Monday, March 13, 2017

U.S. v. McNICOL
829 F.3d 77 (1st Cir. 2016)
(cert. denied 1/9/2017)

Trusts and Estates practitioners often focus solely on the Tax Code found in Title 26 of the United States Code and ignore other parts of the United States Code (U.S.C.). However, it is a mistake to do so as Marci McNicol learned first-hand. In this case, the Federal Priority Statute found in 31 U.S.C. § 3713 came into play to impose liability on Marci for the decedent’s unpaid Federal income tax liability.

Here, at the time of his death, the decedent owed over $300,000 in Federal income taxes. As a result of this and other liabilities, the decedent’s estate, which consisted almost entirely of interests in two closely held companies, was insolvent. Marci, the decedent’s widow, transferred decedent’s interest in one of the companies to herself even before the court had appointed her as executrix of the decedent’s estate. Once she was appointed executrix of decedent’s estate, Marci transferred the other company to herself. Both transfers were without consideration at a time when Marci knew of her husband’s unpaid tax liability.

In October of 2003, the IRS filed a formal claim against the estate for the unpaid income taxes due. By November of 2006, however, the tax bill had not been paid, and the IRS again contacted Marci seeking payment. Marci informed the IRS in 2008 that she would no longer cooperate with them in the collection effort. At that point, the IRS served Marci with a formal notice of potential liability under the Federal Priority Statute, and ultimately filed suit against Marci in her capacity as executrix of the decedent’s estate to collect the decedent’s liability and also against her individually under the Federal Priority Statute for transferring assets to herself from the decedent’s estate without first paying the decedent’s Federal income tax liability.
The Federal Priority Statute provides that (1) a claim of the U.S. government against a decedent is to be paid first when the decedent’s estate or trust is insolvent, and (2) an executor or trustee who pays “any part of a debt” of an estate or trust prior to paying the government claim is personally liable for payment of such government claim. The trial court granted the government’s motion for summary judgment against Marci individually to the extent of the value of the property transferred to her from the estate.

Using such phrases as “it is clear beyond contradiction” and “the statute means what it says and says what it means”, the Appeals Court resoundingly affirmed the trial court’s order. The Federal Priority Statute creates a priority of payment outside the scope of the priority of payment provisions found in state probate codes, and outside the scope of Federal transferee liability provisions found in Title 26. Under the Federal Priority Statute, the executor or trustee is personally liable for the government’s claim as long as the following three requirements are present, with the burden of proof as to all three on the person seeking relief from such personal liability.

1. The executor or trustee transferred assets of the estate or trust prior to paying the government claim;
2. The estate or trust was insolvent at the time of such transfer; and
3. The executor or trustee had knowledge of the government’s claim or notice of facts that would cause “a reasonably prudent person to inquire” as to the existence of such a claim.

Interestingly, the Court did not limit personal liability to those transfers that occurred once the estate was opened and Marci was officially appointed executrix. This Court extended personal liability under the Federal Priority Statute to any person having control over the decedent’s property at the time it was transferred. Thus, this would extend personal liability under the Federal Priority Statute to any person having control over a decedent’s property that would be subject to the claims of the decedent’s creditors under applicable state law. This could include property held in any nonprobate transfer form, such as in a transfer on death account.

As a consequence of the potential personal liability under the Federal Priority Statute, an executor, trustee or person having control of the decedent’s property (referred to hereafter for convenience together as “executor”) should ascertain as quickly as possible the extent of the decedent’s debts and the value of the decedent’s property in whatever form held. If it is possible that the decedent was insolvent at the time of death, the executor should review the decedent’s income tax returns to determine whether all of the decedent’s income was reported and all the deductions were validly taken. The executor should review all of decedent’s gift tax returns and make sure that all taxable transfers were adequately disclosed on a gift tax return. Consider filing a Form 4810, Request for Prompt Assessment Under IRC § 6501(d) for all of the decedent’s open year income tax returns and gift tax returns, which will shorten the statute of limitations for such taxes to an 18 month period.

The Federal Priority Statute is not invoked to produce executor liability where estate assets were in fact used to pay expenses given priority under a state’s priority of payment provisions. If a determination is made that the decedent was insolvent at the time of death, or the estate could potentially become insolvent, close attention should be paid to the state priority of payment statute. The executor of a potentially insolvent estate should not make any disbursement or distribution, other than for those items given priority under the state priority of payment statute, until all Federal tax liabilities have been ascertained and paid.

Thursday, March 9, 2017

PLR 201642019

Not only is strict adherence to the structure set out in prior favorable rulings best, it is essential when it comes to obtaining a favorable ING ruling. The provisions in the trust document need to carve a very fine line through the grantor trust/incomplete gift rules to obtain a favorable ING ruling. The goal is to have the Service rule that a trust is not a grantor trust for income tax purposes yet not a completed gift for gift tax purposes and included in the grantor’s estate to get a basis adjustment at death.

The earliest ruling, ILM 201208026, fell short of a favorable ruling with the Service finding that the retained testamentary power of appointment was insufficient to avoid a completed gift. By 2014, practitioners had carefully studied this early ruling and devised a set of trust provisions that successfully walked the tight rope through the grantor trust/incomplete gift rules to obtain favorable rulings in a series of private letter rulings. Each of those rulings contained the following elements:

• The Trust was created in an asset protection jurisdiction;
• The grantor was a discretionary beneficiary;
• A distribution committee with at least two adverse parties, acting unanimously, had total distribution discretion for distributions among the grantor and the other beneficiaries;
• A corporate trustee would make discretionary distributions among the grantor and the grantor’s descendants, as directed by a majority of the distribution committee, with the grantor’s consent but without the participation of any recipient;
• A corporate trustee would make discretionary distributions to the grantor’s descendants as directed by the grantor in a non-fiduciary capacity for the health, education, maintenance and support of any such descendant; and
• The grantor retained a broad testamentary special power of appointment.

Now in PLR 201642019, the Service has singled out one of those prior previously favorable rulings (identified in this ruling as PLR 140408-13) that deviated from this formulaic approach in a seemingly small way, and revoked that prior favorable ruling. This deviating trust provision directed the trustee to distribute the trust property to the grantor in the event (1) neither of grantor’s children was serving as a member of the Distribution Committee or (2) there remained only one member of the Distribution Committee. The Service now ruled that this provision resulted in the grantor having a reversionary interest in the trust corpus far exceeding the 5% threshold in § 673 of the Code. As a result the trust was a grantor trust for income tax purposes under § 673. In fact, the Service valued this reversionary interest at 100% of the value of the trust corpus because the members of the Distribution Committee could resign at any time, terminating the trust and distributing the whole trust corpus to the grantor.

The moral of this ruling is that when you attempt to copy a favorable tax structure, don’t vary the terms.

Thursday, March 2, 2017

IRS Notice 2017-12

The Service issued FAQs in June of 2015 to let practitioners know that they were no longer routinely issuing closing letters. The Service instructed practitioners that they would now have to request such a closing letter, but could not do so until 4 months after filing the estate tax return. Their goal was to reduce the amount of work the Service needed to complete as a cost cutting measure. However, taxpayers need closure and the requests for closing letters almost became routine. Because so many practitioners were routinely requesting closing letters, the Service let it be known informally, with a posting on its website, that a transcript could be requested, and would be an acceptable substitute for an estate tax closing letter. But requesting such a transcript has not been a simple matter, with many groans of frustration along the way. The Service has now provided guidance in this Notice 2017-12 on this alternative method of confirming that an estate tax return examination is closed.
Although practitioners may prefer to obtain a closing letter, the Service points out in this Notice that an estate tax closing letter does not foreclose the Service from reexamining an estate tax return at a later date. Instead, a closing letter simply indicates that the estate tax return has been accepted, either as filed or after an adjustment to which the estate has agreed. After an estate tax closing letter has been sent to the taxpayer, for example, the Service may still audit the estate tax return that makes a portability election up until the statute of limitation has run on the estate tax return of the surviving spouse to determine the surviving spouse’s applicable exclusion amount.
After receiving so many requests for a closing letter, the Service began to realize that executors, state taxing authorities and probate courts want to know that an estate tax return has been accepted by the Service. Therefore, the Service now formally announced in this Notice that an “account transcript” is an alternative method of obtaining that finality without the need for the Service to issue a closing letter. An account transcript is a computer generated report that contains detailed information about the procedures that have been undertaken by the Service in handling a given estate tax return. Among the many details contained in this transcript is the date on which the estate tax examination was closed, identified by the computer code of “421”. In the Service’s view, the account code “421” on an account transcript is the functional equivalent to an estate tax closing letter, and should provide the same level of finality required by some state taxing authorities and probate courts.
This Notice instructs the practitioner that an account transcript can be obtained without charge by faxing Form 4506-T, Request for Transcript of Tax Return, to the Service at the fax number provided on the Form. (This is the same Form that is used to request a transcript for any type of tax return.) This Form should not be filed any earlier than four months after the estate tax return has been filed. Letters testamentary or of administration showing the authority of the executor must be provided with the Form. If the account transcript is being requested by a taxpayer’s representative, a Form 2848, signed by the taxpayer specifically authorizing the representative to request the account transcript, must also be sent with the Form. Even though there is a place on the IRS.gov website under “Tools” to “Get a Tax Transcript”, the taxpayer cannot currently obtain either an estate tax closing letter or an account transcript online. The remaining question is whether state courts and financial institutions will accept the account transcript or whether these entities will continue to require an estate tax closing letter to evidence acceptance of an estate tax return. If an estate tax closing letter is required, an estate tax closing letter may still be requested, and this Notice instructs that the way to do so is by calling the IRS at 866-699-4083.

Tuesday, February 21, 2017

The 7520 rate for March 2017 has decreased to 2.4%.

The March 2017 Applicable Federal Interest Rates can be found here.

Thursday, January 19, 2017

What he wants to accomplish vs. what he needs to accomplish…

As the United States rings in a New Year, it also welcomes a new president. All eyes are trained on Washington in anticipation of what President-elect Donald Trump will tackle in his first 100 days in office. Trump’s initial success will depend on how well he defines his own agenda and how he navigates the difference in details between his goals and the policy priorities of Congressional Republicans. Trump will also need to divide his political capital between the things his administration wants to do versus what it needs to do in the New Year.

Click here to read the Alert by David C. Russell and Miguel Rodriquez.

Tuesday, December 13, 2016

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While there is considerable uncertainty among wealth planners and tax professionals regarding how the incoming administration will impact the federal tax code, nearly everyone agrees that change is imminent. With that in mind, we have assembled this chart, which compares current tax rates with President-elect Donald Trump’s proposed tax plan, and the House Republicans’ Blueprint plan (released in June, 2016).  Click here.

Wednesday, October 19, 2016

The 7520 rate for November 2016 has remained at 1.6%.

The November 2016 Applicable Federal Interest Rates can be found here.

Tuesday, September 27, 2016

 

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Both presidential candidates have proposed changes to the estate tax regime.  Coming as a surprise to nobody, the proposals are quite different. (more…)

Thursday, September 22, 2016

 

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Based on the Consumer Price Index for the 12-month period ending August 31, 2016, Thompson Reuters Checkpoint has released their projected inflation-adjusted Estate, Gift, GST tax, and other exclusion amounts for 2017, as follows: (more…)

Tuesday, September 20, 2016

The 7520 rate for October 2016 has increased to 1.6%.

The October 2016 Applicable Federal Interest Rates can be found here.