Recent Developments

(and few that are not so recent)

at the IRS

Jim Hogan
Andersen Tax
Part I RECENT DECISIONS
• Notice of 2017-15, 2017-6 IRB 783 Guidance on the Application of the
United States v. Windsor Decision

• Estate of Powell v. Commissioner, 148 TC No. 18 (May 18, 2017)

• Estate of Sommers v. Commissioner, 149 TC No. 8 (August 27, 2017)

• Revenue Procedure 2017-34, 2017-26 IRB 1279 Simplified Method for

Small Estates to Elect Portability

Part II TREASURY PRIORITY GUIDANCE PLAN 2016-

2017 - FOR TRUSTEE, GIFT, ESTATE AND
GENERATION – SKIPPING TANSFER TAXES
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Notice 2017-15, 2017-6 IRB 783
Notice 2017-15 provides guidance on the application of the decision in United States v.
Windsor, and the holdings of Revenue Ruling 2013–17, 2013–38 I.R.B. 201, to the
rules regarding the applicable exclusion amount, and the generation-skipping transfer
(GST) exemption as they relate to certain gifts, bequests, and generation-skipping
transfers by (or to) same-sex spouses. The Notice provides special administrative
procedures allowing certain taxpayers and the executors of certain taxpayers’ estates to
recalculate a taxpayer’s remaining applicable exclusion amount and remaining GST
exemption to the extent an allocation of that exclusion or exemption was made to
certain transfers made while the taxpayer was married to a person of the same sex.

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Notice 2017-15 (CONT’D)
The Notice provides that, as long as the limitations period for filing claims of credits or
refunds under Sec. 6511 has not expired, a taxpayer may file an amended gift tax return
or a supplemental estate tax return to claim the marital deduction for a gift or bequest to
the taxpayer’s same-sex spouse and to restore the applicable exclusion amount
allocated to that transfer. If the limitations period has expired, the taxpayer may
recalculate the taxpayer’s remaining applicable exclusion amount as a result of
recognizing the taxpayer’s marriage to the taxpayer’s spouse. However, once the
limitations period on assessment of tax has expired, neither the value of the transferred
interest nor any position concerning a legal issue (other than the existence of the
marriage) related to the transfer can be changed.

The Notice allows taxpayers to make certain adjustments for generation-skipping

transfer tax purposes.

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Estate of Powell v. Commissioner 148 TC No. 18
(May, 18 2017)
The decedent, Nancy Powell, was in very poor health when her son, acting under a
power of attorney, transferred approximately $10 million of cash and securities from
her revocable trust to a family limited partnership (NHP) in exchange for a 99% limited
partner interest. The decedent’s two sons contributed unsecured notes for a 1% general
partnership interest. The interest was valued based on a 25% discount for lack of
control and marketability.

On the same day the assets were transferred to the family limited partnership, son,
acting under the power of attorney, transferred decedent’s 99% interest to a charitable
lead annuity trust (CLAT). The terms of the CLAT called for an annuity payment to a
charitable organization for the remainder of decedent’s life with the corpus of the trust
divided between her two sons upon her death. The power of attorney only authorized
gifts to the decedent’s issue up to the annual exclusionary amount for federal gift tax
purposes. Mrs. Powell died approximately one week after the transfer.

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Estate of Powell v. Commissioner (CONT’D)
IRS argued that the $10 million in assets contributed to the FLP should be included in
the decedent’s gross estate without a valuation discount on three different grounds:

First, the decedent retained at her death the possession, enjoyment, or right to the
income from property she transferred to NHP or the right either alone or in conjunction
with any person to designate the persons who shall possess the property transferred and
thus is includible under Sec. 2036(a).

Second, decedent retained, at her death, the power to alter, amend, revoke, or
terminate the property transferred to the partnership and, thus, is includible under Sec.
2038(a).

Third, decedent retained, at her death, a power to change the enjoyment of the
99% limited partnership interest in NHP through the exercise of a power by the
decedent alone or in conjunction with any other person to alter, amend, revoke, or
terminate the interest and, thus, is includible under Sec. 2038. 10/18/201
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Estate of Powell v. Commissioner (CONT’D)
In this case, the decedent could control distributions through her son acting as the
general partner and as her agent. In addition, the only owners of the partnership other
than the decedent were members of the family and the partnership did not conduct a
business. The Tax Court had no trouble concluding that the value of the cash and
securities transferred to the limited partnership should be included in the decedent’s
gross estate under Sec. 2036(a)(2). The court also determined that the son with power
of attorney lacked authority to transfer the decedent’s limited partnership interest to the
CLAT and as a result, the 99% limited partnership interest was includible in the estate
under Sec. 2033 or Sec. 2038(a). Finally, the stated that even if the interest had been
validly transferred to the CLAT, Sec. 2035(a) would have recaptured the assets for
inclusion because the transfers occurred less than three years before the decedent’s
death.

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Estate of Sommers v. Commissioner, 149 T.C. No. 8 (August
22, 2017)
During his life, the decedent made transfers of art to an LLC and made gifts of LLC
interests to his nieces under a net gift arrangement. When a donee agrees to pay the
gift tax on the gift, the full amount of the property transferred is not treated as a taxable
gift. Instead, the taxable gift is determined algebraically and is the difference between
the total value of the property transferred and the gift on the net gift. After making the
gifts, the decedent remarried his former wife and commenced a state court action
against the nieces claiming there had been no effective transfer or gift of the artwork to
the LLC or of LLC units to the nieces. An arbitrator in an Indiana action and a
subsequent state court in New Jersey held that the gift transfers were effective. The
decedent died shortly thereafter and following his death, the estate—with his widow
serving as executrix—filed a Federal estate tax return claiming that the decedent had
retained the power to alter, amend, revoke or terminate the gifts within the meaning of
Sec. 2038 so that the LLC units were includable in his gross estate (and arguably would
pass in a manner that would qualify for the marital deduction). On audit, the IRS:

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Estate of Sommers v. Commissioner, 149 T.C. No. 8(CONT’D)
1) Reduced the amount of the LLC interest the executor had included in the estate
under Sec. 2038,
2) Reduced the corresponding marital deduction,
3) Under Sec. 2035(b), included the value of the gift tax attributable to the gifts

The Tax Court determined that the gift tax paid by the nieces was includible in the
value of his gross estate. The parties, however, did not agree on whether that inclusion
was offset by a deduction allowable in the same amount under Sec. 2053(a) since the
gift tax liability was not paid until after the individual’s death.

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Estate of Sommers v. Commissioner, 149 T.C. No. 8(CONT’D)
The Tax Court rejected the estate’s argument that denying a deduction for the
estate’s gift tax liability conflicted with the rationale for including the gift tax in the
value of decedent’s gross estate under Sec. 2035(b). In this case, the two state court
actions determined that the transfer of the LLC interests was complete and could not be
considered revocable transfers. Thus, the amount of the gift tax was includible in the
decedent’s estate. The court pointed out that if the gross-up were offset by a deduction
of the same amount, there would be a complete exemption from gift tax that would
frustrate the purpose of Sec. 2035(b).

The estate was also unsuccessful in its attempt to apportion part of the estate tax
liability to the nieces. The court ruled that New Jersey law only allows apportionment
to individuals who received property included in the gross estate. Because the LLC
units that held the artwork had already been transferred as gifts to the nieces prior to
decedent’s death, the LLC units were not included in the decedent’s estate, and
therefore, apportionment was not proper.
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IRS Guidance Provides Simplified Method for Small Estates
to Elect Portability
On June 8, 2017, IRS released Rev. Proc. 2017-34, 2017-26 IRB 1279, regarding a
simplified method for certain taxpayers to obtain an extension of time to make a
portability election. The relief is available for estates that, under Sec. 6018(a), are
not required to file an estate tax return. The simplified procedure will benefit
estates of decedents who failed to timely make a portability election and lighten
the burden on IRS to review letter ruling requests.

Requirements for Portability Election

A portability election allows a surviving spouse to apply a decedent

spouse’s unused exclusion amount (DSUE) to the surviving spouse’s own
subsequent transfers during life or at death. The portability election applies
to estates of decedents who have died after December 31, 2010, if such
decedent is survived by a spouse. The applicable exclusion amount is
$5,450,000 for 2016 and $5,490,000 for 2017.
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IRS Guidance Provides Simplified Method for Small Estates
to Elect Portability (CONT’D)
Under Sec. 2010(c)(5)(A), the executor of a decedent’s estate must satisfy certain
requirements to make the decedent’s DSUE amount available to a surviving
spouse. The executor must, among other things, elect portability on a timely filed
estate tax return (Form 706) and provide a computation of the DSUE amount.
Under Sec. 6018(a), the due date of a decedent’s Form 706 is nine months after
the decedent’s date of death, or the last day of the period covered by an extension
(if an extension for filing has been obtained). The portability election is effective
only if made on or before that date.

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IRS Guidance Provides Simplified Method for Small Estates
to Elect Portability (CONT’D)
Late Portability Elections

In general, an extension of time to elect portability will not be granted to an

estate that is required to file an estate tax return based on the value of the gross
estate and adjustable taxable gifts. Conversely, an extension may be available
to an estate that is not required to file an estate tax return. In 2014, the IRS
issued Rev. Proc. 2014-18, 2014-7 I.R.B. 513, which provided a simplified
method to obtain an extension of time under Treas. Reg. 301.9100-3 but the
method described in this revenue procedure was only available to estates until
December 31, 2014. Subsequently, the IRS issued a significant number of
private letter rulings providing an extension of time to elect portability to estates
that failed to meet the deadline provided in the Treas. Reg. 20.2010-2(a)(1). All
of these letter rulings were issued to estates that were not required to file an
estate tax return because the value of the estate did not exceed the threshold
provided in Sec. 6018(a). However, this type of relief is time consuming and
very expensive. 10/18/201
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IRS Guidance Provides Simplified Method for Small Estates
to Elect Portability (CONT’D)
New Revenue Procedure

Rev. Proc. 2017-34 provides a simplified method of obtaining an

extension of time to elect portability that is available to estates of
decedents that are not required to file an estate tax return. In general,
the executor must file a complete and properly prepared Form 706 on or
before the later of January 2, 2018, or the second annual anniversary of
the decedent’s date of death. The executor must state at the top of the
Form 706 that the return is “FILED PURSUANT TO REV. PROC.
2017-34 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).”

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PART II

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 Chief Counsel

Deputy Chief
Counsel
(Technical)

Financial
Institutions and Income Tax and Passthroughs and
Corporate
Products Accounting Special Industries
(CC:CORP)
(CC:ITA) (CC:PSI)
(CC:FIP)

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10/18/201
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Regulations under §2704 regarding restrictions on the
liquidation of an interest in certain corporations and
partnerships. Proposed Regulation published on August 2,
2016.

Section 2704 of the Internal Revenue Code provides special valuation rules
relating to estate, gift, and GST taxes for valuing intra-family transfers of interests
in corporations and partnerships subject to lapsing voting or liquidation rights and
restrictions on liquidation.

Under section 2704(a), lapses of voting or liquidation rights are treated as a

transfer of the excess of the fair market value of all interests held by the transferor,
determined as if the voting or liquidation rights were nonlapsing, over the fair
market value of such interests after the lapse.

Under section 2704(b), certain restrictions on liquidation are disregarded in

determining the fair market value of the transferred interest. 10/18/201
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Regulations under §2704 (CONT’D)

The Treasury Department and the IRS have determined that the current regulations
have been rendered substantially ineffective in implementing the purpose and
intent of the statute by changes in state laws and by other subsequent
developments.

Treasury’s answer:

Lapses under Section 2704(a). The proposed regulations sought to amend

the regulations such that it would narrow the exception in the definition of a
lapse of a liquidation right to transfers to lapses that occurred three years or
more before the transferor’s death that do not restrict or eliminate the rights
associated with the ownership of the transferred interest.

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Regulations under §2704 (CONT’D)

Disregarded Restrictions. A new class of restrictions is described in the

proposed regulations that would be disregarded, described as “disregarded
restrictions” that were intended to address restrictions on the liquidation or
redemption of such interests.

In early December 2016, the Treasury Department held a hearing on the

regulations.

Treasury received a significant amount of comments opposing the regulations.

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Regulations under §2704 (CONT’D)

On April 21, 2017, the President signed Executive Order 13789, which directed
the Secretary of the Treasury to review all significant tax regulations issued after
January 1, 2016, and determine which increase financial burdens on taxpayers,
increase complexity, or exceed the IRS's statutory authority. The Secretary was to
identify projects that identifying regulations that (i) impose an undue financial
burden on U.S. taxpayers; (ii) add undue complexity to the Federal tax laws; or
(iii) exceed the statutory authority of the Internal Revenue Service. Subsequently,
the Treasury Department issued Notice 2017-38, which identified 8 projects that
meet at least one of the criteria. The Notice indicates that the Treasury
Department intends to propose reforms—potentially ranging from streamlining
problematic rule provisions to full repeal to mitigate the burdens of identified
regulations. One of the projects identified was the Proposed Regulations under
Section 2704 on Restrictions on Liquidation of an Interest for Estate, Gift and
Generation-Skipping Transfer Taxes (REG-163113- 02; 81 F.R. 51413)

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Guidance on qualified contingencies of charitable remainder
annuity trusts under §664. Rev Proc. 2016-42 on August 8,
2016.

Low interest rates in recent years have greatly limited use of a CRAT as an
effective charitable-giving vehicle. For example, in May of 2016, the § 7520 rate
was 1.8 percent. At this interest rate, the sole life beneficiary of a CRAT that
provides for the payment of the minimum allowable annuity (equal to 5 percent of
the initial FMV of the trust assets) must be at least 72 years old at the creation of
the trust for the trust to satisfy the probability of exhaustion test. The § 7520 rate
has not exceeded the minimum 5 percent annuity payout rate since December of
2007, which has necessitated testing for the probability of exhaustion for every
CRAT created since that time.

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Guidance on qualified contingencies (CONT’D)

The IRS’s answer:

The Revenue Procedure includes a new sample provision that provides an

alternative to satisfying the probability of exhaustion test for those CRATs to
which this revenue procedure applies. The sample provision causes the early
termination of the CRAT, followed by an immediate distribution of the
remaining trust assets to the charitable remainder beneficiary if the payment of
that annuity amount would result in the value of the trust corpus, when
multiplied by a specified discount factor, is less than 10 percent of the value of
the initial trust corpus.

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

Section 682 provides that the gross income of a wife who is divorced or legally
separated under a decree or separation agreement includes trust income that the
wife is entitled to receive that would be otherwise taxable to the husband under the
grantor trust rules. Payments from the trust that are expressly designated as
support for a minor child are not taxed to the beneficiary spouse under Sec. 682.

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Guidance on definition of income for spousal support trusts
(CONT’D)
Pursuant to Sec. 682, the payee (frequently the wife) of the trust is
considered a beneficiary and must meet three requirements:

1) The payor and payee must be legally separated or divorced.

2) But for the Sec. 682 treatment, the income would be taxable to the
grantor.
3) The income cannot be fixed as child support.

Because the payee of a trust established under Sec. 682 is considered the
beneficiary of the trust, and the characterization of income to the trust
passes through to the payee spouse. The payee spouse or beneficiary of
the trust is taxed on the income required to be distributed under the trust,
not including any income characterized as child support, whether or not
that income was actually paid to the beneficiary spouse.
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Guidance on basis of grantor trust assets at death under
§1014.
What is a grantor trust?
It’s a trust in which the grantor (aka the settlor) or another person is treated as the owner
of the trust income or principal or both for federal income tax purposes. If a trust is a
grantor trust, then the individual who created the trust or in limited circumstances another
person is treated as the owner of the trust is taxed to the same extent as if he or she had
received all of the items of “income, deductions, and credits against tax of the trust”
attributable to the trust.

Some grantor trust powers will result in the inclusion of the trust’s property in a decedent
gross estate for federal estate tax purposes and others do not.

Grantor creates:
1) A revocable trust is a grantor trust under section 676 of the Internal Revenue Code
and includible in the grantor’s estate under section 2038.
2) A trust in which the grantor has the authority in a nonfiduciary capacity to reacquire
trust property by substituting other property of an equivalent value. In this case, the
trust will be considered a grantor trust but it will not be included in the grantor’s
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Guidance on basis of grantor trust assets at death under
§1014. (CONT’D)

What is the basis of the assets in the trust following the death of the
grantor? There are three alternatives:

1)if the transfer is viewed as a bequest or devise, then section 1014

applies to cause the basis to equal the date of death value;

2)if the transfer is viewed as a sale by the grantor to the trust, the trust’s
basis will equal the purchase price under section 1012; or

3)if the transfer is viewed as a gift by the descendent then the basis will
be the same as the grantor’s basis under section 1015.

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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.
Section 1014(f) requires that the basis of certain property acquired from a
decedent may not exceed

In the case of property the final value of which has been determined for
federal estate tax purposes—the value.

In the case of property not described above, and if a statement has been
furnished under section 6035 that identifies the value of such
property—the value.

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Final regulations under §§1014 (f) and 6035 (CONT’D)

What does the term “determined” for federal estate tax purposes mean?

1) The value of such property is shown on the decedent’s estate tax

return and the value is not contested by the IRS before the statute of
limitations expires
2) If not described above, the value is specified by the government
and is not timely contested by the executor of the estate, or
3) The value is determined by a court or pursuant to a settlement
agreement with the IRS.

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Final regulations under §§1014 (f) and 6035 (CONT’D)

Section 6035

1) The Act added a new section 6035 entitled Basis Information to Persons
Acquiring Property from a Decedent.
2) Section 6035 applies to the executor of any estate required to file an estate
tax return. Under section 2203 an executor is:
3) the executor or administrator of the decedent; or,
4) if there is no executor or administrator appointed, then any person in actual
or constructive possession of any property of the decedent.
5) Under section 6035(a)(2), each person who is required to file an estate tax
return must furnish a statement identifying the value of each interest in the
property reported on the return to each person who holds a:
6) legal interest in property or
7) beneficial interest in property to which the estate tax return relates

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Final regulations under §§1014 (f) and 6035 (CONT’D)

When must an executor file the statements required under section 6035

1) Each required statement shall be furnished at such time as the Treasury

Department may prescribe, but in no case later than the earlier of:
2) 30 days after the date on which the Form 706, Form 706-NA, Form 706-A is
required to be filed (including extensions, if any), or
3) 30 days after the return is filed.
4) Adjustments - if there is an adjustment to the information required to be
included on a statement filed, a supplemental statement must be filed within
30 days.
5) Under section 6035(a)(2), each person who is required to file an estate tax
return must furnish a statement identifying the value of each interest in the
property reported on the return to each person who holds a:
6) legal interest in property or
7) beneficial interest in property to which the estate tax return relates

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Final regulations under §§1014 (f) and 6035 (CONT’D)

When must an executor file the statements required under section

6035

Each required statement shall be furnished at such time as the Treasury

Department may prescribe, but in no case later than the earlier of:

1) 30 days after the date on which the Form 706, Form 706-NA, Form
706-A is required to be filed (including extensions, if any), or
2) 30 days after the return is filed.
3) Adjustments - if there is an adjustment to the information required
to be included on a statement filed, a supplemental statement must
be filed within 30 days.

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Revenue procedure under §2010(c) regarding the validity of
a QTIP election on an estate tax return filed only to elect
portability. Published as Rev Proc. 2016-49 on September 27,
2016.
On September 27, 2016, IRS released Rev. Proc. 2016-49, 2016-42 IRB 462, which provides
revised procedures for treating a qualified terminable interest property (QTIP) election as
null and void. The revenue procedure confirms the procedures by which IRS will disregard a
QTIP election, but it excludes from its scope those estates in which the executor made the
portability election in accordance with the regulations under Sec. 2010(c)(5)(A).

The revenue procedure resolves an issue as to whether the QTIP election could be made, not
to avoid federal estate tax, but to increase the amount of deceased spousal unused exemption
(DSUE) being ported to the surviving spouse.

Rev. Proc. 2001-38, 2001 CB 1335, provides a procedure by which IRS will disregard and
treat as a nullity for federal estate, gift, and generation-skipping transfer tax purposes a QTIP
election made in cases where the election was not necessary to reduce the estate tax liability
to zero. Rev. Proc. 2001-38, when issued, provided relief to the surviving spouse of a
decedent whose estate received no benefit from the unnecessary QTIP election. 10/18/201 33
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Revenue procedure under §2010(c)(CONT’D)
In 2010, Congress amended Sec. 2010(c) allowing an executor of an estate to make a
portability election under Sec. 2010(c)(5)(A). IRS determined that this 2010 amendment
may influence the decision of whether to make a QTIP election under Sec. 2056(b)(7). A
QTIP election would reduce the decedent's taxable estate and thereby maximize the amount
of unused exclusion available to be used by the decedent's surviving spouse. Thus, the
executor of an estate electing portability of the decedent's unused applicable exclusion
amount (DSUE amount) may wish to make a QTIP election without regard to whether the
QTIP election is necessary to reduce the estate tax liability to zero.

With the availability of portability elections, IRS determined that the procedure to void and
nullify QTIP elections in Rev. Proc. 2001-38 may bring into question the ability of a
decedent's estate to make an otherwise unnecessary QTIP election to maximize the available
unused exclusion amount.

The revenue procedure treats as void QTIP elections made in cases where all of the
following requirements are satisfied:

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Revenue procedure under §2010(c)(CONT’D)
The estate's federal estate tax liability was zero, regardless of the QTIP election, based on
values as finally determined for federal estate tax purposes, thus making the QTIP election
unnecessary to reduce the federal estate tax liability;

The executor of the estate neither made nor was considered to have made the portability
election as provided in Sec. 2010(c)(5)(A) and the regulations thereunder; and

The procedural requirements for relief detailed in section 4.02 of the revenue procedure are
satisfied.

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Revenue procedure under §2010(c)(CONT’D)
As part of the procedural requirements, the surviving spouse (Taxpayer) must notify IRS that
a QTIP election is within the scope of this revenue procedure. Notice is provided by entering
at the top of the Form 706 or Form 709 the notation "Filed pursuant to Revenue Procedure
2016-49." In addition, the Taxpayer must identify the QTIP election that should be treated as
void and provide an explanation of why the QTIP election falls within the scope of the
revenue procedure. The explanation should include all the relevant facts, including the value
of the predeceased spouse's taxable estate without regard to the allowance of the marital
deduction for the QTIP at issue compared to the applicable exclusion amount in effect for the
year of the predeceased spouse's death. The explanation should establish that the QTIP
election wasn't necessary to reduce the estate tax liability to zero based on finally determined
estate tax values and that the executor opted not to elect portability of the DSUE amount.

Rev. Proc. 2016-49 is effective September 27, 2016 and applies to QTIP elections within the
scope of the revenue procedure. Rev. Proc. 2001-38 is modified and superseded as a result of
this revenue procedure.

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

Sections 20.2031-4 and 25.2512-4 state generally, that the fair market
value of notes is presumed to be the amount of unpaid principal, plus
accrued interest unless the executor or the donor, as the case may be
establishes a lower value.

The government has litigated a number of cases over the years involving
the legitimate value of notes between or among family members.

What do taxpayers need to show to demonstrate that the loan or note is

legitimate?

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Guidance on the valuation of promissory notes (CONT’D)

What do taxpayers need to show to demonstrate that the loan or note is

legitimate?

1) Demonstrate that there is a real expectation of repayment and an

intention to enforce the debt.
2) See factors Miller v. Commissioner, T.C. 1996-3 and see Rev. Rul. 77-
299.
3) Rosen v. Commissioner, T.C. Memo 2006-115. The assets of a family
limited partnership were included in the decedent’s estate because the
advances to the decedent during his life from the partnership
demonstrated a retained enjoyment of the assets transferred to the FLP
even though the decedent gave an unsecured demand note for the
advances. The loans were treated as distributions from the
partnership. Moreover, the court provided a “laundry” list of factors
required to establish a bona-fide loan.
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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.

Section 2032(a) provides that the value of the gross estate may be
determined, if the executor so elects, by valuing all the property includible
in the gross estate as follows. Property distributed, sold, exchanged, or
otherwise disposed of during the 6-month period immediately after the
date of death (alternate valuation period) is valued as of the date of
distribution, sale, exchange, or other disposition (transaction date).
Section 2032(a)(1). Property not distributed, sold, exchanged, or
otherwise disposed of during the alternate valuation period is valued as of
the date that is 6 months after the decedent’s death (6-month date).

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Final regulations under §2032 (a) (CONT’D)

The purpose of this section can be traced back to 1929. Congress enacted in
response to “the hardships which were experienced after 1929 when market values
decreased very materially between the period from the date of death and the date
of distribution to the beneficiaries.” 79 Cong. Rec. 14632 (1935) (statement of Mr.
Samuel B. Hill). See, also, H.R. Rep. No. 74-1681, at 9 (1935); S. Rep. No. 74-
1240, part 1, at 9-10 (1935).

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Final regulations under §2032 (a) (CONT’D)

In 2006, the Tax Court in Kohler v. Commissioner, T.C. Memo. 2006-152, held
that valuation discounts attributable to restrictions imposed on closely-held
corporate stock pursuant to a post-death reorganization should be considered when
valuing stock on the alternate valuation date. In that case, approximately two
months after the death of the decedent, the Kohler Company underwent a
reorganization that qualified as a tax-free reorganization under section 368(a) and,
thus, was not a sale or disposition for purposes of section 2032(a)(1). The estate
opted to receive new Kohler shares that were subject to transfer restrictions. The
estate elected to use the alternate valuation method under section 2032(a)(2) and
took into account discounts attributable to the transfer restrictions on the stock in
determining the value for Federal estate tax purposes. In the Internal Revenue
Bulletin No. 2008-9 on March 3, 2008, the IRS nonacquiesced to the Tax Court
opinion in Kohler (AOD 2008-1).

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Final regulations under §2032 (a) (CONT’D)

In 2008, the Treasury Department issue proposed regulations under section 2032.
Under the proposed regulations, the election to use the alternate valuation method
would be available to estates that experience a reduction in the value of the gross
estate during the alternate valuation period, but only to the extent that the
reduction in value is due to” market conditions” and not to other post-death events
(events occurring during the alternate valuation period). The term “market
conditions” was defined as events outside of the control of the decedent (or the
decedent’s executor or trustee) or other person whose property is being valued that
affect the fair market value of the property includible in the decedent’s gross
estate. Changes in value due to mere lapse of time or to other post-death events
would be ignored in determining the value of the decedent’s gross estate under the
alternate valuation method.

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Final regulations under §2032 (a) (CONT’D)

In 2011, the Treasury Department withdrew the proposed regulations that it had
issued in 2008 and issued a new set of proposed regulations. The new proposed
regulations identify transactions that constitute distributions, sales, exchanges, or
dispositions of property. If an estate’s (or other holder’s) property is subject to
such a transaction during the alternate valuation period, the estate must value that
property on the transaction date. The value included in the gross estate is the fair
market value of that property on the date of and immediately prior to the
transaction. The term “property” refers to the property includible in the decedent’s
gross estate under section 2033.

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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 will probably address the issues raised in Estate of Graegin v. Commissioner, 56
TCM 387 (1988). Section 2053(a) of the Code provides that the value of the taxable estate
shall be determined by deducting from the value of the gross estate amounts for, among
other things, administration expenses. Under the regulations, amounts will be deductible
from a decedent's gross estate as an “administration expense" if the amount of an expense
incurred is actually and necessarily incurred in the administration of the decedent's estate. In
general, the IRS has concluded that a loan that is incurred to avoid a forced sale of assets is
reasonably and necessarily incurred to administer an estate.

In Graegin, the decedent owned stock in a closely held corporation at his death. Under his
will, the residue of his estate poured over to a trust that was charged with the payment of
claims and expenses of the estate. To avoid selling the stock of the closely held corporation,
the estate borrowed from one of the subsidiaries of the closely held corporation. The
amount of the deduction is generally the entire amount of post-death interest.

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

In general, there are two types of defined value clauses that courts have
addressed in the past number of years:

1) Formula clause with the excess of any gift to an individual passes to

charity. In these cases, an individual makes a gift to another individual
and the documents of transfer state that if the value of the gift is
increased, any such increase passes to charity. Examples of these types
of clauses can be found in: McCord v. Commissioner, 461 F. 3d 614;
Estate of Christiansen v. Commissioner, 586 F.3d 1061; Estate of
Petter v. Commissioner, 653 F.3d 1012.

2) Formula clause with the excess of any gift to an individual returns to

the donor. An example of this type of clause can be found Wandry v.
Commissioner, T.C. Memo 2012-88. 10/18/201
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Guidance under §§2522 and 2055 regarding the tax impact
of certain irregularities in the administration of split-interest
charitable trusts.

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Guidance under §2801 regarding the tax imposed on U.S.
citizens and residents who receive gifts or bequests from
certain expatriates.
Congress added Section 2801 to the Code as part of the Heroes Earnings
Assistance and Relief Tax Act of 2008. This section pertains to the estate
and gift tax consequence for individuals who have relinquished his or her
U.S. citizenship status or individuals terminating long-term permanent
resident status.

Section 2801 imposes a tax on the U.S. citizen or resident recipient of the
covered gift or bequest. A domestic trust that receives a covered gift or
bequest is treated as a U.S. citizen and is therefore liable for the tax. The
tax rate is the highest rate that applies to gifts and estates.

The term “covered gift” is defined as a gift as under the gift tax provisions
of the Code, received directly or indirectly from a covered expatriate
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Guidance under §2801 (CONT’D)
The term “covered bequest” is defined as any property acquired, directly
or indirectly, by reason of the death of a covered expatriate that would
have been includible in the gross estate of the covered expatriate if he or
she had been a U.S. citizen at the time of death.

The proposed regulations place on the recipient of a gift or bequest the

burden to determine whether he or she received a covered gift or bequest.
In other words, the burden is on the recipient to determine whether the
donor or decedent is or was a covered expatriate. The proposed
regulations indicate that a recipient of a gift or bequest may submit a
request to the IRS, with the consent of the expatriate, to disclose certain
return information of the expatriate that may assist the recipient in
determining whether the donor or decedent is or was a covered expatriate.

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The opinions and analyses expressed herein do not necessarily reflect those of
Andersen Tax LLC (“Andersen Tax”) or any affiliate thereof. Any suggestions
contained herein are general, and do not take into account an individual’s or entity’s
specific circumstances or applicable governing law, which may vary from jurisdiction
to jurisdiction and be subject to change.

The information contained in this document is intended for the exclusive use of
Andersen Tax personnel in conjunction with internal instructional activities.
Distribution in whole or in part to parties outside the firm without advance written
consent of the Practice Director is prohibited.

© COPYRIGHT 2017 ANDERSEN TAX LLC ALL RIGHTS RESERVED.

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