Capital Letters

Where Estate and Gift Tax Legislation and Regulations Stand Now

Capital Letter No. 43
October 13, 2017

Paradigm shifts, plus politics as usual.

Dear Readers Who Follow Washington Developments:

It is time to take inventory of the prospects for changes in the tax law affecting estate planning.  A new summary of Republican leadership’s aspirations for tax legislation was published on September 27, 2017.  This is also the season by which Treasury and the IRS typically have announced their “Priority Guidance Plan” identifying regulatory and other administrative guidance they expect to devote resources to in the 12-month period beginning July 1 and ending the following June 30.  This year both the legislative and regulatory front are being pummeled by significant political winds.


Thoughtful and constructive policy discussion seems to be increasingly difficult in the current spiral into polarization, in which disagreement has become contempt, debate has become exorcism, and moderation has become the most deadly of vices.  Although the modern descent into polarization and incivility predates the influence of any current actor, the spiral is certainly aggravated today by a strident tone from the White House – some might use a harsher description, some maybe gentler – that seems unprecedented, at least in the television and internet eras.  With no baseline like it by which to make comparisons, it makes analysis, and especially predictions, very tentative.

Yet, now more than ever it seems, Congress in the legislative sphere, and Treasury and the IRS in the regulatory sphere, are being called upon to make decisions for which thoughtful and constructive policy discussion could be crucial.


When we come to any discussion of the prospects for tax reform, there is not even a consensus about what tax reform is.  It is not just tax reduction.  Tax reform could mean redistributing the tax burden so that the tax system is more progressive.  Or it could mean putting more cash in the hands of people most likely to invest it so that productivity increases and wages and standard of living are improved.  Or it could mean eliminating most special tax breaks and incentives and lowering rates so that the tax system is simpler.  Or it could mean providing incentives to encourage activity thought to be socially or economically desirable.  Historically, it has meant any of those things from time to time, sometimes all of those things at the same time, which is one of the reasons the Tax Code has gotten so complicated.

Current Legislative Proposals

There are three principal sources that are being compared for tax ideas at this time:

  • The House Republican leadership’s 35-page “Blueprint,” “A Better Way: Our Vision for a Confident America” (June 23, 2016);
  • President Trump’s one-page Outline, “2017 Tax Reform for Economic Growth and American Jobs” (April 26, 2017); and
  • The nine-page “Big Six” (White House Chief Economic Advisor Gary Cohn, Treasury Secretary Steven Mnuchin, House Speaker Paul Ryan, House Ways and Means Committee Chairman Kevin Brady, Senate Majority Leader Mitch McConnell, and Senate Finance Committee Chairman Orrin Hatch) “Unified Framework for Fixing Our Broken Tax Code” (September 27, 2017).[1]

Business Tax Proposals

The core of the proposals in all three documents appears to be the reforms of the income taxation of businesses, called “job creators.”  Both last year’s Blueprint and last month’s Framework propose lowering the top 35 percent corporate income tax rate to 20 percent, with a special business rate of 25 percent.  The Blueprint describes the special 25 percent rate as applicable to “small businesses and pass-through income,” while the Framework more precisely targets “the business income of small and family-owned businesses conducted as sole proprietorships, partnerships, and S corporations,” thus more clearly omitting investment entities and personal service income that might be earned through an entity.  The 25 percent rate is to be contrasted with the top individual rate of 33 percent in the Blueprint and 35 percent (with the suggestion that “an additional top rate may apply”) in the Framework, which makes it clearly a beneficial rate.  Even when compared to the proposed corporate rate of 20 percent, a 25 percent sole proprietorship or passthrough rate may be better when the second level of taxes on dividends to shareholders is considered (although members of the Senate Finance Committee are reportedly interested in achieving at least some partial “integration” of the taxes on corporations and their shareholders).

The President’s April Outline proposed 15 percent as both the corporate rate and the passthrough rate.  Anything below at least the high 20s, certainly including the Blueprint and Framework proposals, would be aggressive from the standpoint of the revenue neutrality that may be essential to the durability of the legislation.  President Trump’s proposal of a 15 percent rate was a clear sign that he was either abandoning revenue neutrality as an objective or was offering that rate only as a negotiating position.  That the Administration participants joined in the Framework’s return to 20 and 25 percent supports the negotiating position explanation, even though those rates still seriously strain revenue neutrality.

Individual Income Tax Proposals

All three proposals would reduce individual income tax rates and reduce the number of tax brackets to three, with the possible “additional top rate” in the Framework.  The proposed rates are 12, 25, and 33 percent in the Blueprint, 10, 25, and 35 percent in the President’s Outline, and 12, 25, and 35 percent (and possibly another) in the Framework.

All three proposals would double or roughly double the standard deduction.  But the Blueprint and the Framework (the President’s Outline is silent) would eliminate personal exemptions, offsetting much of that increase in the standard deduction.  They would also eliminate most itemized deductions, possibly all except the deductions for home mortgage interest and charitable contributions.  The proposed elimination of the deduction for state income taxes has publicly caused a lot of concern and is very likely to be compromised in some way.

None of the proposals offer much detail.  Notably, they don’t say at what levels of taxable income the proposed brackets begin and end.  Without guessing, it is hard to meaningfully compare the proposals to current law.  Nevertheless, it is significant that representatives of the House, the Senate, and the Administration have all agreed on broad contours.  Tax changes will be a challenge for many reasons, but this broad agreement could make it somewhat easier.

Transfer Tax Proposals

Not surprisingly, all three proposals would repeal the estate tax – or the “death tax” as the President’s Outline and the Framework call it, and the Blueprint and Framework include repeal of the GST tax.  None of the proposals include repeal of the gift tax, and the bill that has been introduced to model the Republican leadership’s intentions regarding the estate tax – H.R. 631, the “Death Tax Repeal Act of 2017,” introduced by Reps. Kristi Noem (R-SD) and Sanford Bishop (D-GA) on January 24, 2017 – retains the gift tax with a 35 percent rate and the current indexed exemption.  Retaining the gift tax, of course, mimics the 2001 Tax Act, when some said the gift tax was needed to backstop the income tax by preventing the easy transfer of capital gain or income-producing property to taxpayers with more favorable tax profiles.

Challenges for the Current Legislative Proposals

Tax reform will be difficult in this Congress.  Aside from the political challenges, there are a lot of details to be filled in, drafted, modeled for workability, and scored for revenue effect.  Then there is the painful task of finding “pay-fors” – revenue-raisers to keep the legislation within the fiscal targets.  This is frequently an occasion to pull previous ideas “off the shelf” if they come with the right revenue estimate to plug an identified fiscal gap.  This, for example, is how the “consistent basis” rules of sections 1014(f) and 6035, minus the proposed application to gifts, were pulled out of the Obama Administration’s “General Explanations of the Administration’s Revenue Proposals” (popularly called “Greenbooks”) to provide short-term funding for the Highway Trust Fund in the Surface Transportation and Veterans Health Care Choice Improvement Act (Public Law 114-41) that was signed into law on July 31, 2015.  Although the notion of “consistency” is superficially appealing, the legislation is widely regarded as ill-advised, fostering tension between executors and beneficiaries, needlessly adding to the burdens of executors, and creating interpretive challenges that seemed to surprise even the Treasury Department that had asked for the legislation in the first place.[2]

In contrast, the repeal of the estate and GST taxes is already drafted in H.R. 631.  It would still be hard to make it permanent, however, in the anticipated context of budget reconciliation.  The prospect of a sunset, the likely retention of the gift tax, and the potential for a carryover basis or other income tax surprise could make estate tax repeal rather high-maintenance and disappointing, creating an unwelcome distraction from the business tax changes at the core of the current proposals.

This is not to say that repeal of the estate tax is impossible.  But it is not a sure thing.


Trump Administration Initiatives

On January 30, 2017, ten days after his inauguration, President Trump issued Executive Order 13771, titled “Reducing Regulation and Controlling Regulatory Costs.”  It requires that whenever a federal department or agency proposes a significant new regulation, it must identify at least two existing regulations to be repealed.  It also requires that the net cost of the new regulation, taking into account the savings from the accompanying repeal, be “no greater than zero.”

This was followed on February 24, 2017, by Executive Order 13777, titled “Enforcing the Regulatory Reform Agenda.”  It requires each federal department and agency to designate a Regulatory Reform Officer and establish a Regulatory Reform Task Force.  Among other things, each Regulatory Reform Task Force is to review existing regulations and “attempt to identify regulations that:

“(i)    eliminate jobs, or inhibit job creation;

“(ii)   are outdated, unnecessary, or ineffective;

“(iii)  impose costs that exceed benefits;

“(iv)   create a serious inconsistency or otherwise interfere with regulatory reform initiatives and policies;

“(v)    are inconsistent with [specified transparency standards]; or

“(vi)   derive from or implement Executive Orders or other Presidential directives that have been subsequently rescinded or substantially modified.”

For purposes of both Executive Orders 13771 and 13777, a “regulation” includes “an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or to describe the procedure or practice requirements of an agency.”  But these requirements do not apply to regulations related to the military, national security, foreign affairs, an agency’s own management or personnel; or any other category the Director of the Office of Management and Budget (OMB) exempts.  In the tax context, the actions caught by that definition could include revenue rulings, revenue procedures, and perhaps even occasional notices and announcements.  The reference to “particular applicability” seems broad enough to include even taxpayer-specific actions like letter rulings, but there is no reason to assume that it would be pushed to such an extreme.

Then of course Executive Order 13789, targeted at Treasury and titled “Identifying and Reducing Tax Regulatory Burdens,” was issued on April 21, 2017, directing the review of recent tax regulations that led to the announcement of the withdrawal of the August 2016 proposed regulations under section 2704, discussed in Capital Letters Number 40 and 42.  In addition to announcing the actions discussed in Capital Letter Number 42, Treasury’s October 2 Report stated that:

“Treasury continues to analyze all recently issued significant regulations and is considering possible reforms of several recent regulations not identified in the June 22 Report [Notice 2017-38].… In addition, in furtherance of the policies stated in Executive Order 13789, Executive Order 13771, and Executive Order 13777, Treasury and the IRS have initiated a comprehensive review, coordinated by the Treasury Regulatory Reform Task Force, of all tax regulations, regardless of when they were issued. … This review will identify tax regulations that are unnecessary, create undue complexity, impose excessive burdens, or fail to provide clarity and useful guidance, and Treasury and the IRS will pursue reform or revocation of those regulations.”

Along this line, in addition to directing an immediate review of all tax regulations issued in 2016 and 2017, Executive Order 13789 had stated:

“To ensure that future tax regulations adhere to the policy described in … this order, the Secretary [of the Treasury] and the Director of the Office of Management and Budget shall review and, if appropriate, reconsider the scope and implementation of the existing exemption for certain tax regulations from the review process set forth in Executive Order 12866 and any successor order.”

That is a reference to a “regulatory impact assessment.”  For example, the Preamble to the August 2, 2016, Proposed Section 2704 Regulations itself included a typical statement that “Certain IRS regulations, including this one, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory impact assessment is not required.”

What Does That Mean?

If a “regulatory impact assessment” is required, it must, among other things, include the following information specified in section 6(a)(3)(C) of Executive Order 12866 (signed on September 30, 1993, by President Clinton):

“(i) An assessment, including the underlying analysis, of benefits anticipated from the regulatory action (such as, but not limited to, the promotion of the efficient functioning of the economy and private markets, the enhancement of health and safety, the protection of the natural environment, and the elimination or reduction of discrimination or bias) together with, to the extent feasible, a quantification of those benefits;

”(ii) An assessment, including the underlying analysis, of costs anticipated from the regulatory action (such as, but not limited to, the direct cost both to the government in administering the regulation and to businesses and others in complying with the regulation, and any adverse effects on the efficient functioning of the economy, private markets (including productivity, employment, and competitiveness), health, safety, and the natural environment), together with, to the extent feasible, a quantification of those costs; and

“(iii) An assessment, including the underlying analysis, of costs and benefits of potentially effective and reasonably feasible alternatives to the planned regulation, identified by the agencies or the public (including improving the current regulation and reasonably viable nonregulatory actions), and an explanation why the planned regulatory action is preferable to the identified potential alternatives.”

That regulatory impact assessment, along with a draft of the proposed regulations, must be reviewed within OMB before a proposed regulation is published for public comment.  In addition, the public must be informed of the content of the regulatory impact assessment and of any changes made in the draft of the proposed regulations after that draft was submitted to OMB for review.  Obviously, that is not information we are accustomed to seeing in connection with tax regulations.

Under section 3(f) of Executive Order 12866, these requirements apply to “any regulatory action that is likely to result in a rule that may:

“(1) Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities;

“(2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency;

“(3) Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or

“(4) Raise novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in this Executive order.”

Heretofore most tax regulations, like the section 2704 proposed regulations, have been considered exempt.  But it is easy to see how the application of these criteria – especially the first and possibly the fourth – can involve subjective assumptions and judgments, which Executive Order 13789 has now directed Treasury to “reconsider.”  We should anticipate that there will be pressure in the Trump Administration for those assumptions and judgments to be more favorable to taxpayers, and possibly for more regulatory impact assessments to be required.


With that backdrop, it is no wonder that the annual Treasury-IRS Priority Guidance Plan for the 12 months beginning July 1, 2017, has not been published yet.  (For that matter, there really has been no typical legislative Greenbook this year either.)  When a Priority Guidance Plan is published, it will be interesting to read, that’s for sure.

The annual Priority Guidance Plan, however, is not nearly as political as the Greenbook.  In the main, it is prepared by career civil servants in the Treasury Department and the IRS.  Historically, the Priority Guidance Plan does not change nearly as much as the Greenbook with a change of Administrations.  So here is a summary of the most current resource we happen to have – the 12 projects under the heading of “Gifts and Estates and Trusts” in the Priority Guidance Plan for the 12 months from July 1, 2016, through June 30, 2017, released on August 15, 2016:

1.  Guidance on qualified contingencies of charitable remainder annuity trusts under §664

This project was new in 2015 and has now been completed by Rev. Proc. 2016-42, 2016-34 I.R.B. 269, which provides a way for a charitable remainder annuity trust to terminate rather than make an annuity payment that would cause the CRAT to fail the “probability of exhaustion” test.

2.  Guidance on definition of income for spousal support trusts under §682

This project was new in 2016.  There is no reason to think that much progress has been made on it.

3.  Guidance on basis of grantor trust assets at death under §1014

This project was new in 2015.

Rev. Proc. 2015-37, 2015-26 I.R.B. 1196, created a stir when it added “[w]hether the assets in a grantor trust receive a section 1014 basis adjustment at the death of the deemed owner of the trust for income tax purposes when those assets are not includible in the gross estate of that owner under chapter 11 of subtitle B of the Internal Revenue Code” to the list of “areas under study in which rulings or determination letters will not be issued until the Service resolves the issue through publication of a revenue ruling, a revenue procedure, regulations, or otherwise.”  The prospect of getting a stepped-up basis at a grantor’s death for assets in a grantor trust the value of which is not included in the grantor’s gross estate would be quite interesting.  And the no-rule designation of Rev. Proc. 2015-37 was continued in section 5.01(12) of Rev. Proc. 2016-3, 2016-1 I.R.B. 126, and in section 5.01(10) of Rev. Proc. 2017-3, 2017-1 I.R.B. 130.

But it appears that this guidance project is aimed only at foreign trusts created by non-U.S. persons who would not have a gross estate anyway.  This is seen in Letter Ruling 201544002 (issued June 30, 2015), which ruled that assets in a revocable trust created by foreign grantors for their U.S. citizen children would receive a stepped-up basis under section 1014(b)(2) at the grantors’ deaths.  The ruling acknowledged the no-rule policy of Rev. Proc. 2015-37, but avoided it on the ground that the ruling request had been submitted before the no-rule policy was announced.  In fact, Rev. Proc. 2015-37 was published in the Internal Revenue Bulletin on June 29, 2015, the day before Letter Ruling 201544002 was issued, suggesting that the initiation of this guidance project was most likely coordinated with – or even prompted by – this letter ruling request, so that this could be the last such ruling request the IRS would have to consider before it could reexamine the issues in published guidance.

4.  Final regulations under §§1014(f) and 6035 regarding consistent basis reporting between estate and person acquiring property from decedent. Proposed and temporary regulations were published on March 4, 2016

This project would finalize the proposed regulations under the consistent basis legislation discussed above.  Because they were not finalized by January 31, 2017 (18 months after enactment of the statute), section 7805(b) will probably prevent them from being retroactive to the date of enactment of the statute.

5.  Revenue Procedure under §2010(c) regarding the validity of a QTIP election on an estate tax return filed only to elect portability

This was the only new item in the 2013-2014 Plan.  It was completed by the publication of Rev. Proc. 2016-49, 2016-42 I.R.B. 462, allowing QTIP elections on estate tax returns filed only to elect portability.

6.  Guidance on the valuation of promissory notes for transfer tax purposes under §§2031, 2033, 2512, and 7872

This project was new in 2015.  The Tax Court has held that section 7872 is the applicable provision for valuing an intra-family promissory note – specifically for determining that a note carrying the section 7872 rate may be valued at its face amount.  See Frazee v. Commissioner, 98 T.C. 554 (1992).  See also Estate of True v. Commissioner, T.C. Memo 2001-167, aff’d on other grounds, 390 F.3d 1210 (10th Cir. 2004).  But Judge Hamblen concluded his opinion in Frazee by stating:  “We find it anomalous that respondent urges as her primary position the application of section 7872, which is more favorable to the taxpayer than the traditional fair market value approach, but we heartily welcome the concept.”  98 T.C. at 590.  This could be the guidance project in which the IRS resolves the anomaly.

7.  Final regulations under §2032(a) regarding imposition of restrictions on estate assets during the six month alternate valuation period.  Proposed regulations were published on November 18, 2011

This first appeared in the 2007-08 Plan!  It should be near completion.  Often called the “anti-Kohler regulations,” after the post-death corporate reorganization case of Kohler v. Commissioner, T.C. Memo 2006-152, nonacq., 2008-9 I.R.B. 481, they are more likely aimed at efforts to bootstrap an estate into a valuation discount by creating or funding entities within the six-month period after death.  After taking an awkward approach in proposed regulations in 2008, the IRS has switched to a more workable approach in re-proposed regulations in 2011.  They have probably been ready to finalize for some time.

8.  Guidance under §2053 regarding personal guarantees and the application of present value concepts in determining the deductible amount of expenses and claims against the estate

This project first appeared in the 2008-09 Plan.  It will probably result in denying a deduction of the undiscounted amount of interest to be paid in the future on a promissory note that cannot be prepaid, as in the case of Graegin loans.  See Estate of Graegin v. Commissioner, T.C. Memo 1988-477).

9.  Guidance on the gift tax effect of defined value formula clauses under §§2512 and 2511

This project was also new in 2015.  It could address a technique that has become quite popular, especially after Wandry v. Commissioner, T.C. Memo 2012-88, nonacq., AOD 2012-004, 2012-46 I.R.B., was decided in 2012 when many estate planners were using defined value formulas for funding the surge of gifts that were being made in case the gift tax exemption returned to pre-2001 levels.

10.  Guidance under §§2522 and 2055 regarding the tax impact of certain irregularities in the administration of split-interest charitable trusts

This project was also new in 2016.  There is also no reason to think that much progress has been made on it.

11.  Regulations under §2704 regarding restrictions on the liquidation of an interest in certain corporations and partnerships

These are the proposed regulations that Treasury has decided to withdraw, as discussed in Capital Letter Number 42.

12.  Guidance under §2801 regarding the tax imposed on U.S. citizens and residents who receive gifts or bequests from certain expatriates

The Heroes Earnings Assistance and Relief Tax Act of 2008 (the “HEART” Act) enacted a new income tax “mark to market” rule when someone expatriates on or after June 17, 2008, and a new succession tax on the receipt of certain gifts or bequests from someone who expatriated on or after June 17, 2008.  The new succession tax is provided for in section 2801, comprising all of new chapter 15.  This project first appeared in the 2009-2010 Plan. 

Referring to the guidance contemplated by this project, Announcement 2009-57, 2009-29 I.R.B. 158 (released July 16, 2009), stated:

The Internal Revenue Service intends to issue guidance under section 2801, as well as a new Form 708 on which to report the receipt of gifts and bequests subject to section 2801.  The due date for reporting, and for paying any tax imposed on, the receipt of such gifts or bequests has not yet been determined.  The due date will be contained in the guidance, and the guidance will provide a reasonable period of time between the date of issuance of the guidance and the date prescribed for the filing of the return and the payment of the tax.

A succession tax paid by the recipient, grafted into a transfer tax paid by the transferor or the transferor’s estate, has proven very difficult to administer.  We now could very likely go a decade from the effective date of June 17, 2008, without the needed guidance.


This completes the survey of the current tax guidance environment begun with Capital Letter Number 40.  We will all be watching the news daily – within our tolerances for pain anyway!  Tax legislation need not be enacted by the end of 2017, but if the picture of legislative progress is not substantially clearer by the end of 2017, it may be very tough to enact anything significant in 2018.

[1] There are many other potential sources for ideas, of course, including Ways and Means Chairman Dave Camp’s 979-page “Discussion Draft” of the “Tax Reform Act of 2014” (February 26, 2014), which might, for example, provide ideas for revenue-raising offsets and for changes in the rules governing charitable contributions and tax-exempt organizations.

[2] In fairness to Treasury, it should be noted that the legislation Congress passed differed in material respects from what the Administration’s Greenbooks had proposed.  On the other hand, the quirky requirement of a report within 30 days of filing the estate tax return had first appeared in the “Sensible Estate Tax Act of 2011,” H.R. 3467, introduced on November 17, 2011, by Congressman Jim McDermott (D-WA), and the elimination of the applicability to gifts had first appeared in Chairman Dave Camp’s “Discussion Draft” of February 26, 2014.

Ronald D. Aucutt

© Copyright 2017 by Ronald D. Aucutt.  All rights reserved.