This edition is the first of a “few” which will be devoted to information gleaned from the American Bar Association’s Real Property, Trusts and Estates’ Spring Symposium in Washington, DC and will be my summary of a few selected sessions. Hopefully this will be of some interest to all of you.
Hot Topics Breakfast
Richard Dees, Turney Berry and Cathey Hughes were on the menu at 7:30 AM this morning.
Cathey Hughes of Treasury took the lead describing from the inside what IRS and Treasury are up to. First, she noted that there simply aren’t that many new developments, and part of that has to do with the (again) reduced budget for the IRS. They put on their budget and business plans what they think they can accomplish during a fiscal year. The official deadline for people to send in suggestions is tomorrow, May 1, but she encouraged people to submit ideas year round. Yet she cautioned that they simply can’t put everything on those plans because they don’t have the manpower to get that much done.
One of the new things proposed by the President is the idea of implementing a legislative change that would trigger the recognition of gain on appreciated assets at death, which would be in addition to but not in replacement of estate tax.
Another major change has to do with combining their analysis of GRATs and sales to defective grantor trusts. Treasury has said a lot about legislative and other proposals to modify the rules for grantor retained annuity trusts (GRATs), and then realized that if they make GRATs less favorable, people will do more sales to grantor trusts. So getting revenue estimates was impossible. They are combining them into one item so they can address both and make a functional difference.
One issue Turney Berry asked Ms. Hughes about is Rev.Rul. 2001-38 which says that elections regarding certain types of trusts (QTIPs) would be disregarded if the result was no change in estate tax due. But with the advent of portability of a deceased spouse’s unused estate tax exemption amount to the surviving spouse, planners don’t want the marital deduction for transfers to QTIPs ignored. If the deduction election is ignored, then part of the decedent’s estate tax exemption must be used as assets flow to the trust, and, necessarily, the ported over “unused” exemption is diminished. Cathey Hughes says they are getting to that but it is way down on the list of things-to-do.
Income tax basis of assets in a charitable remainder trust is on their mind under Section 1014. Regulations should come out on those soon.
And they are working on regulations that are related to Section 1022 that dealt with the ability to elect carryover basis in 2010. And actually she said they are not working on 1022 regulations but rather are going through all regulations that mention basis in any respect and determining if each of those regulations have to be amended to refer to 1022.
Section 2801 dealing with transfers by expatriates is on their mind. She likened those to playing “whack-a-mole.” As soon as they thought they had them ready, one division or department of Treasury or the IRS would notice a problem, and then they would have to re-start and make sure that had been addressed.
Other things from Cathey Hughes – they are still working on getting out final regulations under Section 2032, proposed regulations on 2053 present interest re deductible expenses and regulations under Section 2704 (which had been on the business plan, then were on the legislative agenda for three years and now are back on the business (regulatory) plan.
A big project is that they have to issue regulations on new Section 529a under the ABLE Act by June. Congress gave them only 6 months to get these out. And they have had to coordinate those regulations with the Social Security Administration especially with respect to the definitions. She cautioned that people should not think those regulations will be like the ones under Section 529 college plans. They are different in so many important respects. She did note that Treasury is trying to put out the word that states which have enacted enabling legislation that may not square with the final regulations will not be penalized and the IRS will allow a long cure period so the state legislatures can revise their statutes.
And another big project are revised regulations under Section 469 related to passive and active income and losses, to address the issue of material participation of trusts and estates. She declared that they are not trying to write these regulations to get them to where the IRS wants to be but instead based on what makes sense. (crickets)
Turney Berry asked about decanting and her response was, “We are very busy now.”
Richard Dees then began to describe a couple of CCAs issued by national office, and referred to now by Tax Notes as ILM or internal legal memoranda. He pointed out that these are not subject to any sort of review or comment procedure so there is never a chance for the taxpayer or the public or the bar, or other parts of the IRS or Treasury, to weigh in. As a result, their advice sometimes turns out to be wrong.
He pointed to CCA 20120408 which dealt with retention of a testamentary power of appointment and how an in terrorem clause coupled with an arbitration provision could effectively nullify Crummey powers. But that CCA was issued in what has now become the Mikel decision out of the Tax Court, which said that simply did not apply, and the IRS was wrong.
Another errant CCA was the one issued as the Frank Aragona case was just getting started and concluded that the hours spend working by a person who was both a trustee and an employee of a company owned by a trust could not be attributed to that person as trustee. And then came the Tax Court decision in Frank Aragona which said the IRS was wrong – that a person who holds both positions can effectively double-count hours as employee hours and trustee hours. And the bottom line was that the trust was found to have materially participated in the business making losses active instead of passive.
Mr. Dees pointed out that the IRS is still litigating the issue in other venues. He told of a case out of Chicago where there were nine trusts and a single trustee of all. If that trustee could count all of his hours working for all nine trusts, then the trusts would be found to have materially participated in their jointly owned property. But if he could not aggregate his hours, then no one trust would have enough hours and losses would be passive.