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.

Some Tax Law Changes That Take Effect in 2017

No new tax legislation has come forth yet, but per tax laws passed in prior years, some changes in the law will occur in 2017. Chief among them:

The floor beneath the itemized deduction for medical expenses of taxpayers who are age 65 or older increases from 7.5% of AGI to 10% of AGI. Thus, fewer medical expense deductions for older taxpayers. Code §213.

Forms W-2, W-3, and returns to report non-employee compensation (e.g., Form 1099-MISC), must be filed on or before January 31 of the year following the calendar year to which such returns relate (formerly, these were due on February 28, and not until March 31 for electronic filings). And, those returns are no longer eligible for the extended filing date for electronically filed returns. Code § 6071(c). Also, there are no more automatic Form W-2 extensions - one 30 day extension can be requested on a Form 8809.

Partnerships now have to file their income tax returns by the 15th day of the third month after the end of their tax year (e.g., March 15 for calendar year entities). Partnerships previously had until the 15th day of the fourth month. C corporations now don’t need to file until the 15th day of the fourth month, instead of the prior 15th day of the third month rule. Extension rules have also been changed for some entities. For a table summarizing all of the new filing deadlines for entities, click here.

Taxpayers who have not used an ITIN at least once in the past three years will no longer be able to use that ITIN on a tax return as of Jan. 1, 2017 and will need to obtain a new one. An ITIN is an individual taxpayer identification number. It is issued to individuals that are not eligible to receive a Social Security number such as noncitizens and nonresidents of the U.S. Code §6109(i)(3).

Large business and international taxpayers that request an examination to resolve specific issues relating to returns that are neither due nor filed must pay a user fee. The fee is being increased from $134,000 to $218,000. Rev. Proc. 2016-30. Nothing like a tax compliance system that is so complex that taxpayers must pay $218,000 out of their own pockets to the government to help resolve uncertainties in how it applies to them.

Estate Tax Impact of Life Insurance Required by Divorce

TITLE	Estate Tax Impact of Life Insurance Required by Divorce
AUTHOR(S)	DANIELLE E. MILLER
PUBLICATION	Estate Planning
PUBLISHER	WG&L
ABSTRACT (Key Points & Discussions)	Analysis of estate tax inclusion for life insurance policies that a divorcing spouse is obligated to own or maintain, and for an estate tax deduction if the insurance is includible in the gross estate. One exposure to estate tax inclusion is from the decedent possessing incidents of ownership in the policy per Code §2042(2). However, even if the deceased spouse is owner, lack of actual control over or economic benefits from the policy may result in no incidents of ownership. Estate tax inclusion can also result under Code §2036 via retained economic rights by the decedent  - for example, when the policy is held in a trust and the decedent may benefit from it. Another source of inclusion is a transfer of ownership of the policy within 3 years of death under Code §2035. Deductibility can be available under Code §2053(a)(3) as a claim against the decedent's estate. However, when the obligation is to obtain the policy and name the other spouse as beneficiary (as contrasted with an obligation to pay a fixed amount at death to the surviving spouse), there is no claim remaining after death so this provision may not apply to allow a deduction. Deductibility can also arise under Code §2053(a)(4) as a debt against property (the insurance proceeds). Requirement that obligation be contracted in a bona fide manner and supported by adequate and full consideration can be an obstacle to deductibility. For example, relinquishment of marital rights in decedent's property is not adequate consideration under Code §2043(b)(1) - however, meeting the requirements of Code §2516 will allow for a finding of adequate and full consideration.
RESEARCH TAGS	Divorce; Estate tax inclusion; Estate tax deductibility for claims and debts against property