Tax News

CCH (cch.taxgroup.com) reports:

  Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (P.L. 107-16) the estate tax is scheduled to go from a 45-percent maximum rate and a $3.5 million exclusion in 2009, to total repeal during 2010. Catherine Hughes, attorney-advisor in the Office of Tax Legislative Counsel for Treasury, predicted during a June 18 Grant Thornton webcast on the Obama budget proposal that action to prevent this result is highly likely. In its recent budget proposals in the Treasury "Greenbook," the Obama administration proposed that, instead of a total repeal, the 2009 parameters for the estate tax should be permanently enacted. Hughes gave insights on several aspects of the overall proposal that could eventually survive the vetting process as final legislation takes shape.

Consistency in Value

  The Obama administration budget proposal would require beneficiaries of an estate to report, on disposition, as the basis of property they receive, the fair market value of the asset reported on the decedent's estate tax return. Hughes explained that because the Internal Revenue Code does not currently have any direct provisions tying the fair market value of the property to the recipient's basis, recipients are not directly prevented from manipulating their basis (and therefore their recognized gain or loss) when subsequently selling the property.

  The Obama administration would place one further caveat to this requirement to avoid incorrect reporting. It would allow recipients to use a basis that is less than or equal to the estate tax reported value. "That's a one-sided proposal," Hughes stated. She explained that, "the concern was, if you have a situation where ... the executor reported a value on the estate tax return and the recipient, years later, had reason to believe that the number was overstated on date of death ... when the income tax return of the beneficiary is ... going to be prepared and filed with capital gain or loss reported on the sale of that asset, we didn't want to put the preparer or the taxpayer in the position where they're using, as a basis number, a number they have reason to believe was incorrect and therefore could not meet the standards for the return preparer penalty."

Restrictions on Estate Value

  While restrictions on property generally discount the value of the property and, therefore, the amount of estate tax generated by the asset, Code Sec. 2704(b) lists certain restrictions on property that should be ignored for purposes of valuing an estate. However, certain court decisions and state law amendments have diminished the force of this provision by allowing these discounts to be effectively considered, particularly with regard to partnership interests.

  Calling this issue the "elephant in the living room for estate planners," Hughes reported that the Obama administration's proposal would add another set of restrictions on valuation discounts especially applicable to transferred interests in property. She observed that this amendment would "reinvigorate the intent and the language of the provisions of 2704" and make the statute apply as it was intended.

  The administration's proposal would also prohibit estates from discounting interests in property based on limitations on the right to liquidate to the extent more restrictive than a safe-harbor standard to be set forth in Treasury regulations. Additionally, the proposal calls for regulations to determine when certain interests held by charities and other nonfamily members would be considered held by family members.

  "Because this is such a significant issue, we felt that it would make sense to leave the details to regulations subject to public comment to make sure we got it right instead of letting the statute draw the line from which things would be measured," she said.

  By Torie Cole, CCH News Staff