair market values of the class B units we look at the willing buyer and willing seller of the class B units, and not the willing buyer and willing seller of the class A units.”

The court ruled in favor of the taxpayer and allowed the taxpayer’s claimed discounts.

Some thoughts/observations:

1. Perhaps if the IRS had focused its challenge on the size of the taxpayer’s discounts in lieu of the above alternate and untested valuation theory, it might have gotten something for its efforts.

2. The IRS’ theory, if validated, would deal a blow to gifting structures that are often employed. Since it is only a memorandum decision, its precedential value is limited, but at least it is a good precedent for taxpayers. Perhaps we may hear more about this if there is an appeal.

3. There is no mention of Powell and its successful approach to reduction of discounts where the taxpayers do not control the vote. That is a good thing for taxpayers, but since it was not mentioned it doesn’t mean it was a rejection of Powell.

4. One often doesn’t see IRS challenges to GRAT valuations, since an adjustment in value doesn’t result in an immediate gift because of the adjustment provisions built into GRATs. Perhaps the IRS challenged the value only because it was already litigating the irrevocable gift made by the taxpayer. Or was the IRS intentionally playing the long game - requiring more assets to be paid back to the taxpayer from the GRAT, thus building up the taxpayer’s estate for a later estate tax at death?

Grieve, TC Memo 2020-28

Sunday, February 23, 2020

Basis in a Life Insurance Policy

Life insurance contracts may be sold for many reasons, including among family members as circumstances change, between trusts when it is desired to move a policy out of an irrevocable trust to one that has more desirable terms (although oftentimes that is nontaxable if it is a sale between grantor trusts), or changes in business relationships and coverages.

Previously, the IRS had adopted the position that an owner’s basis in a life insurance policy was the total premiums paid, less the portion of premiums paid attributable to mortality, expense or other insurance coverage (except when the policy was not owned for purposes of insurance protection). This was based on its reading of Code §1016. Thus, persons selling an existing policy could not use a higher basis equal to gross premiums paid in calculating their gain or loss.

Many practitioners disagreed with this interpretation of the law. Happily, the 2017 tax act modified Code §1016(a) to specifically provide that the above basis reduction for mortality, expense, or other reason charges under the insurance contract does not occur. Further, the change was made retroactive to 2009.

There were still some Revenue Rulings in force that were contrary to the new law. So in Rev. Rul. 2020-05, the IRS revised Rev. Rul. 2009-13 and Rev. Rul. 2009-14 so that the examples included in them no longer have a basis reduction.

The old rulings were mooted by the new law, so this ruling is more in the nature of Treasury Dept. housekeeping. Nonetheless, it is a good reminder of the beneficial change enacted in 2017, and may educate some that missed picking up in the revision that occurred in 2017.

Rev. Rul. 2020-05

Tuesday, February 11, 2020

Proportionate Means Proportionate

If a taxpayer contributes a conservation easement in land to a qualified organization, to obtain an income tax deduction the contribution must be in perpetuity. However, the law recognizes that sometimes the easement must be unwound (for example, if the land is taken by the government under eminent domain). In that case, a portion of the value of the property must be given to the qualified organization for conservation purposes.

As to how much the qualified organization must receive, Treas. Regs. § 1.170A-14 (g)(6)(ii) says the property right given to the qualified organization at the time of the donation must have

“a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole at that time. * * * [T]hat proportionate value of the donee’s property rights shall remain constant. “

It goes on to provide 

“[T]he donee organization, on a subsequent sale, exchange, or involuntary conversion of the subject property, must be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction * * *”

In a recent Tax Court case, a contributor included this language in its instrument of conveyance:

In a recent Tax Court case, a contributor included this language in its instrument of conveyance: “(2) This Conservation Easement gives rise to a real property right and interest immediately vested in SERLC. For purposes of this conservation Easement, the fair market value of SERLC’s right and interest (which value shall remain constant) shall be equal to the difference between(a) the fair market value of the Conservation Area as if not burdened by this Conservation Easement and (b) the fair market value of the Conservation Area burdened by this Conservation easement, as such values are determined as of the date of this conservation Easement. If a change in conditions makes impossible or impractical any continued protection of the Conservation Area for conservation purposes, the restrictions contained herein may only be extinguished by judicial proceeding. Upon such proceeding, SERLC, upon a subsequent sale, exchange or involuntary conversion of the Conservation Area, shall be entitled to a portion of the proceeds at least equal to the fair market value of the Conservation easement as provided above. SERLC shall use its share of the proceeds in manner consistent with the conservation purposes set forth in the Recitals herein.(3) Whenever all or part of the Conservation Area is taken in exercise of eminent domain by public, corporate, or other authority so as to abrogate the restrictions imposed by this Conservation Easement, Owner and SERLC shall join in appropriate actions at the time of such taking to recover the full value of the taking and all incidental or direct damages resulting from the taking, which proceeds shall be divided in accordance with the proportionate value of SERLC’s and Owner’s interests as specified above. All expenses, including attorneys’ fees, incurred by Owner and SERLC in such action shall be paid out of the recovered proceeds to the extent not paid by the condemning authority. (emphasis added)

The instrument of conveyance does include some language and concepts required by the Regulation. Do you think it met the proportionality requirement of the Regulation? The Tax Court did not, and denied a $16 million deduction.

The Court interpreted the taxpayer’s instrument to require the computation of a fair market value of the easement at the time of contribution, and to require the donee to receive no less than that value at the termination of the easement. It also interpreted the Regulation as instead requiring that a proportion be determined at the time of the contribution with the numerator being the value of the easement and the denominator being the value of land as of the date of contribution – the donee must then receive on termination an amount equal to the current value on termination multiplied by that fraction – that is, a variable amount based on the original fraction/proportion. So if the value of the land went up over time, so would the amount that must pass to the donee on termination. Since the taxpayer’s instrument was not a variable amount based on value at the time of termination, no deduction was allowed.

The Regulation does talk about the “proportionate value” remaining constant. However, it appears in context of the language that this only means that the ratio must remain constant, not the result of the math computation that computes the minimum amount due to the donee.

Qualifying for charitable deductions for property contributions is a minefield, both as to substantive requirements such as these for easements, and more general appraisal requirements and reporting requirements. When material amounts are at issue, all efforts need to be made to comply with the statutory and regulatory requirements.

Query whether the original value of the easement sets a floor on what the donee must receive – that is, will the proportion formula be applied to reduce that amount if the value of the property declines since the contribution date? I haven’t researched the issue as to case law, rulings or other regulatory provisions, but the above regulatory language does not appear to me to rule out such a possible reduction.

Railroad Holdings, LLC v. Comm., T.C. Memo 2020-22 (February 5, 2020)

Saturday, February 01, 2020

New “No Rule” Areas

Every year the IRS publishes a list of areas where the IRS will not issue a private letter ruling. Items on the list can provide a warning to taxpayers that the IRS may not agree with the conclusion that would be sought in the ‘no rule’ area.

For 2020, the IRS added to the ‘no rule’ list or the ‘will not ordinarily be issued’ list:

1. Whether any portion of the items of income, deduction, and credit against tax of the trust will be included in computing under § 671 the taxable income, deductions and credits of grantors when distributions of income or corpus are made – (A) at the direction of a committee, with or without the participation of the grantor, and (1) a majority or unanimous agreement of the committee over trust distributions is not required, (2) the committee consists of fewer than two persons other than a grantor and a grantor's spouse; or (3) all of the committee members are not beneficiaries (or guardians of beneficiaries) to whom all or a portion of the income and principal can be distributed at the direction of the committee or (B) at the direction of, or with the consent of, an adverse party or parties, whether named or unnamed under the trust document (unless distributions are at the direction of a committee that is not described in paragraph (A) of this section).

2, Whether a trust which is not exempt from tax under § 501(a) is described in § 4947(a)(2) where a grantor, trustee, executor, administrator, donor, or beneficiary has represented that the trust has no amounts in trust for which a deduction was allowed under § 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, because no grantor, trust, estate, donor, or beneficiary has taken or plans to take any such deduction.

3. Whether a split-interest trust is described in § 4947(a)(2) because it has no amounts in trust for which a deduction was allowed under § 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522.

Rev.Proc. 2020-3

Saturday, January 11, 2020

Private Foundations Gain a Small Tax Break on Investment Income

The SECURE Act stole all of the end of year thunder regarding changes in federal taxes. However, other changes were enacted. One of these was the repeal of Code Section 4940(e).

Code Section 4940 previously imposed a 2% excise tax on the investment income of private foundations. Section 4940(e) reduced that tax to 1% for foundations that increased their qualifying distributions over the average for the prior 5 years.

So as to simplify this small corner of the tax universe, this 2%/1% arrangement is now history. In its place the Taxpayer Certainty and Disaster Tax Relief Act of 2019 provides for a flat 1.39% rate.