Treasury and IRS’s Priority Guidance Plan

Jan 19, 2021 | ACTEC Capital Letters, General Estate Planning, IRS / Tax Guidance, Podcasts, T&E Administration, T&E Litigation

“Treasury and IRS’s Priority Guidance Plan,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Susan Snyder, ACTEC Fellow from Chicago. In mid-November, the Treasury Department and the IRS released their Priority Guidance Plan for the 12 months from July 2020 through June 2021. In our highlights of their plans of interest to estate planners, you will be hearing today from ACTEC Fellow Ron Aucutt of Lakewood Ranch, Florida. Welcome Ron.

Thank you very much, Susan. The Treasury IRS Priority Guidance Plan always is a good source for being reminded of the regulations and other administrative guidance that we might see in the near future. So, we were looking for this to come out. Usually, even though, like Susan says, the plan year runs from July to June, they come out in the fall. So, they’re always a little late. That was no exception this year. And for that reason, some of the items and what’s called a plan have actually already been completed. And that’s actually one of the first items I want to mention because it’s so important to estate and trust administration.

Priority Guidance Plan Part I

Part one of the plan is devoted to the remaining work needed to finish the guidance, implementing the 2017 Tax Act, the so-called Tax Cuts and Jobs Act; and Item 4 of Part 1 relates to the deduction of estate and trust expenses. Those are expenses that are described in Section 67(e) of the Internal Revenue Code, that it had deductible above the line in calculating adjusted gross income, not subject to the 2 percent floor on miscellaneous itemized deductions that was enacted by the Tax Reform Act of 1986. The good news is the 2017 Act suspended the 2 percent floor on miscellaneous itemized deductions for eight years; but the bad news is that the deduction and miscellaneous itemized deductions themselves are suspended for eight years through 2025.

And yes, that means entirely disallowed, not just subject to a 2 percent floor. The regulations got a late start, partly because in 2018, the Treasury Department first requested comments on this subject and they received and considered a lot of comments. Then the proposed regulations were published May 11th, 2020, and the final regulations, October 29th, 2020. That part happened pretty quickly. As expected, the regulations clarified that Section 67(e) expenses may continue to be deducted by estates and trusts, which was pretty clear under the 2017 Act. That’s not the end of the matter.

There are also excess deductions in the year that an estate or trust terminates, deductions that might actually be higher in that year, because of the expenses of making distributions, preparing all the necessary documentation like receipts, catching up on paying all expenses and so forth. Those higher deductions might not be fully deductible against income for that year, which is actually being reduced because of the sale and distribution of income producing assets; and there might just not be enough income to cover the deductions.

Will those excess deductions continue to be carried out to the beneficiaries who receive distributions under Section 642(h)? This might’ve been harder for the Treasury and IRS to deal with than the 67(e) question because the statute and the existing regulations weren’t as helpful. But these new regulations provide that, yes, indeed, those excess deductions can be passed through and be deducted by beneficiaries. And, the 2020 instructions for Schedule K-1, a form 1041 that were released on October 21st, confirm that and explain how those deductions should be reported.

This is extremely important and helpful, because otherwise fiduciaries would be under pressure to better match income and expenses by artificially timing expenses, sales, and distributions in ways that could be unfair and frustrating to both fiduciaries and beneficiaries. In this regard, the drafters of the regulations, I think, showed very good sensitivity to the comments they got from the public, including ACTEC’s comments of February 19, 2019 and June 22, 2020. That second set of ACTEC comments were submitted after the proposed regulations had been published and specifically recommended some clarifications of the allocation of expenses among items of income, which the final regulations did make.

Priority Guidance Plan – Part 3

Now let’s turn to some items in the plan that are not completed, but still underway. Part 3 of the plan is titled Burden Reduction and item 14 of Part 3 deals with basis consistency. These are the rules in Sections 1014(f) and 6035 that Congress enacted in a hurry in 2015 to meet a specific revenue need by requiring that if an asset included in a decedent’s gross estate increases the amount of estate tax for that estate, then the basis of that asset in the hands of an estate beneficiary cannot exceed its estate tax value. And to that end, also requiring the executor to report that basis to the beneficiaries. Anybody who has had to work with this basis reporting since 2015 knows it’s a headache, and that the 2015 legislation just wasn’t thought through very well. And proposed regulations published in March 2016 weren’t much help. In addition to Capital Letter No. 50, by the way, there’s more on this subject in Capital Letter No. 44. In particular, get this: The proposed regulations require that within 30 days of filing the estate tax return, each beneficiary must be told, on a Schedule A of Form 8971, the initial basis, that is the value reported for estate tax purposes, of each asset the beneficiary might ever receive, even though they might never receive it, thereby stirring up a lot of false expectations. What executor, who has to file an estate tax return knows within 30 days who’s going to get what? There’s a lot of estate administration to be done before that can happen.

This really could create or aggravate tension among beneficiaries and between beneficiaries and executors; even though the statute seems to require the report only be given to people acquiring the property. But proposed regulations also require that property that’s after discovered or otherwise omitted from the estate tax return in good faith is given an initial basis of zero. Well, that imposes, in effect, a penalty on the beneficiary, perhaps many years, many decades later, for a good faith omission the executor made,even though none of the statutory triggers of the basis rule on Section 1014(f)(1) seem to be satisfied in that scenario. And then, the proposed regulations require that the recipient of that Schedule A I mentioned must in turn file a Schedule A when making any gift or other retransfer of the property that results wholly or partly on a carryover basis for the transferee.

This reporting requirement apparently continues forever until there’s a sale or death or something like that, that steps up the basis. And this is regardless of the size of the estate of each transfer. And even though, by the way, Section 6035 imposes the reporting requirement only on an executor, not on, say, a donor. And now, finalizing these terrible regulations appears under the heading of burden reduction? That makes no sense, of course, unless Treasury does plan to reduce burdens by providing relief from at least some of these tough requirements. So, I predict, probably in this order of likelihood, a walk back of the 30-day deadline, more robust exceptions, maybe relaxation of the retransfer rule and possibly even relief from the zero-basis rule.

Priority Guidance Plan – Gift and Estates and Trusts

Next, there are five items under the heading of Gifts and Estates and Trusts in the part of the plan titled General Guidance.

1. Guidance on basis of grantor trust assets at death under Section 1014: It’s hard to tell what the scope of this project is, as explained in Capital Letter Number 50, it might indeed be limited just to trusts created by non-US persons, or the scope might be broader than that or, it might be narrow and could be expanded. In that light, we can’t really tell if the news is going to be good or bad, but it is guidance we’ll be watching for.

2. Guidance on user fee for estate tax closing letters under Section 2001: This is new. Before June 1st, 2015, the IRS routinely issued a closing letter when the determination of an estate tax return was closed. The examination was closed, except returns that were not required for estate tax purposes but were filed solely to elect portability. But in June 2015, the IRS website was updated to state that henceforth, closing letters would be issued only upon request. About a year and a half later, Notice 2017-12 confirmed that and also confirmed informal reports that we had heard that an estate tax account transcript on the IRS website that includes the transaction code 421, and the explanation “Closed examination of tax return” can, as the notice put it, “Serve as the functional equivalent of the estate tax closing letter.”

I’ve heard lots of stories about how a request for a closing letter or accessing a transcript are very frustrating experiences. And besides, think about it. A transcript with a code 421 just doesn’t have the same dignity as a closing letter. And it’s just not as easy to use to obtain releases of leads, closing of accounts, approval of distributions and other objectives closing letters have routinely and easily been used for in the past. Now, I’ve also heard that the IRS abandoned automatic closing letters for budgetary reasons; that Congress just wasn’t giving it enough money.

That explanation never made sense. Presumably, a closing letter is, or at least it could be, computer generated from the same computer records that support transcripts. And doesn’t it require the same diligence and the same involvement of personnel? In other words, the same expense to generate the transaction code 421 anyway? The IRS doesn’t even pay postage on the letter.

So, when this user fee project comes to fruition, my expectation is that we will be back to business as usual. The user fees will be modest and the issue of whether the budgetary concerns were really justified will just go away.

Update: On December 31, 2020, the IRS published proposed regulations indicating that the user fee for an estate tax closing letter would be $67.

3. Regulations under Section 2032(a) regarding impositions of restrictions on estate assets during the six-month alternate valuation period: There’s a lot of history to this, including another example of the Treasury and IRS listening to public comments, which prompted the re-proposal of earlier regulations. Basically, it’s pretty clear the biggest target here is probably techniques like creating a limited partnership within the first six months after death or making a series of distributions of fractional interests in assets during the first six months after death and claiming additional valuation discounts. Don’t count on that continuing.

4. Regulations under Section 2053 regarding personal guarantees and the application of present value concepts in determining the deductible amount of expenses and claims against the estate: This is an outgrowth of amendments of the Section 2053 regulations in 2009. And again, as Capital Letter Number 50 describes, it reflects sensitivity to public comments that were submitted about the original proposed regulations before 2008.

5. Regulations under Section 7520 regarding the use of actuarial tables and valuing annuities, interests for life or terms of years, and remainder or reversionary interests: The current mortality tables are based on 2000 census data. They became effective May 1st, 2009 and under Section 7520(c)(2), they should have been revised to reflect 2010 census data and to be effective as of May 1st, 2019. Well, they weren’t. Apparently in the last couple of months, the IRS has received the data it needs from the Centers for Disease Control and Prevention, and these revised tables should be near completion now.

As Capital Letter Number 50 notes, it is reasonable to assume that there will be transitional relief for taxpayers, who since May 1st, 2019 have relied on the mortality tables that took effect in May of 2009. But remember, we’re only looking at calculations since May 1st, 2019 that involved mortality or actuarial data. The values of an interest for life, an interest for joint lives, an interest for term life, whichever is shorter or longer, remainder following interests and so forth. We will not need any transitional relief for calculations based just on interest rates that have been published every month on time. For example, for promissory notes or GRATS that involve only fixed terms.

Well as usual, Susan, the introduction to the Priority Guidance Plan states the 2020-2021 Priority Guidance Plan contains guidance projects that will be the focus of efforts during the 12-month period from July 1st, 2020 to June 30th, 2021. But focus does not necessarily mean finished, except for the Section 7520 actuarial tables, we might not see an end result of any of these projects before July, but we will be watching for them.

Thank you, Ron, for your roundup of the Priority Guidance Plan and your predictions. We look forward with hope to what the next months will bring from Treasury and the IRS.

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