Notes from the Clearwater - FioreWealthPlanningConsulting

Well, I am beginning 2019 with a number of webinars for CPEcredit.com, and have one coming up on Feb. 25 - Valuation as a Planning Tool. Also, I will begin to post once again Newsletters, including as an initial one, the 10/24/18 TCM case of Streighthoff - an excellent case on valuing an FLP interest. regards to all, owen

October 5, 2017: Back in Recovery From Open Heart Surgery

Hello to all my readers, and I am pleased to be in recovery from open heart surgery and back with you. My plan is to begin my webinars under the sponsorship of CPECredit.com in December and to have a full schedule in 2018! On September 6th, my surgery took place and I received a new aortic valve plus a double bypass - which necessitated the open heart surgery. So now I am in cardiac rehab 3 days a week, and expect that my chest bone will be healed up in another month. It truly is amazing what the surgical team at Providence St. Patrick's Hospital, the International Heart Institute, can do. While 10 days in the hospital dragged on a bit, I feel wonderful now and thank so many of you for your thoughts, emails and prayers.

In the meantime, tax law developments continue on - including the demise of the Proposed Sec. 2704 Treasury Regulations and the publication with great fanfare of United Framework for Fixing Our Tax Code (once again an outline without any tax legislative content as yet!).

My CPE Educational Offerings - Check out the CPECredit.com website for my December, 2017 tax webinars, with emphasis on closely-held and family business succession planning. Regardless of whatever tax reform bill my be released and even enacted at some point, succession planning is important to tax practitioners of all types. Even with the possible (likely?) repeal of the Federal estate and GST taxes, wealth succession planning should be part of the active practitioner's area of expertise - thus my focus in several webinars offered by CPECredit.com.

The Proposed 2704 Regulations -

My prior Newsletters advised readers of the Treasury Department effort to adopt broad changes in family and other closely-held business valuation discount planning that would be injurious to such businesses. The focus group in Treasury long wanted to restrict valuation discounts (adjustments for minority and non-marketable interests) through broadening and tightening up IRC Sec. 2704, one of the four (4) provisions of Chapter 14, enacted in October, 1990. A fight took place between Treasury and both tax practitioners and small business groups that spilled over into the late 2016 public hearing on the Proposed Regs announced in the summer of 2016.

What happened was that, with President Trump coming into office, all of a sudden a review of tax regulations was commenced, which sounded the death knell of these Proposed Regs which would have gutted in many ways traditional valuation discounts. Steve Leimberg's website, with its series of wonderful Newsletters (see Leimberg Information Services Inc.), just published a Keith Schiller piece, as LISI Estate Planning Email Newsletter #2587, titled "Proposed Regs Under 2704 Finally Die" (10/2/17).

President Trump's Executive Order 13789 (also see IRS Notice 2017-38) called for the Department of Treasury (Steven Mnuchin, Secretary of Treasury) to provide a report on identifying and reducing ta regulatory burdens - A second report was issued October 2, 2017 calling the Proposed 2704 Regs "unworkable" and giving specifics as to why! First, the 2704 Prop. Regs were identified as among regulations that (i) impose an undue burden on U.S. taxpayers, (ii) add undue complexity to the Federal tax laws, or (iii) exceed the statutory authority of the IRS (as claimed by many commentators). The Proposed Regs went into great detail to expand "disregarded restrictions" on business interests so that valuation discounts would be lost to taxpayers. The Treasury's October 2nd report to the President cited the following deficiencies in the 2704 Proposed Regs: (1) Dense rules and definitions, (2) Narrowing long standing exceptions and dramatically expanding the class of restrictions disregarded under 2704, (3) proposed valuation of entity interests as if disregarded restrictions did not exist, whether per business agreements or state law, (4) no exceptions allowed for interests in active or operating businesses, (5) creation of impractical standards for valuation and use of 'fanciful assumptions', (6) imposition of lengthy and difficult rules, and, finally, (7) reduction of legitimate discounts not created artificially as a value-depressing devices. Wow - what condemnation of the regulations process under control of the tax staff folks at Treasury! Note there were over 28,000 adverse comments on the 2704 Prop. Regs. submitted prior to and at the 12/1/16 hearing.

So the 2704 Regs are dead for now, but of course we must be vigilant in our defense of succession planning techniques using valuation adjustments or discounts as part of the plan - and retention of capable, experienced valuation appraisers is at the top of the list in planning.

The United Framework for Fixing Our Tax Code - more of a sketch than a detailed plan, and certainly not actual proposed legislation. Yet we must pay attention to the "Framework".

The "Big Six" put together the Framework, namely, Senate Majority Leader Mitch McConnell, House Speaker Paul Ryan, Treasury Secretary Mnuchin, White House economic adviser Gary Cohn, Kevin Brady, Chair of the House Ways & Means Committee (where all tax legislation begins) and Orrin Hatch, Chair of the Senate Finance Committee. The Framework was announced with great fanfare by President Trump in Indiana on September 27, 2017 - yet details are in short supply, and the concept of substantial benefit to middle class taxpayers rather clearly elusive and perhaps even non-existent. This is a 9-page Framework, and I suggest all my readers obtain a copy and follow its development into legislative form. In fact, there is reason to believe that there will be many changes even in the Framework and certainly surprises in actual legislative language developed by the tax writing committees.

I have found over many years that the committee process works on tax law changes; but in a Trump Administration, it appears this will be a big rush at the end. The Trump tax plan announced 4/26/17 was only 4 pages and now we have the 9/27/17 9-page Framework. Yet as advisors and clients we must pay attention to what is proposed and be prepared to act fast accordingly. I believe an excellent summary of the Framework (remember my readers should obtain and review a copy) is contained in the Wealth Management (Trusts & Estates magazine), Penton Financial Services article of (October 2, 2017). Also, look at the LISI Estate Planning Email Newsletter #2585 (10/2/17) authored jointly by Bob Keebler and Jim Magner - great stuff as will apprise you of the Framework and its contents, so you will be prepared to move ahead with client planning when appropriate!

Some general points on the Framework, in part taken from the above identified sources:

1 - rates - C corporation rate 20%, down from 35%; pass-through entity rate (assuming an active business) at 25%, down from the top individual rate of 39.6%. The present 7-bracket rate structure for individuals would be cut to 3 - 12%, 25% and 35% (but with Congress able to add a 4th "wealthy taxpayer" rate as well!

2 - individual and corporate AMT provisions of the Code to be eliminated.

3 - Federal estate and GST taxes eliminated, but gift tax provisions of Code preserved and uncertain as of now whether any change to the Sec. 1014 stepped-up income tax basis at death provisions.

4 - An area of ambiguity is in the credits and deductions provisions of the Framework - many exemptions, e.g. personal exemptions, to be eliminated and note that the near doubling of the Standard Deduction could be ineffective to help taxpayers who have several children. The Framework states that "tax preferences that encourage work, higher education and retirement security are to be preserved"!

5 - Note the Framework is silent on the "carried interest" loophole often criticized by candidate Trump!

6 - A minimum of a 5-year provision is proposed for expensing capital expenditures (except real estate or "structures"); many business deductions and credits could be eliminated, such as the domestic production deduction and there to be perhaps a partial limitation on the interest deduction; and industry-specific tax incentives could be eliminated, but the R&D deduction and the low income housing credit would be preserved.

7 - As to International Taxation, once again clear legislative language is needed to show just what the "territorial regime" will be as well as the "global minimum tax" on repatriated foreign earnings of U.S. companies.

 

I sincerely hope that my readers enjoy this Newsletter, and sincerely thank you for your emails, prayers and support as to my heart surgery. Look for future Newsletters announcing my December, 2017 and 2018 webinars.

 

Regards to all,    Owen Fiore

 

 

 

KEEP ME IN YOUR THOUGHTS AND PRAYERS!

Personal health is so important, as we all know, and I am positive of my recovery going into a September 6th Open Heart Surgery at the International Heart Institute located at Providence/St. Patrick's Hospital in Missoula, MT. After a couple of years of heart echo tests following my gradually closing Aortic Valve, the doctors determined it was time for surgery. So first I went through some tests, including going into the heart area taking photos, etc., hoping that the latest, less invasive TAVR (transcatheder aortic value replacement) surgery would take care of the problem. However, the tests disclosed a coronary artery with a 75% blockage, requiring a double bypass operation as well as the valve replacement - so Open Heart Surgery, which has been "perfected" over many decades, is what must be done. Keep me in your thoughts and prayers, and stay with us on my Newsletters as I hope to give you good news in a few weeks from now!

 

In the meantime, the highly touted (by the Trump Administration) Tax Reform Bill (4-page summary issued April 26, 2017) still has not resulted in any tax legislation via the House Ways & Means Committee - no surprise, is it?! So it seems I will recover as I hope from the surgery and be back doing webinars and sending out update Newsletters before any tax reform really happens!

 

Thanks so much for your presence and support with my Newsletters over recent years, and I hope to send one out as soon as possible announcing my surgery and recovery from it - which usually for Open Heart Surgery takes 3-4 months. By the way, I will be checking email after the surgery, and for several months while my wife, Mary Ann, and I reside in Missoula, our cell phone is where we can be reached: 208-413-2625.

 

Regards to all.    Owen Fiore

TAX COURT REVISITS IRC SECTION 2036(a) WITH REVIEWED OPINION

Summer has arrived, and the Middle Fork of Idaho's Clearwater River, running by our home in North Idaho, is running high - to the delight of kayakers and rafters! And even though in April, the Trump Administration briefly outlined its "tax reform plan", we as yet have not seen a House Ways & Means Committee tax bill! So all seems to stay in flux, especially as President's Trump's tweets continue to confound his supporters and detractors alike!

 

Upcoming Fiore Webinar - "FAMILY WEALTH & MANAGEMENT SUCCESSION PLANNING" - sponsored by Eli Financial, www.elifinancial.com, and being presented on June 20th. As many of my readers are aware, my various courses online all deal with estate and succession planning. This new course, including over 50 power point slides, a detailed memo of 26 pages on succession planning, a succession planning case study and the usual Selected Bibliography, will show attendees how to get into this area of planning and why it is so important for CPAs and other tax professionals to do so. Learn from the course on June 20th my 10 Steps in Successful Succession Planning, a proactive approach to helping client families preserve for generations their family business enterprises and their investment portfolios.

Tax Court Revisits IRC Sec. 2036(a): Estate of Nancy H. Powell v. Commissioner, 148 T.C. No. 18 (5/18/17) -

I have been a long-time commentator for Leimberg Information Services, Inc. (LISI), my friend Steve Leimberg's wonderful online service for tax professionals, including a series of email Newsletters that include commentaries by professionals on current law and tax developments. See the LISI website for Email Newsletter Archive Message #2556 (6/1/17), which I authored : "Owen Fiore on Estate of Powell: Tax Court Again Rejects Deathbed Use of the Value-Discounting FLP to Reduce Estate Tax."

IRC Sec. 2036(a) essentially requires inclusion in a decedent's estate of property he or she transferred during lifetime but retained undue control over, or beneficial enjoyment from, the transferred assets. Here we are dealing with pass-through entities, such as the family limited partnership (FLP) or family limited liability company (FLLC) as the receptacle for the asset transfer during lifetime. Now some 40 Tax Court cases have been decided and opinions issued, the first of which, way back in 1997, was my own case in which I was the estate's tax litigation counsel: Estate of Dorothy Schauerhamer v. Commissioner,  1997 T.C. Memo. 242. Obviously, the law has developed considerably since 1997, and generally so-called "deathbed transfer tax avoidance plans" have been found wanting under 2036(a). The Powell case opinion not only is the latest in this long series of decisions, but also, being a regular or reviewed opinion of the entire Tax Court, is a significant decision - and various judges had quite different views!

As the court majority opinion, authored by Judge Halpern, stated: "The combined effect of Section 2036(a)(2), Section 2035(a), Section 2043(a) and either Section 2033 or Section 2038(a) would be to include in the value of the decedent's gross estate the value, as of the date of her death (one week after the planning was put in place), of the cash and securities he (decedent's investment manager son) transferred to NHP (the FLP)". So let's see the facts of this case, the majority and concurring opinions in the Tax Court, and what lessons should be learned from this latest anti-FLP judicial decision.

Facts Matter!

What is involved in the Powell case, involving a decedent in Northern California, was the use of a deathbed FLP as an estate tax savings strategy (a 25% valuation discount was opined by Duff & Phelps, a valuation firm), coupled with what turned out to be a failed attempt at a Charitable Lead Annuity Trust (CLAT) intended - one week before decedent's death! - to eliminate decedent's FLP partnership interest (99% limited interest) from her gross estate at death.

Nancy Powell died on August 8, 2008, and her executor was one of two sons who were her estate beneficiaries. After obtaining medical opinions to the effect mother was incapacitated, and thus triggering his position as her attorney-in-fact for asset management, and also being the trustee of mother's revocable trust, son Jeffrey Powell, an investment manager whose firm managed Nancy's $10 million of cash and securities, transferred the assets to NHP Enterprises LP, an FLP. The partnership agreement, under which Jeffrey was general partner and his mother was the 99% limited partner, gave the general partner sole discretion on the amount and timing of all distributions, but also stated that on the written vote of all partners, the partnership could be liquidated.

But Jeffrey was not finished with the deathbed planning! Wanting obviously to eliminate any partnership interest from his mother's gross estate, and acting under her power of attorney, he transferred by gift the entire 99% limited partnership interest to a CLAT in exchange for an annuity to the Nancy H. Powell Private Foundation for her remaining life, following which the assets would go to Jeffrey and his brother. 

Death-Bed Use of an FLP Does Not Work - Ever Since Schauerhamer

IRS jumped in, to be expected, and issued proposed deficiency notices for $5.9 million in estate tax and for a 2008 $3 million gift tax. Note, as indicated below, the gift tax deficiency disappeared since the gift was found to be invalid! As to the estate tax, Judge Halpern, with 7 judges joining in his majority opinion, found that under Sec. 2036(a)(2) the value of the cash and securities must be included in Nancy's estate, but - interestingly enough - that under the "consideration offset" rule, the appraisal value of the FLP units received on the asset transfer to the FLP reduced the amount in the estate - by about 75% of the total! However, since the gift was invalid, that 75% FLP interest value nevertheless was includible in decedent's gross estate under either 2033 or 2038(a). The net result was that all $10 million in asset value was indeed in the gross estate for estate tax purposes!

The Failed Charitable Lead Annuity Trust (CLAT)

Facts do really matter, and here California Probate Law came into plan, i.e. what is required under a power-of-attorney for the attorney-in-fact to make a gift of the property owner's assets in that special capacity. The applicable provision here was Probate Code Sec. 4264(c), that an attorney-in-fact does not have authority to make gifts of the person's property unless that authority is expressly provided in the power of attorney itself. And the only express language in the power regarding gifts was limited to those gifts which were within the limits of the IRC Sec. 2503(b) annual exclusion gift provision (even in 2017, only $14,000 per donor, per donee, per year). The estate's efforts to get around this Probate Code provision were totally unsuccessful, as seems clearly appropriate!

The "Consideration Offset" Twist!

For many years now, especially after the case of Bongard v. Commissioner, 124 T.C. 95 (2005), it has seemed clear that, to avoid 2036(a) destroying, in effect, the FLP or FLLC involved, the "full and adequate consideration in money or money's worth" exception to 2036(a) had to be met - namely, by having a real and significant non-tax purpose for the entity, and, second, by the transferor receiving full consideration for the transfer. Rather than determining the case in the vein, Judge Halpern went the "2-step" approach described above, which perhaps was not even necessary. This issue was advanced by Tax Court Judge Lauber, in a concurring opinion (joined in by 6 judges), and Judge Lauber stated: "There are compelling reasons to question whether a valid partnership was ever formed here", and that the majority opinion did not clearly address the "partnership validity" issue.

What's This All Mean?

Well, first note that, in the end, all $10 million in investment assets were part of the gross estate, and the machinations of decedent's son, Jeffrey Powell, and his legal counsel, failed to produce any estate tax reduction. Also, the author recalls the September, 2016 Tax Court opinion in Estate of Beyer v. Commissioner, T.C. Memo. 2016-183, which was a reminder of the fact of tax planning that "bad facts" usually will not win in litigation with IRS!

Therefore, in planning for wealth succession for our clients, we must be realistic and in good faith apply tax law to the client's situation. Sometimes, death-bed planning can be successful in estate value reduction, e.g. co-tenancy gifts of real estate where no FLP or FLLC is even bothered with! CPAs, lawyers and other tax practitioners must be up front with clients on planning, and hopefully usually will have many years to "season" a long-term plan prior to the death of the estate owner.

 

I hope you have enjoyed this Newsletter, and remember my upcoming Eli Financial webinar, June 20, as well as my CPECredit.com webinars this Fall (see www.cpecredit.com for the schedule of webinars, October - December, 2017).

HERE COMES TAX REFORM - OR WILL IT?

Health Care Bill Out, and Perhaps Tax Reform Bill Coming!

On Friday, March 24th, House Speaker Paul Ryan and President Trump gave up on the Republican "repeal and replace" health care bill designed to get rid of the Affordable Care Act (ACA, or "ObamaCare"). So even with a Republican (sort of) President and a Republican-controlled Congress, the bill was pulled without a votel!

So now what perhaps should have been first up for the President, it appears the Tax Reform Bill will be pushed, with a "schedule" of enactment by the August recess of Congress. As my readers know from my 11/10/16 and 1/7/17 Newsletters, tax reform could be a big deal, both for business and individual taxpayers, with perhaps even full repeal of the Federal estate tax. I offered a 2-hour CPE webinar (www.cpecredit.com) on "Estate & Succession Planning Under a Trump Administration", and I plan to update and expand that course for presentation on the web once we sat least have the House Ways & Means Committee version of a tax bill introduced in Congress. So watch for new developments, which you always can see in my periodic Newsletters.

 

CPE Courses for May, 2017 - check out details on www.cpecredit.com.

I have five (5) CPE courses set for May, 2017 - hope you join us for one or more of them. Here is the schedule (check cpe.credit.com for course descriptions, presentation times, and costs):

1 - May 5, 2017 - "Estate & Succession Planning for the 99%" - this lead course reviews all the non-tax reasons, as well as tax reasons, for renewed interest in, and work on, estate planning for your clients - with or without an estate tax, much needs to be done.

2 - May 12, 2017 - "Family Succession Planning Developments - 2012-2017" - here is the place to see details of all legislative and judicial new developments, beginning with the American Taxpayer Relief Act of 2012 and right up to and including newly proposed tax law changes. 

3 - May 15, 2017 - (the only 3-hour course) "Trusts, Pass-Through Entities & Family Wealth Planning - for example, late this month, U.S. Senator Thune introduced the "S Corporation Modernization Act of 2017", which contains a number of S corporation changes of note (including allowing IRAs to be qualifying S corporation shareholders). Learn how to combine trusts, FLPs, LLCs, S corporations with core asset management and preservation techniques.

4 - May 19, 2017 - "Family Wealth Valuation Issues Today" - Valuation is a core concept and here you will learn in depth the 10 Key Concepts in Valuation Strategies and Planning.

5 - May 26, 2017 - "Buy-Sell and Deferred Compensation Agreement Planning" - two very different types of contractual agreements that often are at the center of family business succession planning.

 

Wealth Management.com - "Tax Reform on the Front Burner" (3/22/17) - this is an excellent article available to you online about how and when tax reform may shake out this year and/or next - The Trusts and Estates monthly magazine published by Wealth Management affords tax practitioners practical and in-depth solutions to estate and succession planning problems. CPAs and other tax practitioners certainly should consider this area as important for their best clients, and become involved in estate and succession planning on a regular basis - a practice development opportunity.

 

Spring Has Arrived Here on the MiddleFork of the Clearwater River in the Central Panhandle of Idaho - Hwy 12 - After a long, snowy winter, it is great to see the birds, including the arrival of robins, the level of the river rising with Spring run-off, and now the daffodils in bloom again - so time to get the flower beds and hanging baskets ready for planting soon!

 

Regards, Owen Fiore, JD, FioreWealthConsulting

 

2017 - A YEAR OF CHANGE, PLUS THE NEED FOR ESTATE PLANNING!

WELCOME AND HAPPY NEW YEAR!

Now that January, 2017 has arrived and the year 2016 is behind us, we can and should focus on the changes in tax law quite likely to occur in 2017 or 2018, including probably repeal of the Federal estate tax. Ever since enactment of the American Taxpayer Relief Act of 2012 (became law 1/3/13), estate planning professionals have struggled with how to convince clients still to consider estate planning important. The fact that 99%+ of all American families will not face any Federal estate tax liability dampened greatly client interest in estate planning. That may actually be tax advisors' fault, having over-concentrating on estate tax savings, such as through valuation discounts for interests in partnerships and other pass-through entities.

Yet now it is quite clear that there are many reasons for estate and succession planning that are not specifically designed to escape the Federal estate tax, or its companion the gift tax. These include planning where a "blended marriage" or where there is a non-traditional/same sex marriage. Also, the succession of management is so important that it never should be overlooked in estate planning. Especially where there is a family-controlled business entity, planning for the succession both of equity and management is very necessary.

And now we have, on January 20th, Donald J. Trump becoming the 45th President of the U.S., with major "tax reform" high on his action agenda. Further, the House Republicans on June 24, 2016 released their "A Better Way" detailed tax plan, from which no doubt the principal provisions in a new tax bill will be taken. The House Ways & Means Committee is where tax legislation begins, and so we must watch for the new tax bill, expected to be filed by early summer, 2017

SEE MY NOVEMBER 10, 2016 NEWSLETTER which summarizes briefly the Trump Tax Plan - remembering that it must be coordinated with the House Republicans' own plan, and both will be subject to the usual Congressional battle over a tax bill, with plenty of input no doubt from lobbyists.

 

NEW CPE COURSE ON 2017-2018 TAX LAW CHANGES

Sponsored by Eli Financial/AudioSolutionz, I will present live on the internet a 2-hour course for CPAs and other tax professionals, as well as for CEOs and CFOs of family-owned companies - the course date is January 19, 2017 - check out www.elifinancial.com for the details on time, cost and materials provided. My live presentation will be accompanied by a detailed outline, over 60 power point slides, and other practice-friendly materials provided participants.

In addition, both on January 13th and February 7th, this same course - titled "Estate & Succession Planning Under A Trump Administration" - will be sponsored, again live presentations by me, by CPE Solutions/CPE Credit. Check out www.cpecredit.com for details.

Knowledge of coming tax law changes, even though uncertain and even in part ambiguous at this time, is important for tax practitioners and their clients. Planning should and really must consider possible law changes, even if only to get certain steps in a plan completed prior to the effective date of an adverse change in law.

My upcoming special "Trump Effect" course will cover all the current tax proposals, consider the current state of the tax law, and review important planning issues that should be considered by tax advisors and their clients. Join me in one of these courses, and know I am available to answer questions during or, via email to owen@owenfiore.com, after the live presentation.

 

OTHER CPE COURSES - SPONSORED BY CPECREDIT.COM

In addition to the "Trump Effect" course, I am presenting in January and February (then later in May-June and October-December) for cpecredit.com five(5) detailed courses on estate and succession planning topics, including one specifically on Valuation, one on Trusts & Pass-Through Entities, one on Buy-Sell and Deferred Compensation Agreements. Each course has its own power point slide deck, a detailed outline and appendices, including a Selected Bibliography of Resources to help advisors fully understand the course content. The remaining two(2) courses are "Estate & Succession Planning for the 99%" (1/20/17) and "Family Succession Planning New Developments - 2012-2017"(1/27/17). I look forward to you joining me with CPE Credit for these important courses, enabling tax professionals truly to raise their level of service to key clients in 2017.

 

POSTSCRIPT ON IRC SEC. 2704 & PROPOSED NEW TREASURY REGULATIONS ADVERSELY IMPACTING FAMILY-OWNED BUSINESSES

As I mentioned in my October 19th Newsletter last year, the Treasury Department, after years of struggling with Sec. 2704, published in August, 2016 Proposed Treas. Regs. on 2704, which taken as a whole appeared to substantially and adversely affect families with investment and business entities, i.e. restricting the shifting of equity with favorable valuation adjustments to younger generation family members. The tax professions generally opposed these new rules, as evidenced by the near uniform comments made at the Washington, D.C. Public Hearing held December 1, 2016. Now with the election of Donald Trump and a Republican-controlled Congress in place, the future of the proposals by Treasury is in jeopardy. In fact, House Republicans have called for Treasury to withdraw these rules entirely, so we will see what happens sometime this year. This is something that must be taken into account by planners in working with their family business clients.

 

We here in North Idaho, as many other places in our country, have had lots of snow, plus quite low temperatures that have kept the snow from melting - so it just continues to pile up! I am looking forward to my webinars, as laid out above, and wish my readers a healthy, successful 2017!

Owen Fiore, JD

"On the Wild & Scenic Middle Fork of the Clearwater River", Hwy 12, in the Idaho Panhandle!

 

TRUMP AS PRESIDENT, TAX LAW CHANGES, AND THE RECENT ESTATE OF BEYER CASE

DONALD TRUMP IS NOW PRESIDENT-ELECT - SO WE LOOK FIRST AT HIS TAX PLAN ANNOUNCED DURING THE CAMPAIGN!

With a Republican Congress likely backing him up all the way, the Trump Administration tax plan would (1) reduce marginal income tax rates for all individuals and businesses, (2) increase standard deduction levels, but eliminate personal exemptions, (3) cap itemized deductions, (4) repeal the Alternative Minimum Tax (AMT), (5) repeal the "Medicare" 3.8% surtax on net investment income over certain levels, (6) repeal the Federal estate tax, (7) and more changes! So let's see about these changes that may well become law in 2017 (assuming Congress cooperates, and dare they not?);

INCOME TAX -

1 - reduce to 3 ordinary income tax rates - 12%, 25% and 33%; keep capital gains at -0-, 15% and 20%.

2 - increases of the standard deduction: from $6,300 to $15,000 for single filers, and from $12,600 to $30,000 for married couple filers; PLUS eliminate personal exemptions.

3 - cap itemized deductions: at $100,000 for single filers, and at $200,000 for married couple filers

4 - repeal the AMT (individual and corporate) and the 3.8% surtax on net investment income over certain levels.

5 - tax "carried interest" income at ordinary income tax rates.

TRANSFER TAXES (Estate, Gift and GST taxes) -

1 - repeal the estate, gift and GST taxes.

2 - establishing a carry-over income tax basis regime for appreciated value assets at death, but with an exemption of $5 million gain per decedent ($10 million for married couple).

3 - disallow an income tax deduction for contributions of appreciated value assets to a private charity established by a decedent or his/her family.

BUSINESS TAX PROPOSALS -

1 - reduce corporate income tax rate from 35% to 15% for all size businesses; but query how this will work with pass-through entities, e.g. partnerships, LLCs and S corporations.

2 - eliminate most deductions and credits for corporate tax expenditures, but keep the R&D credit.

3- impose a one-time 10% repatriation tax on corporate profits held offshore.

Note the House Tax Plan is somewhat different and changes can be expected once Congress takes up "tax reform", now expected to be early in 2017.

 

MORE CPE AVAILABLE FOR CPAs AND OTHER TAX PRACTITIONERS!

I am wrapping up my live webinars for CPAs and other tax practitioners for the year 2016 with seven (7) presentations of my courses for CPE Solutions, check www.cpecredit.com for the course details, descriptions and learning objectives. The November dates are November 14 (Family Wealth Succession Valuation Issues Today) and November 18 (Trusts, Pass-Through Entities & Family Wealth Planning). Then in December there are five (5) presentation dates, including December 2 (Buy-Sell & Deferred Compensation Agreement Planning), December 9 (Family Succession Planning Developments: 2012-2016), December 12 (Estate & Succession Planning for the 99%, December 16 (Trusts, Pass-Through Entities & Family Wealth Planning), and, finally, December 19 (Family Wealth Planning Valuation Issues Today). All of these courses relate to the important area of family estate and succession planning, and my readers are welcome to sign up with cpecredit for any or all of them!

 

AND NOW TO THE TAX COURT - ESTATE OF BEYER V. COMMISSIONER (T.C. Memo. 2016-183, issued September 29, 2016)

This is an FLP case, now there having been nearly 40 such cases since the one I tried in U.S. Tax Court, namely, Estate of Dorothy Schauerhamer v. Comm'r, T.C. Memo. 1997-242. The principal issue in the Beyer case is the application of estate tax provision IRC Sec. 2036(a). Certain lifetime transfers were made to the new FLP, Edward G. Beyer Limited Partnership (FLP), and the question was whether IRS could ignore the entity and tax the marketable securities that comprised the entity assets for estate tax purposes. Tax Court Judge Chiechi found YES, and thus another FLP plan was destroyed. Out of the nearly 40 court decisions on this issue, only about 15 have been taxpayer estate victories - and all of those wins were based on the exception to 2036(a) involving evidence of a "bona fide sale for adequate and full consideration in money or money's worth".

In my soon to-be-posted commentary on Beyer for LISI (Leimberg Information Services, Inc.), which is 14 pages in length and will appear in the LISI Estate Planning Email Newsletter, I state: "In large part, Judge Chiechi concluded that since other management arrangements had been made and would be possible (via grantor trusts, powers of attorney, and decedent's ability to make changes), the FLP was unnecessary, except to attempt estate tax avoidance." It was not helpful to the estate's position here that the FLP agreement had laid out 28 (!) "boilerplate" purposes AND the tax advisors to Mr. Beyer constantly wrote and emailed to him that the plan was designed to avoid or save estate taxes - saving taxes is not in and of itself bad, but there clearly must be a real and significant nontax purpose for setting up an FLP or any other entity. Here the court there were no such reasons!

 

I hope all of my readers have a wonderful holiday season, and enjoy family and friends to the fullest!

Owen Fiore

 

  

 

 

 

ESTATE & SUCCESSION PLANNING - - CHANGES IN VALUTION COMING?

Well, here it is Fall in North Idaho - beautiful leaves, rain, river is rising, and - finally, in several weeks, the National Presidential Election will be over - for 4 more years!

Mary Ann and I enjoyed Hawaii (Island of Kauai) for several weeks in September, and we have trips planned to CA and FL, the first around Thanksgiving, and the other at Christmas time, visiting family - especially grandkids!

My last Newsletter, posted June 18, 2016,included a review of the final chapter in the Estate of Natale Giustina - a great taxpayer victory in estate tax valuation of a non-controlling, limited partnership interest in an FLP. But now, as outlined below, the Treasury Department and IRS want to mount a big attack on family entity valuation discounts for estate, gift and GST purposes. This is in spite of the fact that, with the high transfer tax exemptions now (2016, per person, $5,450,000), less than 1% of American families have to be concerned with the Federal transfer tax!  Note, however, there still are about 20 States with their own death tax, some with much less in the way of exemptions than for Federal purposes.

But first, a bit on my upcoming end-of-year and 2017 CPE events on the internet, via webcasts/webinars for two sponsors.

WesternCPE - This past Spring I filmed for WesternCPE 4 CPE courses geared to educate CPAs and other tax professionals on estate and succession planning - "Estate & Succession Planning for the 99%", "Buy-Sell & Deferred Compensation Agreements", "Entities and Succession Planning", and "Valuation and Discount Planning" - These courses are scheduled by WesternCPE, so check our its website - www.westerncpe.com. As always, I am available to answer questions attendees may have, at owen@owenfiore.com.

CPECredit - For this organization, check www.cpecredit.com, I have 5 courses - including the ones listed about, plus a special course "Estate & Succession Planning Developments - 2012-2016 (soon to be updated for 2017 also), all of which are "live" - thus, I can update each course when I present it. There are about 10 presentations of these courses left for 2016, so check them out!

 

VALUATION - ITS ROLE IN ESTATE & SUCCESSION PLANNING

The term "Valuation" involves both legal and factual issues - as found in a Tax Court case several years ago, the Estate of Virginia Lockett, you cannot expect any valuation discounts on partnership interests if the law and facts show there really is no entity at all! Here Mrs. Locket, prior to her death, ended up with all the partnership interests in an AZ FLP - thus, the law of Arizona as well as the partnership agreement itself (why didn't her advisors read it?!) read that there was no partnership. So the 50% claimed estate tax discount was determined by the court to be a big ZERO!

Valuation involves the trier of fact, whether initially the taxpayer and his appraiser, or the IRS agent, or IRS Appeals, or, if need be, the U.S. Tax Court Judge, determining what is "Fair Market Value" for transfer tax purposes - not defined in the IRC, but rather set forth as the "hypothetical willing buyer-willing seller" standard of value in the Treasury Regulations, Rev. Rul. 59-60, and many court cases. Valuation is the most common dispute to go to Tax Court involving IRS and taxpayers. Clearly, picking and working closely with a good, well-experienced appraiser is the key to success.

Way back in the 1970s-1980s, imaginative arrangements were set up by tax and estate planning attorneys to depress transfer tax value while ensuring family control over entities, such as C and S corporations, FLPs, etc. Congress acted in October, 1990 to set out "Special Valuation Rules", IRC Secs. 2701-2704, inclusive, seeking to control perceived excesses in valuation strategies adopted by taxpayers. Therefore, the use of preferred stock recaps were dealt with in Sec. 2701, now requiring a guaranteed 10% minimum return each year be paid out. Then, with the Grantor Retained Annuity Trust (GRAT) and the Qualified Personal Residence Trust (QPRT), Section 2702 laid out gift tax "safe harbors" for certain specialized lifetime transfers. Section 2703, an estate and gift tax section, states that Buy-Sell Agreements and other restrictive arrangements (e.g. leases) involving family-control, shall be disregarded UNLESS the 3-part "safe harbor" of Sec.2703(b) is fully met - an important consideration in setting up buy-sell agreements for family business and investment entities.

Finally, the subject of family-controlled entities, where there may be lapsing voting rights and/or restrictions on liquidation, involve the fourth rule - IRC Sec. 2704. Since 1990, with the assistance of many State legislatures, 2704 was seen as somewhat of a "paper tiger", i.e. easily avoidable as any adverse impact on valuation discounts. But Treasury released proposed new 2704 Regulations on August 2, 2016, with the public hearing scheduled for December 1, 2016. You can be sure there will be numerous filed comments and many tax professional and family business group witnesses present at the public hearing. Treasury technical person Cathy Hughes has made clear that finalizing these proposed regs may take quite awhile. So why should we care? The answer is in the complexity of the 50 pages of proposed regs and the varying opinions already published by many advisors - Treasury may be overstepping its bounds and perhaps should be proposed legislation to be dealt with by Congress. Further, the proposed regs seem to establish a new 3-year "bright line" test in some cases, i.e. a gift that changes voting power, etc. might be disregarded and an estate tax imposed should the donor die within 3 years after making the gift!

Tax professionals should take advantage of online courses, conferences and tax publication articles on this important 2016 development relating to valuation. Certainly, our appraiser friends will be asking about the impact of the proposals when they are given valuation assignments for family businesses. Here is a tip on an excellent, quite easily readable, summary of the new proposed regs for Sec. 2704, authored by Mark Parthemer, Senior Fiduciary Counsel, Bessemer Trust Co. Check it out and read it - www.bessemertrust.com.

 

CHECK OUT YOUR CLIENTS - IS THE ESTATE PLAN UP-TO-DATE, IS THE AMERICAN TAXPAYER RELIEF ACT OF 2012 TAKEN INTO ACCOUNT, AND IS THERE A TRUE EQUITY AND MANAGEMENT SUCCESSION PLAN IN EFFECT NOW? The CPA is an especially important person in this area, who can be a catalyst to action by him or her and other professionals, including, of course, the estate planning attorney.

Enjoy the Fall, and have a wonderful Holiday Season coming up - plus watch for more Newsletters soon!

Owen Fiore

SUMMER 2016 - SUCCESSION PLANNING HITS ITS STRIDE!

Estate and Succession Planning has been my professional and now consulting concentration for 50+ years - even though the American Taxpayer Relief Act of 2012 made "permanent" very high estate and gift tax per person exemptions, there is much to do in estate and succession planning. Less exposure to the Federal and even some State death taxes really means more wealth to to the younger generations. "You can't take it with you", referring to property of the decededent at his or her death, is still very true. Many of my Newsletter readers have decades of experience in succession planning and realize the importance of this area. As I said way back at the 1978 NYU Institute on Federal Taxation, it is not just tax savings that is important here, but rather the key issue is for advisors to assist clients in meeting family, business and investment goals on a multi-generational basis.

 

Webcasts and Webinars for Tax Advisor CPE  I now am working with two CPE providers on webcasting, namely, WesternCPE (www.westerncpe.com) and CPE Solutions (www.cpecredit.com). On Monday, June 20th I present an introductory succession planning course with CPE Solutions, namely, "Estate & Succession Planning for the 99%" - namely, concentrating on the 99+% of American families/our clients who do not have to worry at least about the Federal estate tax. Then beginning in July, WesternCPE will be scheduling various of my four estate and succession planning courses, which include the "99%" course, Trusts & Pass-Through Entity Planning, Valuation Strategies and Buy-Sell & Deferred Compensation Agreements. In the Fall, beginning October, I will be presenting live webinars on the foregoing four courses plus a special new one, "Estate & Succession Planning Developments - 2012-2016" for CPE Solutions - check out the dates and times online at www.cpecredit.com.

 

Giustina Tax Court Case - The Final Chapter. I have been following this case for several years, and now it has come to the final chapter - the Tax Court Supplemental Opinion on its 2011 Opinion, following the 9th Circuit Court of Appeals 2014 reversal and remand to the Tax Court. This case is a classic "battle of the appraisers" valuation case involving a non-controlling, limited partner interest of the decedent in a Family Limited Partnership. In the first case, its opinion issued in 2011, Judge Morrison of the Tax Court took over the valuation process and obviously went too far! Let's see what happened and learn about valuation in the process.

The best quote is that included in the 9th Circuit's Opinion, quoting from Simplot v. Commissioner (9th Circuit, 2001): The Tax Court engaged in "imaginary scenarios as to who a purchaser might be, how long the purchaser would be willing to wait without any return on his investment, and what combinations the purchaser might be able to effect with the existing partners." The decedent, Natale Giustina, was the patriarch of a family owning some 48,000 acres of substantially contiguous timberland being managed and farmed on a long-term, sustainable yield basis. He owned at his 2005 date of death a 41+% non-controlling, limited partner interest in Giustina Land & Timber, and FLP in which the general partners were younger generation family members.

I reviewed the case in one of my 2011 Newsletters, and again, upon the 2014 9th Circuit Opinion being issued in a February, 2015 Newsletter. The basic issue here ended up being the evidence of valuation and that the Tax Court Judge, Judge Morrison, failed to follow the evidence and rather inserted his own opinions regarded what might happen, thus violating the hypothetical willing buyer - willing seller Fair Market Value standard of value. The citations for the three (3) opinions in this case are: T.C. Memo. 2011-141, 586 F. App'x 417 (9th Cir. 2014), and most recently, T.C. Memo. 2016-114 (June 13, 2016). All of these opinions can be downloading from the internet, so I suggest advisors read them as together a primer on what is involved and how to handle a valuation case.  D. John Thornton, a well-known tax attorney in Boise, ID, was lead counsel in the referenced Simplot case as well as in Giustina.

The 9th Circuit took issue with the Tax Court's conclusion that there was a 25% likelihood of liquidation of the partnership, even though (1) the decedent had only a non-controlling limited interest in the FLP, and (2) the uncontroverted evidence at trial was that the FLP would be operated for decades as a sustainable yield timber farm. So there was no evidence any decision would ever be made to sell out all the timber. The assumptions behind Judge Morrison's conclusion were just too much for the 9th Circuit panel to accept, and so it concluded the Tax Court decision involved "clear error" and reversed. But the appellate court went further and directed the trial court to use only valuation methodology as a "going concern". Note that the present value on an income valuation method of the FLP was $50 million, while the value an a net asset value methodology was $150 million! The battle of the appraisers was quite interesting to review in the opinions issued in Giustina, and again I suggest my readers check out the three opinions! The 9th Circuit directed the Tax Court here, which generally is unusual, but it reconfirms the critical importance of following the evidence. Even though the Federal trial courts are the "gatekeepers" on expert testimony of all types (ala the 1993 U.S. Supreme Court case of Daubert), the facts presented in evidence still must guide the courts.

Reviewing these three opinions will allow readers to better understand how the mixing of valuation methodologies takes place in the litigation context. Robert Reilly of Willamette Management Associates was the estate's expert and John Thomson of Klaris Thomson Schroeder was the IRS independent appraiser - both of these appraisers are well-known and have lots of experience in estate tax valuation cases. Mr. Thomson weighed the NAV method (a number 3x that of the income method!) by 60% and other methods, income and market, by an aggregate of 40%. Mr. Reilly used only the income and market methods, stating that the NAV method could or should not be used as the estate had only a minority interest in the FLP. The court however in 2011 believed there still was a 25% probability that partners would get together and sell all the timber - note that the parties here had agreed to a 40% "market absorption" discount on the timber value! No evidence was presented on any probability of sale and liquidation of the partnership assets - to the contrary all evidence pointed to long-term sustainable timber farming!

The bottom line was that the estate's 706 value nearly prevailed in the end - 11 years after Mr. Giustina's death! You can see my June, 2016 LISI (Leimberg Information Services, Inc.) email commentary detailing all three opinions in this case. Truly, valuation is a core concept in tax planning, but a somewhat uncertain and nebulous one at that!

 

I hope you enjoy this Newsletter as summer begins in earnest!

 

Owen Fiore

 

 

 

TAX COURT WEIGHS IN ON PASS-THROUGH ENTITIES ONCE AGAIN

This issue of my Newsletter series (past Newsletters are available in the archives on this website) covers a recent (March, 2016) Tax Court opinion on the estate tax challenges to pass-through entities via IRC Sec. 2036(a) and also provides information on my upcoming CPE webinars for CPE Solutions LLC (www.cpecredit.com) - 5 courses all on estate and succession planning issues.

Estate of Sarah D. Holliday v. Commissioner of Internal Revenue, T.C. Memo. 2016-51 (3/17/16) - IRS wins another one!

In my last Newsletter, I happily reported on a taxpayer estate victory, Estate of Purdue v. Commissioner, T.C. Memo. 2015-249 (12/28/15); but now the court has released the Holliday opinion, a clear taxpayer defeat! We now have seen about 40 trial court decisions on the estate tax section most dangerous for the viability of FLPs and FLLCs, namely, IRC Sec. 2036(a), described below. Of these, only about 15 decisions were for the taxpayers - not bad considering that it is the government that picks cases to attack partnerships and limited liability companies for estate tax purposes.

I can still recall the first of these 40 cases, namely, Estate of Dorothy Schauerhamer, T.C. Memo. 1997-242, because I was the tax litigation counsel for the estate - which I had early on advised in a confidential engagement letter likely would lose under Sec. 2036(a) of the Code! So this latest case, Holliday, allows us to remind taxpayers and practitioners alike of how important proper planning is in using the FLP or FLLC to spawn estate and gift tax valuation discounts in the high wealth estate. And since 2010, the Internal Revenue Code has included Section 7701(o), the "economic substance doctrine" - which simply makes clear that tax beneficial transactions, especially using entities, must have "significant and real non-tax purposes" if the transactions are to be respected for tax purposes.

First, let's summarize what 2036(a) is all about - it is an estate tax section that, if applicable to the facts, will disregard a lifetime transfer of property if the transferor retains income from or control over the property. At first blush, this would seem to prevent gifts or sales of wealth to family partnerships and limited liability companies; but it is more complicated than that. Plus, there is a major exception that, where applicable, prevents 2036(a) from even applying! The Tax Court in Holliday stated: "Section 2036 is intended to include in a decedent's gross estate inter vivos transfers that were testamentary in nature" (i.e. essentially not really effective until death of the transferor by virtue of retained interests). So two (2) things are necessary for 2036(a) to apply, namely, (i) a property transfer by the decedent during his or her lifetime, and (ii) retention by decedent, directly or indirectly (whether or not by an enforceable agreement), possession or enjoyment of, or the right to income from, the property for the decedent's remaining lifetime.

Second, what is the "exception" or, if you will "safe harbor", involved here? Best explained by the Tax Court in Estate of Bongard v. Commissioner, 124 T.C. 95 (2005), and also discussed in depth in the above-cited Purdue case, 2036(a) does not apply at all if two (2) tests are satisfied by the entity-based transaction. These tests are, first, that there was a "bona fide sale" of the property, and second, that it was for "adequate and full consideration". What do these tests mean in the context of contributions of property to a partnership or limited liability company taxed as a partnership (followed later by gifts of fractional entity interests or transfers to heirs at death of the contributing individual(s)? Essentially, the most important factor is that, for the exception to apply, there must be a "legitimate and significant nontax reason for creating the family limited partnership and the transferors must have received partnership interests proportionate to the value of the property transferred." This is the formula for success identified in the Bongard opinion. Theoretical justifications, mere recitation of entity purposes or benefits other than tax benefits, are not enough. There must be "actual motivation" other than for gift or estate or other tax benefits.

So, in Holliday, where did decedent's two (2) sons go wrong (as did their legal counsel) in the plan? What happened was that the sons, holders of a durable power of attorney over assets of their mother, failed to meet the above tests for avoiding disaster under 2036(a). You may wish to view my complete commentary for Steve Leimberg in LISI Email Estate Planning Newsletter No. 2402 (March 28, 2016). In any event, in spite of all the court decisions on this issue from 1997 to date, the facts that could have saved the Holliday family were not present! There were quite doubtful nontax reasons for setting up an FLP with $5 million of marketable securities and an LLC owned by the sons as the tiny equity percentage general partner. Further, the mother was never involved in the planning and would just "do as the sons wished", as testified to in court(!). Finally, the partnership agreement was not followed - it actually stated (rather unusually) that there would be periodic mandatory distributions of net income not needed for entity expenses to the partners (and only one was made over the two years from entity formation until mother's death!).

So what can we say? - I believe it is that nearly 20 years of litigation should teach clients and their advisors how to avoid 2036(a), and if you can't do it, then don't use the pass-through entity at all!

 

Check Out www.cpecredit.com For My Upcoming Webinars - 5 courses, All On Estate & Succession Planning!

In May and June, under the sponsorship of CPE Solutions LLC (www.cpecredit.com), I will present live webinars (accompanied by detailed outlines, power point slides, and valuable appendices useful to tax practitioners and their clients) on the following subjects:

I. May 6th - "Trusts, Pass-Through Entities & Family Wealth Planning" (3 hours)

II. May 20th - "Family Wealth Valuation Issues" (2 hours)

III. May 27th - "Buy-Sell & Non-Qualified Deferred Compensation Agreements" (2 hours)

IV. June 10th - "Estate & Succession Planning for the 99%" (2 hours)

V. June 20th - "Family Succession Planning Developments - 2016" (2 hours

You can see the course description and learning objectives for each of these client-friendly courses at www.cpecredit.com!

I hope you have enjoyed this Newsletter, and remember you can sign up for email alerts of future Newsletters - no obligation!

From the beautiful Central Panhandle of North Idaho!   Owen Fiore