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Gary L. Britt, CPA, J.D.
1200 Abernathy Road, Suite 1700
Atlanta, Georgia 30328
“Lawyer's That Mean Business”
An Estate Planning law blog published by the law offices of Atlanta Attorneys and Lawyers, AttorneyBritt, Gary L. Britt, CPA, J.D. This blog contains commentary and information regarding current developments in the taxation of income, estates, gifts, and trusts; particularly as related to the preservation and transfer of real estate and other property to one's spouse and future generations; including wills, revocable and irrevocable trusts, family limited partnerships, and family LLCs.
One purpose of fixing a value on an interest in a closely held business is to determine gift and estate tax liability. CPAs called upon to provide such valuations know that this can be a painstaking task. It is not an exact science but an educated estimate when, as often is the case, there is no identifiable market for the interest. This uncertainty can cause unintended gift or estate tax consequences for transfers between related parties during the transferor’s life and at death.
The difference between what a person transferring an interest in a business believes is its fair market value and any higher amount the IRS determines is its fair market value can result in a greater gift tax liability. Likewise, a redetermination by the IRS of the fair market value of such interests held in an estate can spell an underpayment of estate tax. Fortunately for CPA valuation analysts, there are methods that, while not always yielding uniformly accepted results, are recognized by taxing authorities and courts as providing a valid basis for those estimates. In applying those methods, however, CPAs must take stock of recent court decisions for guidance. This article gives an overview of valuation principles for gift and estate tax purposes, reviews some current trends in determining fair market value for such purposes, and makes suggestions for seeking a qualified appraiser.
EXECUTIVE SUMMARY Unintended estate and gift tax consequences can arise from valuations of interests in closely held entities. Because these interests often lack any readily available market value, their values at transfer are usually determined under any of three methods: the market or comparable sales method; the income or discounted cash flow method; or the net asset value or balance sheet method. The market or income method is most suitable for entities carrying on an active trade or business, while interests in entities that primarily hold investment assets such as real estate or securities most often are valued by the net asset value method. Values of interests in closely held entities may also be discounted for lack of marketability where they are subject to restrictions, and lack of control where they constitute minority ownership interests. Discounts for a lack of marketability are usually based on studies of public companies’ restricted stock or a comparison of share prices before and after an initial public offering. Discounts for lack of control for shares of a privately held business are usually based on comparisons of share prices to net asset value per share of publicly traded closed-end investment funds or, for real estate assets, real estate limited partnerships or investment trusts. Another type of discount that has been increasingly recognized by courts in recent years is for projected built-in gains (BIG) tax liability upon liquidation of appreciated assets. Two appeals court decisions have allowed discounts for the full amount of estimated BIG tax when using the net asset valuation method. With underpayment of gift or estate tax potentially at stake, such valuations will need to be competently performed by wellqualified experts. Sources of generally accepted appraisal standards include the Uniform Standards of Professional Appraisal Practice of The Appraisal Foundation and the AICPA’s Statement on Standards for Valuation Services no. 1.
Unintended estate and gift tax consequences can arise from valuations of interests in closely held entities. Because these interests often lack any readily available market value, their values at transfer are usually determined under any of three methods: the market or comparable sales method; the income or discounted cash flow method; or the net asset value or balance sheet method.
The market or income method is most suitable for entities carrying on an active trade or business, while interests in entities that primarily hold investment assets such as real estate or securities most often are valued by the net asset value method.
Values of interests in closely held entities may also be discounted for lack of marketability where they are subject to restrictions, and lack of control where they constitute minority ownership interests. Discounts for a lack of marketability are usually based on studies of public companies’ restricted stock or a comparison of share prices before and after an initial public offering. Discounts for lack of control for shares of a privately held business are usually based on comparisons of share prices to net asset value per share of publicly traded closed-end investment funds or, for real estate assets, real estate limited partnerships or investment trusts.
Another type of discount that has been increasingly recognized by courts in recent years is for projected built-in gains (BIG) tax liability upon liquidation of appreciated assets. Two appeals court decisions have allowed discounts for the full amount of estimated BIG tax when using the net asset valuation method.
With underpayment of gift or estate tax potentially at stake, such valuations will need to be competently performed by wellqualified experts. Sources of generally accepted appraisal standards include the Uniform Standards of Professional Appraisal Practice of The Appraisal Foundation and the AICPA’s Statement on Standards for Valuation Services no. 1.
Every year, millions of taxpayers itemize their deductions on their federal tax return. One of the most common itemized deductions is a donation made to a charitable organization.
Here are the top ten things the IRS wants every taxpayer to know before deducting charitable donations.
Sooner or later, every estate planner comes face to face with the generation-skipping transfer tax (GSTT). Many practitioners do not feel up to the challenge because this particular tax has a reputation for being as treacherous as the sea. But after you boil down all the complications, you’re left with a fairly direct set of circumstances to watch for. This article is meant to help you identify situations that subject clients to the generation-skipping transfer tax and advise them appropriately.
The GSTT is the government’s defense against an end run around estate and gift taxes. It imposes a flat tax on gifts and bequests above the estate/lifetime gift exclusion that avoid gift or estate tax by skipping one or more generations, such as to grandchildren. It is relatively straightforward in its provisions, but financial advisers need to be aware of recent and ongoing changes in exemption amounts, allocations and tax rate and the corresponding implications for estate plans. One important planning element is the optimal use of the lifetime exclusion in tandem with the annual gift exclusion, along with other common estate planning mechanisms.
REINING IN LIFE ESTATES
The GSTT is a simplified version of a tax originally instituted in 1976. Back then, Congress explained that the tax was designed “to remedy the perceived abuse of using a trust to benefit several generations while avoiding Federal Estate Tax during the term of the trust.”
Here’s the abuse they saw: Wealthy families were going to estate planners who created a life estate in their assets for their kids, followed by a life estate in the assets for their grandkids, followed by a life estate in the assets for their great-grandkids and so on. Since life estates are not subject to the federal estate tax, these plans effectively moved incredible amounts of wealth from generation to generation without any risk of the estate tax. Less wealthy families were paying more in estate tax than more wealthy families, who could afford to engage in sophisticated estate planning. The initial GSTT that Congress created, however, was so widely criticized that the Tax Reform Act of 1986 retroactively repealed the 1976 version and implemented the current version.
The 1986 Act imposed a tax equal to the highest estate tax rate on any generation- skipping transfer, with a $1 million exemption per taxpayer. In 1995, the exemption was indexed for inflation in $10,000 increments. In 2001, the exemption was increased to match the estate tax exemption. This change, along with scheduled increases in the exemption amount culminating in the scheduled repeal of the estate and GST taxes, was included in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).
Currently, a taxpayer’s GSTT exemption is $3.5 million, and both the GSTT and the estate tax are scheduled for repeal in 2010. The 2001 EGTRRA changes are then scheduled to sunset on Jan. 1, 2011, and the estate and GSTT exemptions drop back to their 2001 levels, as indexed for inflation. The Obama administration and some in Congress, however, have indicated their desire to avoid repeal of the estate tax and preserve the exemption at its current level. Although they have not specifically addressed the GSTT, it is considered likely to be included in any upcoming estate tax changes (see sidebar, “Forecasting the Estate Tax,” below).
The EGTRRA also introduced another significant GSTT change. Prior to the EGTRRA, a taxpayer’s GSTT exemption was automatically applied only to direct skips. After the EGTRRA, the exemption will also be automatically allocated to indirect skips (defined below) in certain circumstances unless the taxpayer (or the taxpayer’s executor) elects out of the automatic allocation rules. Automatic allocation to indirect skips under the EGTRRA is limited, though: The transfers must be in a GST trust (one that fits the criteria of IRC § 2632(c)(3)(B), which prevents allocation to most charitable trusts as well as trusts in which non–skip persons essentially have more than 25% of the beneficial interest) that’s subject to the gift tax and an estate tax inclusion period that ends after the EGTRRA’s effective date. This automatic allocation is also scheduled to sunset with the other EGTRRA provisions. It is unclear whether it will be retained, but if it is, strategies for electing out under these circumstances, in addition to direct skips, could well be valuable beyond next year
Despite its fearsome reputation, the generation-skipping transfer tax (GSTT) is straightforward in its provisions and worth the attention of CPA planning advisers, especially in the currently unsettled political climate.
The GSTT is imposed on asset transfers that avoid estate or gift tax and skip one or more generations, such as by a grandparent to a grandchild, or if to an unrelated person, to someone more than 37½ years younger than the transferor. It is imposed on direct transfers and transfers via trust. The tax rate and exemption amount are those of the estate tax.
Electing out of an automatic allocation of the GSTT exemption to direct skips and paying any applicable GSTT is advised for preserving the exemption for the trust’s future taxable distributions or termination (“indirect skips”).
Late allocations may be made, but they may adversely affect the amount of the exemption allocated to trust assets for any transfer under a pre-established inclusion ratio, depending on whether assets have appreciated since the allocation date.
Allocations may also come into play for irrevocable life insurance trusts and complex trusts..
Full Article At: The Generation-Skipping Transfer Tax: A Quick Guide
For more on the uniform basis rules for interests in trusts, see
For more on the significance of a “transaction of interest,” see
In PLR 200847015 (TAM, Nov. 21, 2008), the IRS stated in technical advice, that a surviving spouse who was named trustee of a trust did not hold a general power of appointment, when she was authorized to distribute to herself income and principal as she deemed necessary for her health, support, and maintenance. The IRS relied on Rev Rul 78-398, 1978-2 CB 237 , in which the power of a decedent who was the income beneficiary and sole trustee of a trust to apply as much of the trust principal as necessary for such trustee-beneficiary's maintenance and medical care, which power was limited by an ascertainable standard under local law, was limited by an ascertainable standard relating to maintenance and health within the meaning of Code Sec. 2041(b)(1)(A) , and was not a general power of appointment.
In PLR 200848017 (Nov. 28, 2008), the IRS ruled that a nonjudicial reformation of a trust to give the grantor the nonfiduciary power to reacquire trust assets by substituting assets of equivalent value could create a grantor trust for income tax purposes. The IRS did state that all relevant facts and circumstances would need to be considered to determine whether the gran Rev Rul 2004-64 tor really held the power in a nonfiduciary capacity.
Note. This is an extremely useful way to turn any trust into a grantor trust, which may be desirable for several reasons. Generally, the modification should usually include a direction that all the income taxes on the trust will be paid by the grantor, without reimbursement or payment by the trustee, to avoid having the payment of these taxes constitute a taxable gift to the beneficiaries. See Rev Rul 2004-64, 2004-1 CB 7 .
IR-2009-41, April 13, 2009
The Internal Revenue Service today issued its 2009 “dirty dozen” list of tax scams, including schemes involving phishing, hiding income offshore and false claims for refunds.
“Taxpayers should be wary of scams to avoid paying taxes that seem too good to be true, especially during these challenging economic times,” IRS Commissioner Doug Shulman said. “There is no secret trick that can eliminate a person’s tax obligations. People should be wary of anyone peddling any of these scams.”
Tax schemes are illegal and can lead to problems for both scam artists and taxpayers who risk significant penalties, interest and possible criminal prosecution.
The IRS urges taxpayers to avoid these common schemes:
Phishing is a tactic used by Internet-based scam artists to trick unsuspecting victims into revealing personal or financial information. The criminals use the information to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name.
Phishing scams often take the form of an e-mail that appears to come from a legitimate source, including the IRS. The IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Taxpayers who receive unsolicited e-mails that claim to be from the IRS can forward the message to firstname.lastname@example.org. Further instructions are available at IRS.gov. To date, taxpayers have forwarded scam e-mails reflecting thousands of confirmed IRS phishing sites. If you believe you have been the target of an identity thief, information is available at IRS.gov.
Hiding Income Offshore
The IRS aggressively pursues taxpayers and promoters involved in abusive offshore transactions. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through other entities. Recently, the IRS provided guidance to auditors on how to deal with those hiding income offshore in undisclosed accounts. The IRS draws a clear line between taxpayers with offshore accounts who voluntarily come forward and those who fail to come forward.
Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans. The IRS has also identified abusive offshore schemes including those that involve use of electronic funds transfer and payment systems, offshore business merchant accounts and private banking relationships.
Filing False or Misleading Forms
The IRS is seeing scam artists file false or misleading returns to claim refunds that they are not entitled to. Frivolous information returns, such as Form 1099-Original Issue Discount (OID), claiming false withholding credits are used to legitimize erroneous refund claims. The new scam has evolved from an earlier phony argument that a “strawman” bank account has been created for each citizen. Under this scheme, taxpayers fabricate an information return, arguing they used their “strawman” account to pay for goods and services and falsely claim the corresponding amount as withholding as a way to seek a tax refund.
Abuse of Charitable Organizations and Deductions
The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets, including easements on property, closely-held corporate stock and real property. Often, the donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.
Return Preparer Fraud
Dishonest return preparers can cause many headaches for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Taxpayers should choose carefully when hiring a tax preparer. As the saying goes, if it sounds too good to be true, it probably is. No matter who prepares the return, the taxpayer is ultimately responsible for its accuracy. Since 2002, the courts have issued injunctions ordering dozens of individuals to cease preparing returns, and the Department of Justice has filed complaints against dozens of others, which are pending in court.
[The law offices of Attorney-Britt strongly recommend that you use the services of a competent CPA to prepare your tax returns. If you do not already have a CPA, the law offices of Attorney-Britt will be happy to recommend one to you.]
Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. The IRS has a list of frivolous legal positions that taxpayers should stay away from. Taxpayers who file a tax return or make a submission based on one of the positions on the list are subject to a $5,000 penalty. More information is available on IRS.gov.
False Claims for Refund and Requests for Abatement
This scam involves a request for abatement of previously assessed tax using Form 843, Claim for Refund and Request for Abatement. Many individuals who try this have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses Form 843 to list reasons for the request. Often, one of the reasons given is "Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service."
Abusive Retirement Plans
The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to IRAs as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into IRAs or companies owned by their IRAs at less than fair market value to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity which is considered prohibited.
Disguised Corporate Ownership
Some taxpayers form corporations and other entities in certain states for the primary purpose of disguising the ownership of a business or financial activity. Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes, and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance.
Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme.
Misuse of Trusts
For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits and are being used primarily as a means to avoid income tax liability and hide assets from creditors, including the IRS.
The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to divert income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust arrangement.
[As noted above, Trusts are a valuable and powerful tool in the construction of a proper estate plan. The proper use of trusts as part of a total estate plan can result in significant estate tax savings and asset protection benefits. The above comments are not directed at the long-standing and traditional uses of various trusts in legitimate and legal estate planning and asset protection strategies. The above comments about trusts are directed primarily at abusive tax shelter schemes, often "sold" by promoters. The law offices of Attorney-Britt advise that you should always seek competent trained advice from an estate planning professional whenever considering the creation or alteration of an estate plan, and you should always seek a second opinion from a trusted professional when considering any planning device or structure that is promoted by persons with whom you do not have a long standing relationship of trust.]
Fuel Tax Credit Scams
The IRS is receiving claims for the fuel tax credit that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim, potentially subjecting those who improperly claim the credit to a $5,000 penalty.
How to Report Suspected Tax Fraud Activity
Suspected tax fraud can be reported to the IRS using Form 3949-A, Information Referral. Form 3949-A is available for download from the IRS Web site at IRS.gov. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888. The mailing should include specific information about who is being reported, the activity being reported, how the activity became known, when the alleged violation took place, the amount of money involved and any other information that might be helpful in an investigation. The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential.
Whistleblowers also may provide allegations of fraud to the IRS and may be eligible for a reward by filing Form 211, Application for Award for Original Information, and following the procedures outlined in Notice 2008-4, Claims Submitted to the IRS Whistleblower Office under Section 7623
1. The IRA owner must be age 70 ½ or older.
2. The donor must directly transfer the money tax-free to an eligible organization.
3. The maximum amount that an IRA owner may transfer annually tax-free is $100,000 to an eligible organization.
4. This option, created in 2006 and recently extended through 2009, is available to eligible IRA owners, regardless of whether they itemize their deductions.
5. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension plans – commonly referred to as SEP Plans – are not eligible.
6. To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity.
7. Amounts transferred are not taxable and no deduction is available for the amount given to the charity unless nondeductible contributions are transferred.
8. Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.
9. Transferred amounts are counted in determining whether the owner has met the IRA's required minimum distribution rules. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. If nondeductible contributions are transferred to an eligible organization, a charitable contribution deduction may be allowed if itemizing deductions.
10. More information about qualified charitable distributions can be found in Publication 590, Individual Retirement Arrangements.
Integrity, Trust, And Quality Service
Since 1985, AttorneyBritt, Gary L. Britt, CPA, J.D., Attorney At Law, has stood for all of these things. At the law firm of AttorneyBritt, we build relationships based on integrity, trust, and quality service. We take your customer experience serious. In a hectic world, we are here to help you make informed decisions about your individual and business problems. See what makes AttorneyBritt a better choice for your legal needs. Let us make a difference in your world - a world that just became a little bit easier and more profitable.
AttorneyBritt, Gary L. Britt, is both a lawyer and Certified Public Accountant. AttorneyBritt provides a multidisciplinary and comprehensive approach to solving the multifaceted legal, tax law, and business problems of our individual, professional, and corporate clients.
Gary L. Britt, CPA, J.D., Attorney At Law, has over 25 years of experience helping individuals, businesses, and business owners prosecute and defend lawsuits; manage, structure, and govern their business transactions , contracts, and agreements; protect their assets; and successfully transfer their wealth to future generations.
AttorneyBritt provides service and consultation in several areas:
Lawsuits: Contract disputes. Partnership, shareholder, buy-sell, and other disputed agreements. Litigation of disputes between businesses, between businesses and individuals, or between two or more individuals. Filing and Defending Lawsuits of all types.
Business Transactions: Business formation and organization, shareholder and partnership agreements, buy-sell agreements, asset protection, and business succession planning.
Tax Planning and advice for corporations, partnerships, and individuals.
Tax Audit and tax assessment-collection problems with the IRS (Internal Revenue Service) or the Georgia Department of Revenue. Offers in compromise and settlement of tax debts .
Wills, Trusts, and Estates: Will preparation, estate planning, estate administration, asset protection, probate, and will contests.
AttorneyBritt has spent over 23 years serving as either General Counsel or lead outside counsel for various multifaceted business groups involved in: multi-jurisdiction state and federal litigation and arbitration disputes; multi-state commercial real estate development, leasing, and management; hotels; restaurants; manufacturing; franchisees and franchisors; an independent music label; an internet application service provider; and various medical and dental service groups.