The accessible agenda for tax regulations has a different look this time, but the analysis of the history of the current projects, sometimes going back as far as 34 years, is much the same.
Dear Readers Who Follow Washington Developments:
In the Office of Management and Budget’s Fall 2018 Unified Agenda of Federal Regulatory and Deregulatory Actions, released on October 17, 2018, the Treasury Department and the Internal Revenue Service have identified their guidance priorities for the next 12 months or so. The Unified Agenda is not new, but In past years it has generally been easier to review this information in the format of the annual Treasury-IRS Priority Guidance Plan for each plan year beginning July 1 and ending the following June 30. Although the format in the Unified Agenda is very different, there is still significant continuity with the 2017-2018 Priority Guidance Plan, last updated in the Fourth Quarter Update released on August 17, 2018. This Capital Letter will outline some of that continuity, comment on noteworthy projects in the Unified Agenda, and conclude with a compilation of the 18 regulatory projects in the Unified Agenda that may be of most interest to estate planners, grouped by their target completion dates.
STATEMENT OF REGULATORY PRIORITIES
Part of the Unified Agenda consists of statements of the regulatory priorities of various departments and agencies, including the Treasury Department’s Statement of Regulatory Priorities. The Statement encompasses several Treasury agencies, including ATF, Customs, Financial Crimes, the Comptroller of the Currency, and of course the IRS (in Part VI).
The Statement of Regulatory Priorities generally corresponds to Part 1, titled “Initial Implementation of Tax Cuts and Jobs Act (TCJA),” and Part 2, titled “Identifying and Reducing Regulatory Burdens,” in the 2017-2018 Priority Guidance Plan, as updated.
Implementing the 2017 Tax Act
In the Statement of Regulatory Priorities, the IRS and Treasury’s Office of Tax Policy state that during fiscal year 2019 (October 1, 2018, through September 30, 2019), their “first [regulatory] priority is to provide guidance regarding initial implementation of key provisions of the Tax Cuts and Jobs Act (TCJA), Public Law 115-97.” In unnumbered bullet points, the Statement lists 17 priorities, which are carried forward word-for-word from the 25 items in Part 1 of the 2017-2018 Priority Guidance Plan, as it had been revised after enactment of the 2017 Tax Act. The other eight items in the former Part 1 are presumably omitted because Treasury and the IRS are generally satisfied with what they have already accomplished. These omitted items include “Guidance under §170 concerning certain payments made in exchange for state and local tax credits,” which was provided in the controversial Notice 2018-54, 2018-24 I.R.B. 750, on May 23, 2018, and “Guidance regarding the application of §682 [relating to divorce] to trusts executed on or before 12/31/18,” which was provided by Notice 2018-37, 2018-18 I.R.B. 521, on March 13, 2018.
Basic Exclusion Amount (“Clawback”). Of special interest is the thirteenth bullet point, carried over from item 16 of the former Part 1: “Guidance on computation of estate and gift taxes to reflect changes in the basic exclusion amount.” The expanded explanation of this project (REG-106706-18) in the Unified Agenda is “Regulations addressing the difference between the basic exclusion amount applicable at the date of death and the basic exclusion amount applicable with respect to gifts made by the decedent.” That will address the concern about what is sometimes described as “clawback” of a temporary gift tax benefit when calculating the estate tax at the donor’s death.
For example, if a large gift today is entirely or partly exempt from gift tax because of the nearly doubled basic exclusion amount under the 2017 Tax Act and the donor dies after 2025 when the doubling has “sunsetted,” will part of the gift in effect be taxed anyway (“clawed back”) because the deduction under section 2001(b)(2) for gift tax paid would be the temporarily lower 2018 tax? Section 2001(g)(2), added in 2017, clearly provides (perhaps even without regulations) that the answer is no. The lower exclusion amount in effect at the time of death will be used to compute a hypothetical gift tax that is higher than the actual gift tax, and that higher deduction on line 7 of Part 2 of the estate tax return will produce a lower net estate tax. The regulations will certainly provide that.
There has also been speculation that the regulations might address the scenario of making, for example, a $5 million gift today (assuming no previous taxable gifts) and treating that gift as using only the temporary “bonus” exclusion resulting from the 2017 Tax Act, which is sometimes described as using the exclusion “off the top” and still leaving the exclusion of $5 million (indexed) to be used against the estate tax after 2025. But that type of relief would require, in effect, that the higher exclusion amount in effect at the time of the gift is used to compute the actual gross estate tax at the time of the donor’s death. Because that is exactly the opposite of what section 2001(g)(2) clearly requires, it would require a significant regulatory stretch to provide that relief, and it should not be expected.
The current description in the Unified Agenda identifies this regulatory project as “significant,” which means that in response to Executive Order 13789 of April 21, 2017, it will require additional review by the Office of Management and Budget and a “regulatory impact assessment” under Executive Order 12866 of September 30, 1993. That additional review is discussed under the heading “What Does That Mean?” in Capital Letter Number 43. The current description also indicates a target completion date for these regulations of December 2018.
The Qualified Business Income Deduction Under Section 199A. The fifth bullet point in the Statement of Regulatory Priorities, carried over from item 7 of Part 1 of the 2017-2018 Priority Guidance Plan, as updated, is “Computational, definitional, and anti-avoidance guidance under new §199A.” This new deduction is basically (with computational nuances) 20 percent of “qualified business income” of a taxpayer other than a corporation. It was included in the 2017 Tax Act to treat such unincorporated taxpayers more like corporations, for which rates of 34 percent on taxable income over $75,000 and 35 percent on taxable income over $10 million were replaced with a flat rate of 21 percent. For example, at the new top individual rate of 37 percent (only slightly lower than the former 39.6 percent rate), a 20 percent deduction would transform the effective rate on qualified business income to a more competitive 29.6 percent. (Unlike the corporate rates, the individual rates and section 199A sunset in 2026.)
Proposed regulations were released on August 8, 2018. In addition to section 199A, they included proposed regulations under section 643(f), designed to prevent taxpayers from manipulating the section 199A deduction by the use of multiple nongrantor trusts. But Proposed Reg. §1.643(f)-1 would apply to all nongrantor trusts for all income tax purposes, not just to trusts claiming the qualified business income deduction, and for that reason it is especially important to estate planners.
Section 643(f), enacted by the Deficit Reduction Act of 1984, states that, “[f]or purposes of this subchapter [subchapter J], under regulations prescribed by the Secretary, 2 or more trusts shall be treated as 1 trust if … (1) such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries, and (2) a principal purpose of such trusts is the avoidance of the tax imposed by this chapter.” Proposed Reg. §1.643(f)-1(a), mirroring the statute, states that “two or more trusts will be aggregated and treated as a single trust if such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries, and if a principal purpose for establishing such trusts or for contributing additional cash or other property to such trusts is the avoidance of Federal income tax.”
Proposed Reg. §1.643(f)-1(b) adds, however, that “[a] principal purpose for establishing or funding a trust will be presumed if it results in a significant income tax benefit unless there is a significant non-tax (or non-income tax) purpose that could not have been achieved without the creation of these separate trusts.” The effective downgrading of the “principal purpose” standard to a “significant income tax benefit” standard will be controversial and may be challenged if it is finalized without change.
On September 27, ACTEC submitted comments on the proposed regulations, including comments on the proposed multiple-trust rules. ACTEC Washington Affairs Committee Vice Chair Don Kozusko testified on ACTEC’s behalf at the public hearing on October 16. Like the “clawback” regulations, the section 199A regulations are described in the Unified Agenda as “economically significant,” with a target completion date of December 2018.
Other 2017 Tax Act Issues. Other issues in the Statement of Regulatory Priorities related to the 2017 Tax Act that are of interest to ACTEC Fellows include “Guidance on computation of unrelated business taxable income for separate trades or businesses under new section 512(a)(6),” “Guidance implementing changes to section 529,” and “Guidance implementing changes to section 1361 regarding electing small business trusts.” Also included is “Guidance regarding Opportunity Zones under sections 1400Z-1 and 1400Z-2,” pursuant to which Proposed Regs. §§1.1400Z-2(a)-1, 1.1400Z-2(c)-1, 1.1400Z-2(d)-1, and 1.1400Z-2(e)-1, Revenue Ruling 2018-29, and drafts of Form 8996 and instructions were released on October 19.
Additional Items in the Statement of Regulatory Priorities
In addition to items related to the implementation of the 2017 Tax Act, the Statement of Regulatory Priorities also singles out the 2016 and 2017 regulatory actions that Treasury and the IRS determined pursuant to Executive Order 13789 would “impose an undue financial burden on United States taxpayers” or “add undue complexity to the Federal tax laws.” Part 2 of the 2017-2018 Priority Guidance Plan, as updated, had included eight such actions. Two of them, including the controversial 2016 proposed regulations under section 2704, were completely withdrawn on October 20, 2017. The other six actions are carried over to the Fall 2018 Unified Agenda and Statement of Regulatory Priorities.
UNIFIED AGENDA ITEMS BEYOND THE STATEMENT OF REGULATORY PRIORITIES
There are other items of interest to estate planners in the Unified Agenda, beyond the highlights included in the Statement of Regulatory Priorities. Some of these correspond to items in Part 3, titled “Near-Term Burden Reduction,” or Part 5, titled “General Guidance,” in the 2017-2018 Priority Guidance Plan, as updated.
Consistency of Basis Between Estate and Beneficiaries
On July 31, 2015, the day that funding for the Highway Trust Fund was scheduled to expire, President Obama signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act (Public Law 114-41), extending that infrastructure funding for three months, with the $8 billion cost funded by various tax compliance measures. One of those tax measures was section 2004 of the Act, labelled “Consistent Basis Reporting Between Estate and Person Acquiring Property from Decedent,” which of course has nothing to do with highways or veterans’ health care other than supposedly raising money. That provision added sections 1014(f) and 6035 to the Code.
Section 1014(f) requires in general that the basis of property received from a decedent, “whose inclusion in the decedent’s estate increased the liability for the tax,” may not exceed the value as finally determined for estate tax purposes, or, if there is no final determination (as in the case of property sold while an estate tax audit is still in progress or, within the statutory period for assessments, has not begun), the value reported on the estate tax return. Section 6035 requires every executor (or person in possession of property with the statutory duties of an executor) who is required to file an estate tax return – that is, in general, if the gross estate plus adjusted taxable gifts exceeds the applicable filing threshold – to furnish to the IRS and to the recipients of property interests included in the decedent’s gross estate a statement setting forth the value of those property interests reported on the estate tax return. The IRS has provided Form 8971 and its Schedule A for that purpose.
Due Date of Form 8971. Proposed Regulations §§1.1014-10 and 1.6035-1 (REG-127923-15), released on March 2, 2016, include a number of burdensome, controversial, and seemingly avoidable choices. One is to require that Form 8971 be filed and Schedule A be provided to recipients of property within 30 days after the estate tax return is filed, even though an executor of an estate large enough that an estate tax return is required, which has more than one beneficiary, will almost never know by that date who will receive what. Proposed Reg. §1.6035-1(c)(3) unhelpfully advises that “if, by the due date [of Form 8971], the executor has not determined what property will be used to satisfy the interest of each beneficiary, the executor must report on the Statement for each such beneficiary all of the property that the executor could use to satisfy that beneficiary’s interest.” Some of the drafters of this provision have insisted that Congress gave them no choice but to impose such a harsh filing due date.
Congress, in section 6035(a)(3)(A)(ii), did indeed refer to a due date 30 days after the date on which the estate tax return is filed. But it did so only in the context of a person “acquiring” property from a decedent – that is, a beneficiary who has gotten something. That, plus the long history of the consideration of this legislative proposal, originally made by Treasury in 2009, before it was rushed into the 2015 legislation to fill a funding gap and meet a hard deadline, provide ample justification for Treasury and the IRS to take a more reasonable approach and, for example, apply that deadline only to property passing by law or contract at death or already distributed by the executor.
“Zero Basis.” Proposed Reg. §1.1014-10(c)(3)(i)(B) provides that after-discovered and omitted property that is not reported on an initial or supplemental estate tax return before the estate tax statute of limitations runs (thus including all property and omissions discovered after the estate tax statute of limitations runs) would be given a value, and therefore an initial basis, of zero. Moreover, under Proposed Reg. §1.1014-10(c)(3)(ii), if the after-discovered or omitted property would have increased the gross estate enough to cause an estate tax return to be required, but no estate tax return was filed, the estate tax value of all property subject to the consistency rule would be considered to be zero.
Thus, a very innocent omission by the executor could result in a very harsh penalty for beneficiaries. The statutory support for these zero basis rules is very questionable, because such property appears to be neither “property the final value of which has been determined for purposes of the [estate] tax” within the meaning of section 1014(f)(1)(A) nor property “with respect to which a statement has been furnished under section 6035(a)” within the meaning of section 1014(f)(1)(B), which are the only two conditions that activate the substantive rules of section 1014(f).
Reporting of Successive Transfers. Proposed Reg. §1.6035-1(f) imposes an open-ended requirement on a recipient of a Schedule A to in turn provide a Schedule A when making any gift or other retransfer of the property that results wholly or partly in a carryover basis for the transferee – such as a gift. The preamble cites the regulatory authority granted in section 6035(b)(2) and also a concern “that opportunities may exist in some circumstances for the recipient of such reporting to circumvent the purpose of the statute (for example, by making a gift of the property to a complex trust for the benefit of the transferor’s family).” While such property does indeed continue to have a basis determined in part with reference to the value at the time of someone’s death in the past, section 6035 imposes the reporting requirement only on an “executor,” and section 1014(a) itself applies only to property acquired “from a decedent,” creating great doubt about the statutory authority for Proposed Reg. §1.6035-1(f). It is especially harsh to impose this requirement on successive donees when many of those donees may not have estates themselves even close to the threshold for filing a return and may have no reason otherwise to seek advice about such a gift.
Public Comments and Hearing. In short, despite the superficial appeal of “consistency,” the potential for the choices reflected in the proposed regulations to create or aggravate tensions among beneficiaries and between beneficiaries and fiduciaries just do not seem to be worth it. Making those points and others, ACTEC submitted comments on the proposed regulations on May 27, 2016, and Lora Davis’s, Gregg Simon’s, and my statements at the June 27 hearing are also available on the ACTEC website.
Status. The consistent basis regulations had been Item 4 of Part 3 of the 2017-2018 Priority Guidance Plan. Their description in the Unified Agenda includes this encouraging statement: “The final regulations will provide less burdensome guidance to taxpayers enabling them to satisfy the requirements of sections 1014(f) and 6035.” Thus we should expect the final regulations to provide relief, certainly from the 30-day due date and possibly also from the zero-basis and successive-transfers rules.
The description designates these regulations “nonsignificant” and states a target completion date of June 2019.
Extensions of Time to Make GST Exemption Allocations and Elections
Before the 2001 Tax Act, the IRS generally declined to grant so-called “9100 relief” (named after Reg. §301.9100-3 under which most requests for such relief are made) from missed deadlines for allocations and elections relating to the GST exemption, citing the fact that the deadlines are imposed by the Internal Revenue Code itself, not by regulations or other administrative guidance. Under Reg. §301.9100-1(b), 9100 relief is available only for “an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin,” and explicitly not for “an election whose due date is prescribed by statute.”
In response, the 2001 Tax Act added section 2642(g) to the Code, mandating regulations to provide for such relief for allocations and elections under sections 2632 and 2642 and adding that for purposes of such relief, “the time for making the allocation (or election) shall be treated as if not expressly prescribed by statute.” Less than two months later, the IRS, in Notice 2001-50, 2001-2 C.B. 189, acknowledged section 2642(g)(1) and stated that taxpayers may seek extensions of time to take those actions under Reg. §301.9100-3. Then, in Rev. Proc. 2004-46, 2004-2 C.B. 142, the IRS provided a simplified method of dealing with pre-2001 gifts that meet the requirements of the annual gift tax exclusion under section 2503(b) but not the special “tax-vesting” requirements applicable for GST tax purposes to gifts in trust under section 2642(c)(2) – for example, gifts to trusts subject to “Crummey” withdrawal powers.
Proposed Reg. §26.2642-7 (REG-147775-06) was released on April 16, 2008. Although this was almost seven years after the enactment of section 2642(g) and the regulations have not been finalized yet, taxpayers have not been disadvantaged because Notice 2001-50 allows business as usual under Reg. §301.9100-3.
Indeed, it has appeared that taxpayers may have been better off without final regulations. When finalized, Proposed Reg. §26.2642-7 would oust Reg. §301.9100-3 and become the exclusive basis for seeking the extensions of time Congress mandated in section 2642(g)(1), except in cases covered by Rev. Proc. 2004-46. And the requirements of the proposed regulations, while resembling 9100 relief in many ways, seem harsher than Reg. §301.9100-3 in some important respects.
Substantive Requirements. First, under Proposed Reg. §26.2642-7(d)(1), while the general standard, similar to Reg. §301.9100-3(a), is still “that the transferor or the executor of the transferor’s estate acted reasonably and in good faith, and that the grant of relief will not prejudice the interests of the Government,” Proposed Reg. §26.2642-7(d)(2) sets forth a “nonexclusive list of factors” to determine whether the transferor or the executor of the transferor’s estate acted reasonably and in good faith, including (i) the intent of the transferor to make a timely allocation or election, (ii) intervening events beyond the control of the transferor or the executor, (iii) lack of awareness of the need to allocate GST exemption to the transfer, despite the exercise of reasonable diligence, (iv) consistency by the transferor, and (v) reasonable reliance on the advice of a qualified tax professional. Likewise, Proposed Reg. §26.2642-7(d)(3) sets forth a “nonexclusive list of factors” to determine whether the interests of the Government are prejudiced, including (i) the extent to which the request for relief is an effort to benefit from hindsight, (ii) the timing of the request for relief, and (iii) any intervening taxable termination or taxable distribution.
Noticeably, the proposed regulations seem to invite more deliberate weighing of all those factors than the identification of one or two dispositive factors as under Reg. §301.9100-3. “Hindsight,” which could be both a form of bad faith and a way the interests of the Government are prejudiced, seems to be a focus of the proposed regulations. This is probably explained by the obvious distinctive feature of the GST tax – its effects are felt for generations, in contrast to most “9100 relief” elections that affect only a current year or a few years. There simply is more opportunity for “hindsight” over such a long term. Thus, the greater rigor required by the proposed regulations seems to be justified by the nature of the GST tax. Indeed, Congress seems to have anticipated that when it also provided in section 2642(g)(1)(B) that “In determining whether to grant relief under this paragraph, the Secretary shall take into account all relevant circumstances, including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the Secretary deems relevant.”
Procedural Requirements. Second, Proposed Reg. §26.2642-7(h)(3)(i)(D) requires a request for relief to be accompanied by “detailed affidavits” from “each tax professional who advised or was consulted by the transferor or the executor of the transferor’s estate with regard to any aspect of the transfer, the trust, the allocation of GST exemption, and/or the election under section 2632(b)(3) or (c)(5).”
The references to “any aspect of the transfer” and “the trust” appear to go beyond the procedural requirement of Reg. §301.9100-3(e)(3) for “detailed affidavits from the individuals having knowledge or information about the events that led to the failure to make a valid regulatory election and to the discovery of the failure.” Presumably, a professional who advised only with respect to “the transfer” or “the trust” would have nothing relevant to contribute other than a representation that they did not advise the transferor to make the election, a fact that the transferor’s own affidavit could establish.
Status. The section 2642(g) regulations had been Item 8 of Part 3 of the 2017-2018 Priority Guidance Plan. Because of the increased substantive and procedural rigor that Proposed Reg. §26.2642-7 would apparently require, it was somewhat of a surprise when the regulations, which had been dropped from the Priority Guidance Plan in 2016, turned up again in Part 3 of the 2017-2018 Priority Guidance Plan, titled “Near-Term Burden Reduction.” Meanwhile, however, the IRS has received and granted many requests for relief over the years since the publication of Notice 2001-50. It is entirely plausible that, particularly when faced with the burden-reducing mandate of Executive Orders, IRS personnel have concluded that they can do just fine with less documentation. Thus, even though the substantive requirements of considering and weighing a greater number of factors is likely to survive under the statutory encouragement of section 2642(g)(1)(B), the apparent requirement of multiple “detailed affidavits” of questionable relevance and usefulness from professionals with any knowledge of “any aspect of the transfer [or] the trust” may well be relaxed.
The description of these regulations in the Unified Agenda identifies them as “nonsignificant” and states a target completion date of December 2018.
And while the IRS is on this mission of “burden reduction,” we should not be surprised if Revenue Procedure 2019-1 contemporaneously clarifies that the user fee for requesting relief under the section 2642(g) regulations is conformed to the user fee for 9100 relief. Currently, under paragraph (A)(3)(c) of Rev. Proc. 2018-1, 2018-1 I.R.B. 1, the standard user fees are $10,000 for 9100 relief and $28,300 for other letter rulings.
Alternate Valuation Date
Item 2 of Part 5 of the 2017-2018 Priority Guidance Plan, as updated, was “Final regulations under §2032(a) regarding imposition of restrictions on estate assets during the six month alternate valuation period.” These regulations have sometimes been referred to as the “anti-Kohler” regulations, after Kohler v. Commissioner, T.C. Memo 2006-152, nonacq., 2008-9 I.R.B. 481, involving a corporate reorganization of the well-known family-owned plumbing fixture manufacturer that had been under consideration for about two years but was not completed until about two months after a shareholder’s death. It first appeared in the 2007-08 Plan.
Proposed regulations published in 2008 would have added “post-death events other than market conditions” to changes in value resulting from the “mere lapse of time,” which are ignored in determining the alternate value under section 2032(a)(3).
New proposed regulations (REG-112196-07) were published in 2011. In a striking example of Treasury’s responsiveness to criticism, the 2011 preamble stated: “Some commentators expressed concern that the proposed regulations ... would create administrative problems because an estate would be required to trace property and to obtain appraisals based on hypothetical property.... Many commentators ... suggested that the IRS and Treasury Department would better serve taxpayers and address any potential abuse [of the section 2032 election] by ensuring that the regulations address the issues described in this preamble rather than finalizing the approach taken in the proposed regulations. In view of the comments, the Treasury Department and the IRS are withdrawing the proposed regulations (73 FR 22300) by the publication of these proposed regulations in the Federal Register.”
In contrast to the 2008 approach of ignoring certain intervening events – and thereby potentially valuing assets six months after death on a hypothetical basis – the 2011 approach was to expand the description of intervening events that are regarding as dispositions, triggering alternate valuation as of that intervening date. The expanded list, in Proposed Reg. §20.2032-1(c)(1)(i), includes distributions, exchanges (whether taxable or not), and contributions to capital or other changes to the capital structure or ownership of an entity, including “the dilution of the decedent’s ownership interest in the entity due to the issuance of additional ownership interests in the entity.” Proposed Reg. §20.2032-1(c)(1)(i)(I)(1). Under Proposed Reg. §20.2032-1(c)(1)(ii), an exchange of interests in an entity would not be counted if the fair market values of the interests before and after the exchange differed by no more than 5 percent. If the interest involved is only a fraction of the decedent’s total interest, an aggregation rule in Proposed Reg. §20.2032-1(c)(1)(iv) would value the interest at a pro rata share of the decedent’s total interest.
The proposed regulations also include special rules for coordinating with annuities and similar payments (§20.2032-1(c)(1)(iii)(B)) and excepting qualified conservation easements (§20.2032-1(c)(4)), and also many more examples (§20.2032-1(c)(5), (e) Example (2), (f)(2)(B), and (f)(3)).
Although the 2008 proposed regulations were referred to as the “anti-Kohler regulations,” the most significant impact of these proposed regulations may be felt by efforts to bootstrap an estate into a valuation discount by distributing or otherwise disposing of a minority or other noncontrolling interest within the six-month period after death (valuing it as a minority interest under section 2032(a)(1)) and leaving another minority or noncontrolling interest to be valued six months after death (also valued as a minority interest under section 2032(a)(2)). Examples 7 and 8 of Proposed Reg. §20.2032-1(c)(5) specifically address the discount-bootstrap technique – Example 8 in the context of a limited liability company and Example 7 in the context of real estate. Example 1 reaches the same result with respect to the post-death formation of a limited partnership.
The description of the proposed regulations in the Unified Agenda is “In cases where section 2032 election has been made, the proposed regulations provide guidance on: (1) The effect of certain post-death transactions on assets includible in the decedent's gross estate; (2) the treatment of assets the title to which is transferred at death by contract; (3) the determination of the portion of trusts in which the decedent retained an interest that are includible in the decedent's gross estate under section 2036; (4) the effect of the grant of a qualified conservation easement under section 2031(c) during the 6-month period after the date of death; and (5) the types of factors, the impact of which affect the fair market value of assets includible in the decedent's gross estate, that will be recognized under section 2032.”
The Unified Agenda designates the alternate valuation date regulations “nonsignificant” and assigns them a target completion date of December 2018.
Present Value Concepts Under Section 2053
Item 3 of Part 5 of the 2017-2018 Priority Guidance Plan, as updated, was “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 2008-2009 Plan as an outgrowth of the project that had led to the final amendments of the section 2053 regulations in October 2009. T.D. 9468, 74 Fed. Reg. 53652 (Oct. 20, 2009). The April 2007 proposed regulations would have allowed a deduction only of the present value of the estate’s noncontingent obligations, but a dollar-for-dollar deduction of contingent obligations when they were paid. Public comments criticized this distinction as inequitable.
In another example of Treasury’s responsiveness to criticism, the preamble to the 2009 final regulations stated: “Some commentators suggested that the disparate treatment afforded noncontingent obligations (deduction for present value of obligations) versus contingent obligations (dollar-for-dollar deduction as paid) is inequitable and produces an inconsistent result without meaningful justification. These commentators requested that the final regulations allow an estate to choose between deducting the present value of a noncontingent recurring payment on the estate tax return, or instead deducting the amounts paid in the same manner as provided for a contingent obligation (after filing an appropriate protective claim for refund). The Treasury Department and the IRS find the arguments against the disparate treatment of noncontingent and contingent obligations to be persuasive. The final regulations eliminate the disparate treatment by removing the present value limitation applicable only to noncontingent recurring payments. The Treasury Department and the IRS believe that the issue of the appropriate use of present value in determining the amount of the deduction allowable under section 2053 merits further consideration. The final regulations reserve § 20.2053-1(d)(6) to provide future guidance on this issue.”
It is easy to see how the Treasury Department’s and the IRS’s “further consideration” of “the appropriate use of present value concepts” could turn their focus to the leveraged benefit in general that can be obtained when a claim or expense is paid long after the due date of the estate tax, but the additional estate tax reduction is credited as of, and earns interest from, that due date. Graegin loans (see Estate of Graegin v. Commissioner, T.C. Memo 1988-477) could be an obvious target of such consideration.
The Unified Agenda includes the following description of the alternate valuation date regulations: “These regulations provide rules on the proper use of present value in determining the amount deductible from a decedent’s gross estate under section 2053 for expenses or claims against the estate. In addition, these regulations provide rules regarding certain substantiation requirements and the ability to deduct interest expense and amounts paid under a decedent’s personal guaranty.” The Unified Agenda designates them “nonsignificant” and assigns them a target completion date of June 2019.
A PRIORITY GUIDANCE PLAN ITEM OMITTED FROM THE UNIFIED AGENDA: BASIS OF GRANTOR TRUST ASSETS AT DEATH
Item 1 of Part 5 of the 2017-2018 Priority Guidance Plan was “Guidance on basis of grantor trust assets at death under §1014.” This had first appeared in the 2015-2016 Priority Guidance Plan (July 31, 2015). It came about a month after Rev. Proc. 2015-37, 2015-26 I.R.B. 1196 (June 29, 2015), 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.” That designation was continued in section 5.01(12) of Rev. Proc. 2016-3, 2016-1 I.R.B. 126, section 5.01(10) of Rev. Proc. 2017-3, 2017-1 I.R.B. 130, and section 5.01(8) of Rev. Proc. 2018-3, 2018-1 I.R.B. 130.
Meanwhile, Letter Ruling 201544002 (issued June 30, 2015; released October 30, 2015) had addressed a similar basis issue in the context of an irrevocable trust created by non-U.S. persons. It acknowledged the no-rule policy announced in Rev. Proc. 2015-37, but explained that “Rev. Proc. 2015-37 is effective for all letter ruling requests received after June 15, 2015. Because the Service received this ruling request prior to June 15, 2015, Rev. Proc. 2015-37 does not apply.” The coincidence that this letter ruling was issued the day after the no-rule policy had been published made it quite apparent that the two events were coordinated and that the no-rule policy was probably aimed at trusts created by non-U.S. persons and therefore not subject to U.S. estate tax.
There has been speculation that the Trump Administration might possibly expand the scope of the guidance. But this guidance cannot be found in the Unified Agenda. One possible explanation is that the guidance is not expected to be completed in the next 12 months. Another explanation is that the contemplated guidance will be provided, for example, in a revenue ruling, not in regulations. The latter explanation is most consistent with the fact that this guidance cannot be found in last year’s Unified Agenda either, despite its inclusion in the Priority Guidance Plan.
RECAPITULATION OF EIGHTEEN PROJECTS IN THE REGULATORY TIMELINE
The following is a compilation of the 18 regulatory projects in the Unified Agenda that may be of most interest to estate planners, grouped by their target completion dates and arranged within each target completion date from the oldest to the newest projects.
Targeted for Completion in December 2018
Extensions of Time to Make GST Exemption Allocations and Elections (Section 2642(g)). This project (REG-147775-06), opened in 2006, is discussed above.
Alternate Valuation Date (Section 2032). This project (REG-112196-07), opened in 2007, is discussed above.
Available GST Exemption (Section 2642(g)). This project (REG-152070-09) was opened in 2009, evidently as an adjunct to the 2006 project on extensions of time. The description is “The regulations clarify rules for determining the amount of generation-skipping transfer (GST) exemption available for allocation and rules governing the allocation of available GST exemption in the event relief is granted under section 2642(g)(1) to make a timely allocation or election.”
Nonqualified Severances and GST Inclusion Ratio (Section 2642). This project (REG-133716-15), opened in 2015, is intended to produce a proposed regulation, possibly a proposed addition to Reg. §26.2642-6, that “provides guidance with regard to nonqualified severances that do not maintain the same succession of interest as provided in the initial trust.”
Qualified Business Income Deduction (Section 199A). Three projects (PGP-101496-18, PGP-103628-18, and PGP-103630-18) under the 2017 Tax Act, all designated “economically significant,” are related to the qualified business income deduction discussed above.
Basic Exclusion Amount (“Clawback”). This project (REG-106706-18) under the 2017 Tax Act, designated “significant,” is discussed above.
Electing Small Business Trusts (ESBTs) with Non-Resident Aliens as Potential Current Beneficiaries. This project (REG-117062-18) under the 2017 Tax Act is designated “significant.” The description is “Proposed regulations that provide guidance regarding the expansion of eligible potential current beneficiaries (PCBs) of an electing small business trust (ESBT) to include nonresident aliens (NRAs) by section 13541 of the Tax Cuts and Jobs Act, Pub. L. 115-97, 131 stat. 2054 (2017). These proposed regulations prevent NRAs who are PCBs from avoiding U.S. tax on certain types of S corporation income when these NRAs are owners of grantor trusts electing to be ESBTs.”
Targeted for Completion in May 2019
Guidance Under Section 2801 Regarding the Tax Imposed on U.S. Citizens and Residents Who Receive Gifts or Bequests from Certain Expatriates. These regulations (REG-112997-10), which at one time shortly after the enactment of section 2801 in 2008 were viewed as one of Treasury’s highest priorities, first appeared in the 2009-2010 Priority Guidance Plan but were actually dropped from the 2016-2017 Priority Guidance Plan. The abstract in the Unified Agenda states:
“On June 17, 2008, under section 301 of the Heroes Earnings Assistance and Relief Tax Act of 2008, Congress created a new chapter 15 of the Internal Revenue Code and added section 2801. This new provision imposes a tax on a U.S. citizen or resident receiving a covered gift or covered bequest during the calendar year. A covered gift or covered bequest is a gift or bequest received from a covered expatriate, with certain exceptions. The tax is calculated by multiplying the value of the total covered gifts and covered bequests received during the year, reduced by the section 2503(b) amount, by the highest estate tax rate (or gift tax rate if higher) for the taxable year. On July 20, 2009, the Treasury Department and the IRS issued Announcement 2009-57, 2009-29 I.R.B. 158, which states that the Treasury Department and the IRS intend to issue guidance under section 2801 and new Form 708. Proposed regulations were issued on September 10, 2015. The final regulations will provide guidance on the tax imposed by section 2801 on U.S. citizens and residents and certain individuals who relinquished U.S. citizenship or ceased to be lawful permanent residents of the U.S. on or after June 17, 2008, and will provide guidance on new Form 708, including the due date for filing and paying the section 2801 tax.”
Announcement 2009-57 had helpfully 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.”
But that does not mean that going back that far to file returns will be easy without further relief.
Targeted for Completion in June 2019
Below-Market Loans (Section 7872). Proposed regulations under section 7872 were published in 1985. Among other things, Proposed Reg. §20.7872-1 sought to implement section 7872(i)(2), which states that “under regulations prescribed by the Secretary, any loan which is made with donative intent and which is a term loan shall be taken into account for purposes of chapter 11 [the estate tax chapter] in a manner consistent with the provisions of subsection (b) [providing for the income and gift tax treatment of below-market loans].” This may prevent a promissory note issued in an intra-family transaction from being valued for estate tax purposes at less than its face amount plus accrued interest.
Under this project (REG-209226-84), Treasury and the IRS evidently intend to revive those proposed regulations, possibly to finalize them, but more likely to repropose them with updates and revisions.
Present Value Concepts Under Section 2053. This project (REG-130975-08) is discussed above.
Valuation of Promissory Notes for Transfer Tax Purposes (Sections 2031 and 2512). 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 that “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.
Perhaps this project (REG-126593-15), which appeared in the 2015-2016 and 2016-2017 Priority Guidance Plans, is intended to resolve that anomaly. Speaking of anomalies, the title of the project in the Unified Agenda is “Valuation of Promissory Plan,” not “Valuation of Promissory Notes.”
Consistency of Basis Between Estate and Beneficiaries (Sections 1014(f) and 6035). This project (REG-127923-15) is discussed above.
Effect of Section 67(g) on Trusts and Estates. The description of this project (REG-113295-18) is “These regulations will provide clarification of the effect of section 67(g) of the Internal Revenue Code (Code), enacted on December 22, 2017, by an ‘Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,’ Pub. L. 115-97 (Act), on the deductibility of certain expenses described in section 67(b), and (e), section 642(h)(2), and 1.67-4 and 1.642(h)-2(a) of the Income Tax Regulations that are incurred by estates and grantor trusts.”
The regulations are designated “significant.” They are expected to clarify that trust and estate administration expenses continue to be deductible because of section 67(e), despite the eight-year “suspension” of section 67(a) by new section 67(g). They are also expected to address the availability of “excess deductions” to individual beneficiaries under section 642(h) on termination of a trust or estate, although it is harder to be sure of the answer in that context.
Unfortunately, it is not at all clear that Treasury and the IRS will rise to the occasion and reconsider the choice they made in Reg. §1.67-4(b)(4) and (c)(2) that fiduciary investment advisory fees, including the portion of a “bundled” fiduciary fee attributable to investment advice, are “commonly” or “customarily” incurred by individuals investing for their own benefit with no fiduciary duty whatsoever, and are therefore subject to the 2-percent floor. If they do not, it appears that the result would be that those fiduciary expenses are not deductible at all, not merely subject to a 2-percent floor.
Use of Actuarial Tables (Section 7520). The current mortality tables, based on 2000 census data, became effective May 1, 2009. Section 7520(c)(2) mandates revision of the tables at least once every ten years. This project (REG-122770-18) appears to be a routine update, to take effect by May 1, 2019.
Targeted for Completion in September 2019
Information Reporting on Transactions with Foreign Trusts and on Large Foreign Gifts (Sections 643(i), 679, 6048, 6677, and 6039F). This project (REG-124850-08) will provide guidance relating to information reporting on transactions with foreign trusts and on large foreign gifts under sections 6048, 6677, and 6039(F) and loans from or uncompensated use of property of foreign trusts under section 643(i), as well as amendments to the regulations under section 679 relating to foreign trusts having one or more U.S. beneficiaries.
Tax on Net Investment Income (Section 1411). The description of this project (REG-130843-13) is “These regulations will contain rules under section 1411. These rules will address issues not addressed in the NPRM issued on December 5, 2012, and/or will modify rules from that NPRM.”
An issue of great interest to estate planners has been the material participation exception of section 469(c)(1)(B) and (h), enacted in 1986 but incorporated into section 1411 by section 1411(c)(2)(A), as it applies to trusts. The regulations proposed on December 5, 2012, were finalized on November 26, 2013, but did not address the issue of material participation in the context of trusts. The preamble (T.D. 9644) candidly acknowledged Treasury’s sympathy with the problems of material participation and the difficulty of dealing with those problems, which it described as “very complex.”
The preamble to proposed regulations published on December 2, 2013, cited the preamble to the 2013 final regulations and deferred the issue of material participation by estates and trusts, which it said “is more appropriately addressed under section 469.” “Guidance regarding material participation by trusts and estates for purposes of §469” was placed in the 2014-2015 Priority Guidance Plan but was dropped from the 2017-2018 Plan. Because the current description of this project does not refer to Section 469, it is not encouraging on this subject.
Meanwhile, however, the most recent section 469 case law is encouraging. In Frank Aragona Trust, Paul Aragona, Executive Trustee v. Commissioner, 142 T.C. 165 (March 27, 2014), the Tax Court (Judge Morrison) rejected the IRS argument that for purposes of the passive loss rules of section 469 itself a trust in effect could never satisfy the requirement of material participation in a trade or business. The court also held that the trust materially participated in the business because some of its co-trustees materially participated to the extent required by section 469(c)(7)(B). Affected trustees are no doubt relying on Aragona while we wait for regulations.