Yearly Archives: 2016

In Chief Counsel Advice 201637012 the IRS has determined that whether a taxpayer qualifies for abatement of failure to timely file and pay penalties turns on whether the delinquencies were caused by her mental incapacity.

In so holding, the CCA found that the fact that another individual was authorized under a durable power of attorney (POA) to act on the taxpayer's behalf during the relevant time period was irrelevant to whether the penalties should be abated.

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We previously posted Is This the End of Discounting Transfer Taxes with LLC's and FLPs? where we discussed that the Internal Revenue Service issued a proposed regulation which would beef up IRC Section 2704 of 1986 to preclude many of the presently available discounting techniques. In addition, this proposed regulation would expand the purview of section 2704 to include not only partnerships and corporations but LLCs, S corporations, and other family "business" transfer entities.

These long-awaited proposed regulations, released on August 2, 2016, would make sweeping and very significant changes to the valuation of interests in many family-controlled entities for estate, gift, and generation-skipping transfer tax purposes.  The primary focuses of the proposed regulations are treating the lapse of voting or liquidation rights as an additional transfer and disregarding certain restrictions on liquidation in determining the fair market value of a transferred interest.

When finalized, the proposed regulations would:

1. Treat as an additional transfer the lapse of voting and liquidation rights for transfers made within three years of death of interests in a family-controlled entity, thereby eliminating or substantially limiting the lack of control and minority discounts for these transfers;
2. Eliminate any discount based on the transferee’s status as a mere assignee and not a full owner and participant in the entity;
3. Disregard the ability of most nonfamily member owners to block the removal of covered restrictions unless the nonfamily member has held the interest for more than three years, owns a substantial interest in the entity, and has the right, upon six months’ notice, to be redeemed or bought out for cash or property, not including a promissory note issued by the entity, its owners, or anyone related to the entity or its owners;
4. Disregard restrictions on liquidation that are not mandated by federal or state law in determining the fair market value of the transferred interest; and
5. Clarify the description of entities covered to include limited liability companies and other entities and business arrangements, as well as corporations and partnerships.

The proposed regulations would also make significant changes to the valuation for transfer tax purposes of interests in a family controlled entity that are subject to restrictions on redemption or liquidation that is, subject to limitations on the ability of the owner of the interest to require the entity or other owners to redeem or buy out that owner. 

The new rules regarding “Disregarding Certain Restrictions on Redemption or Liquidation” will not take effect until 30 days after the date the regulations are published as final regulations.

Taxpayers who are considering transferring interests in family-controlled entities that are not controlling interests and do not have liquidation rights should consider making the transfers as soon as possible. 

It is possible, however, that if the client dies within three years of the transfer and after the date that the proposed regulations become final, the client may be caught by the final regulations. 

The proposed regulations would also apply to determine and measure any gift component of transfers otherwise structured as sales.  So clients who have recently made transfers and die after the regulations are finalized but within three years of the transfer may be caught by the final regulations.

 

 

According to Law360 a certified class of more than a million tax preparers ranging from accountants to attorneys urged a D.C. federal judge Wednesday to block the Internal Revenue Service from charging  a fee for issuing a preparer tax identification number, arguing the fee is unlawful.

The class members said in a summary judgment motion that, under D.C. Circuit precedent, the IRS can’t regulate tax-return preparers. The fee has existed since 2010 but was lowered from $50 to $33 in a temporary rule-making last year amid concerns it was too high. On Aug. 10, the IRS issued a final rule setting the fee at $33.

“The requirements that tax-return preparers obtain and pay for a [preparer tax identification number] were based entirely on the IRS’s unauthorized attempt to regulate preparers more broadly, making the fee arbitrary and capricious,” the motion said. “Even if the fee were not arbitrary or capricious, it is unlawful … because Congress did not grant the IRS any licensing authority over tax-return preparers.”

The fee, which is charged for application and a renewal every year, caught the ire of many return preparers, who argue it is unnecessary since the PTIN doesn't change and is as unique as a Social Security number, according to court documents. Their Wednesday motion said the IRS had no authority to implement the PTIN requirement.