LEGISLATIVE UPDATE

IRS Announces Revised Actuarial Tables for Valuing Interests under Section 7520

Earlier this month, the Internal Revenue Service announced in proposed, temporary, and final regulations (REG-107845-08, T.D. 9448) revised actuarial tables for use in valuing annuities, interests for life or terms of years, and remainder or reversionary interests in property under I.R.C. § 7520. The revisions, effective May 1, 2009, affect the valuation of inter vivos and testamentary transfers of these partial interests and are intended to reflect the mortality experience based on the 2000 United States census. The revisions are necessary under I.R.C. § 7520(c)(3), which requires that the tables be updated at least every ten years to reflect the most recent mortality experience available at the time of revision.

Section 7520 provides that the value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest must be calculated using tables prescribed by the Secretary and an interest rate equal to 120 percent of the federal midterm rate in effect under I.R. C. § 1274(d)(1) for the month in which the valuation date falls. However, if any part of the property transferred is an estate, gift, or income tax charitable contribution, the Federal midterm rate for either of the two months preceding the month in which the valuation date falls may be used.

The revised Tables S (Single Life Remainder Factors) and U(1) (Unitrust Single Life Remainder Factors) incorporated into the temporary regulations are based on data compiled from the 2000 census as set forth in Life Table 2000CM. Conforming amendments to various sections are also included to reflect the revised tables. Tables B, D, F(4.2) through F(14.0), J, and K are not based on mortality experience and therefore were not changed.

The new guidance also includes a number of transition rules intended to ease adverse consequences that may result from these changes. For example, for estate tax or gift tax purposes, if the date of decedent's death or the date of a gift is on or after May 1, 2009 but before July 1, 2009, the executor of the estate or the donor, as the case may be, may use either tables based on Life Table 90CM or Table 2000CM, along with the Section 7520 interest rate for the month in which the valuation date occurs, to determine the value of any partial interest transferred. However, when valuing charitable deductions with a valuation date occurring between these dates, if the executor or donor elects to use the applicable federal rate (AFR) for either March 2009 or April 2009, valuation tables based on 90CM must be used. If either the May 2009 or June 2009 AFR rate is used, valuation tables based on either 90CM or 2000CM may be used. If the valuation occurs after June 30, 2009, however, tables based on 2000CM must be used, even if a prior month's AFR is elected. The regulations also provide guidance pertaining to the estate of a mentally incompetent decedent.

Three new publications containing complete sets of actuarial tables have also been released by the IRS. Publications 1457 (Actuarial Valuation Version 3A), 1458 (Actuarial Valuation Version 3B), and 1459 (Actuarial Valuation Version 3C) containing complete sets of actuarial tables that include factors not contained in the regulations are available electronically on the IRS website at www.irs.gov.

Source:
Westlaw: Use of Actuarial Tables in Valuing Annuities, Interests for Life or Terms of Years, and Remainder or Reversionary Interests, REG-107845-08, 74 FR 21519-01, 2009 WL 1227633; T.D. 9448, 74 FR 21438-01, 2009 WL 1227647; Internal Revenue Service: Use of Actuarial Tables in Valuing Annuities, Interests for Life or Terms of Years, and Remainder or Reversionary Interests, REG-107845-08, 74 FR 21519-01; TD 9448, 74 FR 21438-01; Publication 1457 (Actuarial Valuation Version 3A), Publication 1458 (Actuarial Valuation Version 3B), and Publication 1459 (Actuarial Valuation Version 3C), Publications and Notices, April 29, 2009.

Tax Court Determines Estate Not Liable for Penalties Resulting from Attorney's Erroneous Advice

Last month, the Tax Court concluded in Estate of Kwang Lee (T.C. Memo 2009-84) that the decedent's estate was not liable for either the accuracy-related penalty under I.R.C. § 6662(a) or the addition to estate tax under I.R.C. § 6651(a)(1) resulting from the court's earlier decision (Estate of Lee v. C.I.R., No. 14511-06, T.C. Memo.2007-371, 12/20/2007) that decedent's estate did not qualify for the marital deduction. In the 2007 decision, the court held that language included in the wills of Kwang Lee (decedent) and his wife, Kyoung Lee, could not change the order of their actual deaths for purposes of determining who was the surviving spouse within the meaning of I.R.C. § 2056(a).

Kwang Lee was born on January 4, 1941. He and his wife had significant combined wealth consisting primarily of life insurance and stock options that were Mr. Lee's employee benefits, which were titled in Mr. Lee's sole name. A minimal portion of their wealth consisted of assets jointly owned by the Lees and assets owned by Ms. Lee alone. Ms. Lee died on August 15, 2001 and Mr. Lee died on September 30, 2001, each leaving a will dated June 21, 2001. Prior to their deaths, the Lees had retained Attorney de Mare to prepare their wills since they were dying of cancer. In order to minimize Federal estate taxes payable on their estates, Ms. de Mare considered having Mr. Lee disclaim or actually transfer some of his employee benefits to his wife but determined that he could do neither. Since it was uncertain that Mr. Lee would actually die first and thus cause the desired transfer of assets, Ms. de Mare included a deemed survivorship provision in each of the Lees' wills. Ms. Lee's will stated, "[f]or purposes of this Will, any person who shall die within six (6) months after my death shall be deemed to have predeceased me". Mr. Lee's will stated "A. [f]or purposes of this Will, any person, other than my wife, who shall die within six (6) months after my death shall be deemed to have predeceased me. B. In the event that my wife shall die at the same time as I, or under circumstances such as to render it difficult or impossible to determine who died first, my wife shall be deemed to have survived me."

After the Lees' deaths, the executor retained Attorney de Mare to help him administer the estates and prepare Mr. Lee's federal estate tax return, which was due on June 28, 2002. On June 28, 2002, Ms. de Mare requested an automatic 6-month extension of time to file the estate tax return for Mr. Lee's estate on Form 4768 and included a check for $250,000. Due to computer problems, Ms. de Mare was unable to complete the return by the extended due date and requested a second extension by letter enclosing a $100,000 check. The letter was returned to her by the IRS, but did not indicate whether the extension was granted, denied, or even considered. Since the $100,000 check had been cashed, Ms. de Mare told the executor that the due date for the estate tax return was now June 30, 2003.

On May 5, 2003, the Internal Revenue Service sent a taxpayer delinquency notice to Mr. Lee's estate. Shortly thereafter, the return was filed claiming a marital deduction under I.R.C. § 2056 of $1,618, 225 as though Mr. Lee had predeceased his wife and also claiming a deduction of $427,331.29 for federal and New Jersey estate taxes paid on his wife's estate, asserting that those taxes were a liability of Mr. Lee's estate because he was considered to have predeceased her. The return reported that decedent's estate had overpaid federal estate tax by $124,676.40. Upon examination the IRS concluded that Mr. Lee's estate was not entitled to deduct either the $1,618,225 or the $427,331.29 because Mrs. Lee died before decedent and subsequently determined a $1,020,129 deficiency in federal estate tax, a $255,032 addition to that tax under I.R.C. § 6651(a)(1) for untimely filing, and a $204,026 accuracy-related penalty under I.R.C. § 6662(a) for negligence or disregard of rules or regulations, or alternatively, for a substantial understatement of income tax.

As noted above, the Court agreed with the IRS and determined that Mr. Lee's estate did not qualify for a marital deduction leaving the issues to decided here whether the estate was liable for the accuracy-related penalty and the addition to tax. In its decision, the court concluded that "petitioner has met the reasonable cause exception to the accuracy-related penalty because, we find, Judge Frese [the executor] relied reasonably and in good faith on the advice of Ms. de Mare as to the legitimacy of the deductions." Further the court stated "that decedent's estate is not liable for the addition to tax because, we find, Judge Frese relied reasonably upon Ms. de Mare's advice that a second 6-month extension could be and was received."

Source:
Westlaw: Estate of Lee v. C.I.R., T.C., No. 14511-06, T.C. Memo. 2009-84, 4/27/09, 2009 WL 1118876; United States Tax Court, Estate of Lee v. C.I.R., T.C., No. 14511-06, T.C. Memo 2009-84, 4/27/09.

IRS Issues Additional Guidance on Portion of Trust Property Includible in Estate if Grantor Reserved Graduated Retained Interest

On April 29, the Internal Revenue Service issued additional guidance in REG-119532-08 (74 FR 19913-01) addressing the method to be used to determine the portion of trust property includible in the gross estate of a deceased grantor who had a graduated retained interest in property at death. These proposed regulations will affect estates that file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.

In 2007, proposed regulations (REG-119097-05, 72 FR 31487-01) were published addressing the amount of a trust to be included in the estate under I.R.C. § 2036 Transfers with Retained Life Estates and I.R.C. § 2039 Annuities if the decedent-grantor had retained use of the property or the right to receive an annuity, unitrust, or other payment from the trust for life, for any period not ascertainable without reference to the grantor's death, or for a period that did not end before the grantor's death. Trusts covered by that guidance included grantor retained interest trusts described in I.R.C. § 2702 and charitable remainder trusts described in I.R.C. § 664. According to the final guidance, I.R.C. § 2036, rather than I.R.C. § 2039, applies if both sections pertain to retained payments in a charitable remainder trust or grantor remainder trust. Under the methodology prescribed in the regulations, the portion of the corpus of a GRT or a CRT to be included in the decedent's gross estate under I.R.C. § 2036 is the amount necessary to generate a return sufficient to pay the decedent's retained annuity, unitrust, or other payment. These proposed regs were published as final in TD 9414 (73 FR 40173) on July 14, 2008.

In response to the comments received on the 2007 guidance, the IRS and Treasury Department issued a separate notice proposing additional changes to the regulations that address the method to be used to determine the portion of trust corpus includible in the estate of decedent-grantor if he or she had reserved a graduated retained interest in property or in a trust. According to the new guidance, the amount of corpus necessary to produce the grantor's retained graduated interest is the sum of:

• the amount of corpus required to generate sufficient income to pay, without reducing or invading principal, the annual amount payable to the decedent at his or her death calculated pursuant to Treas. Reg. § 20.2036-1(c)(2)(i); and
• for each succeeding year of the trust, the amount of corpus required to generate sufficient income to pay, without reducing or invading principal, the increase (if any) in the annuity, unitrust, or other payment for that year, deferred until the beginning date of that increase.

To illustrate this computation, the new proposed regulations add Proposed Reg. §20.2036-1(c)(2)(iii), Example 7. In addition, Treas. Reg. § 20.2036-1(b)(1)(ii) is amended to clarify the calculation to be used to determine the amount includible in decedent's gross estate if the decedent had retained the right to receive an annuity or other payment, rather than income, after the death of the current recipient of that interest and Example 1 of § 20.2036-1(c)(1)(ii) is expanded to provide an illustration of the computation.

The new proposed regulations will be applicable to estates of decedents dying on or after the date the regulations are published as final in the Federal Register. However, before they are adopted as final, the IRS and Treasury have stated consideration will be given to written comments received by July 29, 2009. Submissions should be sent to CC:PA:LPD:PR (REG-119532-08), Internal Revenue Service, Room 5203, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Electronic submissions may be sent via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-119532-08).

Source:
Westlaw: Section 2036- Graduated Retained Interests, REG-119532-08, 74 FR 19913-01, 2009 WL 1148212; Internal Revenue Service: Section 2036-Graduated Retained Interests, REG-119532-08, 74 FR 19913-01, published April 30, 2009.

IRS Unveils Annual Listing of the "Dirty Dozen" for 2009

In IR-2009-41, the Internal Revenue Service announced its list of tax scams for 2009, known as the "Dirty Dozen". This list includes common schemes such as hiding income offshore in undisclosed accounts, filing false or misleading tax returns to claim refunds that the filer is not entitled to, and phishing, which is a tactic used by scam artists to trick victims into revealing personal information used to steal the victim's identity and often takes the form of an email that appears to be from a legitimate source such as the IRS.

The IRS urges anyone who suspects tax fraud to report the incident to the IRS using IRS Form 3949-A, Information Referral, which 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. Identity of the person filing Form 3949-A is not required, but can be kept confidential if provided.

"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."

The 2009 "Dirty Dozen" list includes:

1. Phishing
2. Hiding income offshore
3. Filing false or misleading forms
4. Abuse of charitable organizations and deductions
5. Return preparer fraud
6. Frivolous agreements
7. False claims for refund and requests for abatement
8. Abusive retirement plans
9. Disguised corporate ownership
10. Zero wages
11. Misuse of trusts
12. Fuel tax credit scams

The IRS noted that filing false or misleading forms includes filing frivolous information returns, such as Form 1099-Original Issue Discount (OID), used to claim false withholding credits and legitimize erroneous refund claims. This new scheme for the 2009 list actually evolved from an earlier scam involving a false information return and a "strawman" bank account.

Source:
Westlaw: Beware of IRS' 2009 "Dirty Dozen" Tax Scams, IR-2009-41, 2009 WL 975423; Internal Revenue Service: Beware of IRS' 2009 "Dirty Dozen" Tax Scams, IR-2009-41, April 13, 2009, News Releases April 2009.

Applicable Federal Rates for May 2009 (Rev. Rul. 2009-12)

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

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

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

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

Source:
Westlaw: Federal Rates; Adjusted Federal Rates; Adjusted Federal Long-term Rate and the Long-term Exempt Rate, Rev. Rul. 2009-12, 2009 WL 1027169; Internal Revenue Service: Rev. Rul. 2009-12, Index of Applicable Federal Rates (AFR) Rulings, April 17, 2009.

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