Tax Alert

• Publication year: 2020

TAX ALERT

By Elizabeth T. Pierson, Esq^*

This article summarizes selected developments in federal and state taxation law since the last Quarterly that may be of interest to trust and estate attorneys.

I. FEDERAL ADMINISTRATIVE & LEGISLATIVE ACTIVITIES

A. Series EE Bonds—Income Tax Includability Info 2019-0029 (Nov. 22, 2019)

The IRS has clarified whether the transfer of Series EE bonds to a testamentary trust is a taxable event. If the bonds were owned by a cash method taxpayer who did not report the interest each year and who had purchased the bonds entirely with personal funds, the interest may be reported in either of two ways. The person who files the decedent's final income tax return can elect to include all of the interest earned before the decedent's death on the decedent's final return. The transferee, i.e., the estate or beneficiary, would then report only post-death interest. If the election is not made to include the pre-death interest on the decedent's final return, the interest is income in respect of a decedent. All pre-death and post-death interest is reported by the transferee, who may defer reporting the income until the bonds are cashed or mature, whichever is earlier. In the year the interest is reported, the transferee may claim a deduction for any federal estate tax paid on interest included in the decedent's taxable estate. Form FS 1581, a form issued by the Bureau of Fiscal Service, is used to reissue the bonds to a trust, including a testamentary trust.

B. Proposed Regulations Concerning Deductions to State and Local Government Charities REG-10741-19 (Dec. 17, 2019) 84 Fed. Reg. 68833-01

Treasury has issued proposed regulations concerning the use of charitable contributions as an end run around the $10,000 limitation on the income tax deduction for state and local taxes. The proposed regulations (a) refine the quid pro quo doctrine concerning benefits to be received in connection with such arrangements; (b) allow certain business entities to take charitable deductions even if they expect to receive a state income tax credit as a result; and (c) permit an individual, who itemizes deductions and who does not otherwise reach the $10,000 state and local tax deduction limitation and who makes such a contribution, to deduct the contribution up to the $10,000 limitation.

C. No Rulings List Rev. Proc. 2020-3 (Jan. 2, 2020) 2020-1 IRB 131

The IRS has made additions to the "No Rulings" list. It will not rule on the grantor trust status of a nongrantor incomplete gift trust that is designed to shift income taxation to the trust without a taxable gift, if trust distributions are made either with the consent of an adverse party or at the direction of a committee that has fewer than two persons other than the grantor and the grantor's spouse. The planning for such trusts is discussed in an article by Diana Hastings, ING Trusts and the State of California, published in Issue 26-1 of the Quarterly. The IRS will also not rule on the application of the section 4947 excise tax on transactions involving non-exempt split-interest charitable trusts where the donor does not intend to take a charitable income tax deduction.

D. No Rulings List—International Matters Rev. Proc. 2020-7 (Jan. 3, 2020)

The IRS has added the following to the areas in which rulings will not be issued: Sections 861 (income from sources within the United States), 862 (income from sources without the United States), 871(g) (special rules for original issue discount), 894 (income affected by a treaty), 954 (foreign base company income), and 7701(b) (definition of resident alien and nonresident alien). The IRS has added the following to the areas in which rulings will not ordinarily be issued: Sections 367(a) (transfers of property from the United States), 367(b) (other transfers), 864 (definitions and special rules), 871 (tax on nonresident alien individuals), 881 (tax on income of foreign corporations not connected with United States business), 892 (income of foreign governments and of international organizations), 893 (compensation of employees of foreign governments and international organizations), 894 (income affected by treaty), 901 (taxes of foreign countries and of possessions of United States), 903 (credit for taxes in lieu of income, etc., taxes), 954(d) and 993(c) (manufactured product), 937 (definition of bona fide resident), 956 (investment of earnings in United States property), 985 (foreign currency), 989(a) (qualified business unit), 1058 (transfers of securities under certain agreements), 1059A (limitation on taxpayer's basis or inventory cost in property imported from related persons), 1471, 1472, 1473, and 1474 (taxes to enforce reporting on certain foreign accounts), 1503(d) (dual consolidated loss), 2501 (imposition of tax), 7701 (definitions), 7784 (expatriated entities and their foreign parents), and certain general areas. Revenue Procedure 2019-7 is superseded.

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E. Final Regulations Regarding Qualified Opportunity Zones Treasury Decision 9889 (Jan. 17, 2020)

The Treasury Department and the IRS issued final regulations concerning Qualified Opportunity Zones and qualifying investments in a Qualified Opportunity Fund ("QOF"). They provide that any transfer by gift of a qualifying interest in a QOF is an inclusion event for purposes of section 1400Z-2(b)(1); the transferee's interest is no longer a qualifying investment in a QOF and the donee is not eligible to make an election to adjust the basis in the QOF to fair market value. The death of a QOF investment owner is not an inclusion event; the decedent's deferred gain is the liability of the recipient of the interest at the time of an inclusion event.

II. FEDERAL CASES AND RULINGS: ESTATE TAX, GIFT TAX & GENERATION-SKIPPING TRANSFER TAX

A. Generation-Skipping Transfer Tax—Bifurcation of Non-Exempt Trusts PLR 201946009 (Nov. 15, 2019)

Decedent created a QTIP trust for the benefit of the surviving spouse, which was divided into a GST Exempt Marital Trust and a GST Non-Exempt Marital Trust. Taxpayer proposed dividing the GST Non-Exempt Marital Trust into two trusts. Following the bifurcation, the surviving spouse would make a non-qualified disclaimer of one of the resulting GST Non-Exempt Marital trusts, which would then be held in trust for the decedent's issue. The IRS determined that the QTIP trusts would continue to qualify for the marital deduction; that the surviving spouse will have made a gift of the entire disclaimed trust—the income interest under section 2511 and the balance under section 2519; that the surviving spouse would not be deemed to have made a gift of the spouse's interest in the non-disclaimed trust; and that the portion of the disclaimed trust that would be treated as a gift...