Increased IRS scrutiny on transfer taxes.

• Author: Gardner, John H.

The IRS is sharpening its focus in the transfer tax area. It has released a business plan with a host of projects in this area, has increased the emphasis on gift tax examinations in its examination plan, and has aggressively pursued issues in ongoing examinations, particularly in the area of discounted family limited partnerships (FLPs) and grantor retained annuity trusts (GRATs). In addition, recent technical advice memoranda (TAMs) have been issued by the IRS National Office, providing increased fuel for examination challenges to FLPs and GRATs. This increased IRS scrutiny may not only result in challenges to past transactions, but also must be considered in future planning.

IRS Business Plan

The Service released its "1997 Priorities for Tax Regulations and Other Administrative Guidance" at the end of February 1997. The list of priorities in the trusts, gifts and estates area included a number of carryover items from 1996, and several new items. The major carryover item from 1996 is a regulations project providing guidance on charitable remainder trusts. The IRS has issued proposed regulations (REG-209823-96), as well as Rev. Proc. 97-23, dealing with charitable remainder trusts. The impetus for the project was the high-income charitable remainder unitrust (CRUT) capital gains tax avoidance transaction that was the subject of Notice 94-78. The proposed regulations address this transaction by requiring that the payment of the annuity or unitrust amount in a fixed percentage charitable remainder trust be made by the end of the tax year.

Additional areas addressed by the proposed regulations include allowing a unitrust to "flip" to a fixed percentage method from a net income method in certain circumstances; providing that the donor can be a trustee in connection with unmarketable assets if a qualified appraisal is obtained; applying the rules of Sec. 2702 to certain charitable remainder trusts with multiple noncharitable beneficiaries; and prohibiting the allocation of pre-contribution gain to income in connection with net income with make-up charitable remainder trusts (NIMCRUTs). The proposed regulations and Rev. Proc. 97-23 indicate that no rulings will be issued and the IRS will study whether investing the assets of a NIMCRUT for deferral purposes causes the trust to fail to meet the requirements for a charitable remainder trust.

The other controversial item carried over from last year that should be finalized "soon" involves final...