1. Regulations under §67 regarding miscellaneous itemized deductions of a trust or estate. Proposed regulations were published on July 27, 2007. This project, which first appeared on the 2006-07 Priority Guidance Plan, addresses the conflict between O’Neill Irrevocable Trust v. Commissioner, 994 F. 2d 302 (6th Cir. 1993) (holding that section 67(e)(1) exempts from the “2% floor” on miscellaneous itemized deductions the investment advice expenses of multi-generation trusts) and the opposite holdings in Mellon Bank v. United States, 265 F.3d 1275 (Fed. Cir. 2001), Scott v. United States, 328 F.3d 132 (4th Cir. 2003), and now William L. Rudkin Testamentary Trust v. Commissioner, 467 F.3d 149 (2d Cir. 2006), aff’d sub nom Michael J. Knight, Trustee v. Commissioner, 552 U.S. ___ (No. 06-1286, Jan. 16, 2008). Generally reflecting the Second’s Circuit’s “could not have been incurred” standard, the proposed regulations (REG-128224-06) would apply the 2% floor to all expenses of an estate or trust except expenses that are “unique” to an estate or trust, and an expense would be considered “unique” only if “an individual could not have incurred that cost in connection with property not held in an estate or trust.” The proposed regulations would also require the “unbundling” of unitary fiduciary fees or commissions, so as to identify the portions attributable to activities and services that are not “unique” and are therefore subject to the 2% floor.
On February 27, 2008, the Service issued Notice 2008-32, 2008-11 I.R.B. 593, reopening the comment period on the proposed regulations until May 27, 2008, and providing, among other things, that “[t]he IRS and the Treasury Department expect to issue final regulations … consistent with the Supreme Court’s holding in Knight,” and that fiduciaries meanwhile would not be required to “unbundle” a unitary fiduciary fee on 2007 income tax returns. References in the Supreme Court’s Knight opinion to “a somewhat ambiguous exception,” “uncertainty,” and “the absence of regulatory guidance” seem to suggest that any reasonable regulatory interpretation of section 67(e) would receive deference from the courts, leaving the door open for Treasury to provide definitive guidance that Fellows hope to be practical and consistent with congressional objectives of simplification.
Both ACTEC and I submitted comments pursuant Notice 2008-32 on May 27, 2008.
2. Guidance under §529 regarding qualified tuition programs. An advance Notice of Proposed Rulemaking (ANPRM) was published on January 18, 2008. The advance notice of proposed rulemaking (REG-127172-05) (essentially a request for public comment on proposed rules in conceptual form without actual regulatory language) was published on January 18, 2008, addressing the application of transfer taxes to qualified tuition programs (QTPs) under section 529. In addition to a general anti-abuse rule, rules are proposed to address challenging questions regarding the application of transfer taxes to contributors, account owners, and designated beneficiaries. The proposed rules have been controversial and have generated a lot of comment. ACTEC submitted comments on April 16, 2008.
3. Final regulations under §642(c) concerning the ordering rules for charitable payments made by a charitable lead trust. Proposed regulations were published on June 18, 2008. Proposed Reg. §§ 1.642(c)-3(b)(2) & 1.643(a)-5(b) (REG-101258-08) would allow provisions in a governing instrument of an estate or trust that specify the source from which income amounts are to be paid to charities to be respected for federal tax purposes only when the provisions have “economic effect independent of income tax consequences” – that is, apparently only if those provisions affect the amount that is paid to charity. In an annuity or unitrust context it is hard to think of an ordering regime that affects the amount that is paid to charity. Thus, the proposed regulations are in substance a prohibition, and the amount of income distributed to each charitable beneficiary will consist of the same proportion of each class of items of income of the estate or trust as the total of each class bears to the total of all classes.
Although the proposed regulations themselves do not include an effective date, the preamble to the notice of proposed rulemaking states that “[t]he regulations, as proposed, apply to trusts and estates for taxable years beginning after the date final regulations are published in the Federal Register.” It is not explicitly stated whether and how the regulations would apply to existing irrevocable trusts, but the preamble expresses the belief of the IRS and Treasury, based on “the structure and provisions of Subchapter J as a whole” and supported by a chain of references and cross-references, that the result in the proposed regulations is already required by the law and regulations. When publishing sample charitable lead unitrust forms in July 2008, the Service stated: “A provision in the governing instrument of a charitable lead trust that provides for the payment to charity to consist of different classes of income determined on a non pro rata basis will not be respected because such a provision does not have economic effect independent of the income tax consequences of the payment. See §1.642(c)-3(b)(2) and (3).” Rev. Proc. 2008-45, 2008-30 I.R.B. 224, § 5.02(10); Rev. Rul. 2008-46, 2008-30 I.R.B. 238, § 5.02(10).
4. Guidance under §643 regarding uniform basis rules for trusts. This project is new in the 2008-09 Plan. It is likely that it is intended to address the results when the income and remainder beneficiaries of a charitable remainder trust sell their respective interests in a coordinated sale designed to circumvent the rules governing commutation of CRT interests.
5. Adjustments to sample charitable trust forms under §664. When it published sample charitable lead unitrust forms in Rev. Proc. 2008-45, 2008-30 I.R.B. 224, and Rev. Rul. 2008-46, 2008-30 I.R.B. 238, the Service completed a round of sample forms for various split-interest trusts. Now the Service apparently intends to go over its work again, to reflect updates in the law, practice, and thinking.
6. Revenue ruling regarding the consequences under various income, estate, gift, and generation-skipping transfer tax provisions of using a family owned company as a trustee of a trust. A proposed Rev. Rul. was published on August 4, 2008. As Capital Letter Number 11 shows, the proposed revenue ruling published in Notice 2008-63, 2008-31 I.R.B. 261, strikes the right chord by attempting to find a way to make the use of a family-owned trust company tax-neutral, by preventing the owners from doing indirectly through the company what they could not do directly themselves, but permitting unwelcome tax consequences to be avoided by the same types of firewalls that are used for individual trustees.
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 April 25, 2008. While the so-called “anti-Kohler regulations” (Proposed Reg. § 20.2032-1(f), REG-112196-07) will need a little polishing in their application to post-death corporate reorganizations (ACTEC submitted comments on July 22, 2008), their principal effect and likely principal objective is to curtail the use of purported valuation discounts arising from post-death fractionalizations of assets like real estate and family limited partnerships and LLCs. As Capital Letter Number 11 concludes, it is hard to lament too strenuously the loss of techniques that seemed “too good to be true” anyway.
8. Guidance under §2036 regarding graduated grantor retained annuity trusts (GRATs). Final regulations, Reg. §§ 20.2036-1(c) & 20.2039-1(e), T.D. 9414, published on April 23, 2008, took the relatively welcome position that the Service will apply section 2036 and will refrain from applying section 2039 when the grantor of a GRAT dies during the GRAT term. Under the new regulations, the amount includible in the gross estate is the amount needed to generate the retained interest without invasion of principal – that is, in perpetuity – up to the entire date-of-death value of the trust assets. Reg. § 20.2036-1(c)(2)(i). In the case of a GRAT, this will usually result in inclusion of the entire value of the assets, unless the assets have increased enormously in value.
The new regulations offer one GRAT example, Reg. § 20.2036-1(c)(2)(iii), Example 2, which, unlike many GRATs, is not graduated – that is, it does not include an annual increase in the annuity, which, if paid in perpetuity, will always exhaust the GRAT if the graduation rate, usually 20%, exceeds the 7520 rate. The preamble to the final regulations acknowledged that an example using a graduated GRAT would be helpful and appropriate, but stated that the issue requires further consideration. This 2008-09 project is the result.
9. Guidance providing procedures for filing and perfecting protective claims for refunds for amounts deductible under §2053. This project is new in the 2008-09 Plan and grows out of item 11.
10. Guidance under §2053 regarding personal guarantees and the application of present value concepts in determining the deductible amount of administration expenses and claims against the estate. This project also grows out of item 11. The second part of this project, relating to “present value concepts,” is evidently aimed at the leveraged benefit obtained when a claim or expense is paid long after the due date of the estate tax, but the additional estate tax deduction is credited as of the due date of the tax and earns interest from that date. If this project results in a deduction of only the present value of the payment, as of the due date of the tax, and the discount rate used in the calculation of the present value is the same as the rate of interest on the tax refund, and the interest is not subject to income tax (or the discount rate is also reduced by the income tax rate), then the invocation of “present value concepts” might make very little difference on paper.
11. Final regulations under §2053 regarding the extent to which post-death events may be considered in determining the deductible amount of a claim against the estate. Proposed regulations were published on April 23, 2007. This project, which originally appeared in the 2003-04 Plan, addresses the valuation of claims against the estate, especially claims being pursued in litigation pending at the date of the decedent’s death. In general, the proposed regulations (REG-143316-03) will allow a deduction of otherwise deductible (that is, existing at the date of death and legally enforceable) claims only if and when they are paid or ascertainable with reasonable certainty. If that does not occur before the estate tax statute of limitations runs, the executor’s recourse is to file a protective claim for refund (the procedures for which will be clarified by the project announced in item 9).
12. Final regulations under §2642(g) regarding extensions of time to make allocations of the generation-skipping transfer tax exemption. Proposed regulations were published on April 17, 2008. This first appeared on the 2008-09 Priority Guidance Plan. The background of this project is section 564(a) of EGTRRA, which added subsection (g)(1) to section 2642, directing Treasury to publish regulations providing for extensions of time to allocate GST exemption or to elect out of statutory allocations of GST exemption (when those actions are missed on the applicable return or a return is not filed).
13. Guidance under §2704 regarding restrictions on the liquidation of an interest in a corporation or partnership. This item first appeared on the 2003-04 Plan and will address section 2704(b)(4), which states, in the context of corporate or partnership restrictions that are disregarded:
The Secretary may by regulations provide that other restrictions shall be disregarded in determining the value of the transfer of any interest in a corporation or partnership to a member of the transferor’s family if such restriction has the effect of reducing the value of the transferred interest for purposes of this subtitle but does not ultimately reduce the value of such interest to the transferee.
Items 11, 12, and 13 will be the subject of closer scrutiny in future Capital Letters.
14. Final regulations under §7477 regarding declaratory judgment procedures relating to gift tax valuation issues. Proposed regulations were published on June 9, 2008. The Taxpayer Relief Act of 1997 (P.L. 105-34) enacted a trilogy of welcome relief provisions to accompany the imposition of the gift-by-gift statute of limitations disclosure rules of section 6501(c)(9). The relief trilogy, effective for gifts made after August 5, 1997, included (i) addition of a new section 2001(f) to deny revaluation for estate tax purposes of all gifts adequately disclosed on a gift tax return once the gift tax statute of limitations has run, (ii) amendment of section 2504(c) to drop the requirement that a current gift tax must have been paid to achieve this finality of valuation, thus extending the finality of valuation provided by that statute to gifts that merely use some or all of the donor’s unified credit, and (iii) the addition of section 7477 to empower the Tax Court to issue declaratory judgments regarding the value of gifts, including use of the unified credit, if the donor has first exhausted the available administrative remedies with the Service.
The proposed regulations relating to declaratory judgments (REG-143716-04) describe a “Preliminary Determination Letter” (similar to a “30-day letter”), which the donor may use as the basis for a formal protest to request consideration by Appeals, and a “Letter 3569” (similar to a statutory notice of deficiency or “90-day letter”), which empowers a donor to file a petition with the Tax Court. The Service will view full participation in the Appeals process, including a post-petition referral to Appeals if a Preliminary Determination Letter is not issued for reasons other than the donor’s delay, as an administrative remedy that the statute requires to be exhausted. Proposed Reg. § 301.7477-1(d)(3)(i) & (ii). But the Service will not view the refusal to extend the statute of limitations as a failure to exhaust administrative remedies. Proposed Reg. § 301.7477-1(d)(3)(iii).
15. Guidance under §7520 updating the mortality based actuarial tables to reflect data compiled from the 2000 census. Under section 7520(c)(3), the tables prescribed for making the actuarial calculations under section 7520 are to be revised “[n]ot later than December 31, 1989 [and] … not less frequently than once each 10 years thereafter to take into account the most recent mortality experience available as of the time of the revision.” This project will be important, because estate planners make actuarial calculations all the time, but it will not be controversial.