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HalTerr-12-09Today’s blog post about the Heckerling Institute is written by Withum’s Private Client Services Partner and Practice Co-Leader, Hal Terr.

After the ball drops in Times Square on New Year’s Eve and New Year’s resolutions are made, many estate planning professionals finalize their travel plans to Orlando during the second week of January.   No, it is not to see Mickey and Minnie Mouse at Disney World or check out the latest ride at Universal Studios – it is to attend the University of Miami’s 51st Annual Hecklering Institute on Estate Planning, the largest Continuing Legal Education conference in the country. Over 3,000 attorneys, accountants, trust officers and other financial advisors gather for a week in Orlando, Florida to listen to the top speakers in estate planning.

The conference kicked off with a panel discussion on recent developments by Dennis Belcher, Ronald Aucutt and John Porter.   In addition, Catherine Hughes from the IRS joined the panel this year.   I have to give Catherine Hughes a lot of credit for presenting in front of this crowd and did a great job discussing the issues when the IRS has to implement the legislation passed by Congress or executive orders from the executive branch.   The two topics of primary interest during this session were the proposed regulations under IRC 2704 relating to valuation discounts and the possible future repeal of the estate tax.

According to Catherine Hughes, over 10,000 comments were received by the IRS in response to the proposed regulations under IRC 2704.   According to Catherine Hughes, it was not the intention of the IRS to eliminate all minority discounts with these regulations.   Although many of the abuses of valuation discounts were with non-operating entities funded with marketable securities, these regulations do not distinguish between operating and non-operating entities.   These regulations created a new group of disregarded restrictions to be ignored to calculate discounts, such as restrictions to limit an individual’s right of liquidation.   In addition, for a non-family interest to be considered in valuations of family-controlled entities the interest should be significant to the family, significant to the non-family holder and the interest should be a long-term interest of the non-family holder, more than three years.   Catherine Hughes stated that given the numerous amounts of the comments that the regulations will not become effective by January 20th, President-elect Trump’s inauguration.

For 2016 gift tax returns, for those individuals who made gifts after the date of the proposed regulations that are subject to valuation discounts preparers making disclosures of the transactions may consider disclosing that the valuation does not consider the impact of the proposed Section 2704 regulations, in light of the fact that the regulations do not apply to transfers made before the regulations are finalized.  To start the three year statute of limitations for gift tax returns adequate disclosure must include “[a] statement describing any position taken that is contrary to any proposed, temporary or final Treasury regulations or revenue rulings published at the time of the transfer”.

The discussion then moved to predictions and possibilities of the proposed regulations.   Recently there has been proposed legislation, both in the House of Representative and Senate, not to have the regulations become final.   As one of the panel members noted, tax law is in danger when a member of Congress can cite the Code Section by name.   In addition, the proposed regulations were instituted under the direction of the Treasury Department of President Obama which the incoming President Trump has stated he plans to remove those executive orders burdensome to business.   However, if these regulations do not become final then the valuations rules will still have the prior uncertainty of these rules based on case law history.

The conversation then turned to the prospect of the repeal of the estate tax law.   As Dennis Belcher stated, things are never as good or as bad as it seems.   Both the President-elect Trump and Republican Congressional blueprint propose to repeal the estate and generation skipping tax.   However, both proposals are silent to the gift tax, which is seen as the backstop to protect the integrity of the income tax.  In connection with the repeal of the estate tax, President-elect Trump’s proposal calls for the elimination of step-up in basis for estates over $10 million where this is not mentioned in the Congressional proposal.

It is expected that there will be some tax reform enacted this year since the Republicans now control Congress and the executive branch.   However, given that the Republicans do not have a 60 vote majority in the Senate; it is likely that any tax reform legislation will need to be passed as part of a Budget Reconciliation bill.   While the estate tax only applies to .2% of the population of the U.S. and provides less than 2% of the revenue of the budget, President-elect Trump’s proposal of repeal of the Affordable Care Act, increased infrastructure spending and immigration reform are all significant expenditures to the budget which will need revenue to pay for.   Estate tax repeal was part of the 2001 tax law which sunset in 2010 and was only effective in 2010.   When the 2001 tax act was passed, there was an expectation of future budget surpluses.   This is not the current environment today where there are projected deficits each year in the near future.   It is unknown where estate taxes repeal ranks in order of importance to the President-elect and Congress when considering business tax reform, international tax reform and repatriation of money overseas and individual tax reform.   Also to be considered is the optics of the estate tax repeal when the President and proposed members of his cabinet are billionaires whose families will benefit significantly of estate tax repeal.   As Ronald Aucutt noted, the repeal of the estate tax would require political capital that may be needed to be used elsewhere to pass tax reform.  The Republicans will want to try to have some Democratic votes on the tax reform legislation as not to have the same appearance when the Democrats had no Republican votes when the Affordable Care Act was enacted.  To have the votes of the Democrats, will estate tax repeal be excluded from the tax reform legislation? We will need to wait and see.

Estate tax repeal is tied to the basis of assets at the death of the individual.   If step-up in basis is eliminated for all estates, will that create a death tax to be imposed on significantly more individuals then the current estate tax?   A portion of President-elect Trump’s constituency were the old Regan Democrats in the Rust Belt that felt that the political environment in Washington was not in their best interest and contributed to the income inequality in the country.   How will these voters feel with the estate tax repeal to benefit only the very wealthy and actually create a new death tax if there is no step-up in basis?

So then what should individuals do in preparing their estate plans?  It is expected that the Republicans would want to pass tax reform legislation before the August recess.   As such, most individuals should wait and see if estate tax repeal is included in the tax reform legislation.   Estate documents should be drafted to be as flexible as possible, including marital “QTIP” trusts that will or will not be elected depending on the estate tax law at the time of the individuals passing.   If individuals want to make transfers to shift appreciation from their estate, these individuals should only consider those estate freeze techniques that do not trigger a gift tax such as GRATs or sales to Defective Grantor Trusts.   These transfers should include formula clauses to prevent the imposition of a gift tax in case of a challenge to the valuation of the transfer.

Well that’s all for today!  More commentary to come from the other Withum Estate Tax Partners attending the conference, stay tuned.

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The following is a news alert that we received from Thomson Reuters/PPC, the tax research service to which we subscribe.  It is very disturbing, and all our clients and friends of the firm should be aware of it:

Consumers and Tax Professionals Targeted in IRS E-mail Schemes:  The IRS has seen an approximate 400% surge in phishing and malware incidents so far this tax season. The emails are designed to trick taxpayers into responding to official communications that lead to websites designed to imitate official looking websites. The sites ask for social security numbers and other personal information. The sites also carry malware which infect computers and allow criminals to access files or track keystrokes to gain information. “While more attention has focused on the continuing IRS phone scams, we are deeply worried this increase in email schemes threatens more taxpayers,” Koskinen said. Tax professionals also are reporting phishing schemes to obtain their online credentials. If a taxpayer receives an unsolicited email that appears to be from either the IRS e-services portal or an organization closely linked to the IRS, report it by sending it to phishing@irs.gov. IR-2016-28.

Rules of Thumb:

  • If the “IRS” or “Treasury Department” calls you threatening legal action against you for a tax issue of which you are unaware, hang up – IT IS A HOAX!  As we have pointed out in earlier blog posts, the IRS will never initiate action against you without following strict protocol and they will certainly not call you about something without corresponding with you in writing beforehand.
  • Similarly with e-mail – if an e-mail claims to be an official communication, don’t believe it.  Actually, try not to open it to avoid malware issues.  The bottom line is, the IRS does not use e-mail for “official communication.”[1]  However, if you have a doubt about the authenticity of an e-mail, you can call the IRS at the appropriate number (found at:  https://www.irs.gov/uac/Telephone-Assistance) and speak with them about it.  And, of course, consider reporting the incident as indicated above.

The Internet is a wonderful thing, but with the good comes the bad, and the ability to defraud uninformed taxpayers is right up there with the bad.  Don’t let these geeky, tech-savvy criminals take a bite out of you.

[1] If you are already under examination and working with an agent, s/he may use e-mail to communicate with you, but you will already know who s/he is.  In any event, the communication will not be “official.”

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This week’s blogger is Raymond G. Russolillo, CPA, tax partner and leader of Withum’s Family Office service niche.

I guess physical house robberies and street muggings are too risky for criminals these days.  Over the past couple of years, an entire cottage industry of IRS scammers has sprung up whereby telephone “solicitors” call unsuspecting Raymond Russolillotaxpayers and threaten them with legal action if they do not pay their back taxes immediately.  A number of my clients have received such calls and were, to put it mildly, shaken up by the whole experience.

Here’s the deal – we all know that the IRS is a huge, unwieldy bureaucracy that is very easy to criticize and ridicule and just as easy to fear.  As an institution, it is far from perfect.  But, the one thing IRS really knows, and lives by, is PROCEDURE!  There are time constraints and notice requirements and all kinds of legal processes procedures in place to protect both the taxpayer and the taxing agency.  And the bottom line is, procedure dictates that IRS not shake down taxpayers by telephone!  If the IRS is truly “after” you, you will know because they always make first contact by mail.  The telephone may be used to communicate with you once you are in the audit process, but any settlement offer, assessment, or bill will always be delivered to you on paper, not by an angry, demanding phone call.

Scammers rely on taxpayers’ ignorance of procedure and fear of government agencies.  Don’t be so easily fooled.  Knowing the rules the IRS lives by will enable you to spot a scam and nip it in the bud.  The IRS will never:

  1. Call to demand immediate payment, nor will they call about taxes owed without first having mailed you a bill.
  2. Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  3. Require you to use a specific payment method for your taxes, such as a prepaid debit card.
  4. Ask for credit or debit card numbers over the phone.
  5. Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

So, what if you receive a call from a scammer?  First of all, stop, take a deep breath….and do nothing.  End the call.  If you receive a voice mail message, you may want to save the recording, particularly if you plan to report the incident to the authorities.   If you have some doubt about the legitimacy of a call (under the theory that “where there is smoke there is fire” – perhaps you received a letter that you ignored or forgot about), you should immediately contact your tax advisor for assistance.  At the very least, you can contact the Internal Revenue Service yourself at (800) 829-1040 to see if there are any open tax items you may have neglected to address.  But, if you know you owe no taxes or you are unaware of any issues in dispute, you may want to consider reporting the incident to the Treasury Inspector General for Tax Administration (TIGTA) at (800) 366-4484 or at www.tigta.gov.  You can also file a complaint using the FTC Complaint Assistant; choose “Other” and then “Imposter Scams.”  Include the words “IRS Telephone Scam” in the notes.

Finally, regarding other forms of communication, it is safe to say that the IRS is not even in the 21st century yet.  They do not use unsolicited e-mail (which itself is so 20th century), text messages, or any kind of social media to discuss your personal tax issues.

You know the old saw about “a fool and his money are soon parted.”  Don’t let fear and ignorance make you that fool.

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CCH’s Federal Tax Day newsletter recently dropped this bombshell of a news item on its subscribers:  “Tax-exempt organizations complained about the difficulty of completing Form 990, Return of Organization Exempt From Income Tax, at a May hearing before the House Ways and Means Oversight Subcommittee. Industry officials told Subcommittee Chairman Charles W. Boustany Jr., R-La., that completing Form 990 requires too much detailed, and sometimes redundant, information…” 

To which I reply:  Why should tax-exempts be any different from the rest of us?  A tax return is a tax return!  We need a Congressional hearing to tell us this?

But seriously, from the moment I entered this profession, I have had trouble with the notion of tax exempt organizations filing tax returns.  It all seems just a bit contradictory to me.  Of course, the main purpose of such forms is not so much tax calculation but an effort to ensure that tax-exempt organizations are in fact tax-exempt and not just claiming to be.  So the basic returns (form 990 for public charities and form 990-PF for private foundations) are really more regulatory compliance checklists than tax returns.  Oh, these returns do provide financial data such as balance sheets and income statements, but as plain vanilla tax calculators – not so much.  (Except, of course, for private foundations that are subject to a whopping 1% or 2% excise tax on investment income — and IRS better make sure that they collect these taxes or we may end up having to curtail vital governmental services in these great United States.) 

But, protect the public these forms do – IRS can make sure that tax exempt organizations are who they say they are and that they are in compliance with the myriad regulations designed to protect the philanthropic public.  As far as the rest of us are concerned – we too have the ability to check up on virtually any charity by viewing its 990 or 990PF online either at the charity’s website or at www.guidestar.org

So, all kidding aside, these reports provide a valuable service for those who wish to invest in particular charities.  Of course, like all financial reports, simplicity is not their overriding virtue — they are written not in English but instead in bureaucratic legalese, and it takes a fair amount of work for the casual reader to get through them in any sort of meaningful way. Think of them as a kind of prospectus for a tax exempt organization.

But because you can never tell a book by its cover (which is even harder in these days of Kindles and Nooks), this information is vital to the philanthropic investor.  Just because an organization has a word like “Cancer” or “Youth” or “Jewish/Catholic/Protestant/Muslim” in its title does not mean that it is an efficiently run charity worthy of your support.  Thankfully, the Internet has made the gathering of both qualitative and quantitative data about tax exempt entities far simpler and quicker that at any time in the past (thank you Al Gore!).  Regardless of whether you have $10 or $10 million to invest/contribute, this data can help you make intelligent choices about which organizations deserve your support.  In addition to an organization’s form 990, you can always read its annual report (often available at the organization’s website) or avail yourself of even easier-to-digest information from third party websites such as www.charitablenavigator.org, www.guidestar.org, or www.bbb.org

Remember the old retailer’s slogan “An educated consumer is our best customer” – that slogan applies just as much in the marketplace of philanthropic choice.     The information is out there.  Use it or lose it.

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