The Unwanted IRS Time Machine – Is Your Gift Tax Return Actually Done?

Posted in Internal Revenue Code, IRS, Tax Planning

Taxpayers may assume that once a gift tax return is filed, they can sit back and avoid worrying about the IRS making adjustments once the general three-year statute of limitations has passed. But the IRS has a powerful “rewind-the-clock” tool that taxpayers may inadvertently trigger if they aren’t careful when preparing any filed gift tax returns. The problem is that certain types of gifts – such as partnership interests – require specific descriptions to be included on the return, or else the IRS can claim that an open-ended statute of limitations period applies. It is important to consult with counsel or get professional advice on the contents of your gift tax return in order to have peace of mind that your return won’t be resurrected from the dead at a future date.

Internal Revenue Code section 6501(a) applies a general three-year statute of limitations to most tax returns filed by a taxpayer, including a gift tax return. Once this time period has passed, the IRS is prohibited from making adjustments to the return. Of course, there are exceptions, such as when no gift tax return is filed (creating an open-end period for the IRS), the return is fraudulent (same), or the return is alleged to have omitted tax that is greater than 25 percent of the total tax actually owed (which permits a 6-year period). Perhaps the most concerning exception is in Code section 6501(c)(9), which allows the IRS to make an assessment at any time for a gift tax return which either does not include a required gift or the gift was not disclosed “in a manner adequate to apprise” the IRS of the nature of the item. Although the concept of adequate disclosure is not necessarily defined in the IRC, a regulation provides a safe harbor. Too detailed to list here, Treas. Reg. § 301.6501(c)-1(f)(2) contains a long laundry list of items that must be included by a taxpayer on the return concerning the gift in order for the IRS to deem it adequately disclosed. The exhaustive nature of the regulation can make it easy for a disclosed gift to fail to satisfy the safe harbor provisions, making it likely the IRS could challenge a gift in a subsequent audit and make an assessment, even many years after the return was filed.

This was the issue raised in FAA20152201F. The Donor had reported two gifts of partnership interests on the gift tax return, but IRS Chief Counsel attorneys decided that the gift descriptions included on the return were inadequate, allowing the IRS to assess gift tax under Code section 6501(c)(9) if the normal section 6501(a) assessment period had run. The IRS identified numerous deficiencies with the gift descriptions on the return. First, the Donor included an EIN for a partnership that was missing a digit. Because the IRS did not know the placement of the missing digit, it was unwilling to look up 70 possible EIN combinations to track down the right entity. Furthermore, the return included an abbreviated name of the partnership so that, even if the proper EIN had been provided, the names would not have matched up. The IRS deemed these mistakes to constitute failure to adequately describe the partnership.

In addition, the Donor’s gift tax return did not include a description of the financial data used to determine the value of the partnership interest, nor did it specifically identify the amount of each claimed valuation discounts that was applied – both requirements set out in the safe harbor. The gift description similarly lacked any information about the 100 percent value of the partnership since the appraisal was based on the net assets.

Not that taxpayers and their advisers intentionally use shortcuts when putting together a gift tax return, but it can be easy in the rush of things to not take the time to carefully address each element of the safe harbor detailed description regulation. The smallest of foot-faults may create an opportunity for the IRS to claim that an assessment can occur after the normal three-year statute of limitations period has passed.  Instead of letting haste or inattentiveness ruin careful planning – seek tax advice at the start and take time to prepare your gift tax return for success.

AICPA Suggests Adequate Disclosure Reference for Section 2704 Proposed Regulations

Posted in IRS, Tax Planning

The American Institute of Certified Public Accountants (AICPA) recently published recommendations for a disclosure statement to be included on a U.S. Gift (and Generation-Skipping Transfer) Tax Return (IRS Form 709) disclosing the transfer of an interest in a family partnership or family controlled entity made on the same date or after the issuance of the Internal Revenue Code (Code) Section 2704 proposed regulations.

Under the adequate disclosure rules pertaining to IRS Form 709, if a taxpayer is taking a position that is contrary to proposed regulations, it must be disclosed on the return. In the case of a transfer of an interest in a family partnership or family controlled entity addressed in Code Section 2704 proposed regulations, the adequate disclosure statement should indicate that the Section 2704 proposed regulations were not taken into account in determining the value of the entity at the time of the transfer because, under the effective date provisions of the section 2704 proposed regulations, there is no requirement that the section 2704 proposed regulations be considered.

See AICPA’s new recommendations concerning a disclosure statement. https://www.aicpa.org/interestareas/personalfinancialplanning/resources/taxplanning/downloadabledocuments/suggested_disclosure.pdf

 

A $64 Million Question – When is a Written Acknowledgment for a Charitable Donation Needed?

Posted in Income Tax, Tax Planning

Year-end is a time for many taxpayers to satisfy their philanthropic and tax-related charitable goals; however, it is important to remember that the simple act of giving does not necessarily result in the realization of desired income tax benefits from a charitable donation. The Internal Revenue Service, under Internal Revenue Code (Code) § 170(f)(8)(A) and (B) requires that any taxpayer desiring to claim an income tax deduction for a charitable donation of $250 or more in any tax year is required to substantiate the donation by obtaining a contemporaneous written acknowledgment (CWA). The CWA must be obtained from the charity by the date on which the taxpayer files the return claiming the deduction, including: (1) the name of the charity, (2) the date of the contribution, (3) the amount of any cash contribution, (4) a statement of whether or not goods or services were provided by the charity in exchange for the contribution, (5) a description and estimated value of any such goods or services provided by the charity to the taxpayer, and (6) if applicable, in the case of contributions to organizations that operate exclusively for religious purposes, a statement of any intangible religious benefits provided by the charity to the taxpayer.

In 15 West 17th Street LLC v. Comm’r, 147 TC No. 19 (Dec. 22, 2016), the taxpayer learned of the rigidity of this requirement when it failed to obtain a CWA for a charitable donation of property valued at $64.49 million. Instead, the taxpayer relied on IRC §170(f)(8)D) which provides that a donation may be substantiated if the charitable donee files a return “on such form and in accordance with such regulations as the Secretary may prescribe” that contains the information required in a CWA. The Tax Court disagreed with the taxpayer’s reliance on this provision because the Treasury has not yet issued regulations to this effect and the provision is not “self-executing.” Until such time as the Treasury issues such regulations, a CWA is required. The Tax Court went on to deny the taxpayer its $64.49 million income tax deduction for the charitable donation.

As tax season rapidly approaches, taxpayers desiring to claim deductions for 2016 charitable donations should carefully review the receipts and acknowledgments for such donations to ensure that they are in compliance with applicable substantiation requirements.

IRS Announces Increase for February 2017 Applicable Federal Rates and 7520 Rates

Posted in Internal Revenue Code, IRS

The Internal Revenue Service (IRS) publishes a monthly update to the applicable federal rates (AFRs) and 7520 rates. The February 2017 rates reflect a slight increase over January’s rates. Planning professionals and their clients should take note of fluctuations in these rates and be mindful of planning opportunities that come with rate changes.

The AFR is calculated by the IRS under Section 1274(d) of the Internal Revenue Code (the Code) and is used for many purposes. One of its most common applications is to establish the minimum interest rate that can be charged on an intra-family loan without income or gift tax consequences. These “safe harbor rates” are dependent upon two factors: (i) the term of the loan and (ii) the frequency of compounding of interest.

For these purposes:

  • Demand notes and notes with a term of three years or less are considered short-term obligations;
  • Notes with a term of more than three years but less than nine years are considered mid-term obligations; and
  • Notes with a term of more than nine years are considered long-term obligations.

The 2017 AFR rates are as follows:

legacy adv

The 7520 rates are used to calculate the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest. They are calculated by the IRS under Code Section 7520 (hence, the name “7520 rates”) and are always 120% of the AFR for mid-term obligations with semi-annual compounding. The 7520 rates for 2017 are as follows:

leg adv

Rates are typically published on the 20th day of each month and provide planning opportunities for certain estate planning vehicles which are interest rate sensitive.  For example:

  • Lower rates are generally preferable for intra-family loans, grantor retained annuity trusts (GRATs), installment sales to grantor trusts and charitable lead annuity trusts (CLATs).
  • Higher rates are generally preferable for qualified personal residence trusts (QPRTs) and charitable remainder annuity trusts (CRATs).

As rates continue to change, advisors and clients should maintain an open dialogue so that clients can take advantage of any planning opportunities tied to increasing or decreasing rates.

What Happens to My Social Media Accounts When I’m Gone?

Posted in Estate Planning

When working on their legacy plan, most individuals focus on their finances and real and personal property.  However, over the past few years and the rise of social media, many of our prized memories and photographs are now stored online – Facebook, Instagram, Google, Twitter, and so on.  Each social media company has its own set of rules related to account maintenance after the account holder’s passing.  Today’s legacy planners need to address this issue directly with their clients and traditional estate planning documents should include provisions to address clients’ wishes.  The attached New York Times article serves as a good starting point for discussion.

 

Greenberg Traurig’s Marvin A. Kirsner Featured in Law360

Posted in Firm News, Sales Tax

In a recent article featured in Law360, Greenberg Traurig Shareholder Marvin A. Kirsner discusses the top tax cases to watch in 2017. Kirsner addresses the South Dakota v. Wayfair Inc. case, which requires out-of-state sellers to file sales information with Colorado. To read the full article, click here.

 

President Barack Obama Signs New Legislation Regarding Special Needs Trusts

Posted in Estate Planning, Trusts

On Dec. 13, 2016, President Barack Obama signed the 21st Century Cures Act (Act) allowing individuals to create their own self-settled special or supplemental needs trust (SNT), without having to go to court. [1] Prior to enactment of this new law, disabled individuals who did not have a living parent or grandparent (or did not need a guardian) could not independently establish a self-settled SNT without going to court. As of the effective date of the Act, such disabled individuals will no longer need to go through potentially costly and time consuming court proceedings to establish a self-settled SNT.

A SNT is a type of trust created for the benefit of a disabled individual who either is receiving or may in the future receive public assistance benefits (i.e., Supplemental Security Income (SSI) and Medicaid). The goal of the SNT is to provide support to the SNT’s beneficiary without risking the beneficiary’s eligibility for public benefits.[2] A SNT may be incorporated into an estate plan to ensure the financial security and lifestyle of an individual with special needs.

A well-drafted SNT provides for “supplemental” support to the beneficiary. In other words, the distributions from the SNT to the beneficiary should be limited to payment of expenses other than food and shelter, medications, medical services, assistive technology, transportation, education, and certain housing items as those items are generally provided by public assistance already. If the trust agreement is properly drafted, the funds held in the SNT will not be counted as resources for purposes of determining eligibility for SSI and Medicaid benefits.[3]

There are two types of SNTs: third party SNT and the self-settled SNT. A third-party SNT is a trust in which a third party, such as a family member or friend, creates and funds the trust for a disabled individual. A self-settled SNT is a trust in which a disabled individual funds the trust with his or her own assets. For either type of SNT, trustee selection is important since the trustee will have sole and absolute discretion over the SNT assets and must understand the interplay between the beneficiary’s eligibility for public benefits and the provisions of the SNT. For this reason, professional trustees are often recommended.

Before creating any type of SNT, it is important to seek the advice of an attorney who is experienced in estate planning to carefully review several SNT planning considerations including, but not limited to: who will act as trustee; the preparation of a letter of intent to assist the trustee of the SNT; and funding options for the SNT.

*Admitted to the practice of law in Florida.


[1] H.R. 31 – 114th Congress (2015-2016).  The Act amends Section 1917(d)(4)(A) of the Social Security Act (42 U.S.C. 1396p(d)(4)(A)) by inserting “the individual,” after “for the benefit of such individual by.”

[2] In order to be eligible for SSI and Medicaid benefits, an individual cannot have more than $2,000 in assets that can be converted to cash. To understand what resources may be included for purposes of determining public benefits eligibility see https://www.ssa.gov/ssi/text-resources-ussi.htm  and 20 CFR § 416.1201(a)(1).

[3] State Medicaid Programs and Social Security Administration’s Program Operations Manual Systems have specific guidelines or requirements for SNTs.  For more information visit https://secure.ssa.gov/poms.nsf/lnx/0501120000.

Greenberg Traurig’s Bradley Marsh Featured in Law360

Posted in Firm News

In this Law360 article, Greenberg Traurig Shareholder Bradley Marsh discusses California real estate legislation and regulations to watch in 2017.  Marsh addresses how California will regulate and tax recreational marijuana and proposed changes to Prop. 13.  To read the full article, click here.

2017 Federal Tax Inflation Adjustments

Posted in IRS, Tax Planning

Each year, the IRS makes inflation adjustments to numerous thresholds, exemptions, exclusions, and other amounts that affect various tax calculations under the Internal Revenue Code. For example, annual inflation adjustments apply to the standard deductions available to taxpayers for income tax purposes, the filing thresholds for each income tax bracket, the amount available for annual exclusion gifts, and the federal gift and estate exemption, just to name a few. With 2016 almost over, it’s a good time to review the 2017 federal tax inflation adjustments to see how they may impact your planning next year.

See IRS release IR-2016-139 summarizing some of the more notable adjustments.

For a complete list of all federal tax provisions impacted by annual inflation adjustments, see Rev. Proc. 2016-55.

LexBlog