LEGISLATIVE UPDATE

District Court Denies Partial Refund of Gift Taxes Resulting from Gifts of LLC

Last month, the U.S. District Court for the Western District of Washington granted the government's motion for summary judgment in a case in which plaintiffs William and Stacy Linton sought partial refund of gift taxes paid for the year 2003 on interests in a limited liability company given by the couple to trusts established for the benefit of their children. (Linton v. U.S., 2009-2 U.S. Tax Cas. (CCH) P 60575, 104 A.F.T.R.2d 2009-5176, 2009 WL 1913255 (W.D. Wash. 2009)).

In November 2002, William Linton formed WLFB Investments, LLC, naming himself as sole member. On January 22, 2003, Linton gave his wife, Stacy, 50% of his interests in the company. On the same date, William executed and dated a quit claim deed, letters of authorization for transfer of securities, and an assignment of assets contributing property to the LLC. The couple, along with James Linton (William's brother), also executed but did not date:

• separate trust agreements for each of the couple's four children, signed by William and Stacy as Grantors and by James as Trustee. Provisions in each of the trust agreements indicated that the trust is irrevocable and that the agreement is "entered into effective upon contribution of property to the Trust."
• separate documents titled "Gift of Percentage Interest in WLFB Investments, LLC" for each of the trusts. Four of the gift documents were signed by William as Assignor and James as Trustee, and the other four were signed by Stacy as Assignor and James as Trustee. Each gift document stated that the assignor "hereby gifts to the... Trust, dated the same date hereof, (the "Assignee") a total of 11.25 of the percentage interests in WLFB Investments, LLC... standing in his respective name on the books of the Company." Accordingly, each of the four Trusts received 11.25% from each parent, for a total of a 22.5% interest in WLFB LLC for each Trust.

A few months later, the drafting attorney inserted the missing dates as January 22, 2003 on the trust agreements and gift documents.

Since the LLC agreement contained certain restrictions on transfers of interests to non-family members, and limits on involvement of members other than the managers (William and Stacy) in the LLC's day-to-day business, the Linton's applied a 47% discount to the value of the gifted interests for lack of marketability when calculating their 2003 gift tax. As a result, William reported taxable gifts of $725,548, while Stacy reported taxable gifts of $724,000. Upon examination of the returns, however, the Internal Revenue Service concluded the discounting was improper because the sequence of events was uncertain since the documents contributing property to WLFB LLC, creating Trusts for each child, and giving each trust percentage interests in the LLC were all signed on the same day, January 22, 2003. Consequently, William and Stacy actually made taxable gifts of $1,587,988 and $1,520,440, respectively, resulting in additional gift taxes totaling $518,331.41, including interest. The couple timely paid this additional amount, subsequently seeking refund together with costs and attorney fees.

During testimony, the attorney who prepared the documents stated that he did insert January 22, 2003 as the date of the trust agreements and gift documents, but believes that he made a "mistake" and that the intended date was January 31, 2003. Another advisor to the Linton's testified that the intended order of the transactions was "[t]o form the LLC, transfer the assets into the LLC, and then determine the amount of any gifts they wanted to make of LLC units for the benefit of their children and do those after that," noting that this sequence was required "[b]ecause you have to get the assets into the LLC first so it's the owner of the assets before you start making transfers of units in the LLC." However, the government argued that this oral testimony was insufficient, citing an unpublished decision of the Ninth Circuit that a taxpayer's claim for refund "must be substantiated by something other than tax returns, uncorroborated oral testimony, or self-serving statements." Lovelace v. U.S., 951 F.2d 360 (9th Cir. 1991), 1991 WL 275375 (quoting Mays v. U.S., 763 F.2d 1295, 85-2 U.S. Tax Cas. (CCH) P 9490, 56 A.F.T.R.2d 85-5335 (11th Cir. 1985)).

The court agreed that such testimony would not aid the Linton's in their request for a tax refund, noting that the facts are particularly similar to those in Senda v. C.I.R., 433 F.3d 1044, 2006-1 U.S. Tax Cas. (CCH) P 60515, 97 A.F.T.R.2d 2006-419 (8th Cir. 2006), where the contribution and gift occurred on the same day and the facts did not make clear which occurred first. Thus, the court concluded that "[o]n January 22, 2003, plaintiffs executed documents and transferred property in a manner that, as a matter of law, constituted indirect gifts to their children."

Source:
Westlaw: Linton v. U.S., 2009-2 U.S. Tax Cas. (CCH) P 60575, 104 A.F.T.R.2d 2009-5176, 2009 WL 1913255 (W.D. Wash. 2009).

IRS Provides New Guidance on Treatment of Employer-Owned Life Insurance

In Notice 2009-48 (Treatment of Certain Employer-owned Life Insurance Contracts, Notice 2009-48, 2009 WL 1425586 (I.R.S. Not 2009)), the Internal Revenue Service provides new and substantial guidance under I.R.C. § 101(j) and I.R.C. § 6039I in the form of questions and answers concerning reporting requirements for employer-owned life insurance contracts and what entities are subject to these requirements. In order to ensure that employees whose lives are insured by their employers are adequately informed of the insurance and the tax consequences of that coverage, the Pension Protection Act of 2006 added I.R.C. § 101(j) to the Code. Return and record requirements with respect to employer-owned life insurance contracts are set forth in I.R.C. § 6039I.

The notice answers important questions relating to the definition of employer-owned life insurance contracts, exceptions to the application of I.R.C. § 101(j)(1), satisfaction of notice and consent requirements, the transition rule affecting I.R.C. § 1035 exchanges, and information reporting requirements under I.R.C. § 6039I and Form 8925, Report of Employer Owned Life Insurance Contracts.

Source:
Westlaw: Treatment of Certain Employer-owned Life Insurance Contracts, Notice 2009-48, 2009 WL 1425586 (I.R.S. Not 2009); Internal Revenue Service: Treatment of Certain Employer-Owned Life Insurance Contracts, Notice 2009-48, published May 27, 2009

IRS Issues Interest Rates for Use in Valuing Farmland in Decedents' Estates in 2009

Late in July, the Internal Revenue Service issued Rev. Rul. 2009-21 (Special Use Value; Farms; Interest Rates, Rev. Rul. 2009-21, 2009 WL 2206540 (2009)) containing the interest rates to be used by decedent's estates in computing the special use value of farm real property for which an election is made under I.R.C. § 2032A as of a date in 2009. Under this section of the Code, an executor may elect to value certain farm real property that comprises the majority of assets in a decedent's estate and that passes to a family member on its use as a farm, rather than on its highest and best use. The section imposes certain requirements intended to ensure that the property continues to be used as a family farm. Under I.R.C. § 2032A(e)(7)(A)(ii), rates on new Farm Credit System Bank loans are used in computing the special use value of real property used as a farm for which an election is made.

Table 1 of the ruling sets forth the average annual effective interest rates, calculated in accordance with I.R.C. § 2032A(e)(7)(A) and Treas. Reg. § 20.2032A-4(e), to be used under I.R.C. § 2032A(e)(7)(A)(ii).

TABLE 1
TABLE OF INTEREST RATES
(Year of Valuation 2009)

Table 2 contains the states within each Farm Credit System Bank Chartered Territory.

TABLE 2
TABLE OF FARM CREDIT SYSTEM BANK CHARTERED TERRITORIES

Source:
Westlaw: Special Use Value; Farms; Interest Rates, Rev. Rul. 2009-21, 2009 WL 2206540 (2009); Internal Revenue Service: Rev. Rul. 2009-21, 2009-30 I.R.B. 162, published July 27, 2009.

IRS Requests Public Comments on Several Rules and Tax Forms Affecting Estate Planning Practitioners

In continuing efforts under the Paperwork Reduction Act of 1995, the IRS is soliciting comments from the general public concerning the following items of interest to estate planning professionals:

Comments on the following forms are requested by September 21:

1. Form 1041-T, Allocation of Estimated Tax Payments to Beneficiaries. Trustees and executors use this form to make an election under I.R.C. § 643(g) to allocate estimated tax payments to a beneficiary(ies). The IRS uses the information on the form to determine the correct amounts that are to be transferred from the fiduciary's account to the individual's account. (Proposed Collection; Comment Request for Form 1041-T, 74 FR 35910-02, 2009 WL 2143405 (F.R.))
2. Form 4970, Tax on Accumulation Distributions of Trusts. Beneficiaries of a domestic or foreign trust use this form to calculate the tax adjustment attributable to an accumulation distribution. It is also used to verify whether the correct tax has been paid on the accumulation distribution. (Proposed Collection; Comment Request for Form 4970, 74 FR 36549-01, 2009 WL 2175728 (F.R.))

Comments on the following forms and guidance are requested by September 28:

1. 706-GS(D-1), Notification of Distribution From a Generation-Skipping Trust. Trustees use this form to provide information to distributees and the IRS regarding generation-skipping distributions from trusts. Distributees must have this information in order to compute the generation-skipping tax imposed by I.R.C. § 2601, and the IRS uses the information to verify that the tax has been properly calculated. (Proposed Collection; Comment Request for Form 706-GS(D-1), 74 FR 38087-01, 2009 WL 2251998 (F.R.)). Comments should be sent to R. Joseph Durbala, Internal Revenue Service, room 6129, 1111 Constitution Avenue NW., Washington, DC 20224.
2. Form 706-GS(T), Generation-Skipping Transfer Tax Return for Terminations. Trustees use this form to compute and report the tax due on generation-skipping transfers that result from the termination of interests in a trust. The IRS uses the information to verify that the tax has been calculated correctly. (Proposed Collection; Comment Request for Form 706-GS(T), 74 FR 38086-01, 2009 WL 2251996 (F.R.))
3. Rev. Rul. 2000-35 on automatic enrollment in tax code Section 403(b) plans. This guidance describes the criteria that must be met before an employee's compensation can be reduced and contributed to an employee's section 403(b) plan without an affirmative election by the employee. (Proposed Collection; Comment Request for Revenue Ruling 2000-35, 65 FR 48048-02, 2000 WL 1063983 (F.R.))

All comments on the above items should be sent to R. Joseph Durbala, IRS, Room 6129, 1111 Constitution Ave. N.W., Washington, D.C. 20224.

Source:
Westlaw: Proposed Collection; Comment Request for Form 1041-T, 74 FR 35910-02, 2009 WL 2143405 (F.R.)); Proposed Collection; Comment Request for Form 4970, 74 FR 36549-01, 2009 WL 2175728 (F.R.)); Proposed Collection; Comment Request for Form 706-GS(D-1), 74 FR 38087-01, 2009 WL 2251998 (F.R.); Proposed Collection; Comment Request for Form 706-GS(T), 74 FR 38086-01, 2009 WL 2251996 (F.R.)); Proposed Collection; Comment Request for Revenue Ruling 2000-35, 65 FR 48048-02, 2000 WL 1063983; Department of the Treasury: Proposed Collection; Comment Request for Form 1041-T, 74 FR 35910-02, No. 138 Notices – July 21, 2009; Proposed Collection; Comment Request for Form 4970, 74 FR 36549-01. No. 140 Notices – July 23, 2009; Proposed Collection; Comment Request for Form 706-GS(D-1), 74 FR 38087-01, No. 145 Notices – July 30, 2009; Proposed Collection; Comment Request for Form 706-GS(T), 74 FR 38086-01, No. 145 Notices – July 30, 2009; Proposed Collection; Comment Request for Revenue Ruling 2000-35, 65 FR 48048-02, No. 145 Notices – July 30, 2009.

Applicable Federal Rates for August 2009 (Rev. Rul. 2009-22)

TABLE 1
Applicable Federal Rates (AFR) for August 2009 for purposes of I.R.C. § 1274(d)

TABLE 2
Adjusted AFR for August 2009 for purposes of I.R.C. § 1288(b)

TABLE 3
Rates under I.R.C. § 382 for August 2009

TABLE 4
Appropriate Percentages under I.R.C. § 42(b)(1) for August 2009

Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, and before December 31, 2013, shall not be less than 9%.

TABLE 5
Rate under I.R.C. § 7520 for August 2009

Source:
Westlaw: Federal Rates; Adjusted Federal Rates; Adjusted Federal Long-term Rate and the Long-term Exempt Rate, Rev. Rul. 2009-22, 2009 WL 2152352 (2009); Internal Revenue Service: Rev. Rul. 2009-22, Index of Applicable Federal Rates (AFR) Rulings, July 21, 2009.

See all articles in current issue