Obama Sets Forth His Deficit Reduction Plan Which Includes Estate and Gift Tax Changes

The Obama Administration has proposed a deficit reduction plan in which “[t]he Administration . . . supports the return of the estate tax exemption and rates to 2009 levels.”  This means that the estate tax applicable exclusion amount would go to $3.5 million (down from $5 million currently) and the gift tax exemption to $1 million, (down from $5 million currently) and the top marginal rates would be 45 percent (up from 35% currently).  Portability of a deceased spouse's unused estate tax applicable exclusion amount would remain under the President's proposal. 

New IRS Notice Eliminates Taxation of Personal Use of Employer Provided Cell Phones

 When an employer provides its employees with cell phones primarily for business reasons, there is no taxation to the employee on either the business or personal use and no recordkeeping of usage is required.  Similarly, reimbursements by employers of an employee-provided cell phone for business use is similarly not taxed.  This notice applies for all tax years beginning with 2010.  Notice 2011-72,2011-38 IRB; IR 2011-93.

The normal rule for an employer providing property to an employee that has both business and personal uses is that no deduction is allowed for the personal, living, or family expenses.

Generally an employee is taxed on the personal portion of any property provided to the employee.  AThe IRS has declared in effect that the employee's personal use of an employer-provided cell phone is a tax-free de minimis fringe benefit.

The notice does require that there must be substantial reasons relating to the employer's business, other than providing compensation to the employee, for providing the phone in order for the employee not to be taxed. Examples include contacting the employee at all times for work-related emergencies, or the employee's availability to speak with clients when he's away from the office or call clients in other time zones after his normal workday is over. However, the notice provides that cell phones provided to promote employee morale or goodwill, to attract prospective employees, or to provide additional compensation to employees is not provided primarily for noncompensatory business purposes.

The same rule of non-taxation of employer supplied cell-phones applies for employee reimbursements for their cell phones.  However, reimbursements of unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee's regular wages will remain taxable.

Tax Advantages of Purchasing Property (including Qualified Real Property) for Business Use This Year

Pursuant to Sections 168 and 179 of the Internal Revenue Code, depreciation deductions and expensing deductions will be more generous in 2011 than in 2012 and beyond.  To summarize, for businesses interested in purchasing new equipment or other business property, this is the year to do so.  Now is the time to buy machinery and equipment before the advantages are set to expire.  You can lock in accelerated deductions by buying qualifying assets this year but that property must also be placed in service before year-end.  Until the end of the year, in addition to tangible personal property, there is expensing allowed for qualified real property under Section 179(f)(1).  This section permits expensing of up to $250,000 this year. 
Qualified real property is:

(A) qualified leasehold improvement property described in Section 168(e)(6),

(B) qualified restaurant property described in Section 168(e)(7), and

(C) qualified retail improvement property described in Section 168(e)(8).

See Section 179(f)(2)(C)

In order to qualify as Qualified real property, the property must be depreciable and acquired for use in the active conduct of a trade or business.  However, the following types of property are not eligible: property used for lodging, property used outside the U.S., property used by governmental units, foreign persons or entities and certain tax-exempt organizations; also exempt are air conditioning or heating units). Section 179(f)(1)(C).

The 10 year statute of limitation for collection after assessment may be extended by an offer in compromise

The United States District Court in Nevada case of U.S. v. Booher, 108 AFTR 2d 2011-5113 highlights the fact that the IRS may pursue collection against a taxpayer even though it began after the 10-year time period generally allowed by law.  The general rule under Section 6502 of the Internal Revenue Code requires the IRS to begin a civil action to collect federal tax within 10 years after assessment or such assessment is released.

However, Booher reminds us that under Section 6331(i)(5) the 10 year statute of limitations period is suspended during the time that an offer in compromise (OIC) is pending. In Booher the OICs filed extended the limitation period beyond the general 10 year period.  Booher reminds us to obtain transcripts of account for taxpayers to ascertain whether or not the 10 year period has expired before taking action.  Such transcripts will show the existence of OICs and the duration of their pendency.

Defined Value Gifts Approved by Ninth Circuit

The U.S. 9th Circuit Court of Appeals in Estate of Petter v. CIR, ___ F.3d ___, 2011 WL 3332532 (9th Cir. Aug. 4, 2011), just affirmed the United States Tax Court, holding that a taxpayer is not liable for transfer tax in a defined value gift scenario.  The taxpayer in Petter claimed a charitable deduction for the value of a charity's share of a gift of interests in an LLC, where the gift documents transferred to the donor's children a fixed dollar amount of the interests as finally valued for tax purposes, and gave the balance to charity. The court also held that the taxpayer was entitled to a charitable deduction for the value of the additional assets transferred to charity upon the donees' final determination of the value of the LLC interests.
This affirmance gives planners more assurance that this type of planning opportunity will pass muster with the courts.

Senate Bill Proposes to Eliminate Short Term GRATs

A Senate Bill - S.1286, 112th Cong., 1st Sess. (June 28, 2011) - was introduced by Senator Robert B. Casey (D-Pa.) which would set a minimum term for all grantor retained annuity trusts (GRATs) at 10 years. The bill would also prevent any decreasing annuity payment GRATs during the first 10 years, and would require that the remainder interest have a value greater than zero on the date the trust is created. The bill would make these changes retroactively to all transfers made after December 31, 2010. 

Previously, short term GRATs of two years in duration, decreasing term GRATs and so called zero out GRATs were used effectively to save estate taxes.

This bill highlights the fact that we should move diligently to perform estate planning now.

Tax Court Sets Value of a Publishing Company Lower Than Initially Reported on Estate Tax Return!

In Estate of Gallagher v. Comm'r, T.C. Memo. 2011-148 (June 28, 2011), the Tax Court set a value for an interest in a publishing company below the amount found on the Estate Tax Return.  The Tax Court applied the discounted cash flow method to determine the fair market value of the 15% interest held in a publishing company held by the Decedent. The estate tax return had initially valued the Decedent's portion of the publishing company at $34.9 million and on audit, the IRS determined the value to be $49.5 million.  The estate petitioned to the United States Tax Court and obtained an independent appraisal indicating its value to be only $26.6 million. The Tax Court (Judge James S. Halpern, J.T.C. held the value of the Decedent's interest to be $32.6 million (less than on the return), using the discounted cash flow method of valuation. The Court also applied discounts for lack of marketability and lack of control.
The upshot is that when the IRS challenges a valuation, sometimes, you end up better off than the value that was placed on the return.