Saturday, March 5, 2022

Summer 2022 Farm Income Tax/Estate and Business Planning Conferences


In December, I posted a “hold-the-date” announcement for the 2022 summer national farm income tax/estate and business planning conferences that Washburn Law School will be conducting this summer.  The itineraries for each event are now finalized and registration will open soon.  Some have already booked their lodging and made travel plans.  The events are the highest quality, most practical professional tax and legacy planning conferences for practitioners with farm and ranch clients you can find anywhere in 2022.  Both conferences will also be simulcast live online in the event you aren’t able to attend in person.  In addition, each conference provides one hour of ethics for attorneys, CPAs and other tax practitioners. 

On June 13 and 14, the conference will be held at the Chula Vista Resort near the Wisconsin Dells.  On August 1 and 2, the conference will be at Fort Lewis College in Durango, Colorado.

In today’s article, I detail the speakers and the itineraries for each location.  2002 summer seminars – it’s the topic of today’s post.

The Speakers

In addition to myself, the following make the line-ups for the conferences:

Wisconsin Dells 

Joining me on Day 1 will be Paul Neiffer.  Paul is a CPA with CliftonLarsonAllen out of Walla Walla Washington.  He and I have worked together on numerous tax conferences for the past decade.  He specializes in income taxation, accounting services, and succession planning for farmers and agribusiness processors.  He is also a contributor at and writes the Farm CPA Today blog. 

Also making presentations at the Wisconsin Dells conference will be Carlos Ramon, Dr. Allen Featherstone and Prof. Peter Carstensen.  Here are their brief bios:

Carlos Ramon.  Carlos is the Program Manager, Cyber & Forensic Services, with the IRS Criminal Investigation Division (IRS-CID).  He has over nineteen years of federal law enforcement experience, the last 16 of which have been with the IRS-CID.  With IRS-CID, Carlos has served (among other things) as an ID Theft Coordinator, and Program Manager for Cyber and Forensic Services. He is specially trained in different IRS-CI programs responsible for investigating criminal violations of the Internal Revenue Code and related financial crimes involving tax, money laundering, public corruption, cyber-crimes, identity theft, and narcotics.  Carlos holds a bachelor’s degree in Animal Science from Penn State University, a master’s in business administration from the Inter American University of Puerto Rico, and a Doctorate in Business Administration in Management Information System from the Ana G Mendez University. 

Dr. Allen M. Featherstone.  Dr. Featherstone is the Department Head of the Agricultural Economics Department at Kansas St. University where he also is the Director of the Master in Agribusiness Program.  His academic focus is on agriculture finance and his production economics research has investigated issues such as ground water allocation in irrigated crop production, comparison of returns under alternative tillage systems, the costs of risk, interactions of weather soils, and management on corn yields, analysis of the returns to farm equity and assets, and analysis of the optimizing behavior of Kansas farmers, examining the stability of estimates using duality, and examining the application of a new functional forms for estimating production relationships.

Peter C. Carstensen.  Prof. Carstensen is Professor of Law Emeritus at the University of Wisconsin School of Law.  From 1968-1973, he was an attorney at the Antitrust Division of the United States Department of Justice assigned to the Evaluation Section, where one of his primary areas of work was on questions of relating competition policy and law to regulated industries.  He has been a member of the faculty of the UW Law School since 1973.  He is also a Senior Fellow of the American Antitrust Institute.  His scholarship and teaching have focused on antitrust law and competition policy issues.  IN 2017, he published Competition Policy and the Control of Buyer Power, which received the Jerry S. Cohen Memorial Fund Writing Award for best antitrust book of 2017. 


The Day 1 lineup and topics are the same at the Durango event as they are at the Wisconsin Dells event.  Joining me on Day 2 at Durango will be the following:

Timothy P. O’Sullivan.  Tim is a senior partner with the Foulston law firm in Wichita, Kansas.  He represents clients primarily in connection with their estate and tax planning and the administration of trusts and estates. As part of his practice, Mr. O’Sullivan crafts wills, testamentary trusts, revocable living trusts, irrevocable trusts, dynasty or other types of generation-skipping trusts, “special needs” trusts, financial and healthcare powers of attorney, living wills, premarital agreements, stock purchase or buy-sell agreements, strategic gifting and estate tax planning, asset protection planning, governmental resource planning (e.g., Medicaid and SSI), family business succession plans, premarital agreements, IRA, 401k or other tax deferred beneficiary designations and deferral strategies, life insurance structures, family limited partnerships and limited liability companies, grantor retained annuity trusts (GRATs), private annuities, self-canceling installment notes (SCINs) and other instruments and estate planning techniques. A substantial portion of Mr. O’Sullivan’s practice also involves advising clients on strategies and provisions which enhance the preservation of family harmony in the estate planning process.

Mary Ellen Denomy.  Mary is a CPA with a specialty in oil and gas accounting, valuations and audits.  She is an Accredited Petroleum Accountant, Certified Fraud Deterrent Analyst and Master Analyst in Financial Forensics.  She has spoken across the country on oil and gas issues, been interviewed frequently and has testified as a successful expert.  Mary Ellen is a former member of the Board of the National Association of Royalty Owners (NARO), the Board of Examiners of the Council of Petroleum Accountants Societies, Past President of NARO-Rockies and former Trustee of Colorado Mountain College.  She is currently a licensed CPA in both Colorado and Arizona.

Mark Dikeman.  Mark is the Associate Director of the Kansas Farm Management Association as part of the Department of Agricultural Economics at Kansas State University.  Mark is responsible for implementing and maintaining an Extension educational farm business management program for commercial farms, resulting in the development of financial and production information to be used for comparable economic analysis by the farms as well as for research, policy and teaching.

John Howe.  John practices law in Grand Junction, Colorado with the law firm of Hoskin, Farina and Kampf.  John was raised in Southwestern Colorado and attended the Colorado School of Mines, graduating in 1983 with a bachelor’s degree in geophysical engineering. After a short stint in the oil and gas exploration industry, John attended the University of Colorado School of Law, graduating in 1989.  Following graduation, he clerked for Justice William H. Erickson of the Colorado Supreme Court and has practiced water and real estate law in Grand Junction for more than thirty years.

Michael K. Ramsey.  Mike is a partner in the firm of Hope, Mills, Bolin, Collins & Ramsey LLP located in Garden City, Kansas.  His law practice includes water rights, landowner oil and gas rights, agricultural business and estate planning.  Mike is a partner in an irrigated farming operation located in southwest Kansas. He has spoken on water law topics in Kansas to attorneys, financial institutions, utility company board members, agricultural producers, legislative committees and others. His clients have included users of surface and groundwater for irrigation, livestock, industrial and municipal purposes and groundwater management districts.  He a co-author with Peck, J. and Pitts, D. of "Kansas Water Rights: Changes and Transfers," 57 J.K.B.A. 21 (July 1988) and author of "Kansas Groundwater Management Districts: A Lawyer's Perspective," Vol. XV No. 3 Kan. J. of Law & Pub. Policy 517 (2006).  Mike’s law degree is from the University of Kansas School of Law.

Andrew Morehead.  Andy is a Public Accountant and Certified Financial Planner with a farm and small business practice in Eaton, Colorado and Torrington, Wyoming. He is a Past President of the National Society of Accountants, and is also a Past President of the Public Accountants Society of Colorado.  Andy is a former cattle rancher and farm equipment dealer in western Wyoming, and has taught at various tax-related professional continuing education programs for many years.

Shawn Leisinger.  Shawn is the Associate Dean for Centers and External Programs where he oversees development of Center programs and events that are held throughout the year. He also coordinates all continuing legal education programs sponsored by Washburn Law and other special events.  Shawn joined Washburn University School of Law on a full-time basis in 2010. Previously he served as Assistant General Counsel to the Kansas Corporation Commission Oil and Gas Conservation Division and as Assistant Shawnee County (Kansas) Counselor. Leisinger has coached the Washburn Law American Bar Association Client Counseling competition team since 2003 and the Negotiation competition team since 2008. He has also taught the Interviewing and Counseling and the Professional Responsibility courses and regularly teaches continuing legal education sessions.

Daily Schedules

Wisconsin Dells.  Here is how the topical sessions break out each day at the Wisconsin Dells conference (the speaker for each topic is indicated in parenthesis after the title of each session):

Day 1:

8:00 a.m.-8:05 a.m. – Welcome and Announcements

8:05 a.m.-9:05 a.m. - Tax Update – Key Rulings and Cases from the Past Year (or so) (McEowen)

This opening session begins with a review of the most significant recent income tax cases, IRS rulings and other tax administrative developments.  This session will help you stay on top of the ever-changing interpretations of tax law that impact your clients.   

9:05 a.m.-9:35 a.m. - Reporting of WHIP and Other Government Payments (Neiffer)

Farmers that participate in federal farm programs have unique tax reporting requirements and the programs have unique tax rules that apply.  This session will provide a review of the basic tax rules surrounding farm program payments, including new USDA programs that have been created for farmers in recent years.  Also reviewed will be the options for deferring revenue protection policies.

9:35 a.m.-9:55 a.m. (Morning Break)

9:55 a.m.-10:20 a.m. - Fixing Bonus Elections and Computations (McEowen)

The TCJA made several changes to bonus depreciation and the IRS issued a Revenue Procedure in 2019 allowing modifications of a bonus election.  Final regulations were published in late 2020 that withdrew a “look-through” rule for partnerships and clarify the application of I.R.C. §743(b) adjustments.  This session brings tax preparers up-to-date on dealing with changes to bonus elections and related computations.

10:20 a.m.-10:50 a.m. - Research and Development Credits (Neiffer)

Beginning in 2022, taxpayers must provide particular information when claiming a refund for research and development credits under I.R.C. §41 on an amended return.  What information is required?  What business components must be identified, and how are research activities performed to be documented?  How can an insufficient claim be perfected?  These issues and more will be addressed.

10:50 a.m.-11:20 a.m. – Farm NOLs (Neiffer)

In 2021, the IRS issued guidance on how farm taxpayers are to handle carryback elections related to farm net operating losses (NOLs) in light of all of the legislative rule changes in recent years.  This session reviews the guidance and illustrates how a farm taxpayer can elect to not apply certain NOL rules of the CARES Act, and how the COVID-Related Tax Relief Act (CTRA) election can be revoked. 

11:20 a.m.-Noon  -  The Taxability of Retailer Reward Programs; Tax Rules Associated with Demolishing Farm Structures (McEowen)

This session addresses the tax issues associated with farm clients receiving “rewards” from retailers that they transact business with.  How are the “rewards” to be reported?  Is the information that the retailer provides to the farmer correct?  This session sorts it out.  In addition, this session covers the proper tax treatment of demolishing farm structures.  Significant weather events in recent months in large areas of farm country destroyed or significantly damaged many farm structures.  When those structured are beyond repair and are demolished, what is the proper way to handle it for tax purposes? 

Noon-1:00 p.m. – Lunch

1:00 p.m.  – 2:15 p.m. IRS-CI: Emerging Cyber Crimes and Crypto Tax Compliance (Ramon)

This session explains how to identify a business email compromise and/or data breach and how to respond to it.  The session will also identify what the Dark Web is and how it is utilized for cybercrimes and identity theft.  Likewise, the session will help attendees to recognize the general terminology and tax treatment pertaining to virtual/crypto currency. In addition, the session will allow participants to gain a better understanding of the efforts by IRS-Criminal Investigation to combat cyber criminals and illicit activity.

2:15 p.m. – 2:45 p.m.  Potpourri – Part 1 (McEowen and Neiffer)

This session includes discussion of numerous tax issues of importance to farmers and ranchers.  The topics covered include how machinery trade transactions are handled and reported on Form 4797 and Form 4562; inventory accounting issues (what is included in inventory; how the Uniform Capitalization Rules impact inventory accounting; when accrual accounting is required; inventory valuation methods; and crop accounting).  Also covered will be the tax treatment of early termination of CRP contracts; partnership reporting; weather-related livestock sales; and contribution margin analysis

2:45 – 3:05 p.m. - Afternoon Break

3:05 p.m. – 4:25 p.m. Potpourri (cont.) (McEowen and Neiffer)

The potpourri session continues…and concludes.

Day 2:

7:30 a.m. – 8:00 a.m. – Registration

8:00 a.m. – 8:05 a.m. – Welcome and announcements

8:05 a.m. – 9:00 a.m. - Estate and Business Planning Caselaw and Ruling Update (McEowen)

Day 2 begins with a review of the big developments in the courts and with the IRS involving estate planning, business planning and business succession.  Stay on top of the issues impacting transition planning for your clients by learning how legal, legislative and administrative developments impact the estate and business planning process.

9:00 a.m. – 9:50 a.m. – The Use of IDGTs (and other strategies) For Succession Planning (McEowen)

Estate planning with intentionally defective grantor trusts (IDGTs) can have many advantages. This session will discuss the ins and outs of IDGTs, including how they may be a part of developing comprehensive estate plans and how they can be tax “effective” for federal estate tax purposes.

9:50 – 10:10 a.m. – Morning Break

10:10 a.m. – 11:25 a.m. – The Ag Economy and the Impact on Farm/Ranch Clients (Part 1)

Between the Upper and Nether Stone: Anticompetitive Conduct Grinding Down Farmers (Carstensen)

Enforcement of antitrust and related competition laws has become a major focus of the Biden Administration.  One primary area of concern is agriculture.  Farmers face significant risks of harm in their supply markets.  The impacts come from a variety of places: equipment which they cannot repair because of restraints imposed by the manufacturer, seeds and other inputs sold by a limited number of suppliers who restrict resale and lower cost distribution, increased prices of fertilizer associated with increased concentration in the production of that input.  On the output side, there is increased concentration in the markets into which farmers sell many of their crops and livestock.  Recently litigation has highlighted how a cartel of poultry integrators exploited growers, consumers, and workers.  Similar claims are pending in other output markets.  This presentation will provide a survey of the issues and the potential for positive or negative impact on farmers and their bottom line.

11:25 a.m. – Noon - Post-Death Dissolution of S Corporation Stock and Stepped-Up Basis; Last Year of Farming; Deferred Tax liability and Conversion to Form 4835 (McEowen)

Noon – 1:00 p.m. – Luncheon

1:00 p.m. – 2:15 p.m. - The Ag Economy and the Impact on Farm/Ranch Clients (Part 2)

Agricultural Finance and Land Situation – (Featherstone)

The current agricultural finance situation and land will be discussed.  Information will be provided on past, recent, and future developments.  Information on the income situation, the financial health of farm operations, and current land market trends will be provided.

2:15 – 2:55 p.m. – Post-Death Basis Increase – Is Gallenstein Still in Play?; Using an LLC to Make an S Election – (McEowen)

Can surviving spouses in non-community property states get a full basis step-up in jointly held property when the first spouse dies?  Gallenstein may still apply for some clients – what are those situations and what does it mean?  Also, the session will examine the procedures involved and the Forms to be filed when an S election is made via a limited liability company. 

2:55 p.m. – 3:15 p.m. Afternoon Break

3:15 p.m. – 3:25 p.m. – Getting Clients Engaged in the Estate/Business Planning Process – (McEowen)

In this brief session, a checklist will be provided designed to assist practitioners in getting clients engaged in the estate, business and succession planning process.  What can be done “jump start” the process for clients?

3:25 p.m. – 4:25 p.m.  – Ethical Problems in Estate and Income Tax Planning – (McEowen)

This session focuses on ethical situations that practitioners often encounter when counseling clients on estate/business planning or income tax planning.  The governing ethical rules are often not carefully tailored for estate and tax planners/preparers, and competing responsibilities often bedevil the professional.  So, how can the estate planning and/or income tax preparer stay “within the rails”?  This session will address the primary rules including the application of relevant portions of Circular 230.

Durango Seminar

Day 1:

8:00 a.m.-8:05 a.m. – Welcome and Announcements

8:05 a.m.-9:05 a.m. - Tax Update – Key Rulings and Cases from the Past Year (or so) (McEowen)

This opening session begins with a review of the most significant recent income tax cases, IRS rulings and other tax administrative developments.  This session will help you stay on top of the ever-changing interpretations of tax law that impact your clients.  

9:05 a.m.-9:35 a.m. - Reporting of WHIP and Other Government Payments (Neiffer)

Farmers that participate in federal farm programs have unique tax reporting requirements and the programs have unique tax rules that apply.  This session will provide a review of the basic tax rules surrounding farm program payments, including new USDA programs that have been created for farmers in recent years.  Also reviewed will be the options for deferring revenue protection policies.

9:35 a.m.-9:55 a.m. - Morning Break

9:55 a.m.-10:20 a.m. - Fixing Bonus Elections and Computations (McEowen)

The TCJA made several changes to bonus depreciation and the IRS issued a Revenue Procedure in 2019 allowing modifications of a bonus election.  Final regulations were published in late 2020 that withdrew a “look-through” rule for partnerships and clarify the application of I.R.C. §743(b) adjustments.  This session brings tax preparers up-to-date on dealing with changes to bonus elections and related computations.

10:20 a.m.-10:50 a.m. - Research and Development Credits (Neiffer)

Beginning in 2022, taxpayers must provide particular information when claiming a refund for research and development credits under I.R.C. §41 on an amended return.  What information is required?  What business components must be identified, and how are research activities performed to be documented?  How can an insufficient claim be perfected?  These issues and more will be addressed.

10:50 a.m.-11:20 a.m. – Farm NOLs (Neiffer)

In 2021, the IRS issued guidance on how farm taxpayers are to handle carryback elections related to farm net operating losses (NOLs) in light of all of the legislative rule changes in recent years.  This session reviews the guidance and illustrates how a farm taxpayer can elect to not apply certain NOL rules of the CARES Act, and how the COVID-Related Tax Relief Act (CTRA) election can be revoked. 

11:20 a.m.-Noon  -  The Taxability of Retailer Reward Programs; Tax Rules Associated with Demolishing Farm Structures (McEowen)

This session addresses the tax issues associated with farm clients receiving “rewards” from retailers that they transact business with.  How are the “rewards” to be reported?  Is the information that the retailer provides to the farmer correct?  This session sorts it out.  In addition, this session covers the proper tax treatment of demolishing farm structures.  Significant weather events in recent months in large areas of farm country destroyed or significantly damaged many farm structures.  When those structured are beyond repair and are demolished, what is the proper way to handle it for tax purposes? 

Noon-1:00 p.m. – Luncheon

1:00 p.m.  – 2:15 p.m. IRS-CI: Emerging Cyber Crimes and Crypto Tax Compliance (Ramon)

This session explains how to identify a business email compromise and/or data breach and how to respond to it.  The session will also identify what the Dark Web is and how it is utilized for cybercrimes and identity theft.  Likewise, the session will help attendees to recognize the general terminology and tax treatment pertaining to virtual/crypto currency. In addition, the session will allow participants to gain a better understanding of the efforts by IRS-Criminal Investigation to combat cyber criminals and illicit activity.

2:15 p.m. – 2:45 p.m.  Potpourri – Part 1 (McEowen and Neiffer)

This session includes discussion of numerous tax issues of importance to farmers and ranchers.  The topics covered include how machinery trade transactions are handled and reported on Form 4797 and Form 4562; inventory accounting issues (what is included in inventory; how the Uniform Capitalization Rules impact inventory accounting; when accrual accounting is required; inventory valuation methods; and crop accounting).  Also covered will be the tax treatment of early termination of CRP contracts; partnership reporting; weather-related livestock sales; and contribution margin analysis

2:45 – 3:05 p.m. - Afternoon Break

3:05 p.m. – 4:25 p.m. Potpourri (cont.) (McEowen and Neiffer)  

The potpourri session continues…and concludes.

DAY 2: 

7:30 a.m. – 8:00 a.m. – Registration

8:00 a.m. – 8:05 a.m. – Welcome and announcements

8:05 a.m. – 9:00 a.m. - Estate and Business Planning Caselaw and Ruling Update (McEowen)

Day 2 begins with a review of the big developments in the courts and with the IRS involving estate planning, business planning and business succession.  Stay on top of the issues impacting transition planning for your clients by learning how legal, legislative and administrative developments impact the estate and business planning process.

9:00 a.m. – 9:45 a.m. – The Use of IDGTs (and other strategies) For Succession Planning (McEowen)

Estate planning with intentionally defective grantor trusts (IDGTs) can have many advantages. This session will discuss the ins and outs of IDGTs, including how they may be a part of developing comprehensive estate plans and how they can be tax “effective” for federal estate tax purposes.

9:45 a.m. – 10:05 a.m.  – Morning Break

10:05 – 11:00 a.m. – Estate Planning to Minimize Income Taxation:  From the Mundane to the Arcane (O’Sullivan)

With the failure of the Biden legislative agenda in 2021 that would have had a deleterious effect on many estate planning techniques, and with estate and gift tax reduction techniques continuing to be relevant (for the immediate future) to a small minority of the population, income tax reduction techniques continue to be the major tax focus of the estate planner’s regimen.  This session will initially address simple, well understood but infrequently utilized- estate planning strategies, and then gravitate to more advanced complex techniques both within and without non-grantor trusts. These techniques can substantially reduce the income taxation burden on beneficiaries of estate plans while carrying out the grantor’s/testator’s other important estate planning goals, including asset protection, maintenance of plan integrity, flexibility and charitable giving.  Learn the techniques that can be implemented for particular clients.

11:00 a.m. – Noon – Oil and Gas Royalties and Working Interest Payments:  Taxation, Planning and Oversight (Denomy)

This presentation will cover how to properly report royalties and working interest payments on current tax returns.  We will then begin to look at estate planning recommendations for your clients.  Also discussed will be issues that you may be able to advise your clients about concerning whether they are being paid according to their agreements.  The session concludes with what it means to be called to be an expert as your client’s CPA.

Noon – 1:00 p.m. - Luncheon

1:00 p.m. – 1:50 p.m. - Economic Evaluation of a Farm Business (Dikeman)

This session will address key components of analyzing the economic health of a farm business.  How much did a farm really make?  Evaluating the economic performance of an agricultural business can be complicated.  With prepaid expenses and generous depreciation options, it is difficult to gauge farm performance especially by looking only at a tax return.  This session will look at the impact of income tax management decisions on the economic performance of a farm business.

1:50 p.m. – 3:05 p.m. – Appropriation Water Rights - Tax and Estate Planning Issues (Mike Ramsey; Andy Morehead; John Howe)

The panel will explore the nature and types of appropriation water rights that practitioners may encounter with their clients, jurisdictional differences and whether the rights are real or personal property interests.  Common ownership, conveyance and title problems will be discussed. Valuation issues will be addressed. There will be discussion about IRC Section 1031 exchanges and depletion issues with examples commonly encountered in sale and transfer transactions.   Concerning estate planning and estate, gift and generation skipping taxation, the potential use and utility of SLATS (spousal lifetime interest trusts), IDGTs (intentionally defective grantor trusts) and IRC Sections 2032A and 6166 will be covered. The emphasis will be on identification of issues with reference materials for further study.  

3:05 -3:25 p.m. – Afternoon Break

3:25 – 4:25 p.m. - Ethically Negotiating End of Life Family Issues (Leisinger)

This ethics exercise takes a look at the sometimes complex processes and issues that arise at end of life for family members.  Participants will be given confidential information and motivations from two different children of a parent who is at end of life and needing to liquidate assets to pay for nursing home care and other expenses.  Ethical rules for attorneys will be discussed and applied to the negotiation exercise and outcomes that participants will be asked to complete as part of the program. 


Registration will open soon for both events and will be available through my website –  I will also post here when registration is open and provide the link for you.  Again, if you aren’t able to attend in person, you may attend online.  Also, if you are a law student or undergraduate student interested in attending law school, please contact me personally for details on a discounted registration rate.

March 5, 2022 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Monday, December 20, 2021

2022 Summer Conferences – Save the Date

During the summer of 2022 Washburn Law School will be sponsoring farm income tax and farm estate and business planning conferences in Wisconsin and Colorado. 

Please hold the following dates:

  • June 13-14, Chula Vista Resort, Wisconsin Dells, Wisconsin
  • August 1-2, Fort Lewis College, Durango, Colorado

The Chula Vista Resort has been in existence since the late 19th century, and is located three miles north of downtown Wisconsin Dells.  In 2006, the Resort was expanded to add an indoor waterpark along with an 18-hole golf course.  The resort property also contains a riverwalk, a steakhouse and an outdoor wave pool along the Wisconsin River. 

The Durango event in early August will be a beautiful time of the year to be in southwest Colorado.  Attractions include the Durango and Silverton narrow gauge railroad, and numerous historical sights, including Mesa Verde National Park.  To the north of Durango is Telluride, Colorado, another historic western town.

The conferences will provide discussion and analysis of key issues of importance to income tax  planning as well as estate and business planning for farm and ranch clients.   The daily agenda’s for both events is currently being planned, and registration for the events should be available by mid-late January. 

Until then, hold the dates for planning purposes.  I look forward to seeing you at one of these events during the summer of 2022.

December 20, 2021 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Tuesday, October 19, 2021

S Corporations - Reasonable Compensation; Non-Wage Distributions and a Legislative Proposal


Operating a small business means, in part, paying business taxes.  But, business taxes for many small businesses are different than those that are taken out of an employee’s paycheck.  Under current law, there can be an advantage for many small businesses, particularly those engaged in professional services, to operate in the form of an S corporation.  But, that advantage could be eliminated under a proposal that is under consideration in the Congress.

S corporation tax treatment and a current legislative proposal – it’s the topic of today’s post.

S Corporation Tax Treatment

Many small businesses are subject to the Self-Employment Contributions Act (SECA), and self-employment tax must be paid.  But S corporation shareholders are not subject to SECA tax because the S corporation is treated as separate from the shareholders – its activities are not attributed to its shareholders.  An S corporation must pay its owner-employees “reasonable compensation” for services rendered to the corporation.  That compensation is subject to Federal Insurance Contributions Act (FICA) tax.  But any non-wage distributions to S corporation shareholders are not subject to either FICA or SECA taxes.  Therein lies the “rub.”  Salary that is too low in relation to the services rendered results in the avoidance of payroll taxes.  So, when shareholder-employees take flow-through distributions from the corporation instead of a salary, the distributions are not subject to payroll taxes (i.e., the employer and employee portions of FICA taxes and the employer Federal Unemployment Tax Act (FUTA) tax. 

Note:  FICA requires employers to withhold a set percentage of each employee’s paycheck to cover the Social Security tax, Medicare tax and other insurance costs.  Employer’s must also equally match those withholdings, with the total amount being 15.3 percent of each employee’s net earnings.  Under SECA, a small business owner is deemed to be both the employer and the employee and is, therefore, responsible for the full 15.3 percent “self-employment tax” that is paid out of net business earnings

In accordance with Rev. Rul. 59-221, S corporation flow-through income is taxed at the individual level and is (normally) not subject to self-employment tax.  Also, in addition to avoiding FICA and FUTA tax via S corporation distributions, the 0.9% Medicare tax imposed by I.R.C. §3101(b)(2) for high-wage earners (but not on employers) is also avoided by taking income from an S corporation in the form of distributions.  These are the tax incentives for S corporation shareholder-employees to take less salary relative to distributions from the corporation.  With the Social Security wage base set at $142,800 for 2011, setting a shareholder-employee’s compensation beneath that amount with the balance of compensation consisting of dividends can produce significant tax savings.    

Note:  It is currently projected that the Social Security wage base will be $146,700 for 2022.

Who’s an “Employee”?

Most S corporations, particularly those that involve agricultural businesses, have shareholders that perform substantial services for the corporation as officers and otherwise.  In fact, the services don’t have to be substantial.  Indeed, under a Treasury Regulation, the provision of more than minor services for remuneration makes the shareholder an “employee.”  Once, “employee” status is achieved, the IRS views either a low or non-existent salary to a shareholder who is also an officer/employee as an attempt to evade payroll taxes and, if a court determines that the IRS is correct, the penalty is 100 percent of the taxes owed.   Of course, the burden is on the corporation to establish that the salary amount under question is reasonable.  

Determining Reasonableness

Before 2005, the court cases involved S corporation owners who received all of their compensation in form of dividends.  Most of the pre-2005 cases involved reclassifications on an all-or-nothing basis.  In 2005, the IRS issued a study entitled, “S Corporation Reporting Compliance.”  Now the courts’ focus is on the reasonableness of the compensation in relation to the services provided to the S corporation.  That means each situation is fact-dependent and is based on the type of business the S corporation is engaged in and the amount and value of the services rendered. 

So what are the factors that the IRS examines to determine if reasonable compensation has been paid?  Here’s a list of some of the primary ones:

  • The employee’s qualifications;
  • the nature, extent, and scope of the employee’s work;
  • the size and complexities of the business; a comparison of salaries paid;
  • the prevailing general economic conditions;
  • comparison of salaries with distributions to shareholders;
  • the prevailing rates of compensation paid in similar businesses;
  • the taxpayer’s salary policy for all employees; and
  • in the case of small corporations with a limited number of officers, the amount of compensation paid to the particular employee in previous years.

According to the IRS, the key to establishing reasonable compensation is determining what the shareholder/employee did for the S corporation.  That means that the IRS looks to the source of the S corporation’s gross receipts. If they came from services of non-shareholder employees, or capital and equipment, then they should not be associated with the shareholder/employee’s personal services, and it is reasonable that the shareholder would receive distributions as well as compensation.  Alternatively, if most of the gross receipts and profits are associated with the shareholder’s personal services, then most of the profit distribution should be allocated as compensation. In addition to the shareholder/employee’s direct generation of gross receipts, the shareholder/employee should also be compensated for administrative work performed for the other income-producing employees or assets.  As applied in the ag context, for example, this means that reasonable compensation for a shareholder/employee in a crop farming operation could differ from that of a shareholder-employee in a livestock operation.

Recent Cases

For those interested in digging into the issue further, I suggest reading the following cases:

  • Watson v. Comr., 668 F.3d 1008 (8th Cir. 2012)
  • Sean McAlary Ltd., Inc. v. Comr., T.C. Sum. Op. 2013-62
  • Glass Blocks Unlimited v. Comr., T.C. Memo. 2013-180
  • Scott Singer Installations, Inc. v. Comr., T.C. Memo. 2016-161

Each of these cases provides insight into the common issues associated with the reasonable compensation issue.  The last two also address distributions and loan repayments in the context of reasonable compensation of unprofitable S corporations with one case being a taxpayer victory and the other a taxpayer loss. 

Legislative Proposal

A current proposal, effective for tax years beginning after December 31, 2021, that would change the tax rules applicable to S corporations is being considered as part of the massive spending bills that are currently before the Congress.  The proposal is an attempt to ensure that all of the pass-through business income that an individual receives that has more than $400,000 of adjusted gross income for the tax year is subject to the 3.8 percent Medicare tax – either through the tax on net investment income (I.R.C. §1411) or through the SECA tax.  This outcome would be accomplished by the legislation amending the definition of “net investment income” so that it includes an individual’s gross income and gain from a pass-through business that is not otherwise subject to employment taxes.  That means it would apply to S corporation shareholders who are active in the corporation’s business, but don’t receive a “sufficient” level of compensation.  The proposal would also apply SECA tax to the distributive share of the business income that an S corporation shareholder receives who materially participates in the entity’s business

Note:  The proposal would also apply SECA tax (above a threshold amount) to the distributive shares of partners in limited partnerships and limited liability company (LLC) members that provide services to the entity and materially participate.


If the legislative proposal is enacted into law, it would significantly change the taxation of pass-through entities and owners that have AGI above the $400,000 threshold.  The technique of reducing employment tax by managing compensation levels withing the boundaries set by the IRS and the courts would no longer be a viable strategy.  Also, if enacted, the proposal could incentivize the revocation of the S election in favor of C corporate status.  But, that move depends, at least in part, on where the C corporate tax rate turns out to be  - that’s under consideration in the Congress also. 

Stay tuned. 

October 19, 2021 in Business Planning, Income Tax | Permalink | Comments (0)

Monday, October 11, 2021

Caselaw Update


It’s been a while since I highlighted a few recent cases for the blog.  Today is that day.  Recently, the court have decided cases about a packing plant’s potential liability exposure to employee claims about the virus; a legal challenge to the beef checkoff; C corporation distributions; and whether a trade or business existed in a rather unique setting.

Caselaw update – it’s the topic of today’s post.

Meat-Packing Plant Employees Can’t Sue Over Virus Claims 

Fields v. Tyson Foods, Inc., No. 6:20-cv-00475, 2021 U.S. Dist. LEXIS 181083 (E.D. Tex. Sept. 22, 2021).

The plaintiffs were defendant’s employees. They sued for negligence and gross negligence, alleging that the defendant failed to take adequate safety measures, such as not providing personal protective equipment and not implementing social-distancing guidelines, which caused them to contract COVID-19. The plaintiffs argued that the defendant failed to satisfy a duty of care to keep its premises in a reasonably safe condition, and that it failed to exercise ordinary care to reduce or eliminate the risk of employees being exposed to COVID-19. The defendant filed a motion to dismiss for a failure to state a claim upon which relief can be granted. The defendant argued that the Poultry Products Inspection Act (PPIA) as promulgated by the Food Safety and Inspection Service (FSIS) of the Department of Agriculture contained an express-preemption clause that foreclosed the plaintiffs’ claims. Additionally, the defendant argued that the recently passed Pandemic Liability Protection Act (PLPA) provided the defendant retroactive protection against damages lawsuits that alleged exposure to COVID-19. The trial court agreed and noted that the PPIA’s express-preemption clause overrode state requirements that are different than the regulations. The trial court noted that although the plaintiffs argued that the defendant failed to impose adequate safety measures to reduce the spread of COVID-19 in its facility, the FSIS promulgated a number of regulations under the PPIA that directly addressed the spread of disease. The trial court held that the duty of care alleged by the plaintiffs’ negligence claim would require the defendant to utilize additional equipment, therefore the plaintiffs’ claims were preempted by federal law. The trial court next addressed the PLPA, which generally shields corporations from liability if an individual suffers injury or death as a result of exposure to COVID-19. The trial court noted that the plaintiffs needed to allege that the defendant either knowingly failed to warn them or remedy some condition at the facility that the defendant knew would expose the plaintiffs to COVID- 19, or that the defendant knowingly contravened government-promulgated COVID-19 guidance. Further, the plaintiffs must allege reliable scientific evidence that shows that the defendant’s conduct was the cause-in-fact of the plaintiffs’ contracting COVID-19. The trial court noted that the plaintiffs failed to provide any reliable scientific evidence that showed that the defendant was the cause-in-fact of the plaintiffs’ contracting COVID-19. Because the plaintiffs merely made conclusory statements that they contracted COVID-19 due to unsafe working conditions, without alleging how or when they contracted COVID-19, the trial court held the plaintiffs’ complaint failed to satisfy the PLPA. Upon granting the defendant’s motion to dismiss, the trial court noted that even if the plaintiffs amended their complaint to satisfy the causation prong, the PPIA preemption clause would still foreclose the plaintiffs’ claims. 

Lawsuit Challenging Changes to Beef Checkoff Continues

Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America v. United States Department of Agriculture, et al., NO. 20-2552 (RDM), 2021 U.S. DIST. LEXIS 187182 (D. D.C. Sept. 29, 2021).

The plaintiff, a cattle grower association, sued the United States Department of Agriculture (USDA) claiming that the USDA made substantive changes to the Beef Checkoff Program in violation of the Administrative Procedure Act (APA) by entering into memorandums of understanding (MOUs) with various state beef councils. The plaintiff asserted that such amendments should have been subject to public notice-and-comment rulemaking. The MOUs gave the USDA more oversight authority over how the state beef councils could use the funds received from the checkoff. In other litigation, the USDA has been claiming oversight authority (even though not exercised) over state beef councils to argue that the beef checkoff is government speech rather than private speech in order to defeat First Amendment claims. In the present litigation, the USDA motioned to dismiss the case for lack of standing. The court denied the USDA’s motion on the basis that the plaintiff, on the face of its claim, had established sufficient elements of associational standing – that at least one of the plaintiff’s members had suffered a diminished return on investment as a result of the MOUs. The court did not address the factual question of the plaintiff’s standing. The USDA’s had also asserted a defense of claim preclusion but the court postponed examining that issue until additional evidence was submitted allowing the court to fully address the issue of jurisdiction.

Lack of Documentation Leads to Receipt of Constructive Dividends

Combs v. Comr., No. 20-70262, 2021 U.S. App. LEXIS 28875 (9th Cir. Sept. 23, 2021), aff’g., T.C. Memo. 2019-96.

The petitioner was the sole shareholder of a C corporation in which he housed his motivational speaking business. The fees he earned were paid to the corporation. The corporation paid him a small salary which he instructed the corporation not to report as income to him. In addition, he also paid many personal expenses from a corporate account. The IRS claimed that the distributions from the corporation to the petitioner constituted dividends that the petitioner should have included in gross income. The Tax Court noted that if the corporation has sufficient earnings and profits that the distribution is a dividend to the shareholder receiving the distribution, but that if the distribution exceeds the corporation’s earnings and profits, the excess is generally a nontaxable return of capital to the extent of the shareholder’s basis in the corporation with any remaining amount taxed to the shareholder as gain from the sale or exchange of property. The Tax Court noted that the petitioner’s records did not distinguish personal living expenses from legitimate business expenses and did not provide any way for the court to estimate or determine if any of the expenses at issue were ordinary and necessary business expenses. Thus, the court upheld the IRS determination that the petitioner received and failed to report constructive dividends. The appellate court affirmed noting that there was ample evidence to support the Tax Court’s constructive dividend finding and that the petitioner had failed to rebut any of that evidence. 

Suing Ex-Wife Not a Trade or Business

Ray v. Comr., No. 20-6004, 2021 U.S. App. LEXIS 27614 (5th Cir. Sept. 14, 2021).

The petitioner divorced his wife in 1977 and then sued her in state court in 1998 over debts she owed associated with two real estate purchases and credit cards, as well as penalties she owed the petitioner for not providing him with financial statements in a timely manner. During the pendency of the lawsuit in 2020, he sued her two more times in state court and sued her attorneys in federal court. The federal litigation involved losses from trading agreements the petitioner entered into with her involving a futures and options trading method she created. Ultimately, she owed the petitioner about $384,000 for trading losses incurred with funds he deposited into a commodities brokerage account. The petitioner deducted $267,000 in legal fees on his 2014 return and the IRS rejected the deduction, tacking on an accuracy-related penalty. In 2019, the Tax Court disallowed the legal expenses under I.R.C. §162(a), but allowed a deduction for legal costs incurred that were associated with trading agreement losses as production of income expenses under I.R.C. §212(1). The Tax Court also upheld the accuracy-related penalties. On appeal the appellate court largely affirmed the Tax Court, find that the petitioner didn’t prove that his lawsuit to recover the trading agreement losses was related to his work with a trade or business. Also, the appellate court upheld the Tax Court finding that the petitioner didn’t have a profit motive in suing his ex-wife which was required for a deduction under I.R.C. §212(1). However, the appellate court held that the Tax Court erred in concluding that the petitioner lacked some justification for claiming deductions under I.R.C. §162(a) for legal fees relating to the trading agreement losses. As such, the appellate court remanded the penalty issue to the Tax Court. 


Expect challenges to the beef checkoff to continue.  Many livestock ranchers and farmers that also have cattle and pay the checkoff have been irritated about the use of their checkoff dollars and the conduct of state beef councils for many years.  Also, the constructive dividend issue is a big one.  Compensation arrangements for corporate officers/shareholders must be structured properly to avoid the constructive dividend issue.  The IRS does examine that issue.  In addition, the trade or business issue often arises in the context of agricultural activities – particularly when rental arrangements are involved.  Remember, under IRS rules a cash lease is not a farming trade or business – it’s a rental activity.  That can have implications in numerous settings.  But, I have never seen the argument come up before the Ray case in the context of suing an ex-spouse!  That’s an interesting twist.    

October 11, 2021 in Business Planning, Income Tax, Regulatory Law | Permalink | Comments (0)

Tuesday, October 5, 2021

Corporate-Owned Life Insurance – Impact on Corporate Value and Shareholder’s Estate


A corporate buy-sell agreement funded with life insurance is fairly common in farm and ranch settings where there is a desire to keep the business in the family for subsequent generations and there are both on-farm and off-farm heirs.  When a controlling shareholder dies, it can be a good way to get the control of the business in the hands of the on-farm heirs and income into the hands of the off-farm heirs.  But, how does corporate-owned life insurance impact the value of the company and the value of the decedent’s gross estate?

The impact of corporate-owned life insurance on value – it’s the topic of today’s post.


Valuation is where the “action” is when it come to federal estate tax.  The rule for valuing property for federal estate (and gift) tax purposes is the “willing buyer-willing-seller” test.  Treas. Reg. §25.2512-1.  Whatever price the parties arrive at is deemed to be the property’s fair market value.  Id.  But, how is a corporation to be valued when it will receive insurance proceeds upon the death of a shareholder and the proceeds will be offset by a corporate obligation to redeem the decedent’s stock?  Will the proceeds of an insurance policy owned by a corporation and payable to the corporation be taken into account in determining the corporation’s net worth?  Under the Treasury Regulations, the proceeds do not add to corporate net worth to the extent that they are otherwise reflected in a determination of net worth, prospective earning power, and dividend-paying capacity.  Treas. Reg. §20.2031-2(f).  This means that, for the stockholders that have various degrees of control, the insurance proceeds may be reflected in the pro-rata determination of stock value.  The same is true for proceeds payable to a third party for a valid business purpose that results in a net increase in the corporate net worth.  See Treas. Reg. §20.2042-1(c)(6).

A related question is what the impact is on the decedent’s estate that has stock redeemed?  Does state law matter?

The Blount Case

The issue of corporate valuation when life insurance proceeds are payable to the corporation upon a shareholder’s death for the purpose of funding a stock redemption pursuant to a buy-sell agreement came up in Estate of Blount v. Comr., T.C. Memo. 2004-116.  In Blount, the decedent owned 83.2 percent of a construction company.  There was only one other shareholder, and the two shareholders entered into a buy-sell agreement in 1981 with the corporation.  Under the agreement, the stock could only be sold with shareholder consent.  Upon a shareholder’s death, the agreement specified that the corporation would buy the stock at a price that the shareholders had agreed upon or, if there was no agreement, at a price based on the corporation’s book value. 

In the early 1990s, the corporation bought insurance policies for the sole purpose of ensuring that the business could redeem stock and continue in business.  The policies provided about $3 million, respectively, for the stock redemption.  The corporation was valued annually, and a January 1995 valuation pegged it at $7.9 million. 

The first shareholder died in early 1996 at a time when he owned 46 percent of outstanding corporate shares.  The corporation received about $3 million in insurance proceeds and paid slightly less than that to redeem the shareholder’s stock based on the prior year’s book value.  The decedent was diagnosed with cancer in late 1996.  The 1981 buy-sell agreement was amended about a month later locking the redemption price at the January 1996 value of the corporation.  The decedent died in the fall of 1987.  The corporation paid his estate about $4 million in accordance with the 1996 agreement.  The decedent’s estate tax return reported the $4 million as the value of the shares.  Upon audit, the IRS asserted that the stock was worth about twice that amount based on the corporation being worth about $9.5 million (including the insurance proceeds to the other corporate assets).

Based on numerous expert valuations, the Tax Court started with a base corporate valuation of $6.75 million.  After adding the $3.1 million of insurance paid to the corporation as a non-operating asset upon the decedent’s death, the corporation was worth $9.85 million.  Given the decedent’s ownership percentage of 83.2 percent, the value of the decedent’s stock for estate tax purposes was $8.2 million.  But the Tax Court limited the stock value to slightly less than $8 million which was the amount that the IRS had determined in its original notice of deficiency.  In making its valuation determination, the Tax Court disregarded the buy-sell agreement on the basis that it had been modified and, therefore, didn’t meet the requirement to be binding during life.  In addition, the Tax Court reasoned that the agreement could be disregarded under I.R.C. §2703 because it was entered into by related parties that didn’t engage in arm’s-length negotiation.  Because the Tax Court disregarded the buy-sell agreement, the issue of whether the corporation’s obligation to redeem the decedent’s stock offset the proceeds was not in issue. 

The appellate court affirmed the Tax Court’s decision that the buy-sell agreement couldn’t establish the value of the corporate stock for estate tax purposes primarily because the decedent owned 83.2 percent of the stock and could have changed the agreement at any time, but reversed on the issue of whether the insurance proceeds should be included in the corporation’s value as non-operating assets.  Estate of Blount v. Comr., 428 F.3d 1338 (11th Cir. 2005).  The appellate court determined that the proceeds had already been taken into account in determining the corporation’s net worth.  The buy-sell agreement was still an enforceable liability against the company under state law even though it didn’t set the value of the company for tax purposes.  The appellate court noted that the insurance proceeds were offset dollar-for-dollar by the corporation’s obligation to satisfy its contractual obligation with the decedent’s estate.  The appellate court grounded this last point in Treas. Reg. §20.2031-2(f)(2), which it held precluded the inclusion of life insurance proceeds in corporate value when the proceeds are used for a redemption obligation. 

Note:  The Ninth Circuit also reached the same conclusion in Cartwright v. Comr., 183 F.3d 1034 (9th Cir. 1999).  In Cartwright, the court deducted the insurance proceeds from the value of the organization when they were offset by an obligation to pay those proceeds to the estate in a stock buyout.

Recent Case

Essential facts.  In Connelly v. United States, No. 4:19-cv-01410-SRC, 2021 U.S. Dist. LEXIS 179745 (E.D. Mo. Sept. 21, 2021), two brothers were the only shareholders of a closely-held family roofing and siding materials business.  They entered into a stock purchase agreement that required the company to buy back shares of the first brother to die.  The company then purchased about $3.5 million in life insurance coverage to ensure it had enough cash to redeem the stock.  The brother holding the majority of the company’s shares (77.18 percent) died on October 1, 2013.  The company received $3.5 million in insurance proceeds.  The surviving brother chose not to buy his shares, so the company used a portion of the proceeds to buy the deceased brother’s shares from his estate for $3 million pursuant to a Sale and Purchase Agreement.  Under the agreement the estate received $3 million and the decedent’s son received a three-year option to buy company stock from the surviving brother.  In the event that the surviving brother sold the company within 10 years, the brother and decedent’s son would split evenly any gains from the sale.

The estate valued the decedent’s stock at $3 million and included that amount in the taxable estate.  Upon audit the IRS asserted that the fair market value of the decedent’s corporate stock should have factored-in the $3 million in life-insurance proceeds used to redeem the shares which, in turn, resulted in a higher value of the decedent’s stock than was reported.  The IRS assessed over $1 million in additional estate tax.  The estate paid the deficiency and filed a refund claim in federal district court.

The buy-sell agreement.  The court noted that a stock-purchase agreement is respected when determining the fair market value of stock for estate tax purposes upon satisfying the requirements of I.R.C. §2703(b).  Those requirements are that the agreement must: 1) be a bona fide business arrangement; 2) not be a device to transfer property to members of the decedent’s family for less than full and adequate consideration in the money’s worth; and 3) have terms that are comparable to similar arrangements entered in an arms’ length transaction.  The court also noted several judicially-created requirements – 1) the offering price must be fixed and determinable under the agreement; 2) the agreement must be legally binding on the parties both during life and after death; and 3) the restrictive agreement must have been entered into for a bona fide business reason and must not be a substitute for a testamentary disposition for less than full-and-adequate consideration. 

The IRS expert claimed that the insurance proceeds should be included in the company’s value as a non-operating asset, and that allowing the redemption obligation to offset the insurance proceeds undervalued the company’s equity and the decedent’s equity interest in the company, and would create a windfall for a potential buyer that a willing seller would not accept.  The IRS expert concluded that the fair market value of the company was $6.86 million rather than $3.86 million.  The IRS also took the position that the stock purchase agreement didn’t meet the requirements in the Code and regulations to control the value of the company. 

The estate claimed that the company sold the decedent’s shares at fair market value and that the shares had been properly valued.  Thus, the $3 million in life insurance proceeds were properly excluded from the decedent’s estate based on the appellate opinion in Blount.  The estate claimed that the stock purchase agreement provided a sufficient basis for the court to accept the estate’s valuation as the proper estate-tax value of the decedent’s shares.  On that point, the IRS claimed that the stock purchase agreement was not a bona fide business arrangement and, as such, didn’t control the value of the decedent’s stock.  The IRS position was that the stated estate planning objectives of the stock purchase of continued family ownership of the company were insufficient to make it a bona fide business arrangement, particularly because the brothers did not follow it by disregarding the pricing mechanisms contained in it.

The court passed on the bona fide business arrangement issue because it determined that the estate had failed to show that the stock purchase agreement was not a device to transfer wealth to the decedent’s family members for less than full-and-adequate consideration.  The process that the surviving brother and the estate used in selecting the redemption price bolstered the court’s conclusion that the stock purchase agreement was a testamentary device.  They also did not obtain an outside appraisal or professional advice on setting the redemption price, thereby disregarding the appraisal requirement set forth in the agreement.  The court also noted that the agreement didn’t provide for a minority interest discount for the surviving brother’s shares or a lack of control premium for the decedent’s shares with the result that the decedent’s shares were undervalued.  This also, according to the court, demonstrated that the stock purchase agreement was a testamentary device to transfer wealth to the decedent’s family members for less than full-and-adequate consideration and was not comparable to similar agreements negotiated at arms’ length.

Inclusion of life insurance proceeds in corporate value.  On the issue of whether the life insurance proceeds should be included in corporate value, the court rejected the appellate court’s approach in Blount, finding it to be analytically flawed.  The court concluded that the appellate court in Blount had misread Treas. Reg. §20.2031-2(f)(2), and that the regulation specifically requires consideration to be given to non-operating assets including life insurance proceeds, “to the extent such nonoperating assets have not been taken into account in the determination of net worth.”  The court concluded that the text of the regulation does not indicate that the presence of an offsetting liability means that the life insurance proceeds have already been “taken into account in the determination of a company’s net worth.”  The court concluded that, “by its plain terms, the regulation means that the proceeds should be considered in the same manner as any other nonoperating asset in the calculation of the fair market value of a company’s stock…. And…a redemption obligation is not the same as an ordinary corporate liability.”  There is a difference, the court noted, between a redemption obligation that simply buys shares of stock, and one that also compensates for a shareholder’s past work.  One that only buys stock is not an ordinary corporate liability – it doesn’t change the value of the corporation as a whole before the shares are redeemed.  It involves a change in the ownership structure with a shareholder essentially “cashing out.”   

The court noted that the parties had stipulated that the decedent’s shares were worth $3.1 million, aside from the life insurance proceeds.  The insurance proceeds were not offset by the company’s redemption obligation and, accordingly, the company’s fair market value and the decedent’s shares included all of the insurance proceeds, and the IRS position was upheld.


The Connelly opinion is appealable to the Eighth Circuit, which would not be bound to follow either the Ninth or Eleventh Circuits on the corporate valuation issue.  The opinion does provide some “food for thought” when using life insurance to fund stock buyouts in closely-held business settings.  That will be an even bigger concern if the federal estate tax exemption declines in the future.

October 5, 2021 in Business Planning, Estate Planning | Permalink | Comments (0)

Monday, September 27, 2021

Fall 2021 Seminars


I receive many requests for my seminar schedule, particularly during the fall season when I am doing training events for tax practitioners.   Today’s post provides a listing (as of today) for my events for the rest of the year.

September 29, 2021 (LaHarpe, Kansas)

This is not a tax event, but a breakfast meeting from 8:00 a.m. – 9:30 a.m. for local landowners impacted or potentially impacted by the Southwest Power Pool Blackberry Line from Wolf Creek Nuclear plant to Blackberry (south of Pittsburg).  I will be discussing real estate principles concerning easements.

October 8, 2021 (Laramie, Wyoming)

This event is for attorneys and CPAs and other tax professionals.  I will be providing an up-to-date discussion and analysis of the current status of proposed tax legislation.  I will also be addressing some other estate and tax planning topics of present importance.  You can learn more about this event and register at the following link:

Kansas State University (KSU) Tax Institutes (October 25 – December 14)

The KSU Tax Institutes are two-day Institutes at six locations across the state of Kansas and two, two-day webinars.  This fall I will be team-teaching Day 1 with Paul Neiffer at Garden City, Kansas and Hays, Kansas.  I will also be team teaching Day 2 at those locations with Ross Hirst, retired IRS.  The three of us will also be teaching Webinar No. 1.  The Garden City Institute is on October 25-26.  The Hays Institute is on October 27 and 28.  Webinar No. 1 is on November 3-4. 

The remaining Institutes will be taught on Day 1 by Prof. Edward A. Morse of Creighton University School of Law and Daniel Waters of Lamson Dugan & Murray in Omaha, Nebraska.  Prof. Morse is also a CPA and is an excellent presenter on tax topics for CPAs and other tax professionals.  He teaches various tax classes at the law school and also operates a farm east of Omaha in Iowa.  Daniel has an extensive tax and estate/business planning practice.  Ross Hirst and I will team teach Day 2 at each of these locations.

The dates for these five Institutes are:  Salina, Kansas on November 8-9; Lawrence, Kansas November 9-10; Wichita, Kansas on November 22-23; Pittsburg, Kansas on December 8-9; and Webinar No. 2 on December 13-14.

You can learn more about the KSU Tax Institutes and the topics that we will be covering, and registration information at the following link:

December 16-17 (San Angelo, Texas)

At this two-day conference, I will be focusing on critical income tax and estate/business planning issues.  This event is sponsored by the San Angelo Chapter of the Texas Society of CPAs. 


I also have other in-house training events scheduled this fall for various CPA firms. 


I look forward to seeing you in-person at one of the events this fall.  If you can’t attend in-person, some of the events are online, as noted.   Also, thanks to those listening to the daily two-minute syndicated radio program that airs across the country.  Air plays were up about 30 percent in August compared to July.  

September 27, 2021 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Monday, September 20, 2021

Estate Planning to Protect Assets From Creditors – Dancing On the Line Between Legitimacy and Fraud


According to the U.S. Financial Education Foundation, it is estimated that over 40 million lawsuits are filed annually.  Thus, for some persons, including farmers and ranchers, an important aspect of estate and business planning is asset protection.  The goal of asset protection planning is to protect property from claims of creditors by restructuring asset ownership to limit liability risk in the event of a lawsuit.  Done correctly the restructuring creates a degree of separation between the assets and their owner to properly shelter them from creditors. 

A significant key to asset protection planning is timing.  Once a lawsuit has been filed or is a substantial certainty to be filed with an anticipated adverse outcome for a client, it’s too late to start utilizing legal strategies to shelter assets from potential creditors.  Civil and criminal liability is possible for all parties involved as well as malpractice liability for related ethical violations.  A recent case illustrates the point.

Considerations when engaging in asset protection – it’s the topic of today’s post.

The Attempt To Shield an Iowa Farm From Creditors – Recent Case

Facts of the case.  A recent federal court case from Iowa illustrates the serious problems that can result for parties and their professional counsel that engage in asset protection if not done properly.  Kruse v. Repp, No. 4:19-cv-00106-SMR-SBJ, 2021 U.S. Dist. LEXIS 114013 (S.D. Iowa Jun. 15, 2021), involves three interrelated lawsuits. The plaintiff was injured in an automobile accident, which left her in need of 24-hour care likely for the rest of her life. The accident was Weller’s fault and, due to his experience as an insurance agent, he knew he would face a large claim for the plaintiff’s injuries. Weller told family members he feared losing the family farm as a result of the impending lawsuit. After determining his liability exposure exceeded his insurance coverage, he sought legal counsel to help him shelter the assets from a potential claim.  Based on the initial legal advice he received, less than two months after the accident Weller transferred the farm and other assets into a revocable trust and made several cash transfers to family members exceeding $100,000.  He notified the defendant bank that he had recently been found at-fault in a major motor vehicle accident and that he faced liability exposure that exceeded his insurance coverage.  However, the bank began working with him to weaken the appearance of his financial condition. 

After leaving his previous attorney when settlement negotiations broke down, Weller met the defendant attorney (Repp) two months before the personal injury trial was set to begin.  Repp holds himself out having a practice focusing on estate planning and that he “counsels and advises clients with respect to the management of their wealth to minimize estate and inheritance taxes through the use of asset protection trusts.”  Weller later testified at trial that he told Repp of his previous attempts to shield himself from judgment by transferring his assets to a revocable trust and making cash "gifts."  To this end, Weller testified he went to Repp specifically because Repp holds himself out as an "asset protection attorney."  Repp told Weller that his previous attorney had given bad legal advice and that the cash gifts were inappropriate transfers of wealth.  Repp then created an LLC and had Weller transfer the farm to the LLC by quitclaim deed to protect it from the anticipated personal injury judgment.  The deed was accompanied with a trustee’s affidavit that Repp prepared and notarized stating that the Trust was conveying the real estate "free and clear of any adverse claim."  This transaction was completed approximately one month before trial in the personal injury case was scheduled to begin.

State court judgment.  The plaintiff was awarded approximately $2,557,100 million in damages in the personal injury lawsuit. Judgment was entered on May 1, 2015. In early 2016, Repp helped Weller prepare a financial statement reporting the value of the farmland as an LLC asset.  The bank helped Weller refinance mortgages on the farm, which listed the farm as Weller’s personal asset, and issued promissory notes that were secured by the mortgage. This led to the plaintiff suing Weller on March 3,2016, for fraudulent transfers intended to shield Weller’s assets from the personal injury judgment. The state trial court determined that the LLC was formed with the intent to shield Weller’s assets from the plaintiff levying her judgment lien against his real estate. The state trial court, on March 13, 2018, found in the plaintiff’s favor and held that all assets of the LLC remained available to the plaintiff for satisfaction of the judgment.

Claims for personal liability and removal to federal court.  The plaintiff sued the bank and Repp in early 2019, alleging that they both knowingly participated in Weller’s fraudulent attempts to shield his assets from the plaintiff’s judgment.  Specifically, the plaintiff claimed that fraudulent transfers had been made under state law; that the defendants conducted or otherwise participated in the conduct of a racketeering enterprise with the purpose of defrauding the plaintiff; and that the defendants tortiously interfered with her ability to collect the personal injury award. The defendants removed the case to federal court and claimed that the undisputed facts entitled them to judgment as a matter of law on various claims.  The federal court largely denied the defendants’ claims in early 2020, and the case proceeded.

Under the fraudulent transfer state law claim, the defendants argued that the plaintiff could not prove that they knew of Weller’s fraudulent intent or that they helped in his scheme to shield his assets from the plaintiff’s judgment. The court strongly disagreed pointing to Weller’s disclosures to the bank that he was at fault in a major motor vehicle accident and the bank’s subsequent dealings. The trial court also noted that the bank allowed Weller to inconsistently classify the farm as both a personal and LLC asset. The court determined a factfinder could reasonably infer that the bank had knowledge of Weller’s intent to defraud the plaintiff. The bank argued that the plaintiff did not show prejudice by reason of priority in interest. The court noted that the bank’s argument was based on a false premise, and that prejudice may be shown if a debtor encumbers property to create the appearance of over-securitization. Thus, the court determined that because critical questions existed concerning the effect of Weller’s refinancing with the bank, summary judgment under the fraudulent transfer claim was precluded.

RICO claim.   The Racketeering Influenced and Corrupt Organizations Act (RICO) provides for criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization.  18 U.S.C. §§1861-1868.   Under RICO, a person who has committed "at least two acts of racketeering activity" within a 10-year period can be charged with “racketeering” if the acts are related in a specified manner to an "enterprise."  Those found guilty of racketeering can be fined up to $25,000 and sentenced to 20 years in prison per racketeering count.  18 U.S.C. §924; §1963.  In addition, the racketeer must forfeit all ill-gotten gains and interest in any business gained through a pattern of "racketeering activity." 

RICO also permits a private individual "damaged in his business or property" by a "racketeer" to file a civil suit.  The plaintiff must prove the existence of an "enterprise." There must be one of four specified relationships between the defendant(s) and the enterprise: (1) either the defendant(s) invested the proceeds of the pattern of racketeering activity into the enterprise; (2) the defendant(s) acquired or maintained an interest in, or control of, the enterprise through the pattern of racketeering activity;  (3) the defendant(s) conducted or participated in the affairs of the enterprise "through" the pattern of racketeering activity; or (4) the defendant(s) conspired to do one of the first three. 18 U.S.C. §1962(a)-(d).  In essence, the enterprise is either the 'prize,' 'instrument,' 'victim,' or 'perpetrator' of the racketeers.  See National Organization for Women v. Scheidler, 510 U.S. 249 (1994).  RICO also allows for the recovery of damages that are triple the amount of the actual or compensatory damages. 

Repp claimed that there was no common purpose among himself and Weller to constitute an associated in-fact enterprise, and if there was, that the enterprise required a common purpose that is fraudulent, illicit, or unlawful.  He asserted that these elements did not exist. The court disagreed, expressing disbelief at the assertions, and noted that RICO liability is extended to those who play some role in directing the group to further its shared goals, unlawful or not, so long as those goals are carried out through a pattern of criminal behavior.

The court stated as follows:

“They nevertheless prepared legal documents transferring his [Weller’s] property to a corporate form that posed significant barriers to any recovery by Kruse, assisted Weller in the creation of financial statements that painted an inaccurate picture of Weller's finances, and defended the legality of the conveyances in court. In both cases, the facts are sufficient for a reasonable jury to find Defendants tacitly agreed to participate in Weller's scheme to defraud Kruse and conspired to further the purpose of a RICO enterprise.”

Thus, the court determined that sufficient evidence existed for a fact-finder to possibly infer that Weller, Repp and the bank shared an unlawful purpose to shield Weller’s assets from the plaintiff’s looming judgment.

The court further stated:

“…Repp changed the course of the effort to defraud Kruse and "joined in a collaborative undertaking with the objective of releasing [Weller] from the financial encumbrance visited upon him by [Kruse]'s judgment."… Reversing the mechanisms put in place by Weller's prior attorney, Repp organized Weller Farms, filed a trustee's affidavit that ignored Kruse's unliquidated tort claim, directed Weller to execute a quit claim deed conveying his real estate to the entity, and assisted Weller in preparing financial statements that embedded multiple "ambiguities" that devalued Weller's financial picture during settlement negotiations. [Repp} then defended the transactions in the fraudulent transfer action, devising a legal strategy in an attempt to persuade the state court to validate the transactions. In essence, Repp agreed Weller's previous efforts were inappropriate. All of his advice that followed was consistent with the expertise in asset protection that Repp, not Weller, possessed.”

The defendants also claimed that there was no pattern of racketeering activity and that they had not directed the conduct of the enterprise’s affairs. The court disagreed, noting that the evidence of three years’ worth of communications led to a reasonable inference that a pattern of racketeering existed. Repp also asserted that he provided nothing more than ordinary legal services such that his conduct played no part in directing the affairs of Weller or the LLC. The court again disagreed and determined that factual issues remained concerning whether Repp played some part in directing the affairs of Weller’s fraudulent scheme.

The court lastly noted that for liability to arise from a RICO conspiracy, the plaintiff only needs to establish a tacit understanding between the defendants for conspirators to be liable for the acts of their co-conspirators. The defendants argued they did not know the full extent of Weller’s fraudulent scheme and were mere scriveners of information provided by him. The court disagreed, stating as follows:

“They claim he was a mere scrivener of information provided by Weller and intended only to assist Weller in setting up a farming entity by which to bring his son into the family business. That characterization, in light of the circumstances surrounding his [Repp’s] relationship with Weller, present genuine factual issues and credibility determinations on whether Repp played "some part" in directing the affairs of Weller's fraudulent scheme and require a jury to resolve.”

The trial court determined there was a genuine issue of material fact as to whether the defendants knew of or were willfully blind to the scope of the RICO enterprise. Therefore, the trial court denied summary judgment on the RICO charges and determined the defendants’ position was a question for the jury.

Tortious interference with economic expectancy.  On the common law tortious interference claim, the defendants argued that the Iowa Supreme Court had not yet recognized tortious interference with an economic expectancy as a cause of action. The Second Restatement of Torts describes this action as, “one who intentionally deprives another of his legally protected property interest or causes injury to the interest.”  Second Restatement of Torts §871.  A party that does this is subject to liability if the party’s conduct is generally culpable and not justifiable under the circumstances. The court determined that although the Iowa Supreme Court had not yet considered this issue, it would likely recognize this tort as a prima facie tort in the context of fraudulent financial practices.

Repp argued that the plaintiff failed to show that his predominant intent in forming the LLC was to injure the plaintiff’s property interest. However, the court noted that the majority rule governing a prima facie tort does not require that the defendant be motivated predominantly to injure the plaintiff. The court pointed out that the facts led to a reasonable inference that Repp knew the transfer of Weller’s assets to the LLC would interfere with the plaintiff’s collection efforts. The bank made a similar argument, which the court rejected, resulting in summary judgment on the tortious interference claim being denied. Thus, the jury will need to determine whether the defendants were more than mere scriveners, and thus subject to tort liability.

Note:  It’s important to remember that the case was positioned on a motion for summary judgment.  That’s a fairly low hurdle for the plaintiff to clear, especially when the evidence on such a motion is viewed in the light most favorably to the non-moving party (the plaintiff in the Iowa case).

Ethical Considerations

The asset protection legal field is fraught with ethical “landmines” for attorneys.  I asked Prof. Shawn Leisinger, Associate Dean for Centers and External Programs at Washburn University School of Law to comment on some of the possible ethical issues involved in the Iowa case.  Shawn teaches ethics at the law school and also sometimes makes ethics presentations at my events around the country.  The following comments are his.

It is fairly well settled that attorneys generally, and certainly attorneys who specialize in taxation issues, may advise clients in the area of “tax avoidance” but must not have that same advice go over the line into “tax evasion.”  This concept frames the ethical guidelines that attorneys must consider when they work with their clients on asset ownership structuring, whether for tax or  liability purposes.  In the Iowa case, a fairly common business entity formation asset protection tactic arguably stepped over the line that falls in that gray area between avoidance and evasion.

While each state has its own version of ethical rules that the attorneys licensed their must follow, these rules generally incorporate or adapt what are known as the Model Rules of Professional Conduct promulgated by the American Bar Association.  In the case at hand a number of these rules would warrant consideration but we only touch on a few of those that apply most directly here. 

MRPC Rule 2.1: Advisor. Under this rule, attorneys are deemed to be counselors who are advised, “In representing a client, a lawyer shall exercise professional judgment and render candid advice.  In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client’s situation.”  This rule is arguably permissive and would suggest that Repp should have had a candid conversation with the client about the steps being taken to protect the client’s assets and the risks and realities of those steps.  We are not privy to the private conversations that occurred in this case, however. 

MRPC Rule 8.4: Misconduct.  This rule sets forth the specific definitions of attorney misconduct that in turn warrant and could support attorney discipline under the rules.  The rule provides, “It is professional misconduct for a lawyer to: … (b) commit a criminal act that reflects adversely on the lawyer’s honesty, trustworthiness or fitness as a lawyer in other respects; (c) engage in conduct involving dishonesty, fraud, deceit or misrepresentation; (d) engage in conduct that is prejudicial to the administration of justice; …”. 

While the “criminal act” under (b) might seem a higher bar to hit in the asset planning realm, as one reads the facts of the Iowa case it is fairly easy to conclude that the multiple steps taken by and with multiple parties to try to shelter the assets noted, and the continuing interaction with the bankers and others involved in the property transfers, hit either the disjunctive “dishonesty” or “misrepresentation” standards in section (c).  I note section (d) as well due to the fact that in many of these kinds of cases a court may well conclude that the catch-all of “acts prejudicial to the administration of justice” certainly must define the actions if one might argue the other provisions do not fit.   

From an ethical perspective one should also know that attorneys have an obligation to report unethical conduct of other attorneys under the rules.  Rule 8.3 provides, “A lawyer who knows that another lawyer has committed a violation of the Rule of Professional Conduct that raises a substantial question as to that lawyer’s honesty, trustworthiness or fitness as a lawyer in other respects, shall inform the appropriate professional authority”.  

An important point to remember is that the ethical perspective on these cases is largely fact specific and subject to argument and interpretation of when and how that gray line may have been crossed.          


To put the Iowa case in perspective and provide further guidance for others engaged in asset protection strategies, I asked Timothy P. O’Sullivan, a partner in Foulston Siefkin LLP, a law firm in Wichita, Kansas to comment.  Among other things, Tim is a Fellow in the American College of Trust and Estate Counsel and is an adjunct professor of law at Washburn University School of Law.  The following comments are his.

This Iowa decision puts into stark relief the personal and professional exposure asset protection attorneys may have when advising clients of estate planning techniques to protect their assets from creditor claims.  Most estate planning attorneys whose practice extends into this area have given thought, but often not enough, to the possibility that they can be held in violation of attorney professional conduct rules by participating in or structuring a transaction that is a fraudulent conveyance by their clients, as well as risk possible personal liability for damages by an aggrieved creditor.  Although there does not appear to be more than a modicum of cases to date imposing such liability against assisting third parties, such exposure is nonetheless present. The exposure may derive from a state’s version of the Uniform Fraudulent Transfer Act, which has been enacted in the vast majority of states, which otherwise would not have included a remedy against a third party involved in the transaction. 

As noted in the Iowa case, other potential legal authority for imposing personal liability rests more solidly and broadly under the federal RICO Act as an alleged “civil conspiracy,” or (as the court also noted) an actionable tort by an aggrieved creditor under the Second Restatement of Torts for assisting in the fraudulent act.   These principles extend well beyond applicable state law.

The potential liability  of estate planning professionals generally requires not only  that the creditor incur damages as a result, but also actual knowledge as to the principal purpose of the estate planning device used, and that the client had a debt (which need not be liquidated) the satisfaction of which  would be avoided, delayed, or hindered by the implementation of a specific asset protection plan. The plan could be as simple as gifting assets away or it could be a plan to make the claim more arduous or unlikely to be satisfied, such as putting exposed non-exempt assets in an LLC or restructuring debt to the detriment of a claim by a creditor.  All three of these strategies were present in the Iowa case.  As noted by the court, there is no defense against the personal liability of an attorney that the attorney was a mere scrivener of his client’s plan if the attorney is assisting in implementing a strategy that the attorney knows to be fraudulent. 

For professionals engaging in asset protection strategies, there can be no more important prophylactic measure against professional liability exposure than gaining sufficient knowledge of the client, the client’s assets and liabilities, and most importantly, determining ab initio whether the client is seeking advice as protection against a specific currently existing, or problematic current creditor.  Perhaps the client is simply desiring to protect against potential future creditors in general due to the nature of the client’s assets or personal, business or professional activities.  If so, asset protection planning is entirely appropriate.  But, determining the client’s purposes up-front is a must.

The use of detailed salient client questionnaires and requisite financial statements that gather complete and relevant legal and financial information from clients is most desirable.  Checking clients’ references and gleaning knowledge of a client’s background can also serve as valuable indicia in determining a client’s honesty and intent in seeking asset protection advice. In all events, the attorney’s engagement letter should make it clear that the attorney is relying on the accuracy of the client’s disclosures and submitted information in recommending or implementing any asset protection plan and further clearly stating that the attorney will not participate, or continue to represent the client, in any plan that might constitute a fraudulent transfer.

Although the Iowa case involved a decision that denied summary judgment in favor of the defendants, the court’s analysis of the legal underpinnings make it quite evident as to the third-party liability exposure of the defendants, including not only the debtor’s attorneys involved in setting up the LLC, but also the debtor’s bank in favorably restructuring the debtor’s debt to the creditors’ disadvantage, should the factual assertions of the plaintiffs be proven at trial.

September 20, 2021 in Business Planning, Criminal Liabilities, Estate Planning | Permalink | Comments (0)

Saturday, September 18, 2021

The Future of Ag Tax Policy – Where Is It Headed?


The Tax writing committees in the Congress are busy trying to figure out ways to pick your pocket through the tax Code to pay for the massive spending legislation that is currently proposed and being debated.  If and when any legislative proposals become law, important planning steps will be necessary for many farm and ranch families.  But, all hinges on just exactly what changes become law.  It’s difficult, if not impossible, to plan for changes that are unknown.  That’s particularly the case if tax changes are done on a retroactive basis. 

In today’s post, I highlight where the areas of change might occur by referring you to a lengthy article resulting from interviews with farm media in recent days.  Also, I invite you to attend either in-person or online, my upcoming 4-hour seminar on the tax landscape on October 8.  The in-person presentation will be at the University of Wyoming College of Law in Laramie.  The event will also be simulcast over the web.  I will provide the most up-to-date information of where legislative proposals are at as of that time and the prospects for passage, and planning steps that need to be taken.

The current tax landscape and the upcoming October 8 seminar – it’s the topic of today’s post.

Possible Changes

In the article in which I am quoted that is linked below, I attach percentages (as of September 17, 2021) as to likelihood of whether particular current tax Code provisions would change.  The areas that I address include the following:

  • The federal estate tax exemption
  • “Stepped-up” basis at death
  • Income tax rates
  • The deduction for state and local taxes
  • A cap on itemized deductions
  • The capital gains tax rate(s)

Stepped-Up Basis

As for the stepped-up basis issue and the possible elimination of modification of the rule, the Congress has tried this approach before.  The long-standing rule has been that the basis of property that is included in a decedent’s estate for tax purposes gets a basis equal to the fair market value of the property in the hands of the heir(s).  I.R.C. §1014.  But, for property that is gifted, the donee generally receives an income tax basis equal to the donor’s basis at the time of the gift.  This is known as a “carryover basis.”  The Tax Reform Act of 1976 expanded carryover basis to include dispositions at death.  Pub. L. No. 94-455, Sec. 2005, 90 Stat. 1872 (1976).  Section 2005(a)(1) of that law retained the old step-up/step-down (fair market value basis) rule of I.R.C. Sec. 1014 in the case of a decedent dying before January 1, 1977.  The Revenue Act of 1978 delayed the effective date of I.R.C. Sec. 1023 (the new carryover basis rule) to decedents dying after 1979, and the non-application date of I.R.C. Sec. 1014 (the old step-up basis rule), to estates of decedents dying before January 1, 1980.  Pub. L. No. 95-600, Sec. 515, 82 Stat. 2884.  The new carryover basis rule of I.R.C. §1023 was repealed by Pub. L. No. 96-223, Sec. 401, 94 Stat. 229 (1980).   This amendment was made effective for decedents dying after 1976.  The date on this repeal amendment is April. 2, 1980.

As of this writing, it appears that the Congress will not change the existing fair market value basis at death rule.  The chairman of the House Ways and Means committee has indicated that the votes are not there to change the rule.  That’s good news for farmers and ranchers and tax practitioners – the administrative burden of changing to a carryover over basis would be extensive.

Corporate Tax and I.R.C. §199A

Corporate tax.  Presently, the proposal is to increase the corporate tax to 26.5 percent on income exceeding $5 million from its current 21 percent rate.  That would amount to a 25.5 percent rate increase at the federal level that corporations would, depending on the competitive structure of their market, pass through to consumers in the form of higher prices.  On top of the 26.5 percent rate would be any state-level corporate tax.  The current federal corporate income tax rate puts the United States near the middle of the pack in comparison with its Organisation for Economic Co-operation and Development peer countries.  The proposed change would give the U.S. one of the highest corporate tax rates of the OECD countries. The result would be a drop in investment in U.S. companies and cause some firms to locate outside the U.S., taking jobs with them.  Also, if the corporate rate is increased, it’s not likely that the various tax deductions and other favorable corporate tax provisions that the Tax Cuts and Jobs Act removed, would not be restored. 

Qualified Business Income Deduction (QBID).  The QBID of I.R.C. §199A, under the current House proposal, the QBID would be limited to a $500,000 deduction (joint), $400,000 (single) and $250,000 (MFS).  It would be capped at $10,000 for a trust or an estate.  For farmers that are patrons of qualified cooperatives the amount passed through from the cooperative would not be limited.  The QBID is presently 20 percent of business income.  There is “talk” on the Senate side of eliminating the QBID, but retaining any amount passed through to a patron from a cooperative. Either proposal, if enacted, would result in a significant tax increase for many farmers. 

For discussion of the other major tax proposals, you can read my comments in the article linked here:

Wyoming Seminar

As mentioned above, I will be addressing the legislative tax proposals and providing possible planning steps at a seminar to be held at the University of Wyoming College of Law in Laramie on October 8, 2021.  You may attend either in person or online.  For more information the October 8 event, you may click here:


The future of tax policy for agriculture is of critical importance at the present time.  Make sure you are staying up with the developments. 

September 18, 2021 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Wednesday, September 15, 2021

Gifting Pre-Death (Partnership Interests) – Part Three


In the Part One of this series, I discussed the basics rules governing gifts made during life and the present interest annual exclusion.  In Part Two, I expanded the present interest gifting discussion to gifts of entity interests and how to qualify the gifts for present interest exclusions.  In today’s Part Three the attention turns to how to report gifts of interests in a partnership for tax purposes. 

The tax reporting of gifted partnership interests – it’s the topic of today’s post.

Basic Rules Applied

Often no issues.  From an income tax standpoint, the donee does not recognize income (or loss) on the value of gifted property.  The gift, however, can trigger gift tax if the amount of the gift exceeds the present interest annual exclusion (presently $15,000 per donee, per year) or is not of a present interest of any amount. In that situation, Form 709 must be filed by April 15 of the year following the year in which the taxable gift was made. But, as noted in Part One, gift tax is often not due because the tax can be offset by unified credit. But remember, even if the credit is used to fully offset gift tax, Form 709 must be filed to show the amount of the taxable gift and the offsetting credit reducing the taxable amount to zero.

Valuing gifts for tax purposes.  If gift tax is imposed, it is calculated on the fair market value (FMV) of the gifted property less the amount of debt (if any) from which the donor is relieved. Applying those principles in the partnership context, the fair market value of a partnership interest would need to be determined, as well as the donor’s share of any partnership liabilities.  If the gifted partnership interest relieves the donor of more debt than the donor has income tax basis in the partnership interest, the excess is treated as an amount realized in a deemed sale transaction.  In that event, the donor must recognize gain.  Treas. Reg. §1.1001-2(a). 

Gain Recognition on Gift of a Partnership Interest

For gifted partnership interests, gain recognition is common when the donor has a negative tax basis capital account.  A partner’s tax basis capital account balance generally equals the amount of cash and tax basis of property that the partner contributes to the partnership, increased by allocations of taxable income to the partner, decreased by allocations of taxable loss to the partner, and decreased by the amount of cash or the tax basis of property distributed by the partnership to the partner.  If the result of all of these adjustments is a negative amount, the partner has a negative tax basis capital account and is more likely to have gain recognition upon the gift of a partnership interest. 

Note:  For tax years ending on or after 2020 partnerships must report each partner’s capital account on a tax basis.  For prior years, a partnership could report partner capital accounts on some other basis (such as GAAP) which limited the ability of the IRS to identify potentially taxable situations.

Depending on whether the “hot asset” rules of I.R.C. §751 apply, some of the gain could be taxed at ordinary income rates. IRC §751 requires recognition of gain from "hot assets" as ordinary income. Under §751(b), "hot assets" include unrealized receivables, substantially appreciated inventory and depreciation recapture. Any amount of capital gain triggered by the gifted partnership interest will be either short-term or long-term under the normal rules. 


Frank has structured his farming operation as a general partnership.  Assume that his tax basis capital account is negative $200,000 and his share of partnership liabilities is $300,000, and the FMV of his interest in the partnership assets is $400,000.  For succession planning purposes, Frank wants to gift his partnership interest to his son, Fred. Frank needs to know both the gift tax and income tax consequences of gifting his partnership interest to Fred.  

The amount of the taxable gift is the difference in the FMV of Frank’s share of the partnership assets and his share  of partnership debt he is being relieved of.  Thus, the amount of the gift is $100,000.  Assuming that the gift qualifies for the present interest annual exclusion (see Part 2 of this series), the taxable gift would be $85,000.  That amount could be fully offset by the estate and gift tax unified credit (assuming Frank has enough currently remaining) resulting in no gift tax liability.  Form 709 would need to be filed by April 15 of the year following the year of the gift. 

On the income tax side of things, the gift of the partnership interest relieved Frank of his share of partnership liabilities of $300,000.  From that amount Frank subtracts the adjusted basis of his partnership interest – that’s Frank’s tax basis capital account value of negative $200,000 plus his share of partnership liabilities of $300,000.  Thus, from the debt relief of $300,000, Frank subtracts $100,000.  The result is that Frank has $200,000 of gain associated with a deemed sale of the partnership interest.   

The amount of gain that Frank recognizes on the gift of the partnership interest is added to Frank’s basis in his interest for determining Fred’s basis. Fred then has a basis equal to the amount realized (the amount of debt relief) in the deemed sale. Treas. Reg. §1.1015-4(a). Fred’s tax basis capital account begins at zero, representing Frank’s negative capital account of $200,000 plus $200,000 gain recognized by Frank. Another way of looking at this is the tax basis of Frank’s share of the partnership assets was $100,000, plus Frank recognized gain of $200,000, reduced by Frank’s share of the partnership debt assumed by Fred of $300,000.

Note:  One exception to the general rule of carryover basis is if the donor’s pays any gift tax on the gift.  See I.R.C. §§742 and 1015. 

Note:  If the FMV of a partnership interest is less than the partner's basis at the time of the gift, for purposes of determining the donee's loss on a subsequent disposition, the donee's basis in the interest is the FMV of the partnership interest at the time of the gift.  I.R.C. §1015(a). 

Partnership-Level Impact

Basis adjustment.  If a gifting partner recognizes gain on the deemed sale of the partnership interest and the partnership had an I.R.C. §754 election in place, the partnership will need to adjust the basis of its assets to reflect the amount of the gain.

Transfer to family members.  If a partnership interest is purchased by a family member, the transfer is subject to the family partnership rules of I.R.C. §704(e)(2). For this purpose, a “family member” is defined as the donor’s spouse, ancestors and lineal descendants and any trusts for the primary benefit of such persons.  If the rules are triggered, the transfers is treated as if it was created by gift from the seller, and the fair market value of the purchased interest is considered to be donated capital. This rule is designed to bar the shifting of income and property appreciation from higher-bracket taxpayers to lower-bracket taxpayers by requiring income produced by capital to be taxed to the true owner of that capital. The rule is also designed to ensure that services are taxed to the person performing the services.  If the IRS deems the rules to have been violated it may reallocate income between partners (or determined that a partner is not really a partner) for income tax purposes.   

Valuation discounts.  As noted in Part 2, gifts of partnership interests to family members are often subject to valuation discounts to reflect lack of marketability or minority interest.  Thus, careful structuring of partnerships and transferring of partnership interests involving family members must be cautiously and carefully undertaken to avoid IRS objection. 


Transitioning the farming or ranching business to the next generation is difficult from a technical perspective.  But those difficulties should not prevent farm and ranch families from doing appropriate planning to ensure that a succession plan is in place to help assist the future economic success of the family business.

September 15, 2021 in Business Planning, Income Tax | Permalink | Comments (0)

Monday, September 13, 2021

Gifting Assets Pre-Death (Entity Interests) – Part Two


In Part One of this series, I discussed some of the basics with respect to gifting pre-death to facilitate estate planning and/or business succession.  Also covered in Part One was a gifting technique utilizing what is known as the “Crummey demand power” as a means of moving property into trusts for minors and qualifying the gifts for the present interest annual exclusion.  In Part Two, the commentary continues with the use of the Crummey gifting technique with respect to entity interests.

Gifting interests in closely-held entities – it’s the topic of today’s article.

Using Crummey-Type Demand Powers in the Entity Context – Significant Cases

Crummey-type demand powers may also be relevant in the context of gifted interests in closely-held entities. From a present-interest gifting standpoint, the issue is whether there are substantial restrictions on the transferred interests such that the donee does not have a present beneficial interest in the gifted property. If so, the present interest annual exclusion is not available for the gifted interests.  The courts have set forth markers that provide guidance.

The Hackl case.  In Hackl v. Comr., 118 T.C. 279 (2002), the taxpayer purchased two tree farms (consisting of about 10,000 acres) worth approximately $4.5 million. He contributed the farms along with another $8 million in cash and securities to Treeco, LLC (“Treeco”), and had an investment goal of long-term growth (the trees were largely unmerchantable timber).  The actual tree farming activities were conducted via a separate entity.   The taxpayer and his wife initially owned all of Treeco’s interests, with the taxpayer serving as Treeco’s manager. Under the LLC operating agreement, the manager could serve for life (or until he resigned, was removed or became incapacitated) and could also dissolve the LLC. The operating agreement also specified that the manager controlled any financial distributions and members needed the manager’s approval to withdraw from the company or sell their shares. As for cash distributions, the operating agreement specified that the taxpayer, as manager, “may direct that the Available Cash, if any, be distributed to the members pro rata in accordance with their respective percentage interests.” No member could transfer their respective interest unless the taxpayer gave prior approval. If a member made an unauthorized transfer of shares, the transferee would only receive the economic rights associated with the shares – no membership or voting rights transferred. In addition, before dissolution, no member could withdraw their respective capital contribution, unless the taxpayer approved otherwise. It also took an 80 percent majority to amend Treeco’s articles of organization and operating agreement and dissolve Treeco after the taxpayer ceased being the manager.

Upon Treeco’s creation, the taxpayer and his wife began transferring voting and nonvoting shares of Treeco to their eight children, the spouses of their children and a trust established for their 25 minor grandchildren. Eventually, a majority of Treeco’s voting shares were held by the children and their spouses. The taxpayer and his wife elected split-gift treatment, and reported the transfers as present interest gifts covered by the annual exclusion ($10,000 per donee, per year at the time).  However, the IRS disallowed all of the annual exclusions, taking the position that the transfers involved gifts of future interests. The taxpayer claimed that the gifts were present interests because all legal rights in the gifted property were given up, but IRS viewed the gifted interests as still being subject to substantial restrictions that did not provide the donees with a substantial present economic benefit. As a result, the IRS position was that the gifts were future interests’ ineligible for the exclusion.

The Tax Court agreed with the IRS that the transfers were gifts of future interests that were not eligible for annual exclusions. The Tax Court determined that the proper standard for determining present interest gift qualification was established in Fondren, 324 U.S. 18 (1945), where the key question was whether the transferee received an immediate “substantial present economic benefit” from the gift. To answer that question, Treeco’s operating agreement became the focus of attention. On that point, the Tax Court noted that Treeco’s operating agreement required the donees to get the taxpayer’s permission before transferring their interests and gave the taxpayer the retained power to either make or not make cash distributions to the donees. In addition, the donees couldn’t withdraw their capital accounts or redeem their interests without the taxpayer’s approval, and none of them, acting alone, could dissolve Treeco.  Based on those restrictions, the Tax Court determined that the donees did not realize any present economic benefit from the gifted interests. Instead, the restrictive nature of Treeco’s operating agreement “forclosed the ability of the donees presently to access any substantial economic or financial benefit that might be represented by the units.”  Thus, the gifts, while outright, were not gifts of present interests. See also Treas. Reg. §25.2503-3. On appeal, the U.S. Court of Appeals for the Seventh Circuit agreed. Hackl v. Comr., 335 F.3d 664 (7th Cir. 2003).

The Price and Fisher cases.  In 2010, the Tax Court reached the same conclusion in a case that was factually identical to Hackl where the donees lacked the ability to “presently to access any substantial economic or financial benefit that might be represented by the ownership units.”  Price v. Comr., T.C. Memo. 2010-2.  Likewise, a federal district court reached the same result in Fisher v. United States, No. 1:08-cv-0908-LJM-TAB, 2010 U.S. Dist. LEXIS 23380 (S.D. Ind. Mar. 11, 2010).  In Fisher, the taxpayers transferred 4.762 percent membership interests in an LLC to each of their seven children (one-third total interest in the LLC). The LLC’s primary asset was undeveloped land bordering Lake Michigan. The taxpayers claimed present interest annual exclusions for the gifts, but on audit, IRS disagreed on the basis that the gifts were future interests and assessed over a $650,000 gift tax deficiency.

The Fisher court noted that the LLC’s operating agreement specified that any potential of the LLC’s capital proceeds to the taxpayers’ children was subject to numerous contingencies that were completely within the LLC general manager’s discretion. So, consistent with Hackl, the court determined that the right of the children to receive distributions of the LLC’s capital proceeds did not involve a right to a “substantial present economic benefit.” As for the taxpayers’ argument that the children had the unrestricted right to possess, use and enjoy the LLC’s primary asset, the court noted that there was nothing in the LLC’s operating agreement that indicated such rights were transferred to the children when they became owners of the LLC interests. Finally, the court rejected the taxpayers’ argument that the children could unilaterally transfer their LLC interests. The court noted that such transfers could only be made if certain conditions were satisfied – including the LLC’s right of first refusal which was designed to keep the LLC interests within the family. Even if such a transfer stayed within the family, the LLC operating agreement still subjected the transfer to substantial restrictions.  The result was that the court upheld the IRS’ determination that the gifts were not present interest gifts, just as the similarly structured transfers in Hackl and Price didn’t qualify as present interest gifts.

The Wimmer case.  In Estate of Wimmer v. Comr., T.C. Memo. 2012-157, the decedent and his wife established an FLP to invest in land and stocks. The decedent also established a trust for his grandchildren. The trust was a limited partner of the FLP and was set-up as a Crummey Trust. The trust, as a limited partner, received dividends. The decedent and his wife were limited partners and they made gifts of partial limited partner interests on an annual basis consistent with the present interest gift tax exclusion. The gifts of the limited partner interests were significantly restricted, however, under the FLP agreement.

The IRS claimed that the gifts of limited partner interests were not present interests and, as such, were not excluded from the decedent's gross estate. However, the Tax Court concluded that while the donees of limited partner interests did not receive an unrestricted right to the interests, they did receive the right to the income attributable to those interests. The Tax Court also noted that the estate had the burden of establishing that the FLP would generate income and that some portion of that income would flow to the donees on a consistent basis and that the portion could be ascertained. Importantly, the FLP held dividend-producing, publicly traded stock. Thus, the court determined that the income from the stock flowed steadily and was ascertainable. Accordingly, the limited partners received present interests and the gifted amounts were excluded from decedent's estate.  Based on Wimmer, an FLP that makes distributions on at least an annual basis should allow the use of present interest gifting. 

Planning Implications

If a partnership/LLC places sufficient restrictions on gifted interests or the general partner has unfettered discretion to make or withhold distributions, any gift of an interest in the partnership/LLC may be treated as a gift of a future interest that does not qualify for the annual gift tax exclusion.  See, e.g., Tech. Adv. Memo. 9751003 (Aug. 28, 1997).  In Hackl, Price and Fisher, there was no question that the donees had the immediate possession of the gifted interests.  However, even if such interests have vested, the Tax Court (and the appellate court in Hackl) listed numerous factors that led to the conclusion that the gifted interests were not present interests.  Unfortunately, from an estate and business planning perspective, those same factors are typically drafted into operating agreements with the express purpose of generating valuation discounts for estate and gift tax purposes.

So, there’s a trade-off between annual exclusion gifts and valuation discounts.  But, Wimmer may provide a way around the corner on that problem if the FLP generates income and it can be established that at least some of that income will consistently flow to the donees in ascertainable amounts.  Beyond that, there may be other ways to achieve both present interest status for gifts and valuation discounts for transfer tax purposes.  Clearly, from a present interest perspective, the key is to gift equity interests in an entity that give a donee the right to withdraw from the entity, have less restrictions on sale or transfer and make regular distributions to a donee.  Structuring to also take valuation discounts upon death could include drafting the entity’s operating agreement to specify that transferred interests are subject to put rights allowing the transferee the ability to force the entity or another transferee to repurchase the transferee’s interests at a particular price, after a specified date or upon the occurrence of a specified event. That seemingly provides the done with a present interest while preserving valuation discounts. 

In any event, a combined strategy of present interest gifting of entity interests with valuation discounting requires careful drafting.


Present interest gifting is possible via entity interests.  When valuation discounts upon death are also desired, the structuring and drafting becomes complex.  In Part Three, I will focus on additional income tax considerations involving income tax basis as well as income tax issues associated with gifting partnership interests.

September 13, 2021 in Business Planning, Estate Planning | Permalink | Comments (0)

Friday, September 10, 2021

Gifting Assets Pre-Death - Part One


Proposed legislation that would decrease the federal estate tax exemption and the federal gift tax exemption is raising many concerns among farm and ranch families and associated estate and business planning issues.  For farmers and ranchers desirous of keeping the family business intact for the next generation, questions about gifting assets and business interests to the next generation of owners now are commonplace. 

Gifting assets before death – Part One of a series - It’s the topic of today’s post.

Federal Estate and Gift Tax - Current Structure

The current federal estate and gift tax system is a “coupled” system.  A “unified credit” amount generates and “applicable exclusion” of $11.7 per individual for 2021.  That amount can be used to offset taxable gifts during life or offset taxable estate value at death.  It’s and “either/or” proposition.  Any unused exclusion at the time of death can be “ported” over to the surviving spouse and added to the surviving spouse’s own applicable exclusion amount at death. 

However, some gifts are not “taxable” gifts for purposes of using up the unified credit and, in turn, reducing the amount of asset value that can be excluded from federal estate tax at death.

Gifting – The Present Interest Annual Exclusion

Basics.  “Present interest” gifts are not “taxable” gifts and do not reduce the donor’s unified credit.  The present interest annual exclusion amount is a key component of the federal gift tax.  I.R.C. §2503.  The exclusion is presently $15,000 per donee, per year. That means that a donor can make gifts of up to $15,000 per year, per donee (in cash or an equivalent amount of property) without triggering any gift tax, and without any need to file Form 709 – the federal gift tax return.  

Note:   Spouses can elect split gift treatment regardless of which spouse actually owns the gifted property. With such an election, the spouses are treated as owning the property equally, thereby allowing gifts of up to $30,000 per donee. Also, under I.R.C. §2503(e), an unlimited exclusion is allowed for direct payment of certain educational and medical expenses. In effect, such transfers are not deemed to be gifts.

The exclusion “renews” each year and is not limited by the number of potential donees.  It is only limited by the amount of the donor’s funds and interest in making gifts.  Thus, the exclusion can be a key estate planning tool by facilitating the passage of significant value to others (typically family members) pre-death to aid in the succession of a family business or a reduction in the potential size of the donor’s taxable estate, or both. But, to qualify for the exclusion, the gift must be a gift of a present interest – the exclusion does not apply to future interests.

Note:   A present interest gift is one that the recipient is free to use, enjoy, and benefit from immediately.  A gift of a future interest is one where the recipient doesn't have complete use and enjoyment of it until some future point in time. “Strings” are attached to future interest gifts.

Gifts to minors.  I.R.C. §2503(c) specifies that gifts to persons under age 21 at the time of the gift are not future interests if the property and the income from the gift “may be expended by, or for the benefit of, the donee before attaining the age of 21 years, and will to the extent not so expended, pass to the donee on his attaining the age of 21 years, and in the event the donee dies before attaining…age…21…, be payable to the estate of the donee or as he may appoint under a general power of appointment…”.  This provision contemplates gifts to minors in trust with a trustee appointed to manage the gifted property on the minor’s behalf.  But, to qualify as a present interest, the gift still must be an “outright” gift with no strings attached. 

Whether gifts are present interests that qualify for the annual exclusion has been a particular issue in the context of trust gifts that benefit minors. In 1945, the U.S. Supreme Court decided two such cases. In Fondren v. Comr. 324 U.S. 18 (1945) and Comr. v. Disston, 325 U.S. 442 (1945), the donor created a trust that benefitted a minor. In Fondren, the trustee had the discretion to distribute principal and income for the minor’s support, maintenance and education and, in Disston, the trustee had to apply to the minor’s benefit such income “as may be necessary for…education, comfort, and support.” In both cases, the Court determined that the minor was not entitled to any amount of a “specific and identifiable income stream.” So, no present interest was involved. The gifts were determined to be future interests.

What if a transferee has a right to demand the trust property via a right to withdraw the gifted property from the trust? Is that the same as outright ownership such that the gifted property would qualify the donor for an annual exclusion on a per donee basis?  In 1951, the U.S. Court of Appeals for the Seventh Circuit said “yes” in a case involving an unlimited timeframe in which the withdrawal right could be exercised without any time limit for exercising the right. Kieckhefer v. Comr., 189 F.2d 118 (7th Cir. 1951).  But in 1952 the U.S. Court of Appeals for the Second Circuit said “no” because it wasn’t probable that the minor would need the funds. Stifel v. Comr., 197 F.2d 107 (2d Cir. 1952).  In Stifel, the minor’s access to the gifted property was to be evaluated in accordance with how likely it was that the minor would need the funds and whether a guardian had been appointed.

The “breakthrough” case on the issue of gifts to minors and qualification for the present interest annual exclusion came in 1968.  In that year, the U.S. Circuit Court of Appeals for the Ninth Circuit, in Crummey v. Comr., 397 F.2d 82 (9th Cir. 1968), allowed present interest annual exclusions for gifts to a trust for minors that were subject to the minor’s right to demand withdrawal for a limited timeframe without any need to determine how likely it was that a particular minor beneficiary would actually need the gifted property. Since the issuance of the Crummey decision, the “Crummey demand power” technique has become widely used to assure availability of annual exclusions while minimizing the donee’s access to the gifted property.

Gifting – The Income Tax Basis Issue

In general, property that is included in a decedent’s estate receives an income tax basis in the hands of the heir equal to the fair market value of the property as of the date of the decedent’s deathI.R.C. §1014(a)(1).  However, the rule is different for gifted property.  Generally, a donee takes the donor’s income tax basis in gifted property.  I.R.C. §1015(a).  These different rules are often a significant consideration in estate planning and business transition/succession plans. 

With the current federal estate and gift tax exemption at $11.7 million for decedent’s dying in 2021 and gifts made in 2021, gifting assets to minimize or eliminate potential federal estate tax at death is not part of an estate or succession plan for very many.  But, if a current proposal to reduce the federal estate tax exemption to $3.5 million and peg the gift tax exemption at the $1 million level would become law, then gifting to avoid estate tax would be back in “vogue.”  However, legislation currently under consideration would change the basis rule with respect to inherited property.  The proposal is to limit the fair market at death income tax basis rule to $1 million in appreciated value before death, and apply a “carry-over” basis to any excess.  An exception would apply to farms and ranches that remain in the family and continue to be used as a farm or ranch for at least 10 years following the decedent’s death.  Gifted property would retain the “carry-over” basis rule. 

Another proposal would specify death as an income tax triggering event causing tax to be paid on the appreciated value over $1 million, rather than triggering tax on appreciated value when the heir sells the appreciated property.  If any of these proposals were to become law, the planning horizon would have to be reevaluated for many individuals and small businesses, particularly farming and ranching operations. 

Still another piece of the proposed legislation would limit present interest gifts to $10,000 per donee and $20,000 per donor on an annual (it appears, although this is not entirely clear) basis. 

Note:  At this time, it remains to be seen whether these proposed changes will become law.  There is significant push-back among farm-state legislators from both aisles and small businesses in general.


Even if the rules change surrounding the exemption from federal estate tax and/or the income tax basis rule at death, and/or the timing of taxing appreciation in wealth, gifting of assets during life will still play a role in farm and ranch business/succession planning.  A big part of that planning involves taking advantage of the present interest annual exclusion to avoid reducing the available federal estate tax exemption at death. 

September 10, 2021 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Sunday, September 5, 2021

When Does a Partnership Exist?


The Uniform Partnership Act defines a partnership as an association of two or more persons to carry on as co-owners a business for profit. Uniform Partnership Act, §6.  As an estate planning device, the partnership is generally conceded to be less complex and less costly to organize and maintain than a corporation.  A general partnership is comprised of two or more partners.  There is no such thing as a one-person partnership, but there is no maximum number of partners that can be members of any particular general partnership.

Sometimes interesting legal issues arise as to whether a particular organization is, in fact, a partnership.  If there is a written partnership agreement, that usually settles the question of whether the arrangement is a partnership.  Unfortunately, relatively few farm or ranch business relationships are based upon a written partnership agreement or, as it is expressed in some cases, a set of articles of partnership.  

When does a partnership exist – it’s the topic of today’s post. 

Informality Creates Questions

If there is no written partnership agreement, one of the questions that may arise is whether a landlord/tenant lease arrangement constitutes a partnership.  Unfortunately, the great bulk of farm partnerships are oral.  Because a partnership is an agreement between two or more individuals to carry on as co-owners a business for profit, a partnership generally exists when there is a sharing of net income and losses. See, e.g., In re Estate of Humphreys, No. E2009-00114-COA-R3-CV, 2009 Tenn. App. LEXIS 716 (Tenn. Ct. App. Oct. 28, 2009). This also tracks the U.S. Supreme Court’s definition of a partnership as the sharing of income and gains from the conduct of a business between two or more persons.  Comr. v. Culbertson, 337 U.S. 733(1949). This rule has been loosely codified in I.R.C. §761, which also includes a “joint venture” in the definition of a partnership. 

A crop-share lease shares gross income, but not net income because the tenant still has some unique deductions that are handled differently than the landlord's deductions.  For example, the landlord typically bears all of the expense for building maintenance and repair, but the tenant bears all the expense for machinery and labor.  Thus, there is not a sharing of net income, and the typical crop-share lease is, therefore, not a partnership.  Likewise, a livestock share lease is usually not a partnership because both the landlord and the tenant will have unique expenses.  But, if a livestock share lease or a crop-share lease exists for some time and the landlord and tenant start pulling out an increased amount of expenses and deducting them before dividing the remaining income, then the arrangement will move ever closer to partnership status.  When the arrangement arrives at the point where there is a sharing of net income, a partnership exists.

Conduct Counts

This means that a partnership can exist in certain situations based on the parties’ conduct rather than intent.  Does the form of property ownership constitute a partnership?  By itself, the answer is generally “no.” See, e.g., Kan. Stat. Ann. §56a-202.  Thus, forms of ownership of property (including joint ownership) do not by themselves establish a partnership “even if the co-owners share profits made by the use of the property.”  See, e.g., Kan. Stat. Ann. §56a-202(c)(1).  Also, if a share of business income is receive in payment of rent, a presumption that the parties would otherwise be in a partnership does not apply.  See, e.g., Kan. Stat. Ann. §56a-202(c)(3)(iii). 

Tax Code, Tax Court and IRS Views

The United States Tax Court, in Luna v. Comr., 42 T.C. 1067 (1964) set forth eight factors to consider in determining the existence of a partnership for tax purposes.  In Luna, the Tax Court considered whether the parties in a business relationship had informally entered into a partnership under the tax Code, allowing them to claim that a payment to one party was intended to buy a partnership interest.  To determine whether the parties formed an informal partnership for tax purposes, the Tax Court asked "whether the parties intended to, and did in fact, join together for the present conduct of an undertaking or enterprise."  The Tax Court listed non-exclusive factors to determine whether the intent necessary to establish a partnership exists. 

The eight factors set forth in Luna are:

  • The agreement of the parties and their conduct in executing its terms;
  • The contributions, if any, which each party has made to the venture;
  • The parties' control over income and capital and the right of each to make withdrawals;
  • Whether each party was a principal and co-proprietor, sharing a mutual proprietary interest in the net profits and having an obligation to share losses, or whether one party was the agent or employee of the other, receiving for his services contingent compensation in the form of a percentage of income;
  • Whether business was conducted in the joint names of the parties;
  • Whether the parties filed federal partnership returns or otherwise represented to the IRS or to persons with whom they dealt that they were joint ventures;
  • Whether separate books of account were maintained for the venture;
  • Whether the parties exercised mutual control over and assumed mutual responsibilities for the enterprise

A recent Tax Court case is instructive on the application of the Luna factors.  In White v. Comr., T.C. Memo. 2018-102, the petitioner was approached by his ex-wife, about forming a mortgage company and, along with their respective spouses, they orally agreed to work together in the real estate business in 2010 or 2011. The business was conducted informally, and no tax professionals were consulted.  In 2011, the petitioner withdrew funds from his retirement account to support the business.  The ex-wife and her new husband did not make similar financial contributions.  Each of the “partners” handled various aspects of the business.  The petitioner initially used his personal checking account for the business, until business accounts could be opened.  Some accounts listed the petitioner as “president” and his wife as treasurer, but other business accounts were designated as “sole proprietorship” with the petitioner’s name on the account.  The petitioner controlled the business funds and used business accounts to pay personal expenses and personal accounts to pay business expenses.  Records were not kept of the payments.  Business funds were also used to pay the ex-wife’s personal expenses. 

The Tax Court applied the Luna factors and concluded that the business was not a partnership for tax purposes. The Tax Court determined that all but one of the Luna factors supported a finding that a partnership did not exist. To begin with, the parties must comply with a partnership.  There was no equal division of profits; the parties withdrew varying sums from the business; the petitioner claimed personal deductions for business payments; the ex-wife and her new spouse could have received income from sources other than their share of the business income; and there was no explanation for how payments shown on the ex-wife’s return ended up being deposited into the business bank account. 

Alternatively, the court concluded that even if a partnership existed, there was no reliable evidence of the partnership's total receipts to support an allocation of income different from the amounts that the IRS had determined by its bank deposits analysis.

When applying the Luna factors to typical farming/ranching arrangements, it is relevant to ask the following:

  • Was Form 1065 filed for any of the years at issue (it is required for either a partnership or a joint venture)?
  • Did the parties commingle personal and business funds?
  • Were any partnership bank accounts established?
  • Was there and distinct treatment of income and expense between business and personal expenses?
  • How do the parties refer to themselves to the public?
  • How do the parties represent themselves to the Farm Service Agency?
  • Are the business assets co-owned?

An informal farming arrangement can also be dangerous from an income tax perspective.  Often

taxpayers attempt to prove (or disprove) the existence of a partnership in order to split income

and expense among several taxpayers in a more favorable manner or establish separate ownership of interests for estate tax purposes.  However, such a strategy is not always successful, as demonstrated in the following case.  See, e.g., Speelman v. Comr., 41 T.C.M. 1085 (1981).

Liability and other Legal Concerns

Why all of the concern about whether an informal farming arrangement could be construed legally as a partnership?  Usually, it is the fear of unlimited liability.  Partners are jointly and severally liable for the debts of the partnership that arose out of partnership business.  It is this fear of unlimited liability that causes parties that have given thought to their business relationship to have written into crop-share and livestock-share leases a provision specifying that the arrangement is not to be construed as a partnership. 

The scenarios are many in which legal issues arise over the question of whether a partnership exists and gives rise to some sort of legal issue.  For example, in Farmers Grain Co., Inc. v. Irving 401 N.W.2d 596 (Iowa Ct. App. 1986), the plaintiff extended credit to the defendant who was a tenant under an oral livestock share lease.  Upon default of the loan, the defendant filed bankruptcy and the plaintiff tried to bind the landlord to the debt under a partnership theory.  The court held that a partnership had not been formed where the landlord did not participate in the operation, no joint bank accounts were established, and gross returns were shared rather than net profits. 

In Tarnavsky v. Tarnavsky, 147 F.3d 674 (8th Cir. 1998), the court determined that a partnership did exist where the farming operation was conducted for a profit, the evidence established that the parties involved intended to be partners and business assets were co-owned.

Oral business arrangements can also create unanticipated problems if one of the parties involved in the business dies.  In In re Estate of Palmer, 218 Mont. 285, 708 P.2d 242 (1985), the court determined that a partnership existed even though title to the real estate and the farm bank account were in joint tenancy.  As such, the surviving spouse of the deceased “partner” was entitled to one-half of the farm assets instead of the land and bank account passing to the surviving joint tenant.


Formality in business relationships can go along way to avoiding legal issues and costly court proceedings when expectations don’t work out as anticipated.  Putting agreements in writing by professional legal counsel often outweighs the cost of not doing so.

September 5, 2021 in Business Planning, Income Tax | Permalink | Comments (0)

Thursday, August 19, 2021

The Illiquidity Problem of Farm and Ranch Estates


Concerns about the possibility of a reduction in the federal estate tax exemption is significant in agriculture.  If a significant drop in the exemption would impact the farming or ranching business, is there a plan in place to pay the resulting tax?  It’s a real problem because ag estates are typically illiquid – as you’ve probably heard it said, ag estates are often “asset rich, but cash poor.” 

The issue of illiquidity in an ag estate, and some thoughts on what can be done about it – it’s the topic of today’s post.

The Problem of Illiquidity

Farmers and ranchers engaged in the production of agricultural commodities often face the same estate and succession planning problems that confront all businesses.  But there are unique issues that face those engaged in agriculture, and the law often treats farm and ranch businesses differently than it does other business types. In numerous other posts, I have highlighted these differences.  Entity structuring can aid in taking advantage of some of those differences.  But, those differences often don’t provide any relief from a common issues for agricultural estates – that of illiquidity.  capital assets, but little cash or assets that are readily convertible into cash.  If the federal estate tax exemption falls significantly as current proposed legislation promises to do starting next year, an estate’s tax bill could pose a significant burden.  That raises a question – has the estate plan been structured in a manner that provides liquidity to pay costs associated with death?  Planning for the potential problem of illiquidity at death That means that planning for this potential problem at should be part of the farm and ranch estate plan.

What is at the heart of the liquidity (or the lack thereof) issue?  Farming and ranching often involves a substantial investment in farm capital assets (land, buildings, equipment, etc.).  It also commonly involves large borrowings that can carry significant interest charges.  This is typically coupled with fluctuating income (or loss) from year-to-year because of diverse weather and market conditions.  On the positive side, ag land values tend to rise over the long-term, but short-term shocks to the land market do occur and can present timing issues for the estate planner.  All of these factors require the use of estate planning strategies that will minimize death taxes and estate administration costs, preserve liquidity of the estate and provide for a systematic and economic disposition (or continuance) of the farm business on the death of the farm owner. In addition, it’s important that the estate plan take full advantage of the ag-tailored tax provisions designed to alleviate the tax burdens of farmers.

Illiquidity of the farm or ranch estate makes it difficult for the estate executor to find readily available cash, or assets that are readily convertible to cash, with which to pay monetary legacies (such as the buy-out of an off-farm heir), administration costs, debts, taxes and other estate obligations. Planning to improve the liquidity of the estate before death can prevent losses which might otherwise be incurred through a quick or forced sale of estate assets to meet post-death obligations.  It can also avoid the necessity of borrowing funds and can avoid post-death disputes (and possible litigation) among beneficiaries over the sale of assets.  Planning can  also help minimize the resulting income and capital gain taxes triggered by assets sold to generate funds to pay obligations associated with death. 

Pre-Death Liquidity Planning 

Where an objective of the estate plan is to preserve as much of the farm business in the hands of the farmer’s heirs, proper planning for liquidity can minimize or eliminate the sale of farm assets. Various steps can be taken during the lifetime of the farmer or rancher to improve the liquidity of the estate. Some common planning steps include deliberately building up liquid assets; buying life insurance; properly using buy-sell agreements; and utilizing other available techniques to reduce the potential estate tax liability at death. 

One approach to liquidity planning is to make a current estimate of existing monetary obligations that the estate is expected to face upon death.  Given the current uncertain status of the transfer tax system, the estimate should involve various projections based on anticipated levels of the federal estate tax exemption and applicable rates at death, with those estimates serving as a rough guide to the amount of funds needed in the estate. The plan should be reviewed periodically to account for changes in asset values.

During profitable years, post-tax investments can provide additional liquidity.  While farmers and ranchers tend to reinvest any surplus back into farm/ranch capital assets, a liquidity planning strategy might be to invest surplus funds in liquid assets such as interest-bearing bank deposits and marketable stocks and bonds. Likewise, surplus funds could be invested in other agricultural real estate with a potential for appreciation, such as from development, with an eye toward later sale.  This could be accomplished without interfering with any objective to keep the original farming operation in-tact for subsequent generations of the farm family. 

Life insurance under a policy on the life of the estate owner can provide an appropriate amount of cash for the estate.  Those funds can then be used to meet estate obligations upon death. This can substantially improve estate liquidity. But care must be exercised to minimize or eliminate estate tax on the life insurance proceeds.  This can be accomplished by properly structuring the ownership of the policy and the beneficiary designation(s). 

Where the farm is operated in partnership or corporate form, a buy-sell agreement among partners or stockholders is often a good planning tool.  A well-drafted buy-sell agreement with well-defined triggering events that is properly funded (likely with life insurance) can ensure that there will be a buyer for the decedent’s ownership interest upon death.  Likewise, a buy-sell agreement can ensure that the estate will have liquid funds from the sale of the decedent’s interest in the farming/ranching entity. 

There are also provisions included in the tax Code that can aid in providing liquidity at death.  Special use valuation allows the agricultural land in the estate to be valued at its use value for agricultural purposes rather than fair market value at death.  I.R.C. §2032A.  There are many rules that must be satisfied for the executor of the decedent’s estate to make a special use valuation election and reduce the land value in the estate by up to (for 2021) $1,190,000.  In addition, the family (knowns as “qualified heirs”) must continue to farm the elected land for 10 years (and, possibly, 12 years) after the decedent dies. 

Another Code provision allows the decedent’s estate to pay federal estate tax in installments over 15 years coupled with a special rule for interest payments.  I.R.C. §6166Normally, federal estate tax is due nine months after the date of the decedent’s death.  But, again, this is a complex provision that requires proper pre-death planning for the estate executor to utilize it. 


The possibility of a decline in the federal estate tax exemption raises real concerns about liquidity in an ag estate.  While the estate of a farmer or rancher valued at $12 million net worth at death would presently have no federal estate tax bill, for instance, that same estate would likely owe more than $2 million in federal estate tax if the exemption were to drop to $3.5 million as currently proposed.  That makes liquidity planning very important to farm and ranch families – particularly those intending on keeping the family business intact for future generations. 

August 19, 2021 in Business Planning, Estate Planning | Permalink | Comments (1)

Monday, August 16, 2021

Ag Law Summit


On Friday, September 3, I will be hosting an “Ag Law Summit” at Nebraska’s Mahoney State Park.  This one-day conference will address numerous legal and tax issues of current relevance.  The conference will also be broadcast live online.

The Ag Law Summit – it’s the topic of today’s post.

Topics and Speakers

Proposed legislation and policy implications.  The day begins with my overview of what’s happening with proposed legislation that would impact farm and ranch estate and business and income tax planning.  Many proposals are being discussed that would dramatically change the tax and transfer planning landscape.  From the proposed lowering of the federal estate tax exemption, to the change in the step-up basis rule at death, to changes in the rules governing gifts, there is plenty to discuss.  But, the list goes on.  What about income tax rates and exemptions?  What about capital gain rates?  There are huge implications if any of these changes are made, let alone all of them.  What does the road forward for ag producers look like?  What changes need to be made to keep the family farm intact?  The discussion during this session should be intense!

State ag law update.  Following my discussion of what is going on at the federal level, the discussion turns to the state level.  Jeff Jarecki, an attorney with Jarecki Lay & Sharp P.C. out of Albion and Columbus, NE will team up with Katie Weichman Zulkoski to teach this session.  Katie is a lawyer in Lincoln, NE that works in lobbying and government affairs.  They will provide a NE legislative update specific to agriculture and review significant federal developments that impact agriculture – including the current Administration’s proposed 30 by 30 plan.

Farm succession planning.  After the morning break.  Dan Waters, a partner in the Lamson, Dugan & Murray firm in Omaha will get into the details of the mechanics of transitioning a farming/ranching business to subsequent generations.  How do you deal with uncertainty in the factors that surround estate and business planning such as commodity prices, land values, taxation, and government programs?  This session will examine various case studies and the use of certain tools to address the continuity question. 

Luncheon.  During the catered lunch, the speaker is Janet Bailey.  Janet has been involved in ag and food policy issues for many years and has an understanding of rural issues.  Her presentation will be addressed to legal and tax professionals that represent rural clients.  How can you maintain a vibrant practice in a rural community?  What other value does a rural practice bring to the local area?  The session’s focus is on the importance of tax and legal professionals to small towns in the Midwest and Plains.

Special use valuation.  If the federal estate tax exemption is reduced, the ability to value the ag land in a decedent’s estate at it’s value for ag purposes rather than fair market value will increase in importance.  During this session, I will provide an overview of the key points involved in this very complex provision of the tax Code.  What steps need to be taken now to ensure that the eventual decedent’s estate qualifies to make the special use valuation election on the federal estate tax return?  How do farmland leases impact the qualification for the election and avoidance of recapture tax being imposed?  Those are just a couple of the topics that will be addressed.

Ag entrepreneur’s toolkit.  This final session for the day will cover the business and tax law feature of limited liability companies.  The session is taught by Prof. Ed Morse of the Creighton University School of Law and Colten Venteicher, an attorney with the Bacon, Vinton, Venteicher firm in Gothenburg, Nebraska.  They will address some of the practical considerations for how to properly use the LLC in the context of farm and ranch businesses. 

Online Broadcast

The Summit will be broadcast online for those unable to attend in-person.  Washburn Law is an NASBA CPE provider. The program will qualify in the taxes area for the minutes noted next to each presentation for both the online and in-person attendees.  The goal of the Summit is tto continue providing good legal and tax educational information for practitioners with a rural client base.  That will aid in the provision of excellent legal and tax services for those rural clients and will, in turn, benefit the associated rural communities.

We hope that you will join us either in-person or online for the Summit on September 3.  For more information and to register, click here:

August 16, 2021 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (2)

Saturday, August 14, 2021

Farm Valuation Issues


It is not uncommon for farmers to encounter the need to have their farm assets valued.  Lenders, for instance, have a keen interest in understanding the value of assets utilized in the farming operation.  Also, valuation is an issue when estate, business and succession planning is engaged in.  What are the valuation issues that are associated with estate and business planning for farmers and ranchers? 

Valuing farm and ranch assets – it’s the topic of today’s post

Real Estate Valuation

Number of acres.  Farmland is typically the asset of largest value in a farmer’s estate.  That makes it important to arrive at an accurate measure of market value.  The starting point is to correctly denote the number acres.  What are the total acres?  What are the taxable acres?  What are the tillable acres?  Often “total acres” defines the total area within a legal description and makes no reference to quality or any restrictions on title, such as easements.  “Taxable acres” is tied to assessed acres, and “tillable acres” are those that are used in crop production.  Recent developments in technology have made it easier to more accurately determine tillable acres, and certifications to the USDA can also determine tillable acres.  But, “tillable acres” does not include areas that can’t be farmed – waterways, fence rows, timber land, creeks etc.  Make sure that the valuation is accurately measuring the type of land at issue and breaks it out properly. 

Legal descriptions.  Make sure that legal descriptions are accurate.  Local government offices such as the County Recorder and County Auditor can be helpful on this.  They can review a legal description and should be able to determine if any part of the legal description has been transferred.  They can also help to determine how the land at issue is owned – individually, in some form of entity, in fee simple, in life estate, etc. 

Zoning.  For farmland, zoning issues are usually not much of an issue.  But, if an airport is nearby there could be issues that come into play that would restrict the height of structures on the property.  That could impact the ability to erect a cell tower, aerogenerator, or even impact the use of drones on the property. 

Some rural counties do have zoning rules that separate farm uses from non-farm rural homeowners.  When those rules apply, they can impact large-scale confinement operations.  However, each state has a right-to-farm law and in some states, counties do not have the authority to zone “agriculture.”  Of course, the key to that issue is what constitutes “agriculture.”  That’s an issue that either state law defines, or the courts have determined the parameters of in judicial opinions. 

Appraisal.  Getting some type of formal valuation of farmland is critical to gaining a proper understanding of the land’s worth for planning purposes.  One approach is to use a certified appraisal, while another approach is to use an estimate of selling price based on comparable sales.  In any event, some attempt needs to be made to get an accurate view of the land’s fair market value.  Land markets are tricky, and appraisals have their drawbacks and may need to be supplemented with additional data that might not be incorporated into the appraisal, such as local buyer strength, distance to local markets and similar features.  There can also be some unique situations that provide inaccurate data about land values.  Discount the reliability of data involving individual sales and look at larger pool of sale data from your area or region.  The state land-grant university ag land sale/survey data is a good place to start.  That data is typically broken down by region of the state and by land type and whether the land is irrigated or not.  The USDA/ERS (Economic Research Service) also provides survey data of land values on its website.  


Valuing livestock is usually not as difficult as valuing land.  Daily market prices exist for just about all types of livestock.  The key is to make sure to understand and properly note differences in livestock with respect to gender, and whether the livestock are to be used for breeding, dairy or meat production purposes.  So, if you know your categories and weight ranges in those categories you will get an accurate picture of value.  Also, livestock can be affected by health issues and catastrophes that can wipe out value very quickly. 


It is easy to come up with an accurate value for most agricultural crops.  They are valued in a similar manner to that of livestock.  There is a daily market price that is readily accessible.  But, factors that can influence the bottom line regardless of the daily market price include quality and the cost to deliver the commodity to market. 

Valuing fruits and vegetable can be a bit trickier.  Most of those types of agricultural crops do not have any reliable daily market price, and there may not be any type of reasonable guarantee that the fruit or vegetable can be sold at its highest valued use.  Many of these crops are sold via production contract, so that can determine value, but there are risks associated with production contracts that can affect value, such as the contracting processor terminating the contract. 

Also, valuation issues can arise when growing crops need to be valued, perhaps because of the death of the farmer.  Some states, such as Iowa, have specific regulations that apply to establish the value of growing crops.  The IRS also has regulations that provide guidance in this area.  Relatedly, predicting harvest yields is highly speculative.  But it might be possible to use the amount of the potential harvest that is insured as a basis for determining a yield when valuing a growing crop.


Under the Obama/Biden Administration, the Treasury Department issued proposed regulations that that would have denied minority discounts in family-controlled entities.  Thankfully, the Trump Administration directed the Treasury to repeal those regulations.  But, there is a much greater likelihood now that those regulations will come back.  If they do, that will be problematic for many farming and ranching operations – particularly so if the exemption from the federal estate tax is reduced significantly as is currently proposed.

In recent decades, discounts for minority interest and lack of marketability have been recognized by the courts as a necessary element in arriving at the true fair market value of a gifted or inherited interest in a family business.  But, if the valuation regulations return they would foreclose many, if not all, of those planning opportunities.  Those regulations represent the Treasury’s attempt to redefine value in just about any manner it desires, and is a movement away from the time-tested (and judicially validated) willing-buyer/willing-seller test.  If the Treasury does resurrect those rules and finalize them in the form they had previously been in, you can expect court challenges that will take years to arrive at a final determination on their validity.


Valuation issues arise often in agriculture. Land is the big item to determine value accurately to the best of one’s ability.  Crops and livestock are usually fairly easy to get an accurate valuation, at least for Midwest type agricultural crops.  But, as always, good valuation numbers will help for financial, tax, and estate, business and succession planning purposes.  Valuation issues will become a bigger issue if the federal transfer tax rules change significantly. 

August 14, 2021 in Business Planning, Estate Planning, Real Property | Permalink | Comments (0)

Thursday, July 15, 2021

Montana Conference and Ag Law Summit (Nebraska)


The second of the two national conferences on Farm/Ranch Income Tax and Farm/Ranch Estate and Business Planning is coming up on August 2 and 3 in Missoula, Montana.  A month later, on September 3, I will be conducting an “Ag Law Summit” at Mahoney State Park located between Omaha and Lincoln, NE.

Upcoming conferences on agricultural taxation, estate and business planning, and agricultural law – it’s the topic of today’s post.


The second of my two 2021 summer conferences on agricultural taxation and estate/business planning will be held in beautiful Missoula, Montana.  Day 1 on August 2 is devoted to farm income taxation, with sessions involving an update of farm income tax developments; lingering PPP and ERC issues (as well as an issue that has recently arisen with respect to EIDLs); NOLs (including the most recent IRS Rev. Proc. and its implications); timber farming; oil and gas taxation; handling business interest; QBID/DPAD planning; FSA tax and planning issues; and the prospects for tax legislation and implications.  There will also be a presentation on Day 1 by IRS Criminal Investigation Division on how tax practitioners can protect against cyber criminals and other theft schemes. 

On Day 2, the focus turns to estate and business planning with an update of relevant court and IRS developments; a presentation on the farm economy and what it means for ag clients and their businesses; special use valuation; corporate reorganizations; the use of entities in farm succession planning; property law issues associated with transferring the farm/ranch to the next generation; and an ethics session focusing on end-of life decisions.

If you have ag clients that you do tax or estate/business planning work for, this is a “must attend” conference – either in-person or online.

For more information about the Montana conference and how to register, click here:


On September 3, I will be holding an “Ag Law Summit” at Mahoney St. Park, near Ashland, NE.  The Park is about mid-way between Omaha and Lincoln, NE on the adjacent to the Platte River and just north of I-80.  The Summit will be at the Lodge at the Park.  On-site attendance is limited to 100.  However, the conference will also be broadcast live over the web for those that would prefer to or need to attend online.

I will be joined at the Summit by Prof. Ed Morse of Creighton Law School who, along with Colten Venteicher of the Bacon, Vinton, et al., firm in Gothenburg, NE, will open up their “Ag Entreprenuer’s Toolkit” to discuss the common business and tax issues associated with LLCs.  Also on the program will be Dan Waters of the Lamson, et al. firm in Omaha.  Dan will address how to successfully transition the farming business to the next generation of owners in the family. 

Katie Zulkoski and Jeffrey Jarecki will provide a survey of state laws impacting agriculture in Nebraska and key federal legislation (such as the “30 x 30” matter being discussed).  The I will address special use valuation – a technique that will increase in popularity if the federal estate tax exemption declines from its present level.  I will also provide an update on tax legislation (income and transfer taxes) and what it could mean for clients. 

The luncheon speaker for the day is Janet Bailey.  Janet has been deeply involved in Kansas agriculture for many years and will discuss how to create and maintain a vibrant rural practice. 

If you have a rural practice, I encourage you to attend.  It will be worth your time. 

For more information about the conference, click here:


The Montana and Nebraska conferences are great opportunities to glean some valuable information for your practices.  As noted, both conferences will also be broadcast live over the web if you can’t attend in person.   

July 15, 2021 in Bankruptcy, Business Planning, Environmental Law, Estate Planning, Income Tax, Real Property, Regulatory Law, Water Law | Permalink | Comments (0)

Friday, May 21, 2021

Ohio Conference -June 7-8 (Ag Economics) What’s Going On in the Ag Economy?


The first of two summer conferences focusing on agricultural taxation and farm/ranch estate and business planning sponsored by Washburn Law School is coming up soon on June7-8. The live presentation will be at the Shawnee Lodge and Conference Center near West Portsmouth, Ohio.  Attendance may also be online because we will be broadcasting the conference live.

This year’s conference includes a component focusing on the farm economy.  I want to focus on that presentation for today’s article.  Understanding ag economics is critical to a complete ability to represent a farmer or rancher in tax as well as estate/business planning. 

The farm economy and the upcoming Ohio conference – it’s the focus of today’s post.

The Ag Economy

As is well known the general economy is struggling.  Of course, the struggles are related to the economy trying to recover from the various state-level shut-downs.  But what about the ag economy?  Understanding the economics that farm and ranch clients are dealing is critical for tax practitioners and those that advise farmers and ranchers on estate and business planning matters.

So, what are the key points concerning the farm economy right now that planners must understand? 

Net farm income.  For starters U.S. net farm income was higher in 2020 than it was in 2019.  When government payments are included, net farm income was 46 percent higher than in 2019 representing the fourth highest amount for any year since 1970. That’s good news for ag producers, rural communities and the practitioners that represent them.  However, it’s also important to understand that 38 percent of the total amount was from government payments and not the private marketplace.  That’s also a record – and not a good one.  What government giveth, government can taketh away. 

Earlier this year, USDA projected net farm income to drop eight percent compared to 2020.  But, even with that drop, net farm income would still be 21 percent higher than the 2000-2019 average.  So far this year grain prices for the major row-crop commodities (corn, soybeans and wheat) have been soaring.  These prices have been driven by strong export demand, tight stocks, weather concerns in South America and the U.S. economy coming out of the various state-level shutdowns. 

Cattle market.  So far this year, the cattle market has shown improved beef demand as restaurants reopen and exports have been strong.  There is also a smaller 2021 calf crop.  However, there are challenges on the processing side of the equation with capacity issues and higher feed prices presenting difficulties.  In addition, drought in cattle country will always be a concern. 

Dairy.  As for the dairy industry, demand is showing greater strength and dairy prices are increasing.  This can also be a resulting impact of the loss of numerous dairy farms in recent years that lowers production.  However, feed cost is wiping out all of the impact of higher dairy prices.   

Exports.  In 2020, total ag exports were also seven percent higher than they were in 2019.  U.S. ag exports to China alone were 91 percent higher in 2020 than they were in 2019, with total ag exports to China being higher in 2020 than at any point during the Obama Administration (or any prior Administration).  China is a critically important market for U.S. ag producers.  China has approximately 20 percent of global population but only seven percent of the world’s arable land.  China must import food from elsewhere.  The Trump Administration got serious with China’s global trade conduct, imposed tariffs and other sanctions against it to the benefit of U.S. agriculture.  Whether this pattern continues is an open question.

So far in 2021, total U.S. ag exports are up 24 percent compared to last year.  A large part of that is due to the increased level of exports to China.  But, there are numerous other ag export markets around the world to keep an eye on.

Accounting.  What about the farm balance sheet?  How is it looking.  For starters, U.S. farmland values continue to hold steady if not slightly higher.  The primary influencers of land values are commodity prices, government support programs, the supply of land, interest rates and inflation in the general economy.  Shocks to one or more of those factors could impact land values significantly.

Farm working capital has seen four straight years of increases after reaching a low point in 2016.  However, total farm debt continues to inch upward the U.S. farm debt to asset ratio is at its highest point in about 12 years (though still far below where it was during the height of the farm debt crisis of the 1980s.  Overall, farm balance sheets (especially for crop producers) have improved primarily because of higher government payments, higher commodity prices and strong land values.   

Prognosticating the Future

What does the future hold for the agricultural sector in the U.S.?  For starters, there is a different administration consisting largely of retreads that have been in the bureaucratic swamp for decades.  They love to regulate economic activity.  While taxpayer dollars may still flow to the sector, that doesn’t mean it will be to support traditional and “ad hoc” farm programs.  It’s more likely that taxpayer dollars will flow to support “food stamps” (remember, a record number of people were on food stamps the last time the current USDA Secretary held the position) and “rural development” and conservation programs.  Of course, with taxpayer dollars flowing to support conservation activities on farms and ranches comes regulation of private property. 

The next Farm Bill comes up in 2023.  What will be the focus of the debate?  Of course, much depends on the outcome of the 2022 mid-term elections.  Will there be an examination of the existing farm programs and how they apply to large farms compared to smaller ones?  Will there be an even greater focus on the environment?  Will the “waters of the United States” (WOTUS) rule be revisited yet again?  What about efforts to regulate carbon?  What about the illegal immigration issue and the current policy fostering a wide-open border?  What about ethanol production?  Recently, the Iowa Governor was quoted as saying, “Every day under normal circumstances hunger is a reality for one in nine Iowans.”  Iowa prides itself is being the nation’s leader in ethanol production.  In light of that, let the Governor’s quote sink-in.  Also, recall where the current USDA Ag Secretary is from. 

As noted above, ag trade and exports is in a rather good spot right now.  There was an emphasis on bilateral rather than multilateral trade agreements.  Will that continue?  Probably not.  It’s likely that there will be an emphasis on rejoining various multilateral trade agreements.  What will be the impact on U.S. ag?  What about China?  It now has more leverage on trade deals with the U.S. 

There are always external factors and policies that bear on the bottom-line of agricultural producers.  What are those going to be?  In 2015, the Congress passed, and the President signed into law, a $305 billion infrastructure bill.  Now, the present (old) Administration is at it again wanting to spend taxpayer dollars on “infrastructure.” I guess that’s an admission that the 2015 bill didn’t work – or maybe the new push for another bill is just an attempt to throw money around to potential voters. 

Another factor influencing farmers and ranchers is tax policy.  The potential for increased income and capital gain rates, the removal of “stepped-up” basis at death, higher estate and gift tax rates coupled with lower exemptions, and a higher corporate tax rate is significant. 

In the general economy, inflation and unemployment are lurking.  Fuel (and other input) prices are up in some places by 50 percent since the beginning of the year – a significant input cost for ag producers.  That, coupled with record taxpayer dollars flowing into the sector are being capitalized into higher food prices.  Providing lower-income people with non-taxable cash has caused them not to seek jobs and has caused unemployment to be higher than what it otherwise would be.  The economy is presently characterized by a high level of job openings and high unemployment at the same time.  Let that sink in. 

As the Congress tosses around trillion-dollar spending bills, it represents spending money that the government doesn’t have.  So, the government just makes more by printing it (or borrowing it).  The influx of money in the economy makes the dollars that are already there worth less. Remember, the promise was that “no one making less than $400,000 would have their taxes go up.”  Ok, but the money you have in your pocket is worth less.  Same difference? Not quite.  Inflation deals more harshly with lower-income persons than it does with someone of greater wealth and with higher income.  Even without factoring in the rise in fuel and food prices, inflation was at 4.2 percent in April, the sharpest spike since 2008. 

What do these external factors mean for agriculture?  Any one of them can be bad.  A combination of them can be really bad.  Now is not the time to be buying more things on credit.  It’s time to be prudent with the income that is presently there.  Pay-off debt.  Tidy-up estate plans.  Righten the “ship” and get ready.  The ride could get rough.


Join us at the Ohio conference either in person or via the online simulcast and join in the discussion.  You don’t want to miss this one.  For more information and to register, you can click here: 

May 21, 2021 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Sunday, May 16, 2021

Intergenerational Transfer of Family Businesses with Split-Dollar Life Insurance


Last week, the U.S. Tax Court, in Morrissette v. Comr., T.C. Memo. 2021-60, decided a case involving an intergenerational transfer of a closely-held family business and the “split-dollar” life insurance technique.  There are some good “take-home” points from the case that show how the use of the technique can work in a complicated estate plan involving a family business where the intent is to keep the business in the family for multiple generations.

Estate Planning with the split-dollar life insurance technique – it’s the topic of today’s post.

Split-Dollar (In General)

In general, a split-dollar life insurance plans exists when two persons enter into an agreement to share both the premiums due and the proceeds receivable on a whole life policy.  See, e.g., Treas. Reg. 1.61-22(B)(1).  This is usually accomplished is by an employer entity splitting premiums and proceeds with an employee.  The employee either pays premiums for his portion (via a loan from the employer) based on the one-year cost of term insurance or pays income tax on the employer’s payment of such amount.  See Rev. Rul. 64-328, 1964-2 C.B. 11.  The advantage is that the employee is responsible for only the cost of pure life insurance protection.  That cost is either determined by the PS58 Cost Table that is published in Rev. Rul. 55-747, 1955-2 C.B. 228, or if it is less, by the insurance company’s premium tables for one-year term insurance of standard risks.  Rev. Rul. 66-110, 1966-1 C.B. 12.   Often, the employee has the option to continue the policy when the agreement terminates.  If the employee dies, the named beneficiary receives a tax-advantaged death benefit.   

The split-dollar technique is sometimes used by large estates in an attempt to minimize taxes at death, often in conjunction with an irrevocable life insurance trust (ILIT).  It can also be used as a funding mechanism for a buy-sell agreement in a closely-held family business where the goal is to maintain family ownership of the business over multiple generations.  But split-dollar arrangements are heavily regulated and specific rules must be followed precisely. 

The Morrissette Estate Plan

Arthur Morrissette founded International Moving Company (Interstate Van Lines) in 1943. He and his wife established revocable trusts in 1994 and funded the trusts, at least in part, with company stock.  The trusts directed that the company stock pass to qualified subchapter S trusts (QSSTs) for the benefit of their sons, and then to trusts for the benefit of their grandchildren. 

After Arthur’s death, his surviving spouse established a plan to secure the funds to pay the estate taxes imposed on the stock passing via the QSST trusts to her sons and grandchildren. She first created three” dynasty” insurance trusts (irrevocable life insurance trusts (ILITs)) – one for each of her sons and their families.  The ILITs and the sons entered into shareholder agreements which set forth arrangements whereby the ILITs would purchase the stock held by a son’s QSST upon the son’s death.   To fund the buyouts, each ILIT secured a life insurance policy on the lives of the two other sons via a cross-purchase buy-sell arrangement.  Ultimately, the three ILITs purchased a total of six policies.

The surviving spouse arranged to pay all the premiums for the policies in lump sums out of her revocable trust. The lump-sum amounts that she advanced to pay premiums on the policies were designed to be sufficient to maintain the policies for her sons' projected life expectancies (which at the time ranged from approximately 15 to 19 years).  The ILITs would ultimately acquire the stock of QSST trusts for the benefit of her grandchildren and subsequent generations, and were designed to not be subject to federal estate tax.

The surviving spouse advanced approximately $29.9 million to make lump sum premium payments on policies insuring the lives of her three sons. The financing for these life insurance policies was structured as “split-dollar arrangements,” meaning that the cost and benefits would be split between the trusts. When she paid a lump sum amount to cover the premiums on the policies, the policies themselves were designed to pay out varying amounts to the trusts for both herself and her sons.

Specifically, upon the death of each of her sons, her revocable trust would receive (attributable to her “split-dollar receivables”) the greater of either (i) the cash surrender value of that policy, or (ii) the aggregate premium payments on that policy. Each ILIT would receive the balance of the policy death benefit.  Such arrangements are commonly structured so that the company advances funds to an ILIT to pay premiums on insurance on the life of the owner of the company, and the split-dollar receivable is payable upon the death of that owner. However, the surviving spouse’s plan was structured such that the receivable wasn’t payable until the death of one of the sons. Also, the company did not own the split-dollar receivable and it would become an asset of her taxable estate.  Given her sons’ life expectancies, the estate was not likely to collect the amounts payable with respect to the split-dollar receivables for 15 to 19 years.

From 2006 until her death in 2009, the surviving spouse made (and reported) gifts to the ILITs out of her revocable trust based upon the cost of the current life insurance protection in accordance with the IRS tables corresponding to the “economic benefit regime.” The total amount of the gifts was $29.9 million, but the economic benefit of the gifts was far less than that.  Accordingly, the surviving spouse reported the payment of the premiums as gifts to her sons for gift tax purposes to the extent of the economic benefit specified by Treas. Reg. §1.61-22. 

IRS gift tax challenge. 

The IRS issued two Notices of Deficiency to the estate. One Notice determined a gift tax liability for the tax year ending December 31, 2006, which concluded the surviving spouse’s estate had failed to report total gifts in the amount that the surviving spouse’s revocable trust advanced to the ILITs to make lump-sum payments of policy premiums. The second Notice grossed-up the surviving spouse’s lifetime gifts by the $29.9 million gifted to the ILITs.  

The surviving spouse’s estate moved for partial summary judgment on the threshold legal question of whether the split-dollar arrangements should be governed under the economic benefit regime of Treas. Reg. §1.61-22.  If so, the surviving spouse didn’t make any significant gift in 2006, and the total value reported for the split-dollar receivables should be based on the present value of the right to collect the split-dollar receivables in 15 to 19 years.  The IRS asserted that it was factually unclear as to whether or not the revocable trust had conferred upon the ILITs an economic benefit in addition to the current cost of life insurance protection.  The IRS claimed that the revocable trust’s lump-sum premium payments should be treated as loans owed back to the estate and valued under Treasury Regulations finalized in 2003 concerning how to treat split-dollar arrangements for tax purposes.  See Rev. Rul. 2003-105, 2003-2 C.B. 696.  The issue was, in essence, whether the 2003 regulations controlled the outcome, or whether the economic benefit regulation controlled.

Ultimately, the Tax Court disagreed with the IRS position. Estate of Morrissette, 146 T.C. 171 (2016).  The Tax Court held that the split-dollar agreements complied with the economic benefit regulation of Treas. Reg. § 1.61-(1)(ii)(A)(2), and that the surviving spouse made annual gifts only of the cost of current protection for gift tax purposes.  Under the regulation, only the economic benefit provided under the split-dollar life insurance arrangement to the donee is current life insurance protection.  As such, the donor is deemed owner of the life insurance contract, irrespective of actual policy ownership, and the economic benefit regime applies.  Thus, to determine if any additional economic benefit was conferred by the revocable trust to the ILITs, the Tax Court considered whether or not “the dynasty trusts [ILITs] had current access to the cash values of their respective policies under the split-dollar life insurance arrangements or whether any other economic benefit was provided.”  Because the split-dollar arrangements were carefully structured to only pay the ILITs that portion of the death benefit of the policy in excess of the receivables payable to the revocable trust, the Tax Court concluded that the ILITs could not have any current access under the final regulations. The Tax Court also determined that no additional economic benefit was conferred by the revocable trust to the dynasty trusts.  The valuation of the receivables at $7.48 represented an approximate 77 percent valuation discount from the value of the amount advanced to pay the premiums. 

IRS estate tax challenge.  The surviving spouse’s estate valued the receivables at $7.48 million.  The IRS disagreed with the estate’s valuation, claiming instead that the transfer of $29.9 million made by her revocable trust should be included in her estate at death by virtue of I.R.C. §2036 and I.R.C. §2038.  The Tax Court did not agree with the IRS position, determining that the transfers had valid non-tax purposes.  The evidence showed that the decedent desired to keep the business in the family, needed liquidity for estate tax purposes, and also wanted to provide a transition of the business to the next generation of the family while maintaining family harmony.  As such, the Tax Court concluded, the cash surrender value of the policies was not pulled back into the estate at death.  The Tax Court also held that I.R.C. §2703 did not apply because the split-dollar agreements served a business purpose and were not simply a manner in which to transfer property for less than full and adequate consideration.  They were also comparable to arm’s length transactions.  However, the court held that the estate was liable for the 40 percent understatement penalty of I.R.C. §6662 because of an undervaluation of the decedent’s split-dollar rights to the life insurance policies. 

The Tax Court did not determine the estate’s federal estate tax value, but directed the parties to value of the rights associated with the split dollar arrangements based on cash surrender values, life expectancies and discount rates.  The Tax Court said that the split-dollar rights are the rights of the decedent’s trust to payment in exchange for paying the policy premiums.  That payment, the Tax Court said, is either the amount of premiums paid or the cash surrender values of the policies, whichever is greater.


The Tax Court’s 2016 decision is very helpful to high-net-worth individuals and owners of closely held businesses.  Similarly structured split-dollar arrangements will be governed by the economic benefit doctrine and protect from gift tax liability.  The result will be that the value of the split-dollar receivables would be determined based on typical valuation principles (i.e., the amount a third party would pay to purchase the split-dollar receivables).

Last week’s Tax Court decision that I.R.C. §2703(a) does not apply to the split-dollar receivables, because they were not subject to any restriction on the revocable trust’s rights to sell or use them opens the door to intergenerational split-dollar arrangements. 

These two Tax Court opinions, taken together, provide a blueprint for passing family assets (like closely held businesses such as a farm or ranch) throughout subsequent generations, with predictable (and favorable) estate and gift tax consequences for the original owners.  That is particularly important in light of the unfavorable changes the present Congress might make to the laws governing the transfer tax system.

May 16, 2021 in Business Planning, Estate Planning | Permalink | Comments (0)

Monday, May 10, 2021

The “Mis” STEP Act – What it Means To Your Estate and Income Tax Plan


In late March, a group of five Democrat Senators from northeastern states introduced the “Sensible Taxation and Equity Promotion (STEP) Act.  Similar legislation has been introduced into the U.S. House, also from an East Coast Democrat.  These bills, combined with S.994 that I wrote about last time, would make vast changes to the federal estate and gift tax system, have a monumental impact on estate planning for many – including farm and ranch families – and would also make significant income tax changes.  The STEP Act also has a retroactive effective date of January 1, 2021. That makes planning to avoid the impacts next to impossible.  Today’s focus will be on the provisions of the STEP Act.

The key components of the STEP Act and its impacts and planning implications – it’s the topic of today’s post.

Income Tax Provisions

Before addressing the STEP Act’s provisions, it’s important to remember other proposals that are on the table.  Those include an income tax rate increase on taxable income exceeding $400,000 (actually about $450,000) by setting the rate at 39.6 percent.  Also, for these taxpayers, the itemized deduction tax benefit is capped at 28 percent.  That makes deductions less valuable.  In addition, the PEASE limitation of three percent would be restored.  This limitation reduces itemized deductions by three percent of adjusted gross income (AGI) over a threshold, up to 80 percent of itemized deductions.  Also, proposed is a phase-out of the qualified business income deduction (QBID) of I.R.C. §199A.  The phaseout of the QBID would impact many taxpayers with AGI less than $400,000. 

Capital Gains 

The STEP Act is largely concerned with capital gains and trusts.  The STEP Act applies the 39.6 percent rate to capital gains exceeding $1,000,000. Passive gains exceeding this threshold would be taxed at 43.4 percent after adding in the additional 3.8 percent net investment income tax of I.R.C. §1411 created by Obamacare.  An additional $500,000 exclusion is provided for the transfer of a personal residence ($250,000 for a taxpayer with single filing status).  Also, outright charitable donations of appreciated property are excluded, but (apparently) not transfers to charitable trusts), and some assets held in retirement accounts.

From an estate planning standpoint, if this provision were to become law a “lock-in” effect would occur to some extent – taxpayers would simply hold assets until death to receive the basis adjustment at death equal to the asset’s fair market value (I.R.C. §1014).  Unless, of course, the “stepped-up” basis rule is eliminated. 

Note:   Planning strategies such as charitable remainder trusts (maybe), appropriate timing of the harvesting of gains and losses and similar techniques can be used to keep income under the $1 million threshold.  Also, especially for high-income taxpayers residing in states with relatively high income tax rates, a tax minimization strategy has been the use of the incomplete non-grantor trust (ING).  An ING is a self-settled, asset protection trust that allows a grantor to fund the trust without incurring gift tax while also achieving non-grantor status for income tax purposes.  The typical structures is to establish the trust is a state without an income tax with the grantor funding the ING with appreciated assets having a low basis. The ultimate sale of the trust assets thereby avoids state income tax.  The IRS has announced that it is studying INGs and will not issue any further rulings concerning them.  Rev. Proc. 2021-3, 2021-1, IRB 140, Sec. 5.


The Step Act also proposes new I.R.C. §1261 which, under certain circumstances, imposes income recognition on gains at the time an asset is transferred to a trust.  Under this provision, gain recognition occurs at the time of a transfer to a non-grantor trust, as well as a grantor trust if the trust assets (corpus) will not be included in the grantor’s estate.  If the corpus will be included in the grantor’s estate at death, there apparently is no gain until a triggering event occurs.  Proposed I.R.C. §1261(b)(1)(A).  

Note:   The lack of clarity of the STEP Act’s language concerning transfers to grantor trusts creates confusion.  Seemingly the relinquishment of all retained powers under I.R.C. §2036 would mean that the trust corpus would not be included in the grantor’s estate, and the transfer to trust would be an income recognition event.  It simply is not clear what the STEP Act’s language, “would not be included” means. 

Apparently, a transfer to a non-grantor marital trust is not an income recognition event. Proposed I.R.C. §1261(c)(2).  Similarly, a transfer qualified disability trust or cemetery trust does not trigger gain recognition.  As noted above, the language is unclear whether a transfer in trust to a charity is excluded from recognition.  However, a transfer to a natural person that is other than the transferor’s spouse is taxed at the time of the transfer. 

Assets that are held in a non-grantor trust would be deemed to be sold every 21 years.  That will trigger gain to the extent of unrealized appreciation every 21 years, with the first of these “trigger dates” occurring in 2026. 

The STEP Act also requires annual reporting for trusts with more than $1 million of corpus or more than $20,000 of gross income.  The reporting requires providing the IRS with a balance sheet and an income statement, and a listing of the trustee(s), grantor(s) and beneficiaries of the trust. 

Note:   The built-in gain on an asset that is transferred during life either outright to a non-spouse or to a type of trust indicated above cannot be spread over 15 years.  However, the transfer of illiquid property (e.g., farmland) to a non-grantor trust that is not otherwise excluded is eligible for installment payments over 15 years, with interest only needing to be paid during the first five years.  If the tax on the appreciated value is caused by death, the tax can be paid over 15 years by virtue of I.R.C. §6166.

Grantor trusts – sales and swaps.  An important estate planning technique for higher wealth individuals in recent years designed to reduce potential estate tax involves the sale or gifting of assets to a grantor trust.  The goal of such a transaction is to make a completed transfer for federal estate and gift tax purposes, but retain enough powers so that the transfer is incomplete for income tax purposes.  This is the “intentionally defective grantor trust” (IDGT) technique. The result of structuring the transaction in this manner is that the future appreciation of the assets that are sold to the trust is removed from the grantor’s estate, and the grantor remains obligated for the annual income tax liability.  Of course, the trust could reimburse the grantor for that tax obligation.  Thus, the grantor ends up with a tax-free “gift” to the trustee of the trust’s income tax liability.  This allows the trust assets to grow without loss of value to pay taxes. 

The IRS blessed the IDGT technique in Rev. Rul. 85-13, 1985-1 C.B. 184.  In the Ruling, the IRs determined that the grantor’s sale of the asset to the trust did not trigger income tax – the grantor was simply “selling” to himself.  The irrevocable, completed nature of the transfer to the trust coupled with grantor trust status for income tax purposes is done by particular trust drafting language.  Also, that language can be drafted to allow the grantor to “swap” low basis assets in the trust with assets having a higher basis.  This allows the “swapped-out” asset to receive a basis increase at the time of the grantor’s death by virtue of inclusion in the grantor’s estate.  I.R.C. §1014

Under the STEP Act, a sale to a grantor trust might be treated as a transfer in trust.  If that is what the language means, then Rev. Rul. 85-13 is effectively repealed.  It also appears that swaps to a grantor trust would be treated that same as a sale.  If this is correct, IDGTs as a planning tool are eliminated. 

GRATs.  One popular estate planning technique for the higher-valued estates has been the use of a grantor-retained annuity trust (GRAT). With this approach, the grantor transfers assets to a trust in return for an annuity. As the trust assets grow in value, any value above the specified annuity amount benefits the grantor’s heir(s) without being subject to federal gift tax.  However, under the STEP Act, a transfer to a grantor trust is taxable if all of the transferred assets are not included in the grantor’s estate.  But, if all of the assets transferred to a grantor trust are included in the grantor’s estate, the transfer to the trust is not a taxable event.

This language raises a couple of questions.  One of the characteristics of a GRAT is that it can be drafted to make a portion taxable.  In that case, it is not completely includible in a decedent’s estate.  Likewise, if property is transferred into a GRAT and the transferor dies during the GRAT’s term and the I.R.C. §7520 rate rises, then less than all of the corpus of the GRAT is included in the decedent’s estate. See Treas. Reg. §20.2036-1, et seq.  This would appear to mean that, under the STEP Act, the transfer to the GRAT would be a taxable event.  It is also unclear whether the use of a disclaimer in the context of a GRAT will eliminate this potential problem. 

Estate Tax Deduction

Income taxes that the STEP Act triggers would be deductible at death as an offset against any estate tax that is due on account of the taxpayer’s death. 

The Constitutional Issue

As noted above, the STEP Act carries a general effective date of January 1, 2021.  It is retroactive.  If that retroactive provision were to hold, many (if not all) planning options that could presently be utilized will be foreclosed.  But is a retroactive tax provision constitutional? 

To be legal, a retroactive tax law change can satisfy the constitutional due process requirement if it is rationally related to a legitimate purpose of government.  Given the enormous amount of spending that the Congress engaged in during 2020 to deal with the economic chaos caused by various state governors shuttering businesses, a "legitimate purpose" could be couched in terms of the “need” to raise revenue.  See, e.g., Pension Benefit Guaranty Corporation v. R.A. Gray & Co., 467 U.S. 717 (1984)United States v. Carlton, 512 U.S. 26 (1994); In re Fifield, No. 04-10867, 2005 Bankr. LEXIS 1210 (Bankr. D. Vt. Jun. 20, 2005).  That’s the case even though historic data indicate that government revenues rarely increase in the long-term from tax increases – particularly the type of tax increases that are presently being proposed. 

Planning Steps

Will the STEP Act become law as proposed?  Probably not.  But, combined with S. 994 the two proposals offer dramatic changes to the rules surrounding income tax, as well as federal estate and gift tax.  With the proposal to basically double the capital gains tax rate, it could be a good idea to intentionally trigger what would be a gain under the STEP Act.  Doing so would at least remove those assets from the transferor’s estate.  In general, “harvesting” gains now before a 39.6 percent rate applies could be a good strategy.  Also, estate plans should be reexamined in light of the possible removal of the fair market value basis rule at death.  Consideration should be given to donating capital gain property to charity, setting up installment sales of property, utilizing the present like-kind exchange rules and making investments in qualified opportunity zones.   

Is all planning basically eliminated for 2021?  I don’t know.  There simply is no assurance whether transfers made to lock in the existing federal estate and gift tax exemption, utilize valuation discounts, etc., will work.  If the STEP Act is enacted, perhaps one strategy that will work would be to gift cash (by borrowing if necessary).  If the STEP Act is not enacted, then utilizing grantor trusts with sales and swaps could be an effective technique to deal with a much lower exemption.

One key to estate planning is to have flexibility.   The use of disclaimer language in wills and trusts is one way to provide flexibility.  Coupled with a rescission provision, disclaimer language included in documents governing transactions completed in 2021 might work…or might not.  It’s also possible that such a strategy could work for estate and gift tax purposes, but not for income tax purposes.

Another technique might be to set up an installment sale of assets to a marital trust for the spouse’s benefit that gives the spouse a power of appointment and entitles the spouse to lifetime income from the entire interest payable at least annually (basically a QTIP trust for the spouse (see I.R.C. §2523(e)).  The STEP Act indicates that such a transfer would not be a gain recognition event – marital trusts are excluded so long as the spouse is a U.S. citizen.  The surviving spouse would be given the power to appoint the entire interest and it could be exercised in favor of the surviving spouse or the estate of the surviving spouse.  No person other than the surviving spouse could have any power to appoint any part of the interest to any person other than the surviving spouse.  With a disclaimer provision the surviving spouse could disclaim all interest in the trust if the STEP Act is not enacted (or is enacted but becomes effective after the transfer by installment sale).  The disclaimer would then shift the assets into a trust for the surviving spouse’s heirs.  There are other techniques that could be combined with this approach to then add back the spouse.  If the STEP Act is enacted, the assets could remain in the marital trust and not trigger gain recognition.  The point is that the disclaimer adds tremendous flexibility (until disclaimers are eliminated – but the drafters of the STEP Act haven’t figured that out yet). 

Also, I haven’t even discussed the proposed American Families Plan yet.  On that one, Secretary Vilsack’s USDA put out an incredibly misleading press release titled, “The American Families Plan Honors America’s Family Farms.”  In it, the USDA claims that the proposed changes to the federal estate tax would apply to only two percent of farms and ranches.  That’s true as long as the family continues to own the farm and is materially participating in the farming operation.  What the USDA didn’t mention is that the American Families Plan eliminates many income tax deductions and will increase the federal income tax bill for practically all farmers and ranchers.


Presently, there is considerable uncertainty in the income tax and estate/business planning environment.  Also, the next shift in the political winds could wipe-out all of these proposed changes (if enacted) and the rules will swing back the other direction. 

There’s never a dull moment.  I can’t emphasize enough how important it is to attend (either in-person or online) this summer’s national conference on farm income tax and estate/business planning.  It’s imperative to get on top of these issues.  For more information on those conferences click here: and here: 

May 10, 2021 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Friday, May 7, 2021

Planning for Changes to the Federal Estate and Gift Tax System


I have received many questions recently on what the Congress might do to the federal estate and gift tax laws and the planning steps, if any, that can be taken now to prepare for changes.  It’s an important questions that many have, particularly farm and ranch families.  It’s also a topic that I will spend a good deal of time on during the summer conferences in Ohio and Montana.  You can learn more about those conferences here:  and

What has been proposed?  Will it pass?  Will valuation discounts be eliminated?  What about the income tax basis rule at death – will it change?

The possible changing estate and gift tax (and income tax basis at death) landscape – it’s the topic of today’s post.

The Current Situation

The Tax Cuts and Jobs Act (TCJA) doubled the basic exclusion amount as well as the generation-skipping transfer tax (GSTT) exemption for years 2018-2025 to $10 million (in 2011 dollars).  Starting in 2026, the exemptions revert to pre-TCJA law - $5 million in 2011 dollars.  In other words, beginning in 2026, the exemptions will fall to $5 million but will be adjusted for inflation since then.  But will we get to 2026 without the current exemptions being reduced before then?  That’s a good question that depends entirely on politics.

What if the exemption decreases?  If the current Congress decreases the exemption, it’s important to understand the “math” behind the computation of a decrease.  Presently, the exemption equivalent of the unified credit for federal estate and gift tax purposes is $11.7 million.  It was $5.49 million in 2017, before TCJA increased it to $11.18 million in 2018.  One strategy to address a drop in the exemption might be to make gifts now while the exemption is at $11.7 million and use exemption to cover the taxes on the gifts.  However, the way the IRS views the $11.7 million exemption is in two separate pieces.  One piece is $5.85 million and represents the “old” exemption.  According to the IRS, gifts made in 2021 use this part of the current $11.7 million exemption first.  Then, for taxable gifts beyond $5.85 million in 2021, the other “piece” of the exemption (also equal to $5.85 million) is utilized.  This piece represents the 2018 exemption increase.  It is this piece that is lost if it is not used before the law changes that decreases the exemption.  This assumes, of course, that any reduction in the exemption would take effect after 2021.  A retroactive change would wipe out this planning strategy of making gifts now to use up the higher exemption. 

Proposed Legislation – S. 994 

Exemption and rates.  Earlier this year, Senator Bernie Sanders proposed the “For the 99.5% Act.”  S. 994.  The bill is currently in the Senate Finance Committee.  A similar proposal was proffered in 2019 but didn’t’ go anywhere.  Basically, the same proposal was made in the President’s final proposed budget in 2016.  The proposals all do essentially the same thing – set the federal gift tax exemption at $1 million without indexing for inflation; set the federal estate tax and GSTT exemption at $3.5 million; and retain portability of any unused exclusion amount.  S. 994, Sec. 2(b).  In terms of the tax rate structure, taxable estates exceeding $3.5 million up to $10 million would face a 45 percent rate.  Taxable estates over $10 million up to $50 million would be taxed at a 50 percent rate.  Those over $50 million but not over $1 trillion would be taxed at 55 percent, and those exceeding $1 trillion would be taxed at 65 percent.  If enacted in its present form, the effective date would be for deaths, GSTT transfers and gifts made after December 31, 2021.  S. 994, Sec. 2(c). 

Special use valuation.  For farms and ranches potentially subject to federal estate tax, electing special use valuation can be a viable estate tax planning technique if the elected land will be farmed by a family member (or members) for 10 years after the decedent dies.  I.R.C. §2023A.  For deaths in 2021, the maximum reduction in value of farmland subject to the election is $1.18 million.  The proposal is to increase that amount to $3 million, effective for deaths after 2021.  S. 994, Sec. 3. 

Conservation easement.  Under current law, land subject to a conservation easement can be excluded from estate tax up to $500,000 in value.  S. 994 increases that amount to $2 million.  It also increases the maximum percentage of the land which can be excluded from 40 percent to 60 percent.  S. 994, Sec. 4.  This provision would be effective for deaths and gifts after 2021.

Grantor trusts.  S. 994 eliminates the current income tax basis step-up rule at death for property contained in certain types of grantor trusts.  The provision applies to property held in a trust of which the transferor is considered to be the owner, and the property transferred to the trust is not included in the transferor’s gross estate at death.  S. 994, Sec. 5. 

Valuation discounts.  As for valuation discounts for such things as lack of marketability, minority interests, blockage, and built-in gain taxes, S.994 specifies that any assets of an entity that are not used in the active conduct of the trade or business that are transferred are to be valued as if the assets were transferred directly (i.e., non-actively traded interests).  Likewise, “passive assets” are not treated as used in the active conduct of a trade or business.  S. 994, Sec. 6.  In addition, no discount for minority interest is allowed if the transferee and family members have control or majority ownership (for non-actively traded interests).  Id.  These assets are to be valued as if the transferor had transferred the assets directly to the transferee.  Id. 

Excluded from the definition of non-business assets are inventory and real estate rental activities involving a real estate professional where the 750-hour requirement has been satisfied.  See, I.R.C. §469(c)(7).  There is also an exception for working capital.  Id.  A “look-through” rule also applies with respect to non-business assets.  This rule is designed to prevent any discount for non-business assets that are held in a lower-tier entity.  A 10 percent ownership interest threshold applies for this purpose.  If the rule applies, the upper-tier entity is treated as if it directly owns its ratable share of the lower-tier entity’s assets.  Id. 

As for minority discounts, S.994 disallows them when the transferor, transferee and family members together have either control or majority ownership after the transfer of entity interests.  “Member of the family” is defined in accordance with I.R.C. §2032A(e)(2).  There the definition includes an individual’s spouse and siblings, ancestors and descendants (including lineal descendants of the decedent’s spouse or parent of the decedent), spouses of descendants, and lineal descendants and spouses of the decedent’s spouse.  For these purposes, a legally adopted child of an individual is treated as blood relation. 

As a distinction from other parts of the legislation, the valuation rules would be effective upon date of enactment.  Id. 

Consider the following example illustrating the impact of eliminating (or severely restricting) valuation discounts:

Example:  Snarkfeltcher Valley Farms (SVF) is a closely-held family farming operation owned by family members.  The parents would like to transfer controlling interests to their son and daughter so that they can manage and control the family business after the parents retire and ultimately pass away.  Presently, SVF has a fair market value of $12 million.  With appropriate estate planning, upon the last of the parents to die with transfer of full operational control to the children, valuation discounts could be achieved.  Under current law, the federal estate tax would be computed as follows (assume that all of the assets are used in SVF’s trade or business):

            Gross Value:                                       $12,000,000

            Lack of marketability discount           $3,000,000

            Minority interest discount:                   $1,800,000

            Net taxable value:                                 $7,200,000

            Available exemption:                         $11,000,000

            Estate tax due:                                    $0

Now assume that S.994 becomes law and the transfer of control of SVF occurs after the law become effective.  Here’s how the federal estate tax would be computed:

Gross Value:                                       $12,000,000

Lack of marketability discount:         $3,000,000

            Minority interest discount:                 $0

            Net taxable value:                               $9,000,000

            Tentative estate tax:                            $3,795,800 ($1,320,800 + .45 x $5.5 mil.)

            Less available credit:                          $1.455,800 (credit that offsets first $3.5 mil.)

            Estate tax due:                                    $2,340,000

Grantor-retained annuity trusts.  An important business succession planning concept for some families is that of the grantor-retained annuity trust (GRAT).  A GRAT is a technique that can allow the grantor to “freeze” the value of the transferred assets while simultaneously providing the grantor with a cash flow stream for a specified time-period.  I have written about the use of the GRAT here:

S. 994 essentially eliminates GRATs as a planning strategy by imposing a minimum 10-year term, and a maximum term tied to the life expectancy of the annuitant plus 10 years. In addition, the remainder interest must have a value (as determined at the time of the transfer) that is not less than an amount that is equal to the greater of 25 percent of the GRAT’s fair market value or $500,000, and not be greater than the fair market value of the property in the trust.  S. 994, Sec. 7.  These rules would be effective to transfer made after the date of enactment.  Id. 

Grantor trusts.  S. 994 also makes changes to the rules governing grantor trusts.  While assets in a grantor trusts are included in the grantor’s estate for federal tax purposes, distributions from grantor trusts during the grantor’s life are treated as taxable gifts.  S. 994, Sec. 8.  In addition, if at anytime during the life of the owner, the owner ceases to be treated as the owner of any of the trust assets, those assets are deemed to be a gift.  Id.  These changes would apply to trusts created after the date of enactment as well as to transfers made to pre-existing trusts after date of enactment and sales to pre-existing trusts.  Apparently existing grantor trusts would be grandfathered. 

GSTT.  The proposed legislation specifies that the inclusion ratio of any trust other than a qualifying trust is pegged at 1.  In addition, a qualifying trust must terminate not greater than 50 years after the trust is created.  Also, pre-existing trusts must terminate within 50 years of enactment.  S. 994, Sec. 9.  Also, S. 994 eliminates the GSTT exemption for certain long-term trusts.  Id. 

Gift tax rule changes.  S. 994 specifies that the first $10,000 of gifts made to a person during the calendar year are not to be included in the amount of gifts made during the year.  S. 994, Sec. 10.  The limit is $20,000 per donor.  The transfers subject to this limitation include transfers in trust, a transfer of an interest in a pass-through entity, a transfer of an interest subject to a prohibition on sale, and any other transfer of property that, without regard to withdrawal, put, or other such rights in the done, cannot immediately be liquidated by the donee.  S. 994, Sec. 10. 

Client Relations

Given these proposed changes in federal estate and gift tax law, how should practitioners advise clients?  For starters, the possible impacts on a client’s estate plan of the proposed changes should be discussed.  Perhaps a projection should be done of a client’s estate value particularly in light of the changes in the valuation discount rules.  Also, consideration should be made of the benefits of accelerating the funding of GRATs and other grantor trusts.  In that vein, sales to an intentionally defective grantor trust (IDGT) may also need to be accelerated.  I have discussed IDGTs here: and here:

Also, give consideration to using the lifetime federal estate/gift tax exclusion prior to the law’s enactment (assuming that it does get enacted).  That also means being prepared to make taxable gifts.  Other thoughts should be given to the ordering rules surrounding the ordering rules for the deceased spouse unused exclusion (DSUE) amount. 


The proposed changes in the rules governing federal estate and gift tax are creating many questions and concern.  Knowing what the proposed changes might be is useful for purposes of evaluating the steps that can be taken to best handle the changes if they are enacted, and ensure that one’s estate/business planning goals can be achieved.  Again, I will spend a significant amount of time at the summer events in Ohio and Montana discussing these matters.  Don’t miss out.  Attendance online is also possible. 

May 7, 2021 in Business Planning, Estate Planning | Permalink | Comments (0)