Utah State University

Planned Giving

Text Resize

Monday December 18, 2017

Washington News

Washington Hotline

House Committee Discussion on Tax Reform

On May 23, the House Ways and Means Committee held a hearing on potential comprehensive tax reform. The hearing was titled, "Increasing U.S. Competitiveness and Preventing American Jobs from Moving Overseas."

Chairman Kevin Brady (R-TX) opened the hearing. He highlighted a bipartisan hope by noting, "Today, we are continuing our work on pro-growth tax reform that will improve the lives of all Americans. This morning's hearing is focused on strengthening American competitiveness and preventing American jobs from moving overseas."

Brady has been advocating comprehensive tax reform for the past two years. He continued, "Americans are being hurt because our nation is saddled with one of the most costly, unfair and uncompetitive tax systems on the planet. According to the nonpartisan Tax Foundation, when it comes to competitive tax codes America is ranked nearly last among our global competitors: 31st of 35."

The Ranking Member on the Ways and Means Committee is Rep. Richard Neal (D-MA). He also supported "reforming our tax code" and recognized the "strong bipartisan support for simplifying our tax system."

Neal continued, "I also believe that a key component of tax reform is ensuring that American businesses remain competitive in the global economy - and that we prevent American jobs from moving overseas. Achieving this includes providing incentives to companies to conduct research and development here in the United States. We also need to improve our nation's infrastructure so that it is in line with other developed nations. That includes meaningful investments to repair and enhance our nation's roads, rail, bridges and harbors."

U.S. Treasury Secretary Steven Mnuchin spoke to the full Ways and Means Committee on May 24. He shared the White House's perspective on tax reform.

Mnuchin stated, "Tax reform will play a major role in our campaign for growth. It has been more than 30 years since we had comprehensive tax reform in this country. We are working diligently to bring tax relief to lower and middle-income Americans as well as make American businesses competitive again."

Editor's Note: These hearings are initial steps toward comprehensive tax reform. Since the last complete reform in 1986, there have been many major changes to the American economy. The general plan for tax reform is to simplify the system by reducing deductions and lowering both individual and corporate tax rates. This will be a long and involved process - especially if the final bill follows the stated preference of Speaker of the House Paul Ryan and Senate Majority Leader Mitch McConnell that a bill should be revenue-neutral. The general goal of tax reform is to encourage job growth while still raising the revenue necessary for the federal government.

FLP-Lead Trust Deductions Denied


In Powell, Estate of Nancy H. et al. v. Commissioner; No. 24703-12; No. 24731-12; 148 T.C. No. 18 (18 May 2017), the Tax Court denied a family limited partnership (FLP) discount and a charitable lead annuity trust (CLAT) deduction.

On August 6, 2008, decedent Nancy H. Powell was incapacitated. Two doctors affirmed this medical condition. Her son Jeffery J. Powell held a power of attorney (POA) that authorized gifts up to the federal annual exclusion limit.

Using this POA, Jeffery transferred $10,022,577 of decedent's cash and securities to NHP Enterprises LP (NHP). The decedent received a 99% limited partnership interest and Jeffery and his brother held the remaining 1% interest in the partnership.

On August 8, Jeffery transferred the 99% limited partnership interest from decedent to a one life charitable lead annuity trust (CLAT). The trust document required an annuity to be distributed each year to the Nancy H. Powell Foundation, a Delaware nonprofit corporation.

On August 15, 2008, Nancy Powell passed away at Marin General Hospital in Greenbrae, California.

An appraisal from Duff & Phelps, LLC determined there should be a 25% discount for lack of marketability with respect to NHP. The estate timely filed IRS Form 706 and claimed the FLP discount and also the CLAT charitable deduction.

The IRS rejected the discount and the deduction. It assessed an estate deficiency of $5,870,226 and an alternative gift tax deficiency of $2,961,366. The IRS claimed three reasons for the deficiency. First, the decedent retained the right "alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom." This retained right caused inclusion under Sec. 2036(a). Second, the decedent "retained at her death a power to change the enjoyment of property transferred to NHP" and there was inclusion under Sec. 2038(a). Third, the decedent retained "at her death a power to change the enjoyment of a 99% limited partnership interest in NHP" and there was inclusion under Sec. 2038(a).

The court recognized that neither party claimed there was a bona fide sale because there was no legitimate nontax purpose for NHP. Because the decedent and the two sons held the power under California law to dissolve the partnership, there was a retained right with respect to the partnership and inclusion is required under Sec. 2036(a).

In addition, the gift by Jeffery under the POA substantially exceeded the power to make a transfer up to the amount of the annual federal exclusion amount. Therefore, under California law it is void or voidable, leading to inclusion in the estate under Sec. 2035(a) or a revocable transfer under Sec. 2038(a).

Therefore, the assets are included at fair market value under a combination of Sec. 2036(a), Sec. 2035(a), Sec. 2038(a) and Sec. 2043(a).

Editor's Note: Because the Tax Court held there was full inclusion of the asset value, it was not necessary to discuss the Sec. 7520 rules with respect to use of the IRS mortality tables. If two doctors do not state that there is a probability the donor will survive for at least 12 months, then the IRS mortality tables may be inapplicable. Given decedent's death within one week of creation of the agreements, this Sec. 7520 provision could have applied.

Estate Loan Interest Deduction Denied


In Coons, Estate of John F III et al. v. Commissioner; No.16-10646; No. 16-10648 (27 Apr 2017), the Eleventh Circuit denied a $71,419,497 deduction for interest on a loan used to pay estate taxes.

Decedent John F Coons III operated Central Investment Corporation (CIC). His primary business activity was to bottle and distribute Pepsi products. After extended negotiations, on January 10, 2005, CIC business interests were sold to PepsiCo and several affiliates. The proceeds of $402,400,000 were transferred to CI LLC.

The CI LLC business interests were owned by Coons, four children, seven grandchildren and several trusts. After negotiations by the various entities, agreements were signed for distributions that were to be made on April 30, 2005. However, Coons passed away on March 3, 2005 before the final distributions had been completed.

After the distributions were completed on April 30, 2005, the estate owned 70.93% of CI LLC.

CI LLC held approximately $200 million in liquid assets and various other business interests. The estate borrowed $10,750,000 from CI LLC to pay the estate tax. The interest on the promissory note was deferred for 18 years and set at a rate of 9.5% interest. The estate deducted $71,419,497 on IRS Form 706.

The IRS denied the deduction and assessed an estate tax deficiency of $42,771,587 and a generation skipping transfer tax (GSTT) deficiency of $15,899,463.

The court determined that the redemptions were very likely. The children and other entities had indicated that they wanted to receive cash for their various ownership interests.

Under Sec. 2053(a)(2) an estate may deduct administration expenses. This also may include the interest on a loan required in order to avoid a forced sale of illiquid assets. See Estate of Graegin v. Commissioner, 56 T.C.M. 387 (1988).

However, this estate did not have a valid need to borrow funds and pay interest. The estate could have directed the revocable trust to make a distribution of liquid assets in order to pay taxes. While the estate claimed that it was necessary to retain the assets to complete decedent's business plan to purchase operating businesses, this was not a valid reason to refuse to make distribution from the revocable trust of liquid assets to the estate. The interest deduction was denied and the deficiencies were upheld.

Applicable Federal Rate of 2.4% for June -- Rev. Rul. 2017-12; 2017-23 IRB 1 (17 May 2017)


The IRS has announced the Applicable Federal Rate (AFR) for June of 2017. The AFR under Section 7520 for the month of June will be 2.4%. The rates for May of 2.4% or April of 2.6% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2017, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return.

Published May 26, 2017

Previous Articles

46% Reduction in IRS Identity Theft Reports

Protecting Your Financial and Tax Records

House Sends American Health Care Act to Senate

White House Releases Tax Reform Plan

April 23 is Tax Freedom Day

scriptsknown