Sunday, February 28, 2021

Ag Law and Taxation - 2019 Bibliography

Overview

Today's post is a bibliography of my ag law and tax blog articles of 2019.  Many of you have requested that I provide something like this to make it easier to find the articles, and last month I posted the bibliography of the 2020 articles.  Soon I will post the bibliography of the 2018 articles and then 2017 and 2016. 

The library of content is piling up.

Cataloging the 2019 ag law and tax blog articles - it's the topic of today's post.

BANKRUPTCY

Non-Dischargeable Debts in Bankruptcy

https://lawprofessors.typepad.com/agriculturallaw/2019/02/non-dischargeable-debts-in-bankruptcy.html

Developments in Agricultural Law and Taxation

https://lawprofessors.typepad.com/agriculturallaw/2019/03/developments-in-agricultural-law-and-taxation.html

More Recent Developments in Agricultural Law

https://lawprofessors.typepad.com/agriculturallaw/2019/03/more-recent-developments-in-agricultural-law.html

More Ag Law and Tax Developments

https://lawprofessors.typepad.com/agriculturallaw/2019/05/more-ag-law-and-tax-developments.html

Farmers, Bankruptcy and the “Absolute Priority” Rule

https://lawprofessors.typepad.com/agriculturallaw/2019/07/farmers-bankruptcy-and-the-absolute-priority-rule.html

Ag in the Courtroom

            https://lawprofessors.typepad.com/agriculturallaw/2019/07/ag-in-the-courtroom.html

Key Farm Bankruptcy Modification on the Horizon?

https://lawprofessors.typepad.com/agriculturallaw/2019/07/key-farm-bankruptcy-modification-on-the-horizon.html

Ag Legal Issues in the Courts

https://lawprofessors.typepad.com/agriculturallaw/2019/08/ag-legal-issues-in-the-courts.html

Are Taxes Dischargeable in Bankruptcy?

https://lawprofessors.typepad.com/agriculturallaw/2019/09/are-taxes-dischargeable-in-bankruptcy.html

The “Almost Top Ten” Ag Law and Ag Tax Developments of 2019

https://lawprofessors.typepad.com/agriculturallaw/2019/12/the-almost-top-ten-ag-law-and-ag-tax-developments-of-2019.html 

BUSINESS PLANNING

Can a State Tax a Trust with No Contact with the State?

https://lawprofessors.typepad.com/agriculturallaw/2019/02/can-a-state-tax-a-trust-with-no-contact-with-the-state.html

Real Estate Professionals and Aggregation – The Passive Loss Rules

https://lawprofessors.typepad.com/agriculturallaw/2019/03/real-estate-professionals-and-aggregation-the-passive-loss-rules.html  

More Recent Developments in Agricultural Law

https://lawprofessors.typepad.com/agriculturallaw/2019/03/more-recent-developments-in-agricultural-law.html

Self-Rentals and the Passive Loss Rules

https://lawprofessors.typepad.com/agriculturallaw/2019/04/self-rentals-and-the-passive-loss-rules.html    

What’s the Best Entity Structure for the Farm or Ranch Business?

https://lawprofessors.typepad.com/agriculturallaw/2019/05/whats-the-best-entity-structure-for-the-farm-or-ranch-business.html

Where Does Life Insurance Fit in an Estate Plan for a Farmer or Rancher?

https://lawprofessors.typepad.com/agriculturallaw/2019/05/where-does-life-insurance-fit-in-an-estate-plan-for-a-farmer-or-rancher.html

Recent Developments in Farm and Ranch Business Planning

https://lawprofessors.typepad.com/agriculturallaw/2019/06/recent-developments-in-farm-and-ranch-business-planning.html

ESOPs and Ag Businesses – Part One

https://lawprofessors.typepad.com/agriculturallaw/2019/07/esops-and-ag-businesses-part-one.html

ESOPs and Ag Businesses – Part Two

https://lawprofessors.typepad.com/agriculturallaw/2019/07/esops-and-ag-businesses-part-two.html

Is a Discount for The BIG Tax Available?

https://lawprofessors.typepad.com/agriculturallaw/2019/08/is-a-discount-for-the-big-tax-available.html

Tax Consequences of Forgiving Installment Payment Debt

https://lawprofessors.typepad.com/agriculturallaw/2019/09/tax-consequences-of-forgiving-installment-payment-debt.html

Ag Law and Tax in the Courts

https://lawprofessors.typepad.com/agriculturallaw/2019/09/ag-law-and-tax-in-the-courts.html

Shareholder Loans and S Corporation Stock Basis

https://lawprofessors.typepad.com/agriculturallaw/2019/09/shareholder-loans-and-s-corporation-stock-basis.html

The Family Limited Partnership – Part One

https://lawprofessors.typepad.com/agriculturallaw/2019/09/the-family-limited-partnership-part-one.html

The Family Limited Partnership – Part Two

https://lawprofessors.typepad.com/agriculturallaw/2019/09/the-family-limited-partnership-part-two.html

Does the Sale of Farmland Trigger Net Investment Income Tax?

https://lawprofessors.typepad.com/agriculturallaw/2019/10/does-the-sale-of-farmland-trigger-net-investment-income-tax.html

Some Thoughts on Ag Estate/Business/Succession Planning

https://lawprofessors.typepad.com/agriculturallaw/2019/11/some-thoughts-on-ag-estatebusinesssuccession-planning.html

S Corporation Considerations

https://lawprofessors.typepad.com/agriculturallaw/2019/11/s-corporation-considerations.html

CIVIL LIABILITIES

When is an Employer Liable for the Conduct of Workers?

https://lawprofessors.typepad.com/agriculturallaw/2019/01/when-is-an-employer-liable-for-the-conduct-of-workers.html

Selected Recent Cases Involving Agricultural Law

https://lawprofessors.typepad.com/agriculturallaw/2019/01/selected-recent-cases-involving-agricultural-law.html

Ag Nuisances – Basic Principles

https://lawprofessors.typepad.com/agriculturallaw/2019/02/ag-nuisances-basic-principles.html

Do the Roundup Jury Verdicts Have Meaning For My Farming Operation?

https://lawprofessors.typepad.com/agriculturallaw/2019/04/do-the-roundup-jury-verdicts-have-meaning-for-my-farming-operation.html

What Does a “Reasonable Farmer” Know?

https://lawprofessors.typepad.com/agriculturallaw/2019/04/what-does-a-reasonable-farmer-know.html

Product Liability Down on the Farm - Modifications

https://lawprofessors.typepad.com/agriculturallaw/2019/05/product-liability-down-on-the-farm-modifications.html

Coming-To-The-Nuisance By Staying Put – Or, When 200 Equals 8,000

https://lawprofessors.typepad.com/agriculturallaw/2019/05/coming-to-the-nuisance-by-staying-put-or-when-200-equals-8000.html

More Ag Law and Tax Developments

https://lawprofessors.typepad.com/agriculturallaw/2019/05/more-ag-law-and-tax-developments.html

Public Trust vs. Private Rights – Where’s the Line?

https://lawprofessors.typepad.com/agriculturallaw/2019/06/public-trust-vs-private-rights-wheres-the-line.html

Ag Law in the Courts

            https://lawprofessors.typepad.com/agriculturallaw/2019/11/ag-law-in-the-courts.html

Fence Law Basics

            https://lawprofessors.typepad.com/agriculturallaw/2019/11/fence-law-basics.html

CONTRACTS

Negotiating Cell/Wireless Tower Agreements

https://lawprofessors.typepad.com/agriculturallaw/2019/01/negotiating-cellwireless-tower-agreements.html

Developments in Agricultural Law and Taxation

https://lawprofessors.typepad.com/agriculturallaw/2019/03/developments-in-agricultural-law-and-taxation.html

Ag Contracts – What if Goods Don’t Conform to the Contract?

https://lawprofessors.typepad.com/agriculturallaw/2019/09/ag-contracts-what-if-goods-dont-conform-to-the-contract.html

ENVIRONMENTAL LAW

Top 10 Developments in Ag Law and Tax for 2018 – Numbers 10 and 9

https://lawprofessors.typepad.com/agriculturallaw/2019/01/top-10-developments-in-ag-law-and-tax-for-2018-numbers-10-and-9.html

Top 10 Developments in Ag Law and Tax for 2018 – Numbers 8 and 7

https://lawprofessors.typepad.com/agriculturallaw/2019/01/top-10-developments-in-ag-law-and-tax-for-2018-numbers-8-and-7.html

Top Ten Agricultural Law and Tax Developments of 2018 – Numbers 6, 5, and 4

https://lawprofessors.typepad.com/agriculturallaw/2019/01/top-ten-agricultural-law-and-tax-developments-of-2018-numbers-6-5-and-4.html

Top Ten Agricultural Law and Tax Developments of 2018 – Numbers 3, 2, and 1

https://lawprofessors.typepad.com/agriculturallaw/2019/01/top-ten-agricultural-law-and-tax-developments-of-2018-numbers-3-2-and-1.html

Big EPA Developments – WOTUS and Advisory Committees

https://lawprofessors.typepad.com/agriculturallaw/2019/02/big-epa-developments-wotus-and-advisory-committees.html

Does Soil Erosion Pose a Constitutional Issue?

https://lawprofessors.typepad.com/agriculturallaw/2019/04/does-soil-erosion-pose-a-constitutional-issue.html

Public Trust vs. Private Rights – Where’s the Line?

https://lawprofessors.typepad.com/agriculturallaw/2019/06/public-trust-vs-private-rights-wheres-the-line.html

More Ag Law and Tax Developments

https://lawprofessors.typepad.com/agriculturallaw/2019/05/more-ag-law-and-tax-developments.html

Eminent Domain and Agriculture

https://lawprofessors.typepad.com/agriculturallaw/2019/06/eminent-domain-and-agriculture.html

Court Decisions Illustrates USDA’s Swampbuster “Incompetence”

https://lawprofessors.typepad.com/agriculturallaw/2019/08/court-decision-illustrates-usdas-swampbuster-incompetence.html

Regulatory Changes to the Endangered Species Act

https://lawprofessors.typepad.com/agriculturallaw/2019/09/regulatory-changes-to-the-endangered-species-act.html

Irrigation Return Flows and the Clean Water Act

https://lawprofessors.typepad.com/agriculturallaw/2019/09/irrigation-return-flows-and-the-clean-water-act.html

Ag Law in the Courts

            https://lawprofessors.typepad.com/agriculturallaw/2019/10/ag-law-in-the-courts.html

Regulatory Takings – Pursuing a Remedy

https://lawprofessors.typepad.com/agriculturallaw/2019/10/regulatory-takings-pursuing-a-remedy.html

Does a Pollutant Discharge From Groundwater into a WOTUS Require a Federal Permit?

https://lawprofessors.typepad.com/agriculturallaw/2019/11/does-a-pollutant-discharge-from-groundwater-into-a-wotus-require-a-federal-permit.html

Groundwater Discharges of Pollutants and the Supreme Court

https://lawprofessors.typepad.com/agriculturallaw/2019/11/groundwater-discharges-of-pollutants-and-the-supreme-court.html

The “Almost Top Ten” Ag Law and Ag Tax Developments of 2019

https://lawprofessors.typepad.com/agriculturallaw/2019/12/the-almost-top-ten-ag-law-and-ag-tax-developments-of-2019.html

ESTATE PLANNING

Tax Filing Season Update and Summer Seminar!

https://lawprofessors.typepad.com/agriculturallaw/2019/01/tax-filing-season-update-and-summer-seminar.html

Time to Review Estate Planning Documents?

https://lawprofessors.typepad.com/agriculturallaw/2019/02/time-to-review-of-estate-planning-documents.html

Can a State Tax a Trust with No Contact with the State?

https://lawprofessors.typepad.com/agriculturallaw/2019/02/can-a-state-tax-a-trust-with-no-contact-with-the-state.html

Estate Planning in Second Marriage Situations

https://lawprofessors.typepad.com/agriculturallaw/2019/02/estate-planning-in-second-marriage-situations.html

Valuing Non-Cash Charitable Gifts

https://lawprofessors.typepad.com/agriculturallaw/2019/03/valuing-non-cash-charitable-gifts.html

Real Estate Professionals and Aggregation – The Passive Loss Rules

https://lawprofessors.typepad.com/agriculturallaw/2019/03/real-estate-professionals-and-aggregation-the-passive-loss-rules.html

Can the IRS Collect Unpaid Estate Tax From the Beneficiaries?

https://lawprofessors.typepad.com/agriculturallaw/2019/03/can-the-irs-collect-unpaid-estate-tax-from-the-beneficiaries.html

Sale of the Personal Residence After Death

https://lawprofessors.typepad.com/agriculturallaw/2019/03/sale-of-the-personal-residence-after-death.html

More Recent Developments in Agricultural Law

https://lawprofessors.typepad.com/agriculturallaw/2019/03/more-recent-developments-in-agricultural-law.html

Thrills with Wills – When is a Will “Unduly Influenced”?

https://lawprofessors.typepad.com/agriculturallaw/2019/04/thrills-with-wills-when-is-a-will-unduly-influenced.html

Heirs Liable for Unpaid Federal Estate Tax 28 Years After Death

https://lawprofessors.typepad.com/agriculturallaw/2019/05/heirs-liable-for-unpaid-federal-estate-tax-28-years-after-death.html

What’s the Best Entity Structure for the Farm or Ranch Business?

https://lawprofessors.typepad.com/agriculturallaw/2019/05/whats-the-best-entity-structure-for-the-farm-or-ranch-business.html

Where Does Life Insurance Fit in an Estate Plan for a Farmer or Rancher?

https://lawprofessors.typepad.com/agriculturallaw/2019/05/where-does-life-insurance-fit-in-an-estate-plan-for-a-farmer-or-rancher.html

Recent Developments in Farm and Ranch Business Planning

https://lawprofessors.typepad.com/agriculturallaw/2019/06/recent-developments-in-farm-and-ranch-business-planning.html

Wayfair Does Not Mean That a State Can Always Tax a Trust Beneficiary

https://lawprofessors.typepad.com/agriculturallaw/2019/06/wayfair-does-not-mean-that-a-state-can-always-tax-a-trust-beneficiary.html

ESOPs and Ag Businesses – Part One

https://lawprofessors.typepad.com/agriculturallaw/2019/07/esops-and-ag-businesses-part-one.html

Issues in Estate Planning – Agents, Promises, and Trustees

https://lawprofessors.typepad.com/agriculturallaw/2019/10/issues-in-estate-planning-agents-promises-and-trustees.html

The Importance of Income Tax Basis “Step-Up” at Death

https://lawprofessors.typepad.com/agriculturallaw/2019/10/the-importance-of-income-tax-basis-step-up-at-death.html

Ag Law in the Courts

            https://lawprofessors.typepad.com/agriculturallaw/2019/11/ag-law-in-the-courts.html

Co-Tenancy or Joint Tenancy – Does it Really Matter?

https://lawprofessors.typepad.com/agriculturallaw/2019/11/co-tenancy-or-joint-tenancy-does-it-really-matter.html

Year-End Legislation Contains Tax Extenders, Repealers, and Modifications to Retirement Provisions

https://lawprofessors.typepad.com/agriculturallaw/2019/12/year-end-legislation-contains-tax-extenders-repealers-and-modification-to-retirement-provisions.html

INCOME TAX

Top 10 Developments in Ag Law and Tax for 2018 – Numbers 10 and 9

https://lawprofessors.typepad.com/agriculturallaw/2019/01/top-10-developments-in-ag-law-and-tax-for-2018-numbers-10-and-9.html

Top Ten Agricultural Law and Tax Developments of 2018 – Numbers 6, 5, and 4

https://lawprofessors.typepad.com/agriculturallaw/2019/01/top-ten-agricultural-law-and-tax-developments-of-2018-numbers-6-5-and-4.html

Top Ten Agricultural Law and Tax Developments of 2018 – Numbers 3, 2, and 1

https://lawprofessors.typepad.com/agriculturallaw/2019/01/top-ten-agricultural-law-and-tax-developments-of-2018-numbers-3-2-and-1.html

Tax Filing Season Update and Summer Seminar!

https://lawprofessors.typepad.com/agriculturallaw/2019/01/tax-filing-season-update-and-summer-seminar.html

QBID Final Regulations on Aggregation and Rents – The Meaning for Farm and Ranch Businesses

https://lawprofessors.typepad.com/agriculturallaw/2019/01/qbid-final-regulations-on-aggregation-and-rents-the-meaning-for-farm-and-ranch-businesses.html

The QBID Final Regulations – The “Rest of the Story”

https://lawprofessors.typepad.com/agriculturallaw/2019/01/the-qbid-final-regulations-the-rest-of-the-story.html

Can a State Tax a Trust with No Contact with the State?

https://lawprofessors.typepad.com/agriculturallaw/2019/02/can-a-state-tax-a-trust-with-no-contact-with-the-state.html

Tax Matters – Where Are We Now?

https://lawprofessors.typepad.com/agriculturallaw/2019/02/tax-matters-where-are-we-now.html

New Developments on Exclusion of Employer-Provided Meals

https://lawprofessors.typepad.com/agriculturallaw/2019/02/new-development-on-exclusion-of-employer-provided-meals.html

Valuing Non-Cash Charitable Gifts

https://lawprofessors.typepad.com/agriculturallaw/2019/03/valuing-non-cash-charitable-gifts.html

Passive Losses and Material Participation

https://lawprofessors.typepad.com/agriculturallaw/2019/03/passive-losses-and-material-participation.html

Passive Losses and Real Estate Professionals

https://lawprofessors.typepad.com/agriculturallaw/2019/03/passive-losses-and-real-estate-professionals.html

Developments in Agricultural Law and Taxation

https://lawprofessors.typepad.com/agriculturallaw/2019/03/developments-in-agricultural-law-and-taxation.html

Real Estate Professionals and Aggregation – The Passive Loss Rules

https://lawprofessors.typepad.com/agriculturallaw/2019/03/real-estate-professionals-and-aggregation-the-passive-loss-rules.html

Sale of the Personal Residence After Death

https://lawprofessors.typepad.com/agriculturallaw/2019/03/sale-of-the-personal-residence-after-death.html

Cost Segregation Study – Do You Need One for Your Farm?

https://lawprofessors.typepad.com/agriculturallaw/2019/03/cost-segregation-study-do-you-need-one-for-your-farm.html

Cost Segregation – Risk and Benefits

https://lawprofessors.typepad.com/agriculturallaw/2019/04/cost-segregation-risks-and-benefits.html

Permanent Conservation Easement Donation Transactions Find Their Way to the IRS “Dirty Dozen” List

https://lawprofessors.typepad.com/agriculturallaw/2019/04/permanent-conservation-easement-donation-transactions-find-their-way-to-the-irs-dirty-dozen-list.html

Self-Rentals and the Passive Loss Rules

https://lawprofessors.typepad.com/agriculturallaw/2019/04/self-rentals-and-the-passive-loss-rules.html

More on Self-Rentals

            https://lawprofessors.typepad.com/agriculturallaw/2019/04/more-on-self-rentals.html

Of Black-Holes, Tax Refunds, and Statutory Construction

https://lawprofessors.typepad.com/agriculturallaw/2019/04/of-black-holes-tax-refunds-and-statutory-construction.html

What Happened in Tax During Tax Season?

https://lawprofessors.typepad.com/agriculturallaw/2019/04/what-happened-in-tax-during-tax-season.html

Cost Segregation and the Recapture Issue

https://lawprofessors.typepad.com/agriculturallaw/2019/06/cost-segregation-and-the-recapture-issue.html

S.E. Tax and Contract Production Income

https://lawprofessors.typepad.com/agriculturallaw/2019/06/se-tax-and-contract-production-income.html

Recent Developments in Farm and Ranch Business Planning

https://lawprofessors.typepad.com/agriculturallaw/2019/06/recent-developments-in-farm-and-ranch-business-planning.html

Ag Cooperatives and the QBID – Initial Guidance

https://lawprofessors.typepad.com/agriculturallaw/2019/06/ag-cooperatives-and-the-qbid-initial-guidance.html

Wayfair Does Not Mean That a State Can Always Tax a Trust Beneficiary

https://lawprofessors.typepad.com/agriculturallaw/2019/06/wayfair-does-not-mean-that-a-state-can-always-tax-a-trust-beneficiary.html

Start Me Up! – Tax Treatment of Start-Up Expenses

https://lawprofessors.typepad.com/agriculturallaw/2019/07/start-me-up-tax-treatment-of-start-up-expenses.html

More on Real Estate Exchanges

https://lawprofessors.typepad.com/agriculturallaw/2019/07/more-on-real-estate-exchanges.html

2019 Tax Planning for Midwest/Great Plains Farmers and Ranchers

https://lawprofessors.typepad.com/agriculturallaw/2019/07/2019-tax-planning-for-midwestgreat-plains-farmers-and-ranchers.html

Tax Treatment of Settlements and Court Judgments

https://lawprofessors.typepad.com/agriculturallaw/2019/07/tax-treatment-of-settlements-and-court-judgments.html

ESOPs and Ag Businesses – Part One

https://lawprofessors.typepad.com/agriculturallaw/2019/07/esops-and-ag-businesses-part-one.html 

Tax “Math” on Jury Verdicts

https://lawprofessors.typepad.com/agriculturallaw/2019/07/tax-math-on-jury-verdicts.html

Kansas Revenue Department Takes Aggressive Position Against Remote Sellers

https://lawprofessors.typepad.com/agriculturallaw/2019/08/kansas-revenue-department-take-aggressive-position-against-remote-sellers.html

Tax-Deferred Exchanges and Conservation Easements

https://lawprofessors.typepad.com/agriculturallaw/2019/08/tax-deferred-exchanges-and-conservation-easements.html

Proper Handling of Breeding Fees

https://lawprofessors.typepad.com/agriculturallaw/2019/08/proper-handling-of-breeding-fees.html

Proper Tax Reporting of Commodity Wages

https://lawprofessors.typepad.com/agriculturallaw/2019/08/proper-tax-reporting-of-commodity-wages.html

Tax Consequences of Forgiving Installment Payment Debt

https://lawprofessors.typepad.com/agriculturallaw/2019/09/tax-consequences-of-forgiving-installment-payment-debt.html

Are Taxes Dischargeable in Bankruptcy?

https://lawprofessors.typepad.com/agriculturallaw/2019/09/are-taxes-dischargeable-in-bankruptcy.html

Ag Law and Tax in the Courts

https://lawprofessors.typepad.com/agriculturallaw/2019/09/ag-law-and-tax-in-the-courts.html

Refund Claim Relief Due to Financial Disability

https://lawprofessors.typepad.com/agriculturallaw/2019/09/refund-claim-relief-due-to-financial-disability.html

Shareholder Loans and S Corporation Stock Basis

https://lawprofessors.typepad.com/agriculturallaw/2019/09/shareholder-loans-and-s-corporation-stock-basis.html

The Family Limited Partnership – Part Two

https://lawprofessors.typepad.com/agriculturallaw/2019/09/the-family-limited-partnership-part-two.html

Hobby Losses Post-2017 and Pre-2026 – The Importance of Establishing a Profit Motive

https://lawprofessors.typepad.com/agriculturallaw/2019/10/hobby-losses-post-2017-and-pre-2026-the-importance-of-establishing-a-profit-motive.html

The Importance of Income Tax Basis “Step-Up” at Death

https://lawprofessors.typepad.com/agriculturallaw/2019/10/the-importance-of-income-tax-basis-step-up-at-death.html

Bad Debt Deduction

            https://lawprofessors.typepad.com/agriculturallaw/2019/10/bad-debt-deduction.html

More on Cost Depletion – Bonus Payments

https://lawprofessors.typepad.com/agriculturallaw/2019/10/more-on-cost-depletion-bonus-payments.html

Recapture – A Dirty Word in the Tax Code Lingo

https://lawprofessors.typepad.com/agriculturallaw/2019/10/recapture-a-dirty-word-in-tax-code-lingo.html

Does the Sale of Farmland Trigger Net Investment Income Tax?

https://lawprofessors.typepad.com/agriculturallaw/2019/10/does-the-sale-of-farmland-trigger-net-investment-income-tax.html

Are Director Fees Subject to Self-Employment Tax?

https://lawprofessors.typepad.com/agriculturallaw/2019/10/are-director-fees-subject-to-self-employment-tax.html

Are Windbreaks Depreciable?

https://lawprofessors.typepad.com/agriculturallaw/2019/11/are-windbreaks-depreciable.html

Tax Issues Associated with Restructuring Credit Lines

https://lawprofessors.typepad.com/agriculturallaw/2019/12/tax-issues-associated-with-restructuring-credit-lines.html

Is a Tenancy-in-Common Interest Eligible for Like-Kind Exchange Treatment?

https://lawprofessors.typepad.com/agriculturallaw/2019/12/is-a-tenancy-in-common-interest-eligible-for-like-kind-exchange-treatment.html

Year-End Legislation Contains Tax Extenders, Repealers, and Modifications to Retirement Provisions

https://lawprofessors.typepad.com/agriculturallaw/2019/12/year-end-legislation-contains-tax-extenders-repealers-and-modification-to-retirement-provisions.html

The “Almost Top Ten” Ag Law and Ag Tax Developments of 2019

https://lawprofessors.typepad.com/agriculturallaw/2019/12/the-almost-top-ten-ag-law-and-ag-tax-developments-of-2019.html

INSURANCE

Prevented Planting Payments – Potential Legal Issues?

https://lawprofessors.typepad.com/agriculturallaw/2019/06/prevented-planting-payments-potential-legal-issues.html

Ag Law in the Courts

            https://lawprofessors.typepad.com/agriculturallaw/2019/11/ag-law-in-the-courts.html

REAL PROPERTY

 Negotiating Cell/Wireless Tower Agreements

https://lawprofessors.typepad.com/agriculturallaw/2019/01/negotiating-cellwireless-tower-agreements.html

Selected Recent Cases Involving Agricultural Law

https://lawprofessors.typepad.com/agriculturallaw/2019/01/selected-recent-cases-involving-agricultural-law.html

The Accommodation Doctrine – More Court Action

https://lawprofessors.typepad.com/agriculturallaw/2019/01/the-accommodation-doctrine-more-court-action.html

Defects in Real Estate Deeds – Will Time Cure All?

https://lawprofessors.typepad.com/agriculturallaw/2019/02/defects-in-real-estate-deeds-will-time-cure-all.html

Is there a Common-Law Right to Hunt (and Fish) Your Own Land?

https://lawprofessors.typepad.com/agriculturallaw/2019/02/is-there-a-common-law-right-to-hunt-and-fish-your-own-land.html

Legal Issues Associated with Abandoned Railways

https://lawprofessors.typepad.com/agriculturallaw/2019/05/legal-issues-associated-with-abandoned-railways.html

Public Trust vs. Private Rights – Where’s the Line?

https://lawprofessors.typepad.com/agriculturallaw/2019/06/public-trust-vs-private-rights-wheres-the-line.html

Ag in the Courtroom

            https://lawprofessors.typepad.com/agriculturallaw/2019/07/ag-in-the-courtroom.html

More on Real Estate Exchanges

https://lawprofessors.typepad.com/agriculturallaw/2019/07/more-on-real-estate-exchanges.html

How Does the Rule Against Perpetuities Apply in the Oil and Gas Context?

https://lawprofessors.typepad.com/agriculturallaw/2019/08/how-does-the-rule-against-perpetuities-apply-in-the-oil-and-gas-context.html

Ag Law in the Courts

            https://lawprofessors.typepad.com/agriculturallaw/2019/10/ag-law-in-the-courts.html

Cost Depletion of Minerals

https://lawprofessors.typepad.com/agriculturallaw/2019/10/cost-depletion-of-minerals.html

Co-Tenancy or Joint Tenancy – Does it Really Matter?

https://lawprofessors.typepad.com/agriculturallaw/2019/11/co-tenancy-or-joint-tenancy-does-it-really-matter.html

“Slip Slidin’ Away” – The Right of Lateral and Subjacent Support

https://lawprofessors.typepad.com/agriculturallaw/2019/12/slip-slidin-away-the-right-of-lateral-and-subjacent-support.html

Is a Tenancy-in-Common Interest Eligible for Like-Kind Exchange Treatment?

https://lawprofessors.typepad.com/agriculturallaw/2019/12/is-a-tenancy-in-common-interest-eligible-for-like-kind-exchange-treatment.html

REGULATORY LAW

Top 10 Developments in Ag Law and Tax for 2018 – Numbers 10 and 9

https://lawprofessors.typepad.com/agriculturallaw/2019/01/top-10-developments-in-ag-law-and-tax-for-2018-numbers-10-and-9.html

Top Ten Agricultural Law and Tax Developments of 2018 – Numbers 6, 5, and 4

https://lawprofessors.typepad.com/agriculturallaw/2019/01/top-ten-agricultural-law-and-tax-developments-of-2018-numbers-6-5-and-4.html

Top Ten Agricultural Law and Tax Developments of 2018 – Numbers 3, 2, and 1

https://lawprofessors.typepad.com/agriculturallaw/2019/01/top-ten-agricultural-law-and-tax-developments-of-2018-numbers-3-2-and-1.html

Is There a Common-Law Right to Hunt (and Fish) Your Own Land?

https://lawprofessors.typepad.com/agriculturallaw/2019/02/is-there-a-common-law-right-to-hunt-and-fish-your-own-land.html

Packers and Stockyards Act – Basic Provisions

https://lawprofessors.typepad.com/agriculturallaw/2019/03/packers-and-stockyards-act-basic-provisions.html

Packers and Stockyards Act Provisions for Unpaid Cash Sellers of Livestock

https://lawprofessors.typepad.com/agriculturallaw/2019/03/packers-and-stockyards-act-provisions-for-unpaid-cash-sellers-of-livestock.html

More Recent Developments in Agricultural Law

https://lawprofessors.typepad.com/agriculturallaw/2019/03/more-recent-developments-in-agricultural-law.html

Ag Antitrust – Is There a Crack in the Wall of the “Mighty-Mighty” (Illinois) Brick House?

https://lawprofessors.typepad.com/agriculturallaw/2019/05/ag-antitrust-is-there-a-crack-in-the-wall-of-the-mighty-mighty-illinois-brick-house.html

Can Foreign Persons/Entities Own U.S. Agricultural Land?

https://lawprofessors.typepad.com/agriculturallaw/2019/05/can-foreign-personsentities-own-us-agricultural-land.html

Prevented Planting Payments – Potential Legal Issues?

https://lawprofessors.typepad.com/agriculturallaw/2019/06/prevented-planting-payments-potential-legal-issues.html

Eminent Domain and Agriculture

https://lawprofessors.typepad.com/agriculturallaw/2019/06/eminent-domain-and-agriculture.html

Classification of Seasonal Ag Workers – Why It Matters

https://lawprofessors.typepad.com/agriculturallaw/2019/06/classification-of-seasonal-ag-workers-why-it-matters.html

Administrative Agency Deference – Little Help for Ag From the Supreme Court

https://lawprofessors.typepad.com/agriculturallaw/2019/06/administrative-agency-deference-little-help-for-ag-from-the-supreme-court.html

Regulation of Food Products

https://lawprofessors.typepad.com/agriculturallaw/2019/07/regulation-of-food-products.html

Ag Legal Issues in the Courts

https://lawprofessors.typepad.com/agriculturallaw/2019/08/ag-legal-issues-in-the-courts.html

Kansas Revenue Department Takes Aggressive Position Against Remote Sellers

https://lawprofessors.typepad.com/agriculturallaw/2019/08/kansas-revenue-department-take-aggressive-position-against-remote-sellers.html

Court Decision Illustrates USDA’s Swampbuster “Incompetence”

https://lawprofessors.typepad.com/agriculturallaw/2019/08/court-decision-illustrates-usdas-swampbuster-incompetence.html

Ag Law and Tax in the Courts

https://lawprofessors.typepad.com/agriculturallaw/2019/09/ag-law-and-tax-in-the-courts.html

Regulatory Takings – Pursuing a Remedy

https://lawprofessors.typepad.com/agriculturallaw/2019/10/regulatory-takings-pursuing-a-remedy.html

The “Almost Top Ten” Ag Law and Ag Tax Developments of 2019

https://lawprofessors.typepad.com/agriculturallaw/2019/12/the-almost-top-ten-ag-law-and-ag-tax-developments-of-2019.html

SECURED TRANSACTIONS

Market Facilitation Program Pledged as Collateral – What are the Rights of a Lender?

https://lawprofessors.typepad.com/agriculturallaw/2019/05/market-facilitation-program-payments-pledged-as-collateral-what-are-the-rights-of-a-lender.html

SEMINARS AND CONFERENCES

Summer 2019 Farm and Ranch Tax and Estate/Business Planning Seminar

https://lawprofessors.typepad.com/agriculturallaw/2019/04/summer-2019-farm-and-ranch-tax-and-estatebusiness-planning-seminar.html

2019 National Ag Tax/Estate and Business Planning Conference in Steamboat Springs!

https://lawprofessors.typepad.com/agriculturallaw/2019/05/2019-national-ag-taxestate-and-business-planning-conference-in-steamboat-springs.html

Summer Tax and Estate Planning Seminar!

https://lawprofessors.typepad.com/agriculturallaw/2019/07/summer-tax-and-estate-planning-seminar.html

2020 National Summer Ag Income Tax/Estate and Business Planning Seminar

https://lawprofessors.typepad.com/agriculturallaw/2019/12/2020-national-summer-ag-income-taxestate-and-business-planning-seminar.html

Fall Seminars

            https://lawprofessors.typepad.com/agriculturallaw/2019/08/fall-seminars.html

WATER LAW

The Accommodation Doctrine – More Court Action

https://lawprofessors.typepad.com/agriculturallaw/2019/01/the-accommodation-doctrine-more-court-action.html

Ag Legal Issues in the Courts

https://lawprofessors.typepad.com/agriculturallaw/2019/08/ag-legal-issues-in-the-courts.html

Ag Law in the Courts

            https://lawprofessors.typepad.com/agriculturallaw/2019/10/ag-law-in-the-courts.html

Regulating Existing Water Rights – How Far Can State Government Go?

https://lawprofessors.typepad.com/agriculturallaw/2019/10/regulating-existing-water-rights-how-far-can-state-government-go.html

The Politics of Prior Appropriation – Is a Senior Right Really Senior?

https://lawprofessors.typepad.com/agriculturallaw/2019/12/the-politics-of-prior-appropriation-is-a-senior-right-really-senior.html

Changing Water Right Usage

https://lawprofessors.typepad.com/agriculturallaw/2019/12/changing-water-right-usage.html

February 28, 2021 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Thursday, February 18, 2021

Will the Estate Tax Valuation Regulations Return?

Overview

Over the past few decades, valuation discounting through the use of family-owned business entities has become a popular estate and gift tax planning technique. If structured properly, the courts have routinely validated discounts ranging from 10 to 40 percent. Valuation discounting has proven to be a very effective strategy for transferring wealth to subsequent generations. It is a particularly useful technique with respect to the transfer of small family businesses and farming/ranching operations. Similar, but lower, valuation discounts can also be achieved with respect to the transfer of fractional interests in real estate.

With the new Administration and Congress in place, will estate tax valuation regulations be put in place that diminish or eliminate the valuation discounting technique?  It’s a distinct possibility.  If it happens, it will remove a significant planning tool for higher wealth estates and will increase the transfer tax cost of transitioning certain farms and ranches to the next generation.

Estate tax valuation discounts – it’s the topic of today’s post.

Valuation and The Concept of Discounting

The value of an asset for federal estate and gift tax purposes is “fair market value.”  For assets traded on an established market or that have a readily ascertainable value, the value for gift and estate tax purposes is their fair market value on the date of the transfer or death as determined by the established market or the otherwise readily ascertainable value.  For other assets, such as interests in a closely-held (non-publicly trade) farm or ranch.  Fair market value is more difficult to determine.  For this type of property, fair market value is defined as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts.” Treas. Reg. §§20.2031-1(b); 25.2512-1; Rev. Rul. 59-60, 1959-1 C.B. 237.  State law controls the determination of what has been transferred in the valuation process. 

The concept of “fair market value” under the “willing buyer-willing seller” test must necessarily take into account a value reduction to reflect either non-marketability of an interest in a closely-held business as well as any lack of control (minority position) that the interest has. A willing buyer simply would not pay a pro-rata portion of an entity’s value for an interest that is not a controlling interest or is not marketable because it is not publicly traded.  Under this standard, it is immaterial whether the buyer and seller are related – the test is based on a hypothetical buyer and seller. Thus, there is no attribution of ownership between family members that would change a minority interest into a majority interest.

Proposed Regulations

Background.  The two primary tax Code provisions that bear on the valuation issue are I.R.C. §2036 and I.R.C. §2704.  I.R.C. §2036 states that, “[t]he value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death— (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.”  I.R.C. §2704 address how to value intra-family transfers of interests in corporations and partnerships subject to lapsing voting or liquidation rights and restrictions on liquidation.  I.R.C. §2704(a)(1) generally provides that, if there is a lapse of any voting or liquidation right in a corporation or a partnership and the individual holding the right immediately before the lapse and members of the individual’s family hold, both before and after the lapse, control of the entity, the lapse will be treated as a transfer by the individual by gift, or a transfer which is includible in the gross estate, whichever is applicable.  Combined, these two Code sections govern transfers of property where the transferor retains certain rights over the property where a bona fide sale for adequate consideration wasn’t received, and the intra-family transfers.  Both of those types of transactions are often a part of estate and business planning for farming and ranching operations.

2016 proposal.  Near the tail-end of the Obama/Biden administration, the Treasury issued proposed regulations (REG-163113-02) that would have significantly curtailed the ability to take valuation discounts on intrafamily transfers of business interests (e.g., discounts for lack of marketability and minority interests) involving both I.R.C. §2036 and I.R.C. §2704.  Specifically, the proposed regulations would treat certain transfers occurring within three years of death that result in the lapse of a liquidation right as transfers occurring at death for purposes of I.R.C. §2704(a). At that time, the IRS explained that the regulations were intended to address estate planning strategies that avoid the application of I.R.C. §2704. The proposed regulations added a three-year rule to narrow the exception to the definition of a lapse of a liquidation right to transfers that occur three or more years prior to the transferor’s death and that do not restrict or eliminate the rights associated with the ownership of the transferred interest.  The proposed regulation was issued by itself, and not also as a temporary regulation, and did not have any provision stating that a taxpayer could rely on it before it is issued as a final regulation.

The effective date of the proposed regulation reaches back to include valuations associated with any lapse of any right created on or after October 8, 1990 occurring on or after the date the proposed regulations is published in the Federal Register as a final regulation. This would make it nearly impossible to avoid the application of the final regulation by various estate planning techniques.

IRS concern.  So, why proposed regulations?  What is the IRS concerned about?  While the IRS has won a number of court cases involving discounting in the context of family limited partnerships (FLPs), it has lost some very significant ones.  The courts have validated discounts associated with FLPs where the FLP was formed for legitimate business purposes and state law formalities have been followed closely.   From my sources both inside and outside of the IRS, the IRS is apparently still encountering situations involving FLPs that are not established in accordance with state law, don’t adequately document the business reasons for forming the FLP and have inaccurate or incomplete asset appraisals.  They think that the revenue loss is large as a result of the technical non-compliance with I.R.C. §§2036 and 2704.   Consequently, the new proposed regulations eliminate the ability to value an interest in an entity (in the aggregate) at an amount less than the value of the value of the property had it not been contributed to the entity.  The IRS view is that the lower value of the property as contained in the entity is an inappropriate way to avoid transfer taxes. 

Elimination of the proposed regulations.  Before the proposed regulations were finalized, President Trump issued Executive Order (EO) 13789.  In that EO, President Trump directed the Treasury Department to review all significant tax regulations issued since January 1, 2016. The Treasury Department was directed to identify regulations that may be “unduly burdensome or complex,” and propose actions to mitigate those burdens.  The Treasury Department identified the proposed valuation regulations as unduly burdensome or complex, and “would have hurt family-owned and operated businesses by limiting valuation discounts.” Additionally, the regulations “would have made it difficult and costly for a family to transfer their businesses to the next generation.” The Treasury Department also noted stakeholders’ concerns that the regulations were vague and would be burdensome to administer.

In withdrawing the proposed regulations, (NPRM REG-163113-02), the Treasury commented that the regulations were “unworkable” and stated that, “it is unclear whether the valuation rules of the proposed regulations would have even succeeded in curtailing artificial valuation discounts.”

Resurrection?

The Biden Treasury Department could revive the withdrawn proposed regulations and potentially finalize them sometime in 2021.  If that happens, the ability to generate valuation discounts for the transfer of family-owned entities such as farm and ranches would be seriously impacted. 

Clearly, the Treasury can write regulations that specify that certain restrictions on transfer can be disregarded when determining the value of an interest in an entity to a family member of the transferor.  However, without legislation allowing it, the IRS cannot simply ignore discounts for lack of marketability or lack of control (minority interest).  Long-standing interpretations of I.R.C. §2704 (and I.R.C. §2036) by the Tax Court and the Circuit Courts support valuation discounts when the transaction is done properly.  As a result, the Courts may have a different view than the IRS/Treasury with respect to the proposed regulations based on the longstanding Congressional intent to allow discounts in a family context. Having discretion does not mean that Treasury has discretion to determine value as it pleases.

Conclusion

The possibility of the valuation regulations returning puts an emphasis on examining estate and transition plans now.  It’s a good idea to have a wealth transfer strategy in place.  While the political margins are close in the House and Senate, the Treasury and IRS could significantly alter the planning landscape without any need for congressional approval. 

The valuation discounting issue merits close attention.

February 18, 2021 in Business Planning, Estate Planning | Permalink | Comments (0)

Saturday, February 6, 2021

What Now? – Part Two

Overview

In Part One earlier this week, I took a look at the possible income tax-related changes that might be on the horizon and the planning implications of such changes.  In today’s post I turn the spotlight to potential changes that could impact estate and business planning.  Will estate and gift tax rates change?  What about the level of the federal estate and gift tax exemption?  Will the income tax basis rule change when a person dies?  Will valuation discounts be available?  These are all important questions that bear on how the farming or ranching business should be structured to facilitate an intergenerational transfer.  These are all questions that are on the minds of many farm and ranch families. 

Potential law changes that could impact farm and ranch estate and business planning – it’s the topic of today’s post.

Estate and Gift Tax Exemption

When I first started practicing, the federal estate and gift tax exemption sheltered $600,000 of wealth.  That seems like a pittance now with the current level set at $11.7 million for deaths in and taxable gifts made in 2021.  Indeed, the farm and ranch estate and business planning practice was robust at the time.  Even 30 years ago, it was quite easy for a modest-sized farming operation to reach the $600,000 net worth level.  That meant that proper structuring of entities, leases, asset ownership and coordinated provisions in wills and trusts were very important.  In addition, in situations where it was clear that the family would continue farming after the death(s) of the senior generation, it was necessary to coordinate the planning with an eye toward a possible special use valuation election in the first spouse’s (and sometimes also the second spouse’s) estate.  With the possible reduction of the exemption being discussed those planning techniques and concepts will be back in vogue.

USDA data indicates that the present average U.S. farmland value for all classes of land averaged $3,160 per acre in 2020.  Nationwide, the average farm size is 445 acres.  Thus, the typical U.S. farming operation has land worth $1,406,200.  Add in livestock, farm machinery and equipment, grain inventory, the home and outbuildings, retirement savings, life insurance and other miscellaneous assets, the typical farm estate will routinely have an asset value totaling anywhere from three million to five million dollars.  Of course, these are averages and the federal estate tax is based on net worth (asset value less debt), but the point is that a reduction in the exemption to under at or under the $5 million level would be of considerable concern to many farm and ranch families (and other small business owners). 

Some proposals that I have seen would lower the exemption anywhere in a range from $3.5 million $5 million.  If that happens, a key question is whether it would be indexed for inflation and whether the reduction would apply retroactively to January 1, 2021.  Any retroactive change could make some prior tax-free gifts taxable.  There is also talk about increasing the top federal estate and gift tax rate to at least 45%. 

While no estate plan can accurately anticipate all potential changes in the law, clearly delaying estate planning now increases the potential that a detrimental change in the law would be in effect before the estate/business plan could be finished. 

Planning strategies.  So, what might be some strategies that could be employed right now?  What’s the most efficient way to use the current exemption amount? 

  • Various types of trusts. Gifting property to an irrevocable trust containing a disclaimer provision provides needed flexibility to adjust for changes in the exemption level.  It can also be used to shift income among beneficiaries.  The trust can be carefully drafted to give the grantor limited access to trust assets while simultaneously protecting trust assets from creditor claims and/or and IRS claim that the trust assets should be included in the grantor’s estate. 

For some assets, a better approach may be to have the owner borrow against them and gift the cash to a trust.  This was an approach that was used in prior years when the exemption was much lower.  The loaned funds are then gifted to a trust and covered by the exemption so that no gift tax occurs.  The leveraged asset remains in the estate but with debt against it.  The result is that the taxable value of the decedent’s estate is reduced.

  • Valuation discounting. A common estate/business planning technique when the exemption was much lower than its present level was to utilize various valuation discounting approaches with respect to interests in entities.  Such discounts from fairy market value can be achieved to reflect the owner’s minority interest in an entity as well as the fact that the interest is in an entity that is not publicly traded and, as a result, lacks marketability.  A $10 million interest, therefore, may be able to be valued in the decedent’s estate with a discounted value of $8 million, for example, to reflect that the decedent only owned 30% (as an example) of a small, closely-held farming or ranching operation.  The IRS has routinely attacked valuation discounting, and the regulations on the matter that were frozen during the Trump Administration now will likely come back.  If so, valuation discount planning may become unavailable. 
  • GRAT.  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.  Of course, if the exemption is lowered, more estates will be in the “high-value” category and the GRAT technique could be even more widespread in use.  Unfortunately, there are discussions that up to 25 percent of the value of assets transferred to a GRAT would be taxed.  If that occurs, the GRAT technique would go by the wayside.
  • Gifting.  A longstanding strategy for large estates that will potentially exceed the exemption amount at death is to use annual exclusion gifts (either outright or via interests in closely-held family entities) to ultimately reduce the size of the taxable estate to an amount that would be fully covered by the exemption amount.  The strategy has become less popular in recent years given the substantial increase in the exclusion amount to its present level of $11.7 million for deaths and gifts made in 2021.  However, current law causes the exclusion amount to decrease to $5 million (plus an adjustment for inflation from 2018) beginning in 2026.  If the exemption were to be reduced to the $3.5 million to $5 million range before then that could place an emphasis for some estates to make gifts now and cover it with the currently higher exemption amount. 
  • One thing to keep in mind with this strategy is a concern that was first raised when the Tax Cuts and Jobs Act was enacted in late 2017.  That is the issue of “clawback” – whether gifts made between 2018 and 2025 that utilized the larger exemption amount will trigger additional estate tax.  In late 2019, the Treasury issued Final Regulations taking the position that clawback will not be imposed when the exclusion drops to the $5 million amount (with an inflation adjustment) at the start of 2026.  T.D. 9884.  Thus, in accordance with the Final Regulation, and estate can compute its estate tax liability using the higher exemption amount that was in effect at the time the gift(s).  Of course, if the law changes the exemption amount before 2026, the Final Regulation wouldn’t apply.  It would then be up to the Treasury whether to utilize clawback on an estate with a lower exemption amount that at the time the decedent made gifts.

  • Under the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97,the basic exclusion amount (BEA) was increased from $5 million to $10 million, indexed for inflation. In 2020, the inflation-indexed BEA is $11.58 million. The TCJA states that the increased $10 million BEA will be in place only until the end of 2025, after which it will revert to the previous $5 million BEA, indexed for inflation. Those in a position to make larger gifts have an opportunity to seize the increased BEA before it is lost; but, in doing so, one should not forget some long-standing gift planning considerations.  Before discussing potential planning that may make use of the increased BEA, it is important to address one concern raised after the enactment of the TCJA regarding whether larger gifts made between 2018 and 2025 that used the increased BEA would give rise to additional estate tax once the exclusion returns to its reduced amount as scheduled under current law. On Nov. 26, 2019, Treasury and the IRS released final regulations (T.D. 9884), clarifying that there will be no "clawback" when the exclusion amount reverts to $5 million (inflation indexed) at the beginning of 2026. Instead, an estate will be allowed to compute its estate tax using the increased BEA that was in effect when the gifts from 2018 to 2025 were made.
  • Retroactive change. A retroactive change in the estate/gift tax exemption would pose special problems.  One effect could be that a taxable gift covered by the current $11.7 million exemption would now be taxable to the extent it exceeds the new, lowered exemption level.  This effect can be avoided with a special type of marital trust (assuming that the transferor is married) coupled with an election (known as a “QTIP” election).  This would involve some guessing as to what the new (lower) exemption level would be.  The election ideally would be made on only with respect to the value of enough property such that the balance could remain exempt from estate tax as covered by the new (lower) exemption amount.  For large estates where both spouses utilize this technique, the “reciprocal trust doctrine” would need to be avoided.

Another way to potentially combat a retroactive reduction in the exemption is to incorporate formula language in a trust that sets forth the value of property gifted to the trust.  Often this approach is used when gifting fractional interests in an entity (such as a limited liability company) to the trust.  The formula language must be drafted with precision.  For example, in Wandry v. Comr., T.C. Memo. 2012-88, formula clause language was upheld as valid because it caused the transfer of percentage interests to the donees equal in value to the amounts set forth in the associated gift documents (i.e., dollar amounts) rather than fixed percentage interests. But, in Nelson v. Comr., T.C. Memo. 2020-81, the tax court determined that the formula clause language was ineffective because it resulted in the transfer of fixed dollar amounts resulting in a substantial gift tax deficiency. 

Disclaimer language in trust instruments can also be used to allow flexibility to deal with a retroactive change in the exemption level.  I.R.C. §2518.  A disclaimer is a renunciation of rights to property that would otherwise pass to the person if they didn’t exercise their right to disclaim receiving the property.  There are also ways to create what I would call a “defective” disclaimer to deal with the issue of retroactivity.  Again, it’s a very complex matter that requires clear and precise drafting. 

Other Potential Changes

GSTT.  There is additional buzz about imposing the current generation-skipping transfer tax (GSTT) on certain “perpetual” or long-term trusts periodically.  For most people, this would be a minor issue.

Present interest gifts.  One proposal is to cap the present interest exclusion for gift tax purposes to $20,000 per donor.  Presently, a person can give up to $15,000 to a donee annually (on a cumulative basis) and incur no gift tax.  There is no limit on the number of donees under current law.  Restricting the provision to $20,000 per donor annually would be a substantial restriction on the ability to make non-taxable gifts.  This would be a significant change by itself, but when combined with a lower estate tax exemption, such a change would be monumental.  Tax-free gifting techniques have long been used as an estate tax minimization strategy.  That would change if this provision were to become law. 

Income tax basis.  This is the “monster” in the room.  Currently, an asset that is included in a decedent’s estate at death for tax purposes receives an income tax basis in the hands of the heir(s) equal to the fair market value of the asset at the time of death.   I.R.C. §1014. This is commonly referred to as “stepped-up” basis.  Thus, if the heir were to sell the asset capital gains tax for the heir would be computed as the difference between the selling price of the asset and the value at the time of the heir inherited the asset.  For an asset that is sold shortly after inheritance, the capital gains tax is likely to be minimal to none.  If the stepped-up basis rule were to be eliminated, the heir would receive the decedent’s income tax basis. For farmland that the decedent owned for many years, for example, that basis could be much lower than the date-of-death value.  That would be particularly the case if the decedent had received the farmland by gift, receiving the donor’s income tax basis in the farmland at the time of the gift.  The result would be heir’s being hit with large capital gains tax, or simply refusing to sell the land (if possible) and creating a “lock-in” effect with respect to certain assets.  To make matters worse, there is even talk of imposing a capital gains tax on the appreciated value at the time of death, rather than at the time the heir sells the inherited property that has appreciated in value. 

A change in the income tax basis rule would substantially impact estate and business planning.  This is particularly true with respect to farm and ranch estates where many assets have a low basis – either from being owned for many years or because of income tax planning strategies that have substantially diminished or eliminated the basis in assets. 

Conclusion

Now is certainly the time to engage tax and estate/business planning professionals in discussion about income tax planning, estate planning and entity structuring.  The legislation that has been discussed as potentially coming in the near future has important implications for farming and ranching operations (and other small businesses) that desire to continue into the next generation.  I will be addressing these issues and providing planning suggestions at my two national event this summer.  Shawnee State Park in Ohio on in early June and Missoula, Montana in early August.  Registration details will be available soon.  Maybe we will have more details by then and can craft plans forward.

February 6, 2021 in Estate Planning | Permalink | Comments (0)

Wednesday, January 20, 2021

Ag Law and Taxation 2020 Bibliography

Overview

Today's post is a bibliography of my ag law and tax blog articles of 2020.  Many of you have requested that I provide something like this to make it easier to find the articles.  If possible, I will do the same for articles from prior years.  The library of content is piling up - I have written more than 500 detailed articles for the blog over the last four and one-half years.

Cataloging the 2020 ag law and tax blog articles - it's the topic of today's post.

BANKRUPTCY

Ag Law and Tax in the Courts – Bankruptcy Debt Discharge; Aerial Application of Chemicals; Start-Up Expenses and Lying as Protected Speech

https://lawprofessors.typepad.com/agriculturallaw/2020/01/ag-law-and-tax-in-the-courts-bankruptcy-debt-discharge-aerial-application-of-chemicals-start-up-expe.html

Unique, But Important Tax Issues – “Claim of Right;” Passive Loss Grouping; and Bankruptcy Taxation

https://lawprofessors.typepad.com/agriculturallaw/2020/01/unique-but-important-tax-issues-claim-of-right-passive-loss-grouping-and-bankruptcy-taxation.html

Disaster/Emergency Legislation – Summary of Provisions Related to Loan Relief; Small Business and Bankruptcy

https://lawprofessors.typepad.com/agriculturallaw/2020/04/disasteremergency-legislation-summary-of-provisions-related-to-loan-relief-small-business-and-bankruptcy.html

Retirement-Related Provisions of the CARES Act

https://lawprofessors.typepad.com/agriculturallaw/2020/04/retirement-related-provisions-of-the-cares-act.html

Farm Bankruptcy – “Stripping, “Claw-Black,” and the Tax Collecting Authorities

https://lawprofessors.typepad.com/agriculturallaw/2020/05/farm-bankruptcy-stripping-claw-back-and-the-tax-collecting-authorities.html

SBA Says Farmers in Chapter 12 Ineligible for PPP Loans

https://lawprofessors.typepad.com/agriculturallaw/2020/06/sba-says-farmers-in-chapter-12-ineligible-for-ppp-loans.html

The “Cramdown” Interest Rate in Chapter 12 Bankruptcy

https://lawprofessors.typepad.com/agriculturallaw/2020/07/the-cramdown-interest-rate-in-chapter-12-bankruptcy.html

Bankruptcy and the Preferential Payment Rule

https://lawprofessors.typepad.com/agriculturallaw/2020/12/bankruptcy-and-the-preferential-payment-rule.html

BUSINESS PLANNING

Partnership Tax Ponderings – Flow-Through and Basis

https://lawprofessors.typepad.com/agriculturallaw/2020/02/partnership-tax-ponderings-flow-through-and-basis.html

Farm and Ranch Estate and Business Planning in 2020 (Through 2025)

https://lawprofessors.typepad.com/agriculturallaw/2020/03/farm-and-ranch-estate-and-business-planning-in-2020-through-2025.html

Transitioning the Farm or Ranch – Stock Redemption

https://lawprofessors.typepad.com/agriculturallaw/2020/07/transitioning-the-farm-or-ranch-stock-redemption.html

Estate and Business Planning for the Farm and Ranch Family – Use of the LLC (Part 1)

https://lawprofessors.typepad.com/agriculturallaw/2020/07/estate-and-business-planning-for-the-farm-and-ranch-family-use-of-the-llc-part-1.html

Estate and Business Planning for the Farm and Ranch Family – Use of the LLC (Part 2)

https://lawprofessors.typepad.com/agriculturallaw/2020/07/estate-and-business-planning-for-the-farm-and-ranch-family-use-of-the-llc-part-two.html

The Use of the LLC for the Farm or Ranch Business – Practical Application

https://lawprofessors.typepad.com/agriculturallaw/2020/08/the-use-of-the-llc-for-the-farm-or-ranch-business-practical-application.html

CIVIL LIABILITIES

Top Ten Agricultural Law and Tax Developments from 2019 (Numbers 10 and 9)

https://lawprofessors.typepad.com/agriculturallaw/2020/01/top-ten-agricultural-law-and-tax-developments-from-2019-numbers-10-and-9.html

Ag Law in the Courts – Feedlots; Dicamba Drift; and Inadvertent Disinheritance

https://lawprofessors.typepad.com/agriculturallaw/2020/01/ag-law-in-the-courts-feedlots-dicamba-drift-and-inadvertent-disinheritance.html

Ag Law and Tax in the Courts – Bankruptcy Debt Discharge; Aerial Application of Chemicals; Start-Up Expenses and Lying as Protected Speech

https://lawprofessors.typepad.com/agriculturallaw/2020/01/ag-law-and-tax-in-the-courts-bankruptcy-debt-discharge-aerial-application-of-chemicals-start-up-expe.html

Dicamba, Peaches and a Defective Ferrari; What’s the Connection?

https://lawprofessors.typepad.com/agriculturallaw/2020/05/dicamba-peaches-and-a-defective-ferrari-whats-the-connection.html

Liability for Injuries Associated with Horses (and Other Farm Animals)

https://lawprofessors.typepad.com/agriculturallaw/2020/06/liability-for-injuries-associated-with-horses-and-other-farm-animals.html

Issues with Noxious (and Other) Weeds and Seeds

https://lawprofessors.typepad.com/agriculturallaw/2020/09/issues-with-noxious-and-other-weeds-and-seeds.html

Of Nuisance, Overtime and Firearms – Potpourri of Ag Law Developments

https://lawprofessors.typepad.com/agriculturallaw/2020/11/of-nuisance-overtime-and-firearms-potpourri-of-ag-law-developments.html

CONTRACTS

The Statute of Frauds and Sales of Goods

https://lawprofessors.typepad.com/agriculturallaw/2020/01/the-statute-of-frauds-and-sales-of-goods.html

Disrupted Economic Activity and Force Majeure – Avoiding Contractual Obligations in Time of Pandemic

https://lawprofessors.typepad.com/agriculturallaw/2020/04/disrupted-economic-activity-and-force-majeure-avoiding-contractual-obligations-in-time-of-pandemic.html

Is it a Farm Lease or Not? – And Why it Might Matter

https://lawprofessors.typepad.com/agriculturallaw/2020/11/is-it-a-farm-lease-or-not-and-why-it-might-matter.html

COOPERATIVES

Top Ten Agricultural Law and Tax Developments of 2019 (Numbers 2 and 1)

https://lawprofessors.typepad.com/agriculturallaw/2020/01/top-ten-agricultural-law-and-tax-developments-of-2019-numbers-2-and-1.html

Concentrated Ag Markets – Possible Producer Response?

https://lawprofessors.typepad.com/agriculturallaw/2020/05/concentrated-ag-markets-possible-producer-response.html

CRIMINAL LIABILITIES

Is an Abandoned Farmhouse a “Dwelling”?

https://lawprofessors.typepad.com/agriculturallaw/2020/02/is-an-abandoned-farmhouse-a-dwelling.html

ENVIRONMENTAL LAW

Top Ten Agricultural Law and Tax Developments of 2019 (Numbers 8 and 7)

https://lawprofessors.typepad.com/agriculturallaw/2020/01/top-ten-agricultural-law-and-tax-developments-of-2019-numbers-8-and-7.html

Top Ten Agricultural Law and Tax Developments of 2019 (Numbers 6 and 5)

https://lawprofessors.typepad.com/agriculturallaw/2020/01/top-ten-agricultural-law-and-tax-developments-of-2019-numbers-six-and-five.html

Top Ten Agricultural Law and Tax Developments of 2019 (Numbers 4 and 3)

https://lawprofessors.typepad.com/agriculturallaw/2020/01/top-ten-agricultural-law-and-tax-developments-of-2019-numbers-4-and-3.html

Clean Water Act – Compliance Orders and “Normal Farming Activities”

https://lawprofessors.typepad.com/agriculturallaw/2020/03/clean-water-act-compliance-orders-and-normal-farming-activities.html

Groundwater Discharges of “Pollutants” and “Functional Equivalency”

https://lawprofessors.typepad.com/agriculturallaw/2020/04/groundwater-discharges-of-pollutants-and-functional-equivalency.html

NRCS Highly Erodible Land and Wetlands Conservation Final Rule – Clearer Guidance for Farmers or Erosion of Property Rights? – Part One

https://lawprofessors.typepad.com/agriculturallaw/2020/09/nrcs-highly-erodible-land-and-wetlands-conservation-final-rule-clearer-guidance-for-farmers-or-erosi.html

NRCS Highly Erodible Land and Wetlands Conservation Final Rule – Clearer Guidance for Farmers or Erosion of Property Rights? – Part Two

https://lawprofessors.typepad.com/agriculturallaw/2020/09/nrcs-highly-erodible-land-and-wetlands-conservation-final-rule-clearer-guidance-for-farmers-or-loss-of-property-rights.html

NRCS Highly Erodible Land and Wetlands Conservation Final Rule – Clearer Guidance for Farmers or Erosion of Property Rights? – Part Three

https://lawprofessors.typepad.com/agriculturallaw/2020/09/nrcs-highly-erodible-land-and-wetlands-conservation-final-rule-clearer-guidance-for-farmers-or-loss-of-property-rights-1.html

The Prior Converted Cropland Exception – More Troubles Ahead?

https://lawprofessors.typepad.com/agriculturallaw/2020/09/the-prior-converted-cropland-exception-more-troubles-ahead.html

TMDL Requirements – The EPA’s Federalization of Agriculture

            https://lawprofessors.typepad.com/agriculturallaw/2020/10/tmdl-requirements-.html

Eminent Domain and “Seriously Misleading” Financing Statements

https://lawprofessors.typepad.com/agriculturallaw/2020/10/eminent-domain-and-seriously-misleading-financing-statements.html

 

ESTATE PLANNING

Ag Law in the Courts – Feedlots; Dicamba Drift; and Inadvertent Disinheritance

https://lawprofessors.typepad.com/agriculturallaw/2020/01/ag-law-in-the-courts-feedlots-dicamba-drift-and-inadvertent-disinheritance.html

Recent Developments Involving Estates and Trusts

https://lawprofessors.typepad.com/agriculturallaw/2020/02/recent-developments-involving-decedents-estates-and-trusts.html

What is a “Trade or Business” For Purposes of Installment Payment of Federal Estate Tax?

https://lawprofessors.typepad.com/agriculturallaw/2020/03/what-is-a-trade-or-business-for-purposes-of-installment-payment-of-federal-estate-tax.html

Alternate Valuation – Useful Estate Tax Valuation Provision

https://lawprofessors.typepad.com/agriculturallaw/2020/03/alternate-valuation-useful-estate-tax-valuation-provision.html

Farm and Ranch Estate and Business Planning in 2020 (Through 2025)

https://lawprofessors.typepad.com/agriculturallaw/2020/03/farm-and-ranch-estate-and-business-planning-in-2020-through-2025.html

Retirement-Related Provisions of the CARES Act

https://lawprofessors.typepad.com/agriculturallaw/2020/04/retirement-related-provisions-of-the-cares-act.html

Are Advances to Children Loans or Gifts?

https://lawprofessors.typepad.com/agriculturallaw/2020/06/are-advances-to-children-loans-or-gifts.html

Tax Issues Associated with Options in Wills and Trusts

https://lawprofessors.typepad.com/agriculturallaw/2020/06/tax-issues-associated-with-options-in-wills-and-trusts.html

Valuing Farm Chattels and Marketing Rights of Farmers

https://lawprofessors.typepad.com/agriculturallaw/2020/06/valuing-farm-chattels-and-marketing-rights-of-farmers.html

Is it a Gift or Not a Gift? That is the Question

https://lawprofessors.typepad.com/agriculturallaw/2020/06/is-it-a-gift-or-not-a-gift-that-is-the-question.html

Does a Discretionary Trust Remove Fiduciary Duties a Trustee Owes Beneficiaries?

https://lawprofessors.typepad.com/agriculturallaw/2020/10/does-a-discretionary-trust-remove-fiduciary-duties-a-trustee-owes-beneficiaries.html

Can I Write my Own Will? Should I?

https://lawprofessors.typepad.com/agriculturallaw/2020/10/can-i-write-my-own-will-should-i.html

Income Taxation of Trusts – New Regulations

https://lawprofessors.typepad.com/agriculturallaw/2020/10/income-taxation-of-trusts.html

Merging a Revocable Trust at Death with an Estate – Tax Consequences

https://lawprofessors.typepad.com/agriculturallaw/2020/11/merging-a-revocable-trust-at-death-with-an-estate-tax-consequences.html

When is Transferred Property Pulled Back into the Estate at Death?  Be on Your Bongard!

https://lawprofessors.typepad.com/agriculturallaw/2020/11/when-is-transferred-property-pulled-back-into-the-estate-at-death-be-on-your-bongard.html

‘Tis the Season for Giving, But When is a Transfer a Gift?

https://lawprofessors.typepad.com/agriculturallaw/2020/12/tis-the-season-for-giving-but-when-is-a-transfer-a-gift.html

 

INCOME TAX

Top Ten Agricultural Law and Tax Developments of 2019 (Numbers 2 and 1)

https://lawprofessors.typepad.com/agriculturallaw/2020/01/top-ten-agricultural-law-and-tax-developments-of-2019-numbers-2-and-1.html

Does the Penalty Relief for a “Small Partnership” Still Apply?

https://lawprofessors.typepad.com/agriculturallaw/2020/01/does-the-penalty-relief-for-a-small-partnership-still-apply.html

Substantiation – The Key to Tax Deductions

https://lawprofessors.typepad.com/agriculturallaw/2020/01/substantiation-the-key-to-tax-deductions.html

Ag Law and Tax in the Courts – Bankruptcy Debt Discharge; Aerial Application of Chemicals; Start-Up Expenses and Lying as Protected Speech

https://lawprofessors.typepad.com/agriculturallaw/2020/01/ag-law-and-tax-in-the-courts-bankruptcy-debt-discharge-aerial-application-of-chemicals-start-up-expe.html

Unique, But Important Tax Issues – “Claim of Right;” Passive Loss Grouping; and Bankruptcy Taxation

https://lawprofessors.typepad.com/agriculturallaw/2020/01/unique-but-important-tax-issues-claim-of-right-passive-loss-grouping-and-bankruptcy-taxation.html

Conservation Easements and the Perpetuity Requirement

https://lawprofessors.typepad.com/agriculturallaw/2020/02/conservation-easements-and-the-perpetuity-requirement.html

Tax Treatment Upon Death of Livestock

https://lawprofessors.typepad.com/agriculturallaw/2020/02/tax-treatment-upon-death-of-livestock.html

What is a “Trade or Business” For Purposes of I.R.C. §199A?

https://lawprofessors.typepad.com/agriculturallaw/2020/02/what-is-a-trade-or-business-for-purposes-of-irc-199a.html

Tax Treatment of Meals and Entertainment

https://lawprofessors.typepad.com/agriculturallaw/2020/03/tax-treatment-of-meals-and-entertainment.html

Farm NOLs Post-2017

            https://lawprofessors.typepad.com/agriculturallaw/2020/03/farm-nols-post-2017.html

Disaster/Emergency Legislation – Summary of Provisions Related to Loan Relief; Small Business and Bankruptcy

https://lawprofessors.typepad.com/agriculturallaw/2020/04/disasteremergency-legislation-summary-of-provisions-related-to-loan-relief-small-business-and-bankruptcy.html

Retirement-Related Provisions of the CARES Act

https://lawprofessors.typepad.com/agriculturallaw/2020/04/retirement-related-provisions-of-the-cares-act.html

Income Tax-Related Provisions of Emergency Relief Legislation

https://lawprofessors.typepad.com/agriculturallaw/2020/04/income-tax-related-provisions-of-emergency-relief-legislation.html

The Paycheck Protection Program – Still in Need of Clarity

https://lawprofessors.typepad.com/agriculturallaw/2020/05/the-paycheck-protection-program-still-in-need-of-clarity.html

Solar “Farms” and The Associated Tax Credit

https://lawprofessors.typepad.com/agriculturallaw/2020/05/solar-farms-and-the-associated-tax-credit.html

Obtaining Deferral for Non-Deferred Aspects of an I.R.C. §1031 Exchange

https://lawprofessors.typepad.com/agriculturallaw/2020/05/obtaining-deferral-for-non-deferred-aspects-of-an-irc-1031-exchange-.html

Conservation Easements – The Perpetuity Requirement and Extinguishment

https://lawprofessors.typepad.com/agriculturallaw/2020/05/conservation-easements-the-perpetuity-requirement-and-extinguishment.html

PPP and PATC Developments

https://lawprofessors.typepad.com/agriculturallaw/2020/06/ppp-and-patc-developments.html

How Many Audit “Bites” of the Same Apple Does IRS Get?

https://lawprofessors.typepad.com/agriculturallaw/2020/07/how-many-audit-bites-of-the-same-apple-does-irs-get.html

More Developments Concerning Conservation Easements

https://lawprofessors.typepad.com/agriculturallaw/2020/07/more-developments-concerning-conservation-easements.html

Imputation – When Can an Agent’s Activity Count?

https://lawprofessors.typepad.com/agriculturallaw/2020/07/imputation-when-can-an-agents-activity-count.html

Exotic Game Activities and the Tax Code

https://lawprofessors.typepad.com/agriculturallaw/2020/08/exotic-game-activities-and-the-tax-code.html

Demolishing Farm Buildings and Structures – Any Tax Benefit?

         https://lawprofessors.typepad.com/agriculturallaw/2020/08/demolishing-farm-buildings-and-structures-any-tax-benefit.html

Tax Incentives for Exported Ag Products

https://lawprofessors.typepad.com/agriculturallaw/2020/08/tax-incentives-for-exported-ag-products.html

Deducting Business Interest

https://lawprofessors.typepad.com/agriculturallaw/2020/09/deducting-business-interest.html

Recent Tax Court Opinions Make Key Point on S Corporations and Meals/Entertainment Deductions

https://lawprofessors.typepad.com/agriculturallaw/2020/09/recent-tax-court-opinions-make-key-points-on-s-corporations-and-mealsentertainment-deductions.html

Income Taxation of Trusts – New Regulations

https://lawprofessors.typepad.com/agriculturallaw/2020/10/income-taxation-of-trusts.html

Accrual Accounting – When Can a Deduction Be Claimed?

https://lawprofessors.typepad.com/agriculturallaw/2020/11/accrual-accounting-when-can-a-deduction-be-claimed.html

Farmland Lease Income – Proper Tax Reporting

https://lawprofessors.typepad.com/agriculturallaw/2020/11/farmland-lease-income-proper-tax-reporting.html

Merging a Revocable Trust at Death with an Estate – Tax Consequences

https://lawprofessors.typepad.com/agriculturallaw/2020/11/merging-a-revocable-trust-at-death-with-an-estate-tax-consequences.html

The Use of Deferred Payment Contracts – Specifics Matter

https://lawprofessors.typepad.com/agriculturallaw/2020/11/the-use-of-deferred-payment-contracts-specific-matters.html

Is Real Estate Held in Trust Eligible for I.R.C. §1031 Exchange Treatment?

https://lawprofessors.typepad.com/agriculturallaw/2020/11/is-real-estate-held-in-trust-eligible-for-irc-1031-exchange-treatment.html

 

INSURANCE

Recent Court Developments of Interest

https://lawprofessors.typepad.com/agriculturallaw/2020/07/recent-court-developments-of-interest.html

PUBLICATIONS

Principles of Agricultural Law

https://lawprofessors.typepad.com/agriculturallaw/2020/01/principles-of-agricultural-law.html

 

REAL PROPERTY

Signing and Delivery

https://lawprofessors.typepad.com/agriculturallaw/2020/02/deed-effectiveness-signing-and-delivery.html

Abandoned Railways and Issues for Adjacent Landowners

https://lawprofessors.typepad.com/agriculturallaw/2020/04/abandoned-railways-and-issues-for-adjacent-landowners.html

Obtaining Deferral for Non-Deferred Aspects of an I.R.C. §1031 Exchange

https://lawprofessors.typepad.com/agriculturallaw/2020/05/obtaining-deferral-for-non-deferred-aspects-of-an-irc-1031-exchange-.html

Are Dinosaur Fossils Minerals?

https://lawprofessors.typepad.com/agriculturallaw/2020/06/are-dinosaur-fossils-minerals.html

Real Estate Concepts Involved in Recent Cases

https://lawprofessors.typepad.com/agriculturallaw/2020/10/real-estate-concepts-involved-in-recent-cases.html

Is it a Farm Lease or Not? – And Why it Might Matter

https://lawprofessors.typepad.com/agriculturallaw/2020/11/is-it-a-farm-lease-or-not-and-why-it-might-matter.html

 

REGULATORY LAW

Top Ten Agricultural Law and Tax Developments from 2019 (Numbers 10 and 9)

https://lawprofessors.typepad.com/agriculturallaw/2020/01/top-ten-agricultural-law-and-tax-developments-from-2019-numbers-10-and-9.html

Top Ten Agricultural Law and Tax Developments from 2019 (Number 8 and 7)

https://lawprofessors.typepad.com/agriculturallaw/2020/01/top-ten-agricultural-law-and-tax-developments-of-2019-numbers-8-and-7.html

Ag Law and Tax in the Courts – Bankruptcy Debt Discharge; Aerial Application of Chemicals; Start-Up Expenses and Lying as Protected Speech

https://lawprofessors.typepad.com/agriculturallaw/2020/01/ag-law-and-tax-in-the-courts-bankruptcy-debt-discharge-aerial-application-of-chemicals-start-up-expe.html

Hemp Production – Regulation and Economics

https://lawprofessors.typepad.com/agriculturallaw/2020/04/hemp-production-regulation-and-economics.html

DOJ to Investigate Meatpackers – What’s it All About?

https://lawprofessors.typepad.com/agriculturallaw/2020/05/doj-to-investigate-meatpackers-whats-it-all-about.html

Dicamba Registrations Cancelled – Or Are They?

https://lawprofessors.typepad.com/agriculturallaw/2020/06/dicamba-registrations-cancelled-or-are-they.html

What Does a County Commissioner (Supervisor) Need to Know?

https://lawprofessors.typepad.com/agriculturallaw/2020/06/what-does-a-county-commissioner-supervisor-need-to-know.html

The Supreme Court’s DACA Opinion and the Impact on Agriculture

https://lawprofessors.typepad.com/agriculturallaw/2020/07/the-supreme-courts-daca-opinion-and-the-impact-on-agriculture.html

Right-to-Farm Law Headed to the SCOTUS?

https://lawprofessors.typepad.com/agriculturallaw/2020/08/right-to-farm-law-headed-to-the-scotus.html

The Public Trust Doctrine – A Camel’s Nose Under Agriculture’s Tent?

https://lawprofessors.typepad.com/agriculturallaw/2020/10/the-public-trust-doctrine-a-camels-nose-under-agricultures-tent.html

Roadkill – It’s What’s for Dinner (Reprise)

https://lawprofessors.typepad.com/agriculturallaw/2020/10/roadkill-its-whats-for-dinner-reprise.html

Beef May be for Dinner, but Where’s It From?

https://lawprofessors.typepad.com/agriculturallaw/2020/11/beef-may-be-for-dinner-but-wheres-it-from.html

Of Nuisance, Overtime and Firearms – Potpourri of Ag Law Developments

https://lawprofessors.typepad.com/agriculturallaw/2020/11/of-nuisance-overtime-and-firearms-potpourri-of-ag-law-developments.html

What Farm Records and Information Are Protected from a FOIA Request?

https://lawprofessors.typepad.com/agriculturallaw/2020/12/what-farm-records-and-information-are-protected-from-a-foia-request.html

Can One State Dictate Agricultural Practices in Other States?

https://lawprofessors.typepad.com/agriculturallaw/2020/12/can-one-state-dictate-agricultural-practices-in-other-states.html

SECURED TRANSACTIONS

Family Farming Arrangements and Liens; And, What’s a Name Worth?

https://lawprofessors.typepad.com/agriculturallaw/2020/02/family-farming-arrangements-and-liens-and-whats-a-name-worth.html

Conflicting Interests in Stored Grain

https://lawprofessors.typepad.com/agriculturallaw/2020/03/conflicting-interests-in-stored-grain.html

Eminent Domain and “Seriously Misleading” Financing Statement

https://lawprofessors.typepad.com/agriculturallaw/2020/10/eminent-domain-and-seriously-misleading-financing-statements.html

 

SEMINARS AND CONFERENCES

Summer 2020 Farm Income Tax/Estate and Business Planning Conference

https://lawprofessors.typepad.com/agriculturallaw/2020/02/summer-2020-farm-income-taxestate-and-business-planning-conference.html

Registration Open for Summer Ag Income Tax/Estate and Business Planning Seminar

https://lawprofessors.typepad.com/agriculturallaw/2020/03/registration-open-for-summer-ag-income-taxestate-and-business-planning-seminar.html

 

Summer 2020 – National Farm Income Tax/Estate and Business Planning Conference

https://lawprofessors.typepad.com/agriculturallaw/2020/04/summer-2020-national-farm-income-taxestate-and-business-planning-conference.html

Year-End CPE/CLE – Six More to Go

https://lawprofessors.typepad.com/agriculturallaw/2020/12/year-end-cpecle-six-more-to-go.html

2021 Summer National Farm and Ranch Income Tax/Estate and Business Planning Conference

https://lawprofessors.typepad.com/agriculturallaw/2020/12/2021-summer-national-farm-income-taxestate-business-planning-conference.html

WATER LAW

Principles of Agricultural Law

https://lawprofessors.typepad.com/agriculturallaw/2020/01/principles-of-agricultural-law.html

MISCELLANEOUS

More “Happenings” in Ag Law and Tax

https://lawprofessors.typepad.com/agriculturallaw/2020/02/more-happenings-in-ag-law-and-tax.html

Recent Cases of Interest

            https://lawprofessors.typepad.com/agriculturallaw/2020/03/recent-cases-of-interest.html

More Selected Caselaw Developments of Relevance to Ag Producers

https://lawprofessors.typepad.com/agriculturallaw/2020/03/more-selected-caselaw-developments-of-relevance-to-ag-producers.html

Court Developments of Interest

https://lawprofessors.typepad.com/agriculturallaw/2020/04/court-developments-of-interest.html

Ag Law and Tax Developments

https://lawprofessors.typepad.com/agriculturallaw/2020/05/ag-law-and-tax-developments.html

Recent Court Developments of Interest

https://lawprofessors.typepad.com/agriculturallaw/2020/07/recent-court-developments-of-interest.html

Court Developments in Agricultural Law and Taxation

https://lawprofessors.typepad.com/agriculturallaw/2020/08/court-developments-in-agricultural-law-and-taxation.html

Ag Law and Tax in the Courtroom

https://lawprofessors.typepad.com/agriculturallaw/2020/09/ag-law-and-tax-in-the-courtroom.html

Recent Tax Cases of Interest

https://lawprofessors.typepad.com/agriculturallaw/2020/09/recent-tax-cases-of-interest.html

Ag and Tax in the Courts

 https://lawprofessors.typepad.com/agriculturallaw/2020/11/ag-and-tax-in-the-courts.html

Of Nuisance, Overtime and Firearms – Potpourri of Ag Law Developments

https://lawprofessors.typepad.com/agriculturallaw/2020/11/of-nuisance-overtime-and-firearms-potpourri-of-ag-law-developments.html

Bankruptcy Happenings

            https://lawprofessors.typepad.com/agriculturallaw/2020/12/bankruptcy-happenings.html

January 20, 2021 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Sunday, January 17, 2021

Agricultural Law Online!

Overview

For the Spring 2021 academic semester, Kansas State University will be offering my Agricultural Law and Economics course online. No matter where you are located, you can enroll in the course and participate in it as if you were present with the students in the on-campus classroom.

Details of this spring semester’s online Ag Law course – that’s the topic of today’s post.

Course Coverage

The course provides a broad overview of many of the issues that a farmer, rancher, rural landowner, ag lender or other agribusiness will encounter on a daily basis. As a result, the course looks at contract issues for the purchase and sale of agricultural goods; the peril of oral contracts; the distinction between a lease and a contract (and why the distinction matters); and the key components of a farm lease, hunting lease, wind energy lease, oil and gas lease, and other types of common agricultural contractual matters. What are the rules surrounding ag goods purchased at auction?

Ag financing situations are also covered – what it takes to provide security to a lender when financing the purchase of personal property to be used in the farming business. In addition, the unique rules surrounding farm bankruptcy is covered, including the unique tax treatment provided to a farmer in Chapter 12 bankruptcy.

Of course, farm income tax is an important part of the course. Tax planning is perhaps the most important aspect of the farming business that every-day decisions have an impact on and are influenced by. As readers of this blog know well, farm tax issues are numerous and special rules apply in many instances. The new tax law impacts many areas of farm income tax.

Real property legal issues are also prevalent and are addressed in the course. The key elements of an installment land contract are covered, as well as legal issues associated with farm leases. Various types of interests in real estate are explained – easements; licenses; profits, fee simples, remainders, etc. Like-kind exchange rules are also covered as are the special tax rules (at the state level) that apply to farm real estate.

A big issue for some farmers and ranchers concerns abandoned railways, and those issues are covered in the course. What if an existing fence is not on the property line?

Farm estate and business planning is also a significant emphasis of the course. What’s the appropriate estate plan for a farm and ranch family? How should the farming business be structured? Should multiple entities be used? Why does it matter? These questions, and more, are addressed.

Agricultural cooperatives are important for the marketing of agricultural commodities. How a cooperative is structured and works and the special rules that apply are also discussed.

Because much agricultural property is out in the open, that means that personal liability rules come into play with respect to people that come onto the property or use farm property in the scope of their employment. What are the rules that apply in those situations? What about liability rules associated with genetically modified products? Ag chemicals also pose potential liability issues, as do improperly maintained fences? What about defective ag seed or purchased livestock that turns out to not live up to representations? These issues, and more, are covered in the scope of discussing civil liabilities.

Sometimes farmers and ranchers find themselves in violation of criminal laws. What are those common situations? What are the rules that apply? We will get into those issue too.

Water law is a very big issue, especially in the western two-thirds of the United States. We will survey the rules surrounding the allocation of surface water and ground water to agricultural operations.

Ag seems to always be in the midst of many environmental laws – the “Clean Water Rule” is just one of those that has been high-profile in recent years. We will talk about the environmental rules governing air, land, and water quality as they apply to farmers, ranchers and rural landowners.

Finally, we will address the federal (and state) administrative state and its rules that apply to farming operations. Not only will federal farm programs be addressed, but we will also look at other major federal regulations that apply to farmers and ranchers.

Further Information and How to Register

Information about the course and how to register is available here:  https://www.enrole.com/ksu/jsp/session.jsp?sessionId=442107&courseId=AGLAW&categoryId=ROOT

You can also find information about the text for the course at the following link:  https://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html

If you are an undergraduate student at an institution other than Kansas State, you should be able to enroll in this course and have it count as credit towards your degree at your institution.  Consult with your academic advisor to see how Ag Law and Economics will transfer and align with your degree completion goals.

If you have questions, you can contact me directly, or submit your questions to the KSU Global Campus staff at the link provided above.

I hope to see you in class beginning on January 26!

January 17, 2021 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Friday, January 8, 2021

Continuing Education Events and Summer Conferences

Overview

There are a couple of online continuing education events that I will be conducting soon, and the dates are set for two summer national conferences in 2021. 

Upcoming continuing education events – it’s the topic of today’s post.

Top Developments in Agricultural Law and Tax

On Monday, January 11, beginning at 11:00 a.m. (cst), I will be hosting a two-hour CLE/CPE webinar on the top developments in agricultural law and agricultural taxation of 2020.  I will not only discuss the developments, but project how the developments will impact producers and others in the agricultural sector and what steps need to be taken as a result of the developments in the law and tax realm.  This is an event that is not only for practitioners, but producers also.  It’s an opportunity to hear the developments and provide input and discussion.  A special lower rate is provided for those not claiming continuing education credit.

You may learn more about the January 11 event and register here:  https://washburnlaw.edu/employers/cle/taxseasonupdate.html

Tax Update Webinar – CAA of 2021

On January 21, I will be hosting a two-hour webinar on the Consolidated Appropriations Act, 2021.  This event will begin at 10:00 a.m. (cst) and run until noon.  The new law makes significant changes to the existing PPP and other SBA loan programs, CFAP, and contains many other provisions that apply to businesses and individuals.  Also, included in the new law are provisions that extend numerous provisions that were set to expire at the end of 2020.  The PPP discussion is of critical importance to many taxpayers at the present moment, especially the impact of PPP loans not being included in income and simultaneously being deductible if used to pay for qualified business expenses.  Associated income tax basis issues loom large and vary by entity type.

You may learn more about the January 21 event and register here:  https://agmanager.info/events/kansas-income-tax-institute

Summer National Conferences

Mark your calendars now for the law school’s two summer 2021 events that I conduct on farm income tax and farm estate and business planning.  Yes, there are two locations for 2021 – one east and one west.  Each event will be simulcast live over the web if you aren’t able to attend in-person.  The eastern conference is first and is set for June 7-8 at Shawnee Lodge and Conference Center near West Portsmouth, Ohio.  The location is about two hours east of Cincinnati, 90 minutes south of Columbus, Ohio, and just over two hours from Lexington, KY.  I am presently in the process of putting the agenda together.  A room block will be established for those interested in staying at the Lodge.  For more information about Shawnee Lodge and Conference Center, you made click here:  https://www.shawneeparklodge.com/

The second summer event will be held on August 2-3 in Missoula, Montana at the Hilton Garden Inn.  Missoula is beautifully situated on three rivers and in the midst of five mountain ranges.  It is also within three driving hours of Glacier National Park, and many other scenic and historic places.  The agenda will soon be available, and a room block will also be established at the hotel.  You may learn more about the location here:  https://www.hilton.com/en/hotels/msogigi-hilton-garden-inn-missoula/

Conclusion

Take advantage of the upcoming webinars and mark you calendars for the summer national events.  I look for to seeing you at one or more of the events.

January 8, 2021 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Sunday, January 3, 2021

The “Almost Top Ten” Ag Law and Ag Tax Developments of 2020 – Part Two

Overview

I continue today with my perusal of the biggest developments in agricultural law and taxation from 2020 with the second installment of the “almost top 10” of 2020.  In part one, I covered deprioritization (or the lack thereof) of withheld taxes in a Chapter 12 bankruptcy; the preferential payment rule in bankruptcy involving the Dean Foods matter; the significant ag nuisance jury verdict in North Carolina involving Murphy Brown; and a recent federal court opinion holding that filing a tax return with false information on

Part two of the “almost top ten of 2020” (in no particular order) – that’s the topic of today’s post.

“Renewable” Energy Cash Grants

Section 1603 of the American Recovery and Reinvestment Tax Act (ARRTA) was a green energy subsidy program created by the Congress and signed into law as a part of the 2009 economic “stimulus” package.  The program created a system of cash grants in lieu of investment tax credits for entities that installed various types of alternative energy property such as solar, wind, geothermal, biomass, and hydropower.  The purpose of payments (which were made after a qualified energy system was installed) was to reimburse grant recipients for a portion of the cost they incurred to install the energy systems at business locations.  The program started in 2009 and ended in 2012.

The program is not without criticism and IRS scrutiny.  The IRS rigorously audits companies utilizing the grants and, in some instances, the courts have ruled for the companies when the IRS partially denied the grants.  Those cases primarily involved indemnity agreements that allowed the financiers of the projects to recover their funds elsewhere if the grant was improperly disallowed.  In such “tax equity” deals it is common for the developer that finances a project to indemnify the tax equity investors if the tax benefits are less than expected. See, e.g., Alta Wind I Owner Lessor C v. United States, No. 13-402, 2020 U.S. Claims LEXIS 2071 (Fed. Cl. Oct. 21, 2020).  In Alta, the wind energy company plaintiff claimed that the government underpaid on the Sec. 1603 grant.  The court ruled that the company had alleged sufficient facts and injury to satisfy the constitutional standing requirement for the court to hear the case because the company had purchased the energy facilities at issue via a negotiated business transaction and alleged it had not been paid in full under Sec. 1603.

The IRS also won a significant case in 2020.  In early 2012, the plaintiff placed a qualified wind facility into service at a cost of $433,077,031. The plaintiff applied for a Section 1603 grant (in lieu of tax credits) of $129,923,109. As part of the grant application, the plaintiff submitted a development agreement that claimed to show a “proof of payment” in support of a $60 million development fee. The plaintiff, a “project company,” paid the development fee to its parent company, Invenergy, LLC. The U.S. Treasury awarded the plaintiff a grant of $117,216,098. The Treasury explained that the reason for the $12.7 million shortfall was based on the plaintiff’s excessive cost basis in the facility based on the inclusion of the development fee in the cost basis calculation. The Treasury asserted that the development fee transaction was a sham lacking economic substance shaped solely by tax avoidance motives.

The court agreed. Bank records showed that money passed through the bank accounts of several entities related to the plaintiff by wire transfer and then back into the original account. The court determined that the plaintiff could not establish any business purpose or economic substance to the banking transactions. A CPA from a national firm, as the result of an audit, testified that the development agreement contained no quantifiable services. Invenergy, LLC, was not able to produce any accounting journal entries showing a business purpose for the banking transactions. Thus, the court determined that the evidence showed a development fee with no quantifiable services, circular wire transfers that started and ended in the same bank account on the same day, none of which were corroborated by independent testimony. The court denied the plaintiff reimbursement of the $12,707,011 cash grant, and the U.S. Treasury was entitled to recover an overpayment of $4,380,039. Bishop Hill Energy, LLC, et al. v. United States, 143 Fed. Cl. 540 (2019). The court also reached the same conclusion in California Ridge Wind Energy, LLC v. United States, 143 Fed. Cl. 757 (2019).

The appellate court affirmed, upholding the trial court’s finding that amounts stated by the plaintiff in development agreements pertaining to the wind farms did not reliably indicate the development costs. The appellate court, on a consolidated appeal of the two cases, noted the “round-trip” nature of the payments; the absence in the agreements of any meaningful description of the development services to be provided, and the fact that all, or nearly all, of the development services had been completed by the time the agreements were executed. The appellate court also determined that the services were not quantifiable. As a result, the government could recover $10 million in cash grants from the two companies. California Ridge Wind Energy, LLC v. United States, 959 F.3d 145 (Fed. Cir. 2020).

The case is significant because it could impact the computation of tax credits for future projects. 

Trust Income Tax Regulations

On May 7, 2020, the IRS issued proposed regulations providing guidance on the deductibility of expenses that estates and non-grantor trusts incur.  REG-113295-18. The reason for the proposed regulations is that the Tax Cuts and Jobs Act (TCJA), effective for tax years beginning after 2017 and before 2026, bars individual taxpayers from claiming miscellaneous itemized deductions.  I.R.C. §67(g).  This TCJA suspension of miscellaneous itemized deductions for individuals raised questions as to whether and/or how estates and non-grantor trusts are impacted.  In late September, the IRS finalized the regulations.  TD 9918 (Sept. 21, 2020).

The Final Regulations affirm that deductions for costs which are paid or incurred in connection with the administration of an estate or trust and which would not have been incurred if the property were not held in such trust or estate remain deductible in computing AGI.  In other words, I.R.C. §67(e) overrides I.R.C. §67(g).  However, the Final Regulations do not provide any guidance on whether these deductions (including those under I.R.C. §§642(b), 651 and 661) are deductible in computing alternative minimum tax for an estate or trust.  That point was deemed to be outside the scope of the Final Regulations. 

As for excess deductions, the Final Regulations confirm the position of the Proposed Regulations that excess deductions retain their nature in the hands of the beneficiary.  Treas. Reg. §1.642(h)-2(a)(2).   Excess deductions passing from a trust or an estate have their nature pegged by Treas. Reg. §1.652(b)-3. The nature of excess deductions of a trust or an estate is determined by a three-step process:  1) direct expenses are allocated first (e.g., real estate taxes offset real estate rental income); 2) the trustee can exercise discretion when allocating remaining deductions – in essence, offsetting less favored deductions for individuals by using them against remaining trust/estate income (also, if direct expenses exceed the associated income, the excess can be offset at this step); 3) once all of the trust/estate income has been offset any remaining deductions constitute excess deductions when the trust/estate is terminated that are allocated to the beneficiaries in accordance with Treas. Reg. §1.642(h)-4.  Treas. Reg. 1.642(h)-2(b)(2).   

Lying With Purpose of Harming Livestock Facility is Protected Speech

Animal Legal Defense Fund v. Schmidt, 434 F. Supp. 3d 974 (D. Kan. 2020)

Beginning with Kansas in 1990, several states have enacted legislation designed to protect confined animal production facilities from sabotage activity from groups and individuals opposed to animal agriculture.  The laws generally forbid undercover filming or photography of activity on farms without the owner's consent.  They have been challenged as unconstitutional on numerous occasions. 

In this federal case involving Kansas law, the plaintiffs are a consortium of activist groups regularly conduct undercover investigations of livestock production facilities. Some of the plaintiffs gain access to farms through employment without disclosing the real purpose for which they seek employment (and lie about their ill motives if asked) and wear body cameras while working. For those hired into managerial and/or supervisory positions, they gain the ability to close off parts of the facility to avoid detection when filming and videoing. The film and photos obtained are circulated through the media and with the intent of encouraging public officials, including law enforcement, to take action against the facilities. The employee making the clandestine video or taking pictures, is on notice that the facility owner forbids such conduct via posted notices at the facility. The other plaintiffs utilize the data collected to cast the facilities in a negative public light but do no “investigation.”

In 1990, Kansas enacted the Kansas Farm Animal and Field Crop and Research Facilities Protect Act (Act). K.S.A. §§ 47-1825 et seq.  The Act makes it a crime to commit certain acts without the facility owner’s consent where the plaintiff commits the act with the intent to damage an animal facility. Included among the prohibited acts are damaging or destroying an animal facility or an animal or other property at an animal facility; exercising control over an animal facility, an animal from an animal facility or animal facility property with the intent to deprive the owner of it; entering an animal facility that is not open to the public to take photographs or recordings; and remaining at an animal facility against the owner's wishes. K.S.A. § 47-1827(a)-(d). In addition, K.S.A. § 47-1828 provides a private right of action for "[a]ny person who has been damaged by reason of a violation of K.S.A. § 47-1827 against the person who caused the damage." For purposes of the Act, a facility owner’s consent is not effective if it is induced by force, fraud, deception duress or threat. K.S.A. § 47-1826(e). The plaintiff challenged the constitutionality of the Act, and filed a motion for summary judgment. The defendant also motioned for summary judgment on the basis that the plaintiffs lacked standing or, in the alternative, the Act barred trespass rather than speech.

On the standing issue, the trial court held that the plaintiffs lacked standing to challenge the portions of the Act governing physical damage to an animal facility (for lack of expressed intent to cause harm) and the private right of action provision, However, the trial court determined that the plaintiffs did have standing to challenge the exercise of control provision, entering a facility to take photographs, etc., and remaining at a facility against the owner’s wishes to take pictures, etc. The plaintiffs that did no investigations but received the information from the investigations also were deemed to have standing on the same grounds. On the merits, the trial court determined that the Act regulates speech by limiting what the plaintiffs could say and by barring pictures/videos. The trial court determined that the provisions of the Act at issue were content-based and restricted speech based on viewpoint – barring only that speech that would harm an animal facility. The trial court determined that barring lying is only constitutionally protected when it is associated with a legally recognizable harm, and the Act is unconstitutional to the extent it bars false speech intended to damage livestock facilities. Because the provisions of the Act at issue restrict content-based speech, its constitutionality is measured under a strict scrutiny standard. As such, a compelling state interest in protecting legally recognizable rights must exist. The trial court concluded that even if privacy and property rights involved a compelling state interest, the Act must be narrowly tailored to protect those rights. By focusing only on those intending to harm owners of a livestock facility, the Act did not bar all violations of property and privacy rights. The trial court also determined that the Governor was a proper defendant. 

In a later action, the court entered a permanent injunction against enforcement of Kan. Stat. Ann. §§47-1827(b)-(d).  Animal Legal Defense Fund v. Kelly, No. 18-2657-KHV, 2020 U.S. Dist. LEXIS 58909 (D. Kan. Apr. 3, 2020).  A notice of appeal of the court’s decision was filed on May 1, 2020.  In July, the court trimmed-down the plaintiff’s request of attorney fees and costs from almost $250,000 to slightly over $176,000.  Animal Legal Defense Fund v. Kelly, No. 18-2657-KHV, 2020 U.S. Dist. LEXIS 124,480 (D. Kan. Jul. 15, 2020). 

Conclusion

In the next post, I will continue the look at the “almost Top 10” of 2020 with Part 3.

January 3, 2021 in Estate Planning, Income Tax, Regulatory Law | Permalink | Comments (0)

Sunday, December 20, 2020

‘Tis the Season for Giving, But When Is A Transfer A Gift?

Overview

Federal estate and gift tax planning changed significantly starting in 2013 due to changes in the law.  Since then, gifting has become less important for many because of the significant increase in the federal estate and gift tax unified credit.  The exemption equivalent of that credit offsets $11.58 million in federal estate tax for death and gifts made in 2020.  With the “stepped-up” basis rule of I.R.C. §1014, most people find it advantageous to not make gifts of property during life and hold the property until death where it will be taxed in the estate but covered by the exclusion and receive a date-of-death fair market value basis in the hands of the heir(s).  There is also the option to make annual cumulative gifts of up to $15,000 (for 2020 and 2021) in cash or property value to a donee. 

But what constitutes a gift?  The answer to that question may not be as simple as it might seem.

When is a transfer of property a completed gift for federal gift tax purposes?  It’s the topic of today’s post.

Dominion or Control 

Generally, the ownership or possession of property is not necessary to make a gift.  The measuring stick for the imposition of federal gift tax is not a change in ownership.  Rather, it is the relinquishment of dominion and control.  Treas. Reg. §25.2511-2(b).  This rule applies to outright transfers as well as to transfers in trust.  Any resulting gift tax is the primary and personal liability of the donor in the amount of the value of the property that passes from the donor to the done, regardless of whether the donee is known and ascertainable at the time of the transfer.  Treas. Reg. §25. 2511-2(a).   

The notion that a change in ownership is not necessary to trigger gift tax is, perhaps, best illustrated with a transfer in trust.  With respect to a trust, a trustee (rather than a beneficiary) owns assets, but a beneficiary can be the one that makes a gift.  Examples of this include the beneficiary releasing a lifetime general power of appointment (such as a Crummey right.  See Crummey et al. v. Comr., 392 F.2d 87 (9th Cir 1968)), or allowing the power to lapse.  A gift may also result from the beneficiary making a transfer a beneficial interest in trust (e.g., signing a non-judicial settlement agreement that modifies a trust).  A gift can also result where a beneficiary has the right to receive all of the income of a trust coupled with a lifetime special power of appointment and exercises that power of appointment.  The exercise of the power constitutes a gift of the income interest.  This is another illustration of how a taxable gift can be made of an asset that the donor does not own, at least on paper.  The point is that when the overall property rights give a taxpayer dominion and control over those property rights, a transfer of those rights will be a taxable transfer for gift tax purposes. 

Disclaimer

The main power that allows a person to avoid the types of gifts mentioned above is known as a disclaimer.  A disclaimer is simply the right of the holder of the power to say “no” to the receipt of a beneficial interest or a power of appointment so long as certain requirements are satisfied. I.R.C. §2518.  If the requirements are met, the disclaimer is known as a “qualified disclaimer” and the act of disclaiming would not be a gift for gift tax purposes.  I.R.C. §2518(a)-(b).  A qualified disclaimer is defined as an irrevocable and unqualified refusal by a person to accept an interest in property but only if the refusal is in writing and the writing is received by the transferor of the interest not later than the date that is nine months after the later of the date of the transfer or the day on which the person attains age 21.  Also, the disclaimant must not have accepted any of the benefits of the property and, as a result of the refusal, the interest must pass without any direction on the disclaimant’s part.  I.R.C. §2518(b). 

Thus, if a beneficiary of property does not accept the benefits or dominion or control of the property and, as a result, the property passes without the beneficiary’s direction, a qualified disclaimer has been made.  In that instance, the beneficiary is treated as being deceased before the initial transfer so that the beneficiary can never have dominion or control or the ability to direct how the property is to pass.  But remember, there is a time limit governing a qualified disclaimer. Nine or fewer months must have passed since the initial transfer or, if later, since the beneficiary attained the age of 21.

Recent IRS Memo

Recently, the Chief Counsel Office of the IRS issued a Memorandum illustrates these principles in the context of a Foundation.  In CCA 202045011 (Jun. 10, 2020), the taxpayer was a U.S. resident and was the primary beneficiary of a foreign Foundation.  The Board of the Foundation resolved to transfer the remaining Foundation assets to the taxpayer.  U.S. citizens and residents are subject to U.S. federal gift tax on worldwide assets – including accounts that might be of a foreign foundation in another country but, nonetheless, might be subject to U.S. gift tax. 

The taxpayer, after receiving notice from the Board, gave written instructions to the Board to send the funds the Foundation’s account denoted as “Bank 1 Account” to “Bank 2 Account.”  The taxpayer did not own “Ban 2 Account” and couldn’t withdraw the funds once there were in the account.  Instead, the funds contained in “Bank 2 Account” belonged to other beneficiaries.  The IRS concluded that, as a result of the Board’s resolution, the minute that resolution hit, the taxpayer had dominion and control over the Foundation’s account – Bank 1 Account.  Thus, as a result, once the taxpayer directed the Board to send those assets to Bank 2 Account, the direction amounted to a release of dominion and control by the taxpayer over the Bank 1 Account constituting a taxable gift.  In addition, since the transfer was at the direction of the taxpayer, it wasn’t a qualified disclaimer.  As noted above, a qualified disclaimer requires the disclaimed property to transfer without the disclaimant’s direction.  Also, even though it was a foreign account, the U.S. resident had U.S. gift tax on that foreign account. 

But the point remains – federal gift tax is not necessarily driven by a change of ownership, instead it is driven by the relinquishment of dominion and control.

Conclusion

Federal gift tax is triggered on the release of dominion and control over property.  That can be a distinct concept from that of a change of ownership.  It’s a sometimes subtle difference, but a difference with a distinction.  While the tax consequence of gifting isn’t that big of a tax issue for very many given the current exemption level, that could change if the political winds change in the future and the applicable exemption for the coupled federal estate and gift tax systems decreases.  It could also become a bigger issue if the stepped-up basis rule is eliminated and/or estate and gift tax rates change.

December 20, 2020 in Estate Planning | Permalink | Comments (0)

Saturday, December 19, 2020

2021 Summer National Farm and Ranch Income Tax/Estate & Business Planning Conference

Overview

The curtain has dropped on my 2020 agricultural law and taxation “tour.”  As I write this, I am in transit returning to Kansas (and then Iowa) from the last stop of 2020 in San Angelo, Texas.  Many of you have already asked about the 2021 National Summer Farm/Ranch Income Tax/Estate and Business Planning Conference. 

In today’s article, I take a moment to mention an upcoming event and the summer conference(s). 

January Webinar

On January 11, 2021, I will be doing a live webinar worth two hours of CLE/CPE credit on the biggest developments in agricultural law and taxation during 2020.  I will also examine other significant developments and what the forthcoming legal and tax issues facing agriculture in the immediate future might be.  This webinar is for lawyers and other tax practitioners as wells as farmer, ranchers, agribusiness professionals, rural landowners, ag media and any others that have an interest in what is going on in the legal and tax world that affects agricultural production and land ownership.  I will dive into constitutional issues involving property rights; water law; environmental law and regulation, income tax issues; farm programs; and other legal and tax issues of importance.

You can learn more about and register for the January 11 event here:  https://washburnlaw.edu/employers/cle/taxseasonupdate.html

Summer 2021 Conferences

Ohio conference.  Two national conferences are being planned for the summer of 2021.  The first event will be in Ohio either at the Salt Fork State Park Lodge and Conference Center near Cambridge, Ohio or at the Shawnee Lodge and Conference Center near Portsmouth, Ohio.  The dates will be either June 1-2; June 7-8 or June 14-15.  I am presently waiting on confirmation that the technology at the locations can meet our needs to provide a high-quality live simulcast of the conference over the internet.  I will announce the dates and location as soon as I have the details finalized, which should be by the end of this month.

You can learn more about the two possible Ohio locations here:  https://www.shawneeparklodge.com/; https://www.saltforkparklodge.com/.

Missoula, Montana.  The second summer national conference will be held in Missoula, Montana on August 2-3.  You can learn more about the venue for the Montana conference here:   https://www.hilton.com/en/hotels/msogigi-hilton-garden-inn-missoula/.   It will also be simulcast live over the internet.

 As the program details are put together, I will provide more details.  Stay tuned.

December 19, 2020 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Sunday, December 6, 2020

Year-End CPE/CLE – Six More to Go

Overview

As 2020 winds down so do my continuing education events for the year.  These late year events are important for practitioners that need additional education credit by the end of the year.  I have six more events remaining this year, some in-person and some online.  One event is a two-hour ethics session for those still needing ethics credit before the year ends.

Year-end continuing education opportunities – it’s the topic of today’s post.

Upcoming Events

This week finds me in Salina, Kansas for the second day of a two-day professional tax training event.  This is a comprehensive conference digging into the specifics of what practitioners need to know for preparing 2020 tax returns for clients.  Included will be up-to-the-minute relevant developments from the courts and the IRS as well as all trust return preparation issues and examples.  More information about the Salina event can be found here:  https://www.agmanager.info/events/kansas-income-tax-institute.

Later this week, on Wednesday, I will be speaking at the AICPA Agriculture Conference.  This national conference is online.  I will be speaking on financial distress tax and non-tax issues facing farmers and ranchers that are struggling financially.  You can learn more about this event here:  https://future.aicpa.org/cpe-learning/conference/aicpa-agriculture-conference.  The next day, I will be doing another Day 2 of a tax conference.  This event will be online, originating from the campus of Kansas State University (KSU).  This is an approved NASBA event.  Thus, CPAs can receive CPE credit for viewing online.  You can learn more about this event here:  https://www.agmanager.info/events/kansas-income-tax-institute

On Friday, I will be doing a two-hour tax ethics session.  This session originates from Washburn Law School and will involve discussion of ethical issues that tax practitioners face when representing clients with tax issues and the preparation of returns.  Also, addressed will be Circular 230 issues and various ethical rules that CPAs and lawyers are subject to when representing clients.  More information about the ethics event can be found here:  https://washburnlaw.edu/employers/cle/taxethics.html.

The following week finds me in San Angelo, TX on December 17 and 18.  This event is sponsored by the San Angelo Chapter of the Texas Society of CPAs.  I will focus on farm estate and business planning as well as farm income tax.  More information about this event can be found here:  https://www.tscpa.org/sanangelo/news/details/2020/11/05/dec.-17---farm-and-ranch-estate-and-business-planning and here: https://www.tscpa.org/sanangelo/news/details/2020/11/05/dec.-17---farm-and-ranch-income-tax-update.  The San Angelo event is my last scheduled event for the year.  It’s been quite a year.  While all of my professional engagements moved online from mid-March until mid-June, about half of them remained online since mid-June.  I start out on the road during the first week of January 2021. 

2021 summer events are being planned for Missoula, Montana as well as east Tennessee.  There possibly will be a third national event in late September.  I also do a number of in-house CPA and law firm training each year.  If your firm is looking for in-house training in 2021 and have an interest in what I can offer, please contact me and I will do my best to get you on the calendar. 

Also, tune in to RFD-TV/SiriusXM each week to hear the hosts interview me concerning various ag law and tax topics.  You can also find me every other Monday morning at 6:00 a.m. (central) on WIBW radio (580 a.m.) and every other Wednesday on KFRM 550 a.m. discussing the biggest and most critical developments in agricultural law and taxation.  All of these shows are captured and posted to the media page of the Washburn Agricultural Law and Tax Report – www.washburnlaw.edu/waltr.

Conclusion

2020 has been a challenge for many and has involved modifying the practice of law and/or tax and how client representation is engaged in.  It’s also been a challenge given the new virus-related legislation and the frequent changes that have come by way of questions and answers and various notices, news releases and postings on the IRS website.  Strange times, indeed.

Stay tuned.

December 6, 2020 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Saturday, November 21, 2020

When Is Transferred Property Pulled Back Into the Estate At Death? Be on Your Bongard!

Overview

When the federal estate tax exemption was much lower than it is now, gifting property played a much greater role in estate planning than it does now.  That gifting could consist of either an outright gift of property or a gift of an interest in an entity.  In either situation, the basic idea was to transfer value away, typically to other family members to keep the transferor’s estate at death beneath the level of the available estate tax exemption at death so that federal estate tax could be avoided. 

However, if a transfer isn’t done correctly, it runs the risk of being pulled back into the decedent’s estate and subjected to federal estate tax at death. 

Avoiding transferred property being included in a decedent’s estate at death – it’s the topic of today’s post.

Tax Code Provision and Tax Court Test

Under I.R.C. §2036, the value of a decedent’s gross estate includes the value of all property to the extent that the decedent had an interest in the property at the time of death.  That includes property that the decedent transferred but retained for life, or for any period of time tied to the decedent’s death the possession or enjoyment of the property.  I.R.C. §2036 also catches a retained right to receive income from the property or the right to designate who possesses the property or the income from the property.  The same is true for a retained right to vote stock of a corporation the decedent controls. 

When will a transfer be respected so that the transferred property will not be included in the transferor’s estate at death?  In Estate of Bongard v. Comr., 124 T.C. 95 (2005), the Tax Court set forth the standard concerning how to determine whether I.R.C. §2036 pulls property back into a decedent's estate. According to the Tax Court, transferred property will be pulled back into the decedent’s estate if the decedent made a transfer of property during life that was not a bona fide sale for adequate and full consideration, and the decedent retained an interest or right in the transferred property.  A sale is bona fide only if the evidence establishes the existence of a legitimate and significant nontax reason exists for the transfer.

Recent Case

The Tax Court’s Bongard standard was at issue in another Tax Court case decided earlier this year.  In Estate of Moore, T.C. Memo. 2020-40, the decedent, at age 88 in late 2004, started negotiations with prospective buyers for the sale of his farm.  However, before he could get the farm sold, he suffered a heart attack and was diagnosed with congestive heath failure.  Doctors told him that he wouldn’t live longer than six months.  Within a week after being discharged from the hospital, and while in in-home hospice care, the decedent worked with an attorney to formalize an estate plan – something he really hadn’t done up to this point in time.  His primary goal was to eliminate potential estate tax.  However, he also wanted to maintain control.  Those two goals can prove difficult to satisfy simultaneously. 

Ultimately, the attorney created various trust for the decedent – a revocable living trust; a charitable lead annuity trust; a trust for his children; a management trust; an irrevocable trust (also for the benefit of his children); and a family limited partnership (FLP).  The management trust (which made a nominal contribution to the FLP upon its formation) held a 1 percent general partner interest in the FLP.  The decedent held a 95 percent limited partnership interest in the FLP.  Each of his four children held a 1 percent limited partner interest. Purportedly, the purpose of the FLP was to provide protection against liability; protection against creditors; bad marriages; and to bring together a dysfunctional family.  Under the terms of the FLP agreement, no single partner could transfer any interest unless all partners agreed.

The decedent transferred all of his property (the farmland and his personal property) to the revocable living trust.  The trust contained a formula that transferred a part of the trust assets to the charitable trust with the goal of causing the least amount of federal estate tax to the estate.  Everything else, after payment of taxes and claims and distributions of specific bequests were specified to pass to the trust for the children.  The management trust held a 1 percent interest as a general partner in the FLP and, upon the decedent’s death, that interest was to be distributed to the trust for his children.  The decedent then transferred (via the revocable living trust) an 80 percent interest in his farmland and $1.8 million worth of assets to the FLP. 

Five days after forming the FLP, and within two months of his death, the decedent sold the farm for almost $17 million.  The FLP and the revocable trust transferred their respective interests in the farmland to the buyer.  The terms of sale allowed the decedent to continue to live on the farm and operate it (in accordance with his capability) until his death. 

After the sale, the decedent directed the FLP to transfer $500,000 to each of his four children in return for a five-year promissory note at a 3.6 percent interest rate per annum.  However, there was no amortization schedule for any of the notes, and none of the children made any payments.  Also, the FLP never attempted to collect on the notes, and the attorney that prepared the estate plan told the children that they didn’t have to pay on the notes.  The FLP then distributed (purportedly a loan) $2 million to the revocable living trust, that the decedent used to pay expenses, including the balance of the $320,000 attorney fee charged to set up all of the trusts and the FLP, and the tax obligation on the sale of the farm. 

Additionally, in late February 2005, the living trust transferred $500,000 to the irrevocable trust, which was treated as a $125,000 gift to each of the four children. Lastly, in early March 2005, the living trust transferred its entire limited interest in the FLP to the irrevocable trust in return for $500,000 cash and a note for $4.8 million. The decedent died in late March of 2005.

The decedent's federal estate tax return reported $53,875 for the management trust's 1% general partnership interest in the FLP; $4.8 million for the note receivable from the irrevocable trust; claimed a $2 million deduction for the debt owed to the FLP and a $4.8 million deduction for a charitable contribution to the charitable trust.  It also reported $1.5 million in taxable gifts; and $475,000 deduction for attorneys' fees associated with the administration of the decedent's estate (reported on Schedule J (the form where estate administration deductions are claimed), which was in addition to the $320,000 charged for establishing the estate plan).

The estate also filed a federal gift tax return for 2005. The return reported gifts of $125,000 for each of the decedent's children in the form of the $500,000 transfer to the irrevocable trust earlier that year.

The IRS issued a notice of deficiency to the estate determining a deficiency of nearly $6.4 million. Additionally, the IRS issued a notice of deficiency determining a gift tax liability of more than $1.3 million for the 2005 tax year.  While the Tax Court was tasked with addressing numerous legal/tax issues, a primary one was whether the value of the farm should be included in the decedent’s estate for tax purposes. 

The Bongard Application

Business purpose.  As noted above, one of the tests established by the Bongard decision is whether a transfer was made for a nontax business purpose.  That is usually evidenced by active management of the transferred asset(s).  But here, the Tax Court noted, the decedent sold the farm days after he transferred it to the FLP.  That meant that there was no business for the children to manage.  Only liquid assets remained in the FLP that the children did not manage.  Instead, and investment advisor was hired to manage the liquid assets.  Also, based on the evidence, there was no legitimate concern about creditor claims (another legitimate purpose for creating the FLP). In addition, the entire estate plan (including the formation of the FLP) was done in the imminence of death as part of a scheme to avoid tax.  The whole plan reeked of being testamentary in nature.

Retained interest.  Also, part of the Bongard test is that the decedent must not retain an interest in the transferred property.  But the Tax Court determined that the decedent had at least an implied agreement to retain possession or enjoyment of the farm property.  Indeed, he continued to live at the farm and made management decisions up to his death and treated the other FLP assets as his own by paying personal expenses (including attorney fees) with them and using FLP assets for making loans to his children.  In essence, he treated the FLP as his pocketbook. 

The retained possession or enjoyment of the transferred property along with the lack of a substantial nontax purpose caused inclusion of the farm property in the decedent’s gross estate at death.  The amount included in the estate was calculated as the value of the farm as of the date of death less the funds that left the estate between the time of the sale and the date of death.  I.R.C. §2043.

Other Issues

The Tax Court also determined that the “loan” from the FLP to the revocable living trust was not really a loan, thereby wiping out an estate tax deduction for the $2 million loan. There was nothing that indicated that it was a loan – no note; no interest; no collateral; no maturity date specified; and no payments were made or demanded. 

The Tax Court also agreed with the IRS that the “loans” to the children were gifts.  Again, like the purported loan from the FLP to the revocable living trust, there was nothing to indicate that the transfers to the children were anything other than gifts.  Those total gifts of about $2 million caused the additional gift tax to be included in the decedent’s estate as gifts within three years of death.  I.R.C. §2035(b). 

Conclusion

The Moore case is an illustration of what not to do.  Of course, the emphasis on avoiding federal estate tax was bigger at the time the planning was engaged in than it is now.  The federal estate tax exemption equivalent of the unified credit was only $1,500,000.  That’s a far cry from the current level of the exemption.  But, for those with large estates that face the potential of federal estate tax, the case clearly points out the peril that unplanned estates face in a rush to tidy matters up before time is up.

In addition, “death bed” estate planning is particularly not good when the planning tries to get too “cute.”  Formalities of entities and transfers must be followed and, when an FLP is involved, the transferor must retain sufficient assets personally to pay living expenses, etc.  Any use of the FLP assets after transfer to the FLP, must be via an agreement that clearly denotes that the assets belong to the FLP and that an appropriate amount is paid for the assets’ usage.  Retained possession and enjoyment of transferred assets is a big “no-no.” 

November 21, 2020 in Business Planning, Estate Planning | Permalink | Comments (0)

Monday, November 16, 2020

Merging a Revocable Trust at Death With an Estate – Tax Consequences

Overview

A revocable trust is a popular estate planning tool that is utilized as a will substitute.  Some people view it as a good alternative to a will for several reasons, including privacy and probate avoidance.  Unfortunately, some believe that a revocable trust will also save estate taxes compared to a properly drafted will.  It will not.  The very nature of the revocability of the trust means that the trust property is included in the decedent’s estate at death. 

While estate tax savings are not an issue with a revocable trust, it’s important to understand the income tax issues that can occur when the grantor of the trust dies and the trust assets become part of the grantor’s estate.  There’s a special tax election involved for a “qualified revocable trust” (QRT) and it has particular accounting and income tax consequences.  It can also provide some tax planning opportunities.

The tax and accounting rules surrounding the election to treat a QRT as an estate – it’s the topic of today’s post.

The I.R.C. §645 Election

The issue.  When the grantor of a revocable trust dies, the trust becomes irrevocable.  For tax purposes, the trust will have a calendar year – a short tax year from the date of death through December 31.  In addition, the trust will be a complex trust if the trustee is not required to make immediate distributions.  In that case, depending on the assets in the trust, the trust may earn income that will be taxed in accordance with the rate brackets applicable to a trust.  For 2020, the top rate of 37 percent is reached at $12,951 of trust income.  Of course, one possible solution to this problem is for the trustee to distribute the trust income to the beneficiaries so that it can be taxed at their (likely lower) tax rates.  But, if that additional income has not been planned for it could create tax issues for the beneficiaries such as underpayment penalties. 

Another option may be for the trustee/executor to make the I.R.C. §645 election for a QRT.

Mechanics.  A QRT is a domestic trust (or portion thereof) that is treated as owned by a decedent (a grantor trust) on the date of the decedent’s death by reason of a power to revoke that was exercisable by the decedent or with the consent of the decedent’s spouse.  I.R.C. §645(b)(1)For a QRT, the executor of the decedent’s estate, along with the trustee, can make an election to have the QRT taxed as part of the decedent’s estate for income tax purposes instead of as a separate trust.  I.R.C. §645(a).  In other words, a joint election by both the trust and the estate’s executor is required. 

Without the election, the revocable trust becomes irrevocable upon the decedent’s death and requires a separate income tax return (Form 1041) to report trust income (using a calendar year-end) that is earned post-death.  The merger of the trust and the estate for income tax purposes applies only to tax years that end before the date six months after the final determination of estate tax, or, if there is no estate tax return that is filed (Form 706), two years after the date of death.  I.R.C. §645(b)(2). 

If an executor is not appointed for the estate, the trustee files the election with an explanatory statement that no executor is being appointed for the estate.  The election is made by completing Form 8855 and attaching a statement to Form 1041 providing the name of the QRT, its taxpayer identification number and the name and address of the trustee of the QRT.

Once made, the election causes the trust to be treated for income tax purposes as part of the decedent’s estate for all applicable tax years of the estate ending after the date of the decedent’s death.  Id.  The electing QRT need not file an income tax return for the short year after the date of the decedent’s death.  Instead, the trustee of the electing QRT only need file one Form 1041 for the combined trust and estate under the estate’s TIN, and all income, deductions and credits are combined. 

The election allows a fiscal year-end to be utilized, ending at the end of a month not to exceed one-year after the decedent’s death.  The utilization of a fiscal year for income tax purposes can allow the estate executor to more effectively time the reporting of income and expense to achieve a more advantageous tax result.  For example, assume that an election is made for a QRT resulting in a tax year of December 1, 2020 through November 30, 2021.  A beneficiary receives a distribution on December 23, 2020.  As a result of the election, the beneficiary won’t have to report any income triggered by the distribution until 2021 and will have until April 15, 2022 to file the return that reports the income from the distribution.  Without the election, the distribution would have been taxed to the beneficiary in 2020 and reported on the 2020 return filed on or before April 15, 2021.   

The election can also allow for the loss recognition when a pecuniary bequest is satisfied with property having a fair market value less than basis.  I.R.C. §267(b).  One $600 personal exemption is allowed; the QRT can deduct amount paid to, or permanently set aside for charity; and up to $25,000 in passive real estate losses can be deducted.  I.R.C. §§642(b); 642(c); 469(i)(4).

Once the election is made, it is irrevocable.

Implications.  The I.R.C. §645 election, while resulting in one tax return for purposes of reporting income and expense on Form 1041, the trust and the estate are still treated as separate shares for purposes of calculating the distributable net income (DNI) deduction.  Treas. Reg. §1.645-1(e)(2)(iii).  The election does not combine the estate and trust for purposes of computing the DNI deduction. Thus, distributions can result in different allocation to beneficiaries and different amounts of income tax paid by the estate/trust. 

To illustrate, assume that an estate has $20,000 of income with no distributions made to the trust which, as typical, is the estate’s sole beneficiary.  The trust has $40,000 of income and made a $60,000 distribution to a beneficiary.  The income reported on Form 1041 is $60,000.  Under the Treas. Reg., the estate’s DNI is calculated separately from that of the trust.  In the example, the estate’s share of DNI is $20,000, but it gets no DNI deduction due to the lack of distributions during the tax year.  Conversely, the trust’s share of DNI is $40,000 and the trust’s DNI deduction is the lesser of the total cash distributed or the DNI.  Here, the DNI was less than the actual cash distributed resulting in a DNI deduction of $40,000.  The filed Form 1041 recognizes the $20,000 of taxable income and the beneficiary has $40,000 of income reported on the beneficiary’s individual return. 

Now assume that the estate distributes $20,000 to the trust, the trust’s share of income is $60,000 ($40,000 plus the $20,000 from the estate).  The full $60,000 of income is DNI of the trust, and the $60,000 distribution to the beneficiary causes the full $60,000 to be taxed at the beneficiary’s level.  There is no tax at the trust level to be taxed at the compressed bracket rates applicable to trusts and estates.  This all means that separate accounting for the trust and the estate must be done while the estate is being administered. 

When the election period ends or when the assets of the original trust are distributed to another trust, the new trust will file returns on a calendar year basis.  Thus, a filing will be required for the timeframe from the end of the fiscal year to the end of the calendar year after the termination.  In that instance, the beneficiaries could end up with two K-1s and the benefit of income deferral could be eliminated depending  on the tax bracket that the beneficiary is in.

Conclusion

Clearly there are several things to consider before making an I.R.C. §645 election.  For individuals that die late in the year, the election can allow estate administration to perhaps be completed before a tax return must be filed.  Thus, the first tax return could end up being the final tax return for the estate if the estate is fully administered by the time the return is due.  That would save administrative costs.  Also, the election can provide the ability to shift income into a later tax year; allow funds to be set aside for charity and receive a deduction but not have to distribute the funds until a later time; eliminate the need for estimated tax payments; and hold S corporate stock during the period of estate administration – an advantage over a trust if administration extends beyond two years.  But the separate share rule can complicate the accounting.  The trust and the estate are not combined for calculating the DNI deduction.  Separate accounting for the trust and estate is needed while the estate is being administered.

More things to think about when a decedent dies with a revocable trust.

November 16, 2020 in Estate Planning, Income Tax | Permalink | Comments (0)

Saturday, October 17, 2020

Income Taxation of Trusts - New Regulations

Overview

On May 7, 2020, the IRS issued proposed regulations providing guidance on the deductibility of expenses that estates and non-grantor trusts incur.  REG-113295-18. The reason for the proposed regulations is that the Tax Cuts and Jobs Act (TCJA), effective for tax years beginning after 2017 and before 2026, bars individual taxpayers from claiming miscellaneous itemized deductions.  I.R.C. §67(g).  This TCJA suspension of miscellaneous itemized deductions for individuals raised questions as to whether and/or how estates and non-grantor trusts are impacted.  In late September, the IRS finalized the regulations.  TD 9918 (Sept. 21, 2020).

New guidance on handling deductions of a non-grantor trust or estate and those that flow to beneficiaries – it’s the topic of today’s post.

Computing Trust/Estate AGI

In general, a trust’s or estate’s AGI is computed in the same manner as is AGI for an individual. I.R.C. §67(e).  However, when computing AGI for trust or an estate, deductions are allowed for administration costs that are incurred in connection with a trust or an estate if those costs would not have been incurred if the property were held individually instead of in a trust or in the context of a decedent’s estateI.R.C. §67(e)(1).  In addition, an estate or trust is entitled to a personal exemption (I.R.C. §642(b)), a deduction for current income distributed from a trust (I.R.C. §651), and a deduction for the distribution of income from an estate or a trust for accumulated income as well as the distribution of corpus (I.R.C. §661). 

But, the TCJA added I.R.C. §67(g) which states, “…no miscellaneous itemized deduction shall be allowed for any taxable year beginning after December 31, 2017, and before January 1, 2026.”  That raised a question of whether the IRS would take the position that the new I.R.C. §67(g) caused the I.R.C. §67(e) expenses to be miscellaneous itemized deductions that a non-grantor trust or estate could no longer deduct.   In 2018, however, the IRS issued Notice 2018-61 to announce pending regulations and stated that I.R.C. §67(e) expenses would remain deductible by virtue of removing them from the itemized deduction category.   

Excess Deductions

Another aspect of non-grantor trust/estate taxation involves “excess deductions.”  When an estate or trust terminates, a beneficiary gets to deduct any carryover (excess) amount of a net operating loss or capital lossI.R.C. §642(h)(1).  The beneficiary can also deduct the trust’s or estate’s deductions for its last tax year that are in excess of the trust’s or estate’s gross income for the year.  I.R.C. §642(h)(2).  These deductions are allowed in computing the beneficiary’s taxable income.  While they must be taken into account in computing the beneficiary’s tax preference items, they cannot be used to compute gross income.  Treas. Reg. §1.642(h)-2(a).  In addition, the character of the deductions remains the same in the hands of a beneficiary upon the termination of an estate or a trust. 

But, the TCJA suspension of miscellaneous itemized deductions clouded the tax treatment of how excess deductions were to be handled.  When a trust or estate terminates with excess deductions they could be treated in the hands of a beneficiary as a miscellaneous itemized deduction that I.R.C. §67(g) disallows.  I say “could be” because an excess deduction could take one of three forms.  It is either comprised of deductions that are allowed when computing AGI under I.R.C. §§62 and 67(e); or it is an itemized deduction under I.R.C. §63(d) that is allowed when computing taxable income; or it is a miscellaneous itemized deduction that the TCJA disallows (through 2025). 

Proposed Regulations

The Proposed Regulations specify that certain deductions of an estate or trust are allowed in computing adjusted gross income (AGI) and are not miscellaneous itemized deductions and, thus, are not disallowed by I.R.C. §67(g). Instead, they are treated at above-the-line deductions that are allowed in determining AGI . The Proposed Regulations also provide guidance on determining the character, amount and manner for allocating excess deductions that beneficiaries succeeding to the property of a terminated estate or non-grantor trust may claim on their individual income tax returns.

Specifically, the Proposed Regulations amend Treas. Reg. §1.67-4 to clarify that I.R.C. §67(g) doesn’t disallow an estate or non-grantor trust from claiming deductions:  (1) for costs which are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in the trust or estate; and (2) for deductions that are allowed under I.R.C. §§642(b), 651 and 661 (personal exemption for an estate or trust; income distributed currently; and distributions for accumulated income and corpus).

As for excess deductions of an estate or trust, prior Proposed Regulations treated excess deductions upon termination of an estate or non-grantor trust as a single miscellaneous itemized deduction.  The new Proposed Regulations, however, segregate excess deductions when determining their character, amount, and how they are to be allocated to beneficiaries.  The new Proposed Regulations specified that the excess amount retains its separate character as either an amount that is used to arrive at AGI; a non-miscellaneous itemized deduction; or a miscellaneous deduction.  That character doesn’t change in the hands of the beneficiary.  The fiduciary is to separately identify deductions that may be limited when the beneficiary claims the deductions. 

The Proposed Regulations utilize Treas. Reg. §1.652(b)-3 such that, in the year that a trust or estate terminates, excess deductions that are directly attributable to a particular class of income are allocated to that income.  The Preamble to the Proposed Regulations states that excess deductions are allocated to beneficiaries under the rules set forth in Treas. Reg. §1.642(h)-4.  After allocation, the amount and character of any remaining deductions are treated as excess deductions in a beneficiary’s hands in accordance with I.R.C. §642(h)(2).  This accords with the legislative history of I.R.C. §642(h) in seeking to avoid “wasted” deductions. 

The bifurcation of excess deductions into three categories by the Proposed Regulations rather than lumping them altogether miscellaneous itemized deductions disallowed by the TCJA is pro-taxpayer. 

The IRS says that the Proposed Regulations can be relied on for tax years beginning after 2017, and on or before the proposed regulations are published as final regulations.   

Final Regulations

I.R.C. §67(g) doesn’t control.  The Final Regulations affirm that deductions for costs which are paid or incurred in connection with the administration of an estate or trust and which would not have been incurred if the property were not held in such trust or estate remain deductible in computing AGI.  In other words, I.R.C. §67(e) overrides I.R.C. §67(g).  However, the Final Regulations do not provide any guidance on whether these deductions (including those under I.R.C. §§642(b), 651 and 661) are deductible in computing alternative minimum tax for an estate or trust.  That point was deemed to be outside the scope of the Final Regulations. 

Excess deductions.  As for excess deductions, the Final Regulations confirm the position of the Proposed Regulations that excess deductions retain their nature in the hands of the beneficiary.  Treas. Reg. §1.642(h)-2(a)(2).  How is that nature determined?  Excess deductions passing from a trust or an estate have their nature pegged by Treas. Reg. §1.652(b)-3. The nature of excess deductions of a trust or an estate is determined by a three-step process:  1) direct expenses are allocated first (e.g., real estate taxes offset real estate rental income); 2) the trustee can exercise discretion when allocating remaining deductions – in essence, offsetting less favored deductions for individuals by using them against remaining trust/estate income (also, if direct expenses exceed the associated income, the excess can be offset at this step); 3) once all of the trust/estate income has been offset any remaining deductions constitute excess deductions when the trust/estate is terminated that are allocated to the beneficiaries in accordance with Treas. Reg. §1.642(h)-4.  Treas. Reg. 1.642(h)-2(b)(2).   

Example 2 of the Proposed Regulations was modified in the Final Regulations to permit allocation of personal property tax to income, with any I.R.C. §67(e) expenses distributed to the beneficiary.  Thus, the fiduciary has discretion to selectively allocate deductions to income or distribute them to a beneficiary.  Those excess deductions that are, in a beneficiary’s hands, allowed at arriving at AGI on Form 1040 are to be deducted as a negative item on Schedule 1. 

As the Proposed Regulations required and the Preamble to the Final Regulations confirm, the information concerning excess deductions must be reported to the beneficiaries when a trust or an estate terminates.  Deduction items must be separately stated when, in the beneficiary’s hands, the deduction would be limited under the Code.  The Preamble states that the Treasury Department and the IRS “plan to update the instructions for Form 1041, Schedule K-1 (Form 1041) and Form 1040…for 2020 and subsequent tax years to provide for the reporting of excess deductions that are section 67(e) expenses or non-miscellaneous itemized deductions.”   

Because excess deductions retain their nature in a beneficiary’s hands, any individual-level tax limitations still apply.  Thus, for example, if an excess deduction results from state and local taxes (SALT) that a non-grantor trust or estate pays, is still limited at the beneficiary’s level to the $10,000 maximum amount under the TCJA.  The Final Regulations addressed this issue, but the Treasury determined that it lacked the authority to exempt a beneficiary from the SALT limitation.

The Preamble also notes that beneficiaries subject to tax in states that don’t conform to I.R.C. §67(g) may need access to miscellaneous itemized deduction excess deduction information for state tax purposes.  This burden apparently rests with the fiduciary of the estate/trust and the pertinent state taxing authority.  The IRS declined to modify federal income tax forms to require or accommodate the collection of this information because it is a state tax issue and not a federal one.    

The Final Regulations clarify that a beneficiary cannot carry back a net operating loss carryover that is passed out of a trust/estate in its final year.  Treas. Reg. §1.642(h)-5(a), Ex. 1.  A net operating loss carryover from an estate/trust can only be carried forward by the beneficiary. 

Applicability

The Final Regulations apply to tax years beginning after their publication in the Federal Register, which will be October 19, 2020.  They do not apply to all open tax years.  That would mean that it is generally not possible to file an amended return to take advantage of the position of the Final Regulations with respect to excess deductions for a tax year predating the effective date of the Final Regulations. However, the Final Regulations also state that, "The rules applicable to taxable years beginning on or before October 19, 2020 are contained in §1.642(h)-2  as in effect prior to October 19, 2020….  Taxpayers may choose to apply paragraphs (a) through (c) of [Treas. Reg. §1.642(h)-2] to taxable years beginning after December 31, 2017, and on or before October 19, 2020.

Conclusion

The Proposed and Final Regulations are, in general, taxpayer friendly.  Tax planning will likely focus on the allocation of deductions in accordance with classes of income over which the fiduciary can exercise discretion (amounts allowed in arriving at AGI; non-miscellaneous itemized deductions; and miscellaneous itemized deductions).  To the extent that the fiduciary can have excess deductions on termination of an estate or non-grantor trust reduce AGI, that is likely to produce the best tax result for the beneficiary or beneficiaries (with consideration given, of course, to possible TCJA-imposed limitations).  Given the compressed tax brackets applicable to trusts and estates, the position taken in the Proposed and Final Regulations on deduction items and the flexibility given to fiduciaries is welcome news. 

October 17, 2020 in Estate Planning, Income Tax | Permalink | Comments (0)

Thursday, October 15, 2020

Can I Write My Own Will? Should I?

Overview

Statistics show that most people do not have a will in place to dispose of their property upon death.  In that event the state where a person is domiciled has a set of rules that will specify who gets the decedent’s property.  If a taker can’t be found under those rules, the state will receive the property. 

Some people don’t get around to executing a will during life.  The reasons for not doing so vary – from not wanting to hire a lawyer; to simply not getting it done.  Other’s may try to write their own will?  Can that be done?  If so, is it a good idea?

Writing one’s own will – it’s the topic of today’s post.

Legal Requirements for a Valid Will

Every state has statutory requirements that a will must satisfy in order to be recognized as valid in that particular jurisdiction.  For example, in all jurisdictions, a person making a will (known as a “testator”) must be of sound mind, generally must know the extent and nature of his or her property, must know who would be the natural recipients of the assets, must know who his or her relatives are, and must know who is to receive the property passing under the will.  A testator lacking these traits does not have testamentary capacity and is not competent to make a will.  Such persons are more susceptible to being influenced by family members and others desirous of increasing their share of the estate of the decedent-to-be. 

Cases involving challenges to wills are common where the testator is borderline competent or is susceptible to influence by others.  However, the fact that the testator was old or in poor health does not, absent other evidence, give rise to a presumption that the testator lacked testamentary capacity or was subject to undue influence.  See, e.g., Lasen v. Anderson, et al., 187 P.3d 857 (Wyo. 2008); In re Estate of Hedke, 278 Neb. 727 (2009)A person that challenges a will on undue influence and lack of testamentary capacity grounds must establish undue influence by clear and convincing proof and that the decedent possessed testamentary capacity despite being unable to comprehend the purchasing power of her estate.  See, e.g., In re Estate of Bennett, 19 Kan. App. 2d 154, 865 P.2d 1062 (1993). 

Generally, a person making a will must be of “full age.” However, in some states persons not yet of the age of majority who are or have been married can execute a will as if they are of full age.

In addition, the will must be in writing and signed at the end by the testator or by someone else in the presence and at the direction of the testator.  In most states, the will must be witnessed by at least two competent and disinterested witnesses who saw the testator sign the will or heard the testator acknowledge it.  A devise or bequest of property in a will to a subscribing witness is void, with narrow exceptions in the law. 

Handwritten Will

In some states, holographic wills (wills that are in the testator’s handwriting but not witnessed) are not admissible.  Other states treat as valid a handwritten will if it meets certain statutory requirements such as being left with the decedent’s other valuable papers or with another person for safekeeping.  See, e.g., In re Church, 466 S.E.2d 297 (N.C. App. 1996).   In Nebraska, for example, a handwritten will is valid if it is signed and dated (in some manner).  The signature can be the testator’s initials.  In re Estate of Foxley, 254 Neb. 204, 575 N.W.2d 150 (1998).  The date can consist of only the month and year.  In re Estate of Wells, 243 Neb. 152, 497 N.W.2d 683 (1993)

Recent Case

In In re Estate of Blikre, 934 N.W.2d 867 (N.D. Sup. Ct. 2019), the decedent’s will devised her estate to her sister, the plaintiff’s wife. The estate consisted of real property and mineral rights. The plaintiff’s wife was originally named the representative of the decedent’s estate, but she died soon after the decedent died. The plaintiff petitioned for appointment as successor personal representative, as did the defendant, who was the decedent’s other sister who had been excluded from the will. Upon the decedent’s death, the plaintiff sought formal probate of the will by attaching a copy of the will to the petition. The defendant argued that the decedent’s will should be considered revoked because the original was missing.

The trial court ordered formal probate of the will, finding that there was insufficient evidence to show the decedent intended to revoke her will. The defendant appealed, arguing that the decedent had a handwritten will that should be formally probated. The defendant claimed the handwritten will revoked the original will and distributed the decedent’s estate to the defendant and her nieces. The appellate court remanded to the trial court to decide this issue. The trial court held that the decedent’s handwritten documents did not express her testamentary intent to distribute her estate and did not revoke her original will.

On appeal, the defendant argued the decedent’s will was invalid because it was not executed in front of two witnesses, and that even if the will were valid, it was replaced by the handwritten will. The appellate court held that the lawyer who notarized the will gave credible evidence that the two witnesses who signed the original will were physically present when it was executed. Further, the appellate court held that although the handwritten documents were written by the decedent, the documents did not amount to a valid handwritten will under North Dakota law. For a handwritten will to be valid, it must express donative and testamentary intent. The appellate court held that the handwritten documents did not clearly express donative intent, but merely listed desires and concerns the decedent had. As for the missing original will, the appellate court noted that the defendant was the only person who accessed a security box that the decedent kept important documents in upon the decedent’s death. Additionally, before the decedent had died, she told the plaintiff to convey mineral deeds to both the plaintiff’s wife and the defendant. At that time, the decedent did not indicate that she had revoked her will. The appellate court determined the combination of the plaintiff’s testimony and defendant’s untrustworthy testimony was able to overcome the presumption that the decedent had revoked the will. 

Conclusion

While an individual may write their own will, it is usually advisable to have an attorney prepare the will.  One reason is because words can mean different things in different contexts.  For example, in Cameron, et. al. v. Bissette, et al., 661 S.E.2d 32 (N.C. 2008), the decedent’s holographic will was ruled void for vagueness because the decedent left “this Land” to certain beneficiaries, but with no explanation of what “this Land” referred to.   In situations where uncertainty is present because of the words used, a court will try to determine the testator’s intent in light of the testator’s lack of skill in will drafting.  See, e.g., In re Estate of Matthews, 13 Neb. App. 812, 702 N.W.2d 821 (2005).

So, to answer the question of whether you can write your own will, the answer is that you can.  Perhaps the better question is whether you should.  That answer is less clear.  But, if you have a farm or ranch or other small business or otherwise have substantial assets, writing your own will is probably not the best idea. Definitely not.

October 15, 2020 in Estate Planning | Permalink | Comments (0)

Monday, October 12, 2020

Principles of Agricultural Law

PrinciplesForBlog2020Fall-cropped

Overview

The fields of agricultural law and agricultural taxation are dynamic.  Law and tax impacts the daily life of a farmer, rancher, agribusiness and rural landowner practically on a daily basis.  Whether that is good or bad is not really the question.  The point is that it’s the reality.  Lack of familiarity with the basic fundamental and applicable rules and principles can turn out to be very costly.  As a result of these numerous intersections, and the fact that the rules applicable to those engaged in farming are often different from non-farmers, I started out just over 25 years ago to develop a textbook that addressed the major issues that a farmer or rancher and their legal and tax counsel should be aware of.  After three years, the book was complete – Principles of Agricultural Law - and it’s been updated twice annually since that time. 

The 47th edition is now complete, and it’s the topic of today’s post – Principles of Agricultural Law.

Subject Areas

The text is designed to be useful to farmers and ranchers; agribusiness professionals; ag lenders; educational professionals; lawyers, CPAs and other tax preparers; undergraduate and law students; and those that simply want to learn more about legal and tax issues.  The text covers a wide range of topics.  Here’s just a sample of what is covered:

Ag contracts.  Farmers and ranchers engage in many contractual situations, including ag leases, to purchase contracts.  The potential perils of verbal contracts are numerous and can lead to unnecessary litigation. What if a commodity is sold under forward contract and a weather event destroys the crop before it is harvested?  When does the law require a contract to be in writing?  For purchases of goods, do any warranties apply?  What remedies are available upon breach? If a lawsuit needs to be brought to enforce a contract, how soon must it be filed? Is a liability release form necessary?  Is it valid?  What happens when a contract breach occurs?  What is the remedy? 

Ag financing.  Farmers and ranchers are often quite dependent on borrowing money for keeping their operations running.  What are the rules surrounding ag finance?  This is a big issue for lenders also?  What about dealing with an ag cooperative and the issue of liens?  What are the priority rules with respect to the various types of liens that a farmer might have to deal with? 

Ag bankruptcy.  A unique set of rules can apply to farmers that file bankruptcy.  Chapter 12 bankruptcy allows farmers to de-prioritize taxes.  That can be a huge benefit.  Knowing how best to utilize those rules is very beneficial.  That’s especially true with the unsettled issue of whether Payment Protection Program (PPP) funds can be utilized by a farmer in bankruptcy.  The courts are split on that issue.

Income tax.  Tax and tax planning permeate daily life.  Deferral contracts; depreciation; installment sales; like-kind exchanges; credits; losses; income averaging; reporting government payments; etc.  The list could go on and on.  Having a basic understanding of the rules and the opportunities available can add a lot to the bottom line of the farming or ranching operation as well as help minimize the bleeding when times are tough.

Real property.  Of course, land is typically the biggest asset in terms of value for a farming and ranching operation.  But, land ownership brings with it many potential legal issues.  Where is the property line?  How is a dispute over a boundary resolved?  Who is responsible for building and maintaining a fence?  What if there is an easement over part of the farm?  Does an abandoned rail line create an issue?  What if land is bought or sold under an installment contract?  How do the like-kind exchange rules work when farmland is traded? 

Estate planning.  While the federal estate tax is not a concern for most people and the vast majority of farming and ranching operations, when it does apply it’s a major issue that requires planning.  What are the rules governing property passage at death?  Should property be gifted during life?  What happens to property passage at death if there is no will?  How can family conflicts be minimized post-death?  Does the manner in which property is owned matter?  What are the applicable tax rules?  These are all important questions.

Business planning.  One of the biggest issues for many farm and ranch families is how to properly structure the business so that it can be passed on to subsequent generations and remain viable economically.  What’s the best entity choice?  What are the options?  Of course, tax planning is a critical part of the business transition process.

Cooperatives.  Many ag producers are patrons of cooperatives.  That relationship creates unique legal and tax issues.  Of course, the tax law enacted near the end of 2017 modified an existing deduction for patrons of ag cooperatives.  Those rules are very complex.  What are the responsibilities of cooperative board members? 

Civil liabilities.  The legal issues are enormous in this category.  Nuisance law; liability to trespassers and others on the property; rules governing conduct in a multitude of situations; liability for the spread of noxious weeds; liability for an employee’s on-the-job injuries; livestock trespass; and on and on the issues go.  Agritourism is a very big thing for some farmers, but does it increase liability potential?  Nuisance issues are also important in agriculture.  It’s useful to know how the courts handle these various situations.

Criminal liabilities.  This topic is not one that is often thought of, but the implications can be monstrous.  Often, for a farmer or rancher or rural landowner, the possibility of criminal allegations can arise upon (sometimes) inadvertent violation of environmental laws.  Even protecting livestock from predators can give rise to unexpected criminal liability.  Mail fraud can also arise with respect to the participation in federal farm programs.  The areas of life potentially impacted with criminal penalties are worth knowing, as well as knowing how to avoid tripping into them.

Water law.  Of course, water is essential to agricultural production.  Water issues vary across the country, but they tend to focus around being able to have rights to water in the time of shortage and moving the diversion point of water.  Also, water quality issues are important.  In essence, knowing whether a tract of land has a water right associated with it, how to acquire a water right, and the relative strength of that water rights are critical to understand.

Environmental law.  It seems that agricultural and the environment are constantly in the news.  The Clean Water Act, Endangered Species Act and other federal (and state) laws and regulations can have a big impact on a farming or ranching operation.  Just think of the issues with the USDA’s Swampbuster rules that have arisen over the past 30-plus years.  What constitutes a regulatory taking of property that requires the payment of compensation under the Constitution?  It’s good to know where the lines are drawn and how to stay out of (expensive) trouble.

Regulatory law.  Agriculture is a very heavily regulated industry.  Animals and plants, commodities and food products are all subject to a great deal of regulation at both the federal and state level.  Antitrust laws are also important to agriculture because of the highly concentrated markets that farmers buy inputs from and sell commodities into.  Where are the lines drawn?  How can an ag operation best position itself to negotiate the myriad of rules?   

Conclusion

It is always encouraging to me to see students, farmers and ranchers, agribusiness and tax professionals get interested in the subject matter and see the relevance of material to their personal and business lives. Agricultural law and taxation is reality.  It’s not merely academic.  The Principles text is one that can be very helpful to not only those engaged in agriculture, but also for those advising agricultural producers.  It’s also a great reference tool for Extension educators. It’s also a great investment for any farmer – and it’s updated twice annually to keep the reader on top of current developments that impact agriculture.

If you are interested in obtaining a copy, perhaps even as a Christmas gift, you can visit the link here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html.  Instructors that adopt the text for a course are entitled to a free copy.  The book is available in print and CD versions.  Also, for instructors, a complete set of Powerpoint slides is available via separate purchase.  Sample exams and work problems are also available.  You may also contact me directly to obtain a copy.

If you are interested in obtaining a copy, you can visit the link here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html.  You may also contact me directly. 

October 12, 2020 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Monday, October 5, 2020

Does A Discretionary Trust Remove Fiduciary Duties A Trustee Owes Beneficiaries?

Overview

Trusts are often used as part of an estate plan for various reasons.  They can be established to take effect during life or be included as part of a will to take effect at death.  They can be revocable or irrevocable.  They can also be established as a “support” trust or as a “discretionary” trust.  A support trust is a trust where the trustee’s responsibility is to provide for the beneficiary’s support such as food, clothing, and shelter.  A discretionary trust, on the other hand, is a trust that has been set up to benefit one or more beneficiaries, but the trustee is given full discretion as to when, if any, trust principal and/or income, are given to the beneficiaries.  With a discretionary trust, the trust beneficiaries have no rights to trust funds.  But, can the trustee of a discretionary trust simply ignore the other beneficiaries?  Is the trustee still accountable for the way the trust assets and income are handled?

The issue of the responsibility of a trustee to other beneficiaries of a discretionary trust – it’s the topic of today’s post.

Recent Kansas Case

Basic facts.  The question of how a trustee relates to other beneficiaries of a discretionary trust came up in a recent Kansas case involving farmland and oil and gas interests.  In Roenne v. Miller, No. 120,054, 2020 Kan. App. LEXIS 72 (Kan. Ct. App. Oct. 2, 2020), the decedent, at the time of her death, had five children and owned royalty interests in oil leases, farmland, a home, as well as cattle, farm equipment and other personal property.  Her will devised a one-half interest in the farmland to a son that was named as trustee of her testamentary trust.  The other one-half interest in the farmland was devised to another son for life with a remainder to his children.  Upon this son dying childless, the remainder would pass to the trustee-son.  All of her livestock and farm machinery along with certain personal property was bequeathed to these two sons equally.  The non-trustee son then assigned his one-half interest in the farm assets and farmland to the trustee-son. 

The decedent’s will clearly specified that the other children were to have no interest in her farmland.  The will directed that the balance of her estate, consisting solely of interests in oil royalties, passed to the testamentary trust.  The trust gave the trustee “uncontrolled” or “exclusive” discretion over trust net income and principal, and provided specifics authorizations for the use of the trust income and principal.  The trust also specified that the trustee was to “only act in a fiduciary capacity” and that the trustee “shall each year render an account of his administration of the trust funds hereunder that the same shall be available for inspection by any of the beneficiaries at any reasonable time.”  In addition, the trust specified that the trustee was liable for any failure to exercise reasonable care, prudence and diligence in the discharge of trustee duties. 

At the time of the decedent’s death, the farmland was encumbered by substantial debt.  The trustee sold the decedent’s home and used the proceeds to pay down debt on some of the farmland.  Other of the farmland was foreclosed upon and the trustee’s wife bought part of it at the foreclosure auction with the trustee’s name later added to the title.  The trustee did pay off a mortgage on one of the oil leases, but also distributed oil lease income to himself over a 19-year period in the amount of $1,300,000.  No bank account was established for the trust and the trustee deposited the oil lease income directly into his personal account that he owned jointly with his wife.  The oil lease income was used to pay down the substantial debt on the farmland and to pay farming expenses.  While the trustee testified that his use of the oil income in such manner did not benefit the trust, he asserted that the would not have taken on the responsibility of executor and trustee unless he could use the oil income to service the debt on to pay off the farm debt and farming expenses.  He testified at trial that he promised the decedent that he “would keep the farm intact whatever way I could.”  In 2013 and 2014, the trustee conveyed the mineral rights from the trust to himself personally as a beneficiary which effectively emptied the trust of assets. 

Trial court.  The other beneficiaries sued the trustee for negligently and fraudulently breaching his fiduciary duties as trustee by converting for his own use the trust income mineral interests. The trial court construed the will and trust together and determined that the decedent’s intent was to give the trustee-son as much power as possible to use trust principal for the benefit of any beneficiary in any amount without limitation.  Additionally, the trial court held that the trustee did not violate his fiduciary duty he owed as a trustee or commit fraud because he relied upon the terms of the trust and had sought out advice from an attorney that advised him that oil income could be used to service debt. He testified that accountants and bankers relied on the trust’s terms in dealing with him and told him that he could use trust income in the manner that he did.  In other words, because the trustee had uncontrolled or exclusive discretion over the trust, the trustee could not be held accountable to the other beneficiaries for his conduct.

Appellate court.  On appeal, the plaintiffs contended that the trial court erred in ruling that the trust language granting the trustee uncontrolled discretion relieved the trustee of his fiduciary duties as a trustee on the basis that such a determination did not square with the law of trusts. The trustee maintained his argument that the trust was a discretionary trust and not a support trust. Consequently, the trust did not require the trustee to make disbursements to the other beneficiaries.  Specifically, the trustee claimed that his conduct conformed to the “prudent investor rule” of Kan. Stat. Ann. §58-24a01, and did not violate his duty of loyalty under Kan. Stat. Ann. §58a-802 because the trust authorized him to transfer trust property to himself. 

The appellate court reversed and remanded.  The appellate court noted that the decedent’s intent in creating the trust was paramount and that the language of the trust was unambiguous in creating a discretionary, as opposed to a support, trust.  No single beneficiary had the right to a distribution.  The trustee had the freedom to act in his capacity as trustee.  As such, the appellate court noted that it could only interfere with that freedom in cases where the trustee abuses discretion, acts in bad faith or acts in a manner that is arbitrary and unreasonable as to amount to bad faith.  A good faith reliance on the express provisions of a trust does not result in trustee liability for breach of trust.  However, even with a fully discretionary trust, the trustee still has fiduciary duties to the beneficiaries of loyalty, impartiality and prudence in accordance with Kan. Stat. Ann. §58a-101 et seq.  These statutory duties, the appellate court noted, cannot be superseded by trust language purporting to give the trustee “uncontrolled” discretion.  A trustee, must still act in good faith and administer the trust for the benefit of the beneficiaries.  While a grantor’s intent is paramount, the law places limits on trustee conduct even in the context of a fully discretionary trust. 

Concerning the duty of loyalty, the appellate court noted that Kan. Stat. Ann. §58a-802(a) requires the trustee to “administer the trust consistent with the terms of the trust and solely in the interests of the beneficiaries.”  The duty preserves the character of the fiduciary relationship between the trustee and the beneficiaries.  The duty of impartiality is an extension of the duty of loyalty and is contained in Kan. Stat. Ann. 58a-803 which specifies that, “If a trust has two or more beneficiaries, the trustee shall act impartially in investing, managing, and distributing the trust property, giving all due regard to the beneficiaries’ respective interests.”  Here, the trustee was one of the five beneficiaries and had a duty to act impartially with respect to the other beneficiaries.  Depositing trust income in the trustee’s personal account, the appellate court held, violated the duty of impartiality. The trust was intended to be for the benefit of all of the decedent’s children, and the trustee’s actions were inconsistent with that intent.

Concerning the duty of prudent administration, Kan. Stat. Ann. §58a-804 states that, “A trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distributional requirements, and other circumstances of the trust.  In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.” 

The trust stated that the trustee could use trust income to pay farming expenses, convey mineral rights, and execute oil and gas leases.  But, it gave such authorization to the trustee only in his role as a fiduciary and not as a beneficiary. The trust instrument was clear in stating, “All powers given to the trustee or trustees by this instrument are exercisable by the trustees only in a fiduciary capacity.  No power given to the trustees hereunder shall be construed to enable any person to purchase, exchange, or otherwise deal with or dispose of the principal [or] the income therefrom for less than adequate consideration in money or money’s worth.”   This is a key point.  There was no indication in the trust language that the trustee could transfer all of the trust assets to his personal account as a beneficiary to operate his own personal farming operation.  Doing so overrode his duties of loyalty and impartiality.  Although the trustee argued he was relying on an oral promise to maintain the farm, the appellate court noted the mother could have given him all of the royalty interest income, like she did with the farm, in her will.  There was no express trust language allowing the trustee to transfer everything to himself and his wife.  

The appellate court held that despite language in the trust granting the trustee uncontrolled discretion to act, the trustee still had fiduciary duties to all of the beneficiaries.  Those duties, the appellate court determined, had been breached.  The trial court’s focus solely on the discretionary language was in error.  On remand, the trial court must address the trustee’s statute of limitations defense, or any other equitable defenses, and remedies for a breach of trust including a money judgment or a specific sum for restitution.

Conclusion

The recent Kansas decision is a case study in what can go wrong with an estate plan.  It illustrates the classic situation in the farm setting where the parent wants to benefit all of the children equally, but have the farm assets end up in the hands of a particular child.  It’s debatable whether the structure chosen to implement that plan was appropriate.  However, when a trust is utilized, clients and potential trustees should be advised of the basics of trust law, the fiduciary duties that a trustee owes to the beneficiaries and that those statutory duties can’t be extinguished by trust language.  Apparently, some judges need to learn those basics also.  In the Kansas case, voters have already turned the first-term trial court judge out of office when his present term is up.     

October 5, 2020 in Estate Planning | Permalink | Comments (0)

Saturday, June 27, 2020

Is It A Gift or Not a Gift? That is the Question

Overview

Either as part of an estate plan or for purposes of setting up another person in business or for other reasons, a gift might be made.  But when is a transfer of funds really a gift?  Why does it matter?  The recipient doesn’t have to report into income gifted amounts.  If the amount transferred is not really a gift, then it’s income to the recipient.  When large amounts are involved, the distinction is of utmost importance.

When is a transfer of funds a gift?  It’s the topic of today’s blog article

Definition of a “Gift”

Under the Internal Revenue Code (“Code”), gross income is income from whatever source derived unless otherwise excluded.  I.R.C. §61(a)However, gross income does not include the value of property that is acquired by gift.  I.R.C. §102(a).  In Comr. v. Duberstein, 363 U.S. 278 (1960), the U.S. Supreme Court defined a gift under I.R.C. §102 as a transfer that proceeds from a detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses.  As a result, the Supreme Court concluded that the most important consideration in determining whether a gift has been made is the donor’s intent.  That’s a broader inquiry than simply looking at how the donor characterizes a particular transaction.  A court will examine objectively whether a gift occurs based on the facts and if those facts support a donor that intended a transfer based on affection, etc.  Detached and disinterested generosity is the key.  If the transfer was made out of a moral duty or some sort of expectation on the recipient’s part, it is not a gift under I.R.C. §102 because it did not arise out of a detached and disinterred generosity.  Similarly, when the recipient has rendered services to a donor, a payment for services is not a gift even if the transferor had no legal obligation to pay the remuneration for the services.   

Apart from the Court’s analysis in Duberstein, a particular transaction may amount to a “common law” gift.  A common law gift requires only a voluntary transfer without consideration.  If the donor had no legal obligation to make the payment, the transfer is a gift under the common law standard.  That’s an easier standard to satisfy than the Code definition set forth in Duberstein

Recent Case

The recent Tax Court case of Kroner v. Comr., T.C. Memo. 2020-73 illustrates how the courts examine whether a particular transfer constitutes a gift and the consequences of misreporting the transaction(s) for tax purposes.  The petitioner was the CEO of a business that bought and sold structured settlement payments and lottery winnings.  The company would buy structured payments from lottery winners and resell the payments to investors.  The petitioner had historically worked in the discounted cashflow industry and, as a result, met a Mr. Haring, a wealthy British citizen, sometime in the 1990s.  Their business relationship lasted until 2007.

In 2003 and 2004, the petitioner was interested in protecting his assets and an attorney recommended the use of an “offshore” trust to hold the petitioner’s assets.  An offshore trust is often associated with tax scams, but I reserve that discussion for another post in the future.  In any event, the petitioner established the “Kroner Family Trust” in a small island in the Caribbean.  The petitioner was the beneficiary of the trust along with his son.  In 2007, the petitioner established another trust in the Bahamas to hold business assets.  From 2005-2007, the petitioner received wire transfers from Mr. Haring totaling $24,775,000.  Some of the transferred funds went directly to the petitioner, but others went to the trust in the Caribbean island and still others went to the petitioner’s business.  The lawyer that set up the offshore trusts “advised” the petitioner that the transfers were gifts that the petitioner didn’t have to report as taxable income.  The attorney’s legal “analysis” which led him to this conclusion was a conversation he had with the petitioner and a note that he drafted for Mr. Haring stating that the transfers were gifts.  The attorney also advised the petitioner of the requirements to file Form 3520 every year that he received a transfer from Mr. Haring to report the gifts from a foreign person.  A CPA prepared the Form 3520 for the necessary years.  The petitioner never reported any of the transfers from Mr. Haring as taxable income. 

The petitioner was audited for tax years 2005-2007.  The IRS took the position that the transfers were not gifts, should have been reported as taxable income, and assessed accuracy-related penalties on top of the tax deficiency. 

The Tax Court agreed that the transfers should have been included in the petitioner’s taxable income.  They were not gifts.  The Tax Court noted that Mr. Haring’s intention was the most critical factor in determining the status of the transfers.  The petitioner bore the burden to establish Mr. Haring’s intent by a preponderance of the evidence.  However, Mr. Haring never appeared at trial and didn’t provide testimony.  Instead, the petitioner tried to establish the gift nature of the transfers by his own testimony.  The petitioner and Mr. Haring had operated some business interests together in the 1990s, and the petitioner acted as a nominee for Mr. Haring for certain of Mr. Haring financial interests.  He even formed a trust in Liechtenstein for Mr. Haring in 2000.  Mr. Haring also provided a loan for the petitioner’s credit counseling business in 2000.  That loan was paid off in 2007.  Mr. Haring also held about a 70 percent equity interest in the petitioner’s cashflow industry business in exchange for providing funding and loan guarantees.  He later liquidated his interest for $255 million. 

The petitioner last saw Mr. Haring in 2002 and testified at trial that he didn’t know where he lived and that he didn’t know his telephone number.  He did, however, receive a telephone call from Mr. Haring in 2005 that lasted no more than three minutes.  The petitioner claimed that Mr. Haring told him during the call that Mr. Haring had a “surprise” for the petitioner.  The petitioner later met with Mr. Haring’s associate and they set up the ability to receive wire transfers from Mr. Haring into the petitioner’s bank account.  That’s when the attorney drafted a note to the petitioner from Mr. Haring stating that the transfers would be gifts. 

The Tax Court didn’t buy the petitioner’s story, finding that neither the petitioner nor the attorney were credible witnesses.  The Tax Court stated that the petitioner’s testimony was self-serving and that the attorney’s testimony was “simply not credible.”  There was no supporting documentary evidence.  In addition, the attorney represented both Mr. Haring and the petitioner.  The Tax Court also noted that the attorney was “evasive in his answers and in his selective invocation of the attorney-client privilege with regard to the legal advice provided to Mr. Haring about the transfers.”  The Tax Court also doubted the authenticity and credibility of the 2005 note allegedly from Mr. Haring but drafted by the attorney regarding his desire to gift funds to the petitioner.  Thus, the note carried little weight in determining whether the transfers were gifts.     

The Tax Court also determined that the petitioner failed to prove that the transfers were made with disinterested generosity.  The record was simply devoid of any credible evidence to prove that Mr. Haring transferred the funds to the petitioner with detached and disinterested generosity.  The Tax Court noted that timing of some of the transfers with liquidity events of the petitioner’s business of which Mr. Haring was an investor.  That raised a question as to whether Mr. Haring was acting as the petitioner’s nominee. 

The Tax Court determined that the petitioner need not pay the 20 percent accuracy-related penalty because the IRS failed to satisfy its burden of production under I.R.C. §6751(b)

Conclusion

The Kroner case is a textbook lesson on what constitutes a gift – detached and disinterested generosity.  The burden of establishing that a transfer is a nontaxable gift is on the party asserting that the transfer amounted to a gift.  The case is also a lesson into the messes that sloppiness and questionable lawyering can get a client into.  When the amount of the gift (or gifts) is as large as that involved in the Kroner case, attention to detail is a must.  The income tax consequences from being wrong are enormous. 

June 27, 2020 in Estate Planning, Income Tax | Permalink | Comments (0)

Wednesday, June 24, 2020

Valuing Farm Chattels and Marketing Rights of Farmers

Overview

When a farmer or rancher dies, often left behind are assets that are unique to agriculture.  For tax purposes, these assets present unique valuation issues.  For practitioners handling ag estates, it’s important to get values correct for federal estate tax purposes and/or a county inheritance tax worksheet.  What are the basics tenets of valuing these unique farm and ranch items?  This was an issue that Don Kelley, who I started out my practice career out with in North Platte, NE, wrote about in his two-volume treatise, Estate Planning for Farmers and Ranchers, and his other two-volume set, Farm Business Organizations.  Don recently turned over the editorship of those treatises to me.  In working on updating those volumes recently, I thought it would be a useful topic for today's article.  

Valuing farm chattels and marketing rights of a farmer at death – it’s the topic of today’s post

Valuing Chattels

There is no specific Treasury Regulation that addresses the valuation of tangible chattel property (personal property) beyond Treas. Reg. §20.2031-6 (addressing household goods/personal effects) and Treas. Reg. §20.2031-1 which addresses general valuation concepts. 

Treas. Reg. §20.2031-1(b) states:

“Livestock, farm machinery, harvested and growing crops must generally be itemized and the value of each item separately returned.  Property shall not be returned at the value at which it is assessed for local property tax purposes unless that value represents the fair market value as of the applicable valuation date.  All relevant facts and elements of value as of the applicable valuation date shall be considered in every case.”

It’s often easier to value chattels and inventory them than it is to value farm/ranch real estate.  Most farm machinery has an established market.  As a result, appraisals of farm machinery and equipment usually are not controversial.  If there is an established retail market for chattel property, it is to be value at retail.  Treas. Reg. §20.2031-1(b).  As the regulation states, “For example, the fair market value of an automobile (an article generally obtained by the public in the retail market) includible in the decedent's gross estate is the price for which an automobile of the same or approximately the same description, make, model, age, condition, etc., could be purchased by a member of the general public and not the price for which the particular automobile of the decedent would be purchased by a dealer in used automobiles.  Examples of items of property which are generally sold to the public at retail may be found in §§ 20.2031-6 and 20.2031-8.”  Id.

This same approach is to be used with respect to farm machinery and equipment and also farm vehicles.  For example, in Estate of Love v. Comr., T.C. Memo. 1989-470, the decedent was in the business of breeding and racing thoroughbred horses and died 11 days after a brood mare mated.  It was not possible as of the date of the decedent’s death (the valuation date) to determine whether the mare was pregnant at the time the decedent died, but the IRS went ahead and assumed that the mare was pregnant on the date of the decedent’s death for valuation purposes.  Doing so greatly increased the value of the mare.  The Tax Court determined that that post-death pregnancy of the mare was not to be taken into account when valuing the mare for estate tax purposes.  There was no way that a hypothetical willing buyer would have known that the mare was pregnant, and the Tax Court determined that the assumption by the IRS of the mare’s pregnancy was not in accord with Treas. Reg. §20.2031-1(b).  The Tax Court also excluded post-death sales of horses in the determination of the mare’s value and relied on comparable sales of horses near the date of the decedent’s death.  The Tax Court’s opinion was upheld on appeal.  923 F.2d 335 (4th Cir. 1991).  

Valuating Fixtures

Farm buildings, fences, water wells and similar items are customarily appraised as part of the farm real estate.  But, if a fixture (and associated chattel equipment) is linked with crop production, valuation is more problematic.  An example of such an item would be an irrigation well used to pump water for crop irrigation.  At least in the areas of the Great Plains and the western Midwest, IRS offices have historically valued detachable chattel items as farm machinery.  Such items of property include aboveground pivot irrigation systems, motors and pumps.  The associated land on which the irrigated crops are grown is typically appraised along with any immovable fixtures (i.e., wells; well casings; pivot stanchions) in place. 

Inventory

Harvested grain in inventory of a farmer usually doesn’t present a valuation issue.  The grain is valued in accordance with trading exchanges for the type of crop involved as of the date of death.  For example, in Willging v. United States, 474 F.2d 12 (9th Cir. 1973), the plaintiff was a wheat farmer that reported income on the accrual basis.  The value of the 1966 opening grain inventory increased by over $36,000 from January 1, 1966 until the date of the farmer’s death in November.  The estate claimed that the increase in the inventory values escaped taxation because of the basis step-up rule of I.R.C. §1014.  The appellate court disagreed, reversing the trial court.  The court noted that the farmer determined income annually by adding to the sales price of products sold during the year the value of his closing inventory, and then subtracting from that amount the value of the opening inventory.  Inventories were valued under the “farm price” method (market price less direct costs of disposition).  The farmer deducted expenses in the year incurred.  Because the farmer elected to be taxed under the accrual method, the court noted that the value of the grain was realized when it increased the inventory value.  It wasn’t realized when it was later sold.  Thus, his death didn’t have the effect of accruing items which would not otherwise have been accrued, but his death closed the tax year for his last tax year for the income he had received that year. 

Marketing Rights

Many farmers are members of agricultural cooperatives and may hold cooperative marketing rights as of the time of death.  This is particularly true with respect to dairy farmers and is also common among beekeepers.  How are such rights valued?  In Cordeiro’s Estate v. Comr., 51 T.C. 195 (1968), the petitioner acquired a herd of dairy cows from the decedent.  The decedent was a member of a cooperative marketing association and had been required to market all of his milk from the herd through the cooperative.  The decedent had been allocated “base” as a measure of his share in the proceeds of the cooperative’s milk sales.  The decedent’s membership and base expired upon the decedent’s death and the petitioner succeeded to it and membership in the cooperative.  The Tax Court determined that the base was separate from the dairy herd and that the petitioner’s cost basis in the dairy cows was to be determined without any value attributed to the base.  A milk base is an intangible right to sell a certain amount of milk at a particular price.  See, Priv. Ltr. Rul. 7818002 (Jan. 6, 1978).  See also, Vander Hoek v. Comr., 51 T.C. 203 (1968), acq., 1969 A.O.C. LEXIS 210 (May 9, 1969). 

Similarly, a rice allotment has been held to be a right this is devisable, descendible, transferable and salable.  First Victoria National Bank v. United States, 620 F.2d 1096 (5th Cir. 1980).  The court said that the allotment was similar to business goodwill.  That reasoning could support an IRS argument that other USDA program benefits that a decedent had applied for have value for tax purposes associated with death. 

Conclusion

Valuation issues for farmers and ranchers can be unique.  When particular items of chattel property are involved, specific valuation guidance is often lacking, and the existing guidance is dated.  While the courts have addressed some of the issues, the general advice of not being greedy holds true.  If a valuation amount looks reasonable to an IRS examining agent, chances are IRS won’t push the issue.

This is just one of the issues that will be addressed at the 2020 Farm & Ranch Income Tax/Estate and Business Planning national conference in Deadwood, South Dakota on July 20-21.  You may attend either in-person or online.  For more information on the conference and how to registration information click here:  https://washburnlaw.edu/employers/cle/deadwoodcle.html

June 24, 2020 in Estate Planning | Permalink | Comments (0)

Wednesday, June 17, 2020

Tax Issues Associated With Options In Wills and Trusts

Overview

As part of an estate plan, an heir may be given an option to buy certain assets of the decedent at a specified price.  In agricultural estates, such an option is typically associated with farmland of the decedent, and often gives the optionee (the person named in the will with the right to exercise the option) a very good deal for the property upon exercise of the option. 

Often the question arises as to the basis of the property in the hands of the optionee when the option is exercised and the resulting tax consequences when the property is later sold. 

Tax issues associated with the exercise of an option – it’s the topic of today’s post.

Options – The Basics

There is no question that an option can be included in a will.  A testator has the right to dispose of their property as desired.  The only significant limitation on testamentary freedom involves the inability to completely disinherit a spouse.  Even if the will leaves nothing for the surviving spouse, under state law the surviving spouse has a right to an elective share entitling the surviving spouse to “elect” to take a portion of the estate regardless of what the deceased spouse’s will says (except, of course, if a valid prenuptial agreement was executed).   Under most state laws, a surviving spouse’s elective share comprises anywhere from between one-third to one-half of the decedent’s estate.  In addition, in some states, the spousal elective share can include retirement assets or life insurance. 

Tax Issues

What are the tax consequences when an optionee exercises an option?  Does the exercise result in tax consequences to the decedent’s estate?  What are the tax consequences if the optionee later sells the property that was acquired by the exercise of the option? 

Decedent’s estate.  The exercise of an option results in no tax consequence to the decedent’s estate.   The exercise of the option, followed by the sale of the property by the estate to the holder of the option does not result in gain or loss to the estate.   In Priv. Ltr. Rul. 8210074, Dec. 10, 1981, the decedent's son was given an option under the terms of the parent’s will to purchase some of the parent’s farmland at $350/acre. The son exercised the option and paid the estate $26,668 for the land. At the time the option was exercised, the farmland was worth $114,293 (as valued on the parent’s estate tax return). The IRS determined that the combined basis of the option and the real estate subject to the option was $114,293 with $26,668 of that allocable to the land. Thus, when the real estate was sold to the son for $26,668, it equaled the basis in the land in the hands of the estate resulting in neither gain nor loss to the estate.

Optionee’s basis. 

When the optionee exercises the option in a will or trust, the primary question is what the income tax basis of the property received under the option is in the optionee’s hands.  I.R.C. §1014 is the applicable basis provision for property acquired from a decedent.  The provision states in pertinent part, “(a)In general Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be— (1) the fair market value of the property at the date of the decedent’s death,… (b)Property acquired from the decedent For purposes of subsection (a), the following property shall be considered to have been acquired from or to have passed from the decedent: (1) Property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent….

This ‘”stepped-up” basis rule applies to property required to be included in the decedent’s gross estate, including property that is subject to an option in a will (or trust) that grants the beneficiary an option to purchase the property at a beneficial price from the estate.  The option is treated as property acquired from the decedent and receives an income tax basis equal to its fair market value as of the date of the decedent’s death.  Its basis is the estate tax value of the property subject to the option less the price the beneficiary must pay to exercise the option.  A beneficiary who exercises an option under a will may add the basis of the option to the cost of the property (the option amount) to determine the optionee’s basis in the property. 

In Cadby v. Comr., 24 T.C. 899 (1955), acq., 1956-2 C.B. 5, the decedent died in 1942.  His will included a provision directing the executor and trustee to sell some of the decedent’s stock to a family member and another person for $25,000 upon proof that the family member had purchased from the decedent’s surviving spouse preferred stock in the same company for $6,000 if payment were made within two years of the decedent’s death.  If payment wasn’t made within the specified timeframe, disposition of the stock was left to the discretion of the executor and trustee. Shortly after the decedent’s death, the family member sold his rights under the will to a third party for $13,000.

In determining the tax consequence of the transaction to the family member, the Tax Court noted that the fair market value of the decedent’s stock interest subject to the option was $55,243 as of the date of death as denoted on the decedent’s federal estate tax return.  In addition, the family member paid $6,000 for the stock he purchased from the decedent’s surviving spouse.  Thus, the family member’s income tax basis in the stock was $61,243.40.  From that amount, the Tax Court subtracted the option price of $25,000 and the payment to the surviving spouse of $6,000.  The result, $30,243.40, was the option price.  Because the family member held a one-half interest in the option, that one-half interest was worth $15,121.70.  Thus, the sale for $13,000 did not trigger any taxable income to the family member. 

IRS Position

Twelve years after the Tax Court’s ruling in Cadby, the IRS issued a Revenue Ruling formally stating its position that a beneficiary who exercises an option under a will may add the basis of the option to the cost of the property (the option amount) to determine the beneficiary’s basis in the property.  Rev. Rul. 67-96, 1967-1 C.B. 195.  In 2003, the IRS issued a private letter ruling again confirming the Tax Court’s approach in Cadby.  Priv. Ltr. Rul. 200340019 (Jun. 25, 2003).  Under the facts of the ruling, under the terms of Mother's will, the taxpayer was given the right to purchase the Mother’s home upon the Mother’s death at an amount less than fair market value.  The basis in the option and in the home upon exercise of the option was determined in accordance with Rev. Rul. 67-96.  Thus, the basis in the option upon its exercise was measured by the difference between the value of the home for federal estate tax purposes and the option price.  In addition, as a result of exercising the option, the taxpayer’s basis in the home was the sum of the basis of the option and the actual option price paid. 

Conclusion

Options can play an important role in transitioning a farming or ranching business to the next generation.  Not only must thought be given to the financial ability of the optionee to exercise the option, the income tax issues triggered upon exercise of the option and, when applicable, the subsequent sale of the property acquired by exercising the option must also be considered.

June 17, 2020 in Estate Planning, Income Tax | Permalink | Comments (0)

Tuesday, June 9, 2020

Are Advances to Children Loans or Gifts?

Overview

Often a parent (or parents) will advance money to a child.  The reasons for doing so are varied, such as making a large loan but then forgiving the payments each year consistent with the federal gift tax present interest annual exclusion (currently $15,000), but a significant question is whether such an advance of funds is a loan or a gift.  The proper classification makes a difference from a tax standpoint.

Is an advance of funds to a child a loan or a gift – that’s the topic of today’s post.

IRS Factors

The IRS presumption is that an advance is a gift when a transfer between family members is involved.  The taxpayer can overcome the presumption by showing that repayment was expected and that the taxpayer actually intended to enforce the debt.  In making that determination, the IRS utilizes a set of factors to evaluate whether an advance of funds amounts to a loan or a gift.  Those factors include whether the borrower signed a promissory note; whether interest was charged; whether collateral secured the indebtedness; whether payment was actually made; whether demand for repayment occurred when a payment was missed; whether there was a fixed due date for the loan; whether the borrower had the ability to repay the debt; how the parties characterized the transaction, and; whether the transaction was reported for federal tax purposes as a loan.  In essence, the question boils down to whether there is a bona fide debtor-creditor relationship. 

Illustrative Cases

In Miller v. Comr., T.C. Memo. 1996-3, the petitioners (a married couple) operated a ranch and employed their two sons to manage it.  One of the boys also managed his parents’ commercial property business in Georgia and that one of the sons helped manage.  The Mother transferred $100,000 to a son by giving him two $50,000 checks in the summer and fall of 1982.  She wrote the word “loan” on the check register and the check stub for each check and the checks were recorded in an account labeled “Notes Receivable – S. Miller” in the Mother’s general ledger.  She was trying to help him pay off a $56,000 mortgage on a house he and his wife bought in 1980 for $300,000 that became due in 1982.  In November of 1982, he used $56,000 of the $100,000 that he received from his Mother to retire the mortgage. The son signed a non-interest-bearing noted in the principal amount of $100,000 that was payable to his Mother.  The note was not secured by any collateral.   The note specified that the son was to pay his Mother on demand or three years after it was executed if no demand was made.  However, the Mother didn’t consider the three-year-later date to be a fixed date on which the son had to pay her, and she had no intention of demanding payment on that date, or any other date.  She also never discussed with her son any consequences of his failing to make payment.  In late 1982, the son made a $15,000 payment on the note, but didn’t make any more over the next three years.  The Mother never sought to enforce repayment, instead writing a “forgiveness” letter to him each year.  The IRS took the position (based on the multiple factors) that the loans were gifts.  The Tax Court agreed, which meant that the Mother had gift tax liability.  

In Estate of Bolles v. Comr., T.C. Memo. 2020-71, the decedent had five children and expressed a desire to treat them equally upon her death. She kept a personal record of advances to each child and any repayment that a child made. She treated the original advances as loans and forgave the “debt” account of each child annually in the amount of the federal gift tax present interest annual exclusion. The decedent and her spouse established a trust to hold some of their jointly owned property, including a substantial art collection and office building in San Francisco. At the time of her death she and her five children were among the beneficiaries of the trust. Her oldest child encountered financial difficulties and entered into an agreement with the trust to use trust property as security for $600,000 in bank loans. The son also owed the trust back-rent from his architecture practice. The son failed to meet the loan obligations and the trust was liable for the bank loan. The decedent transferred over $1 million to the son from 1985 through 2007. The son did not make any repayments after 1988. The decedent also had a revocable trust created in 1989. That trust specifically excluded the son from any distribution from her estate. It was later amended to include a formula to account for the “loans” made to the son during her lifetime.

Upon her death, another son filed a federal estate tax return and the IRS determined a deficiency of $1,152,356, arguing that the decedent’s advances to the oldest child were taxable gifts and not loans. The Tax Court determined that the amounts were gifts based on a non-exclusive, nine-factor analysis used in determining the status of advances: (1) whether there was a promissory note or other evidence of indebtedness; (2) whether interest was charged; (3) whether there was security or collateral; (4) whether there was a fixed maturity date; (5) whether a demand for repayment was made; (6) whether actual repayment was made; (7) whether the transferee had the ability to repay; (8) whether records maintained by the transferor and/or the transferee reflect the transaction as a loan; and (9) whether the manner in which the transaction was reported for Federal tax purposes is consistent with a loan.

The court determined that the decedent did not have a reasonable expectation of repayment due to the son’s financial situation and employment history. However, a small portion of the advances made to the son while his financial situation was more favorable were loans because the decedent could expect repayment based on the son’s improved financial condition. The Tax Court noted that with respect to situations involving loans to family members, an actual expectation of repayment and an intent to enforce the debt are critical to sustaining the tax characterization of the transaction as a loan. 

Conclusion

Be careful when making loans or gifts to children.  Take care to document the transaction(s) carefully and make sure to structure it with the factors listed above in mind to achieve the desired result.  Also, be mindful of another weapon the IRS might utilize in certain transactions, including those involving family members – the “step-transaction” doctrine.  This is another potential problem that can arise when the gift/loan distinction is not in issue.  For example, in Estate of Cidulka v. Comr., T.C. Memo. 1996-149, the IRS successfully utilized the doctrine to trigger gift tax liability.  The decedent had made annual gifts of stock during his life to his son, daughter-in-law and grandchildren.  He treated the transfers as gifts for gift tax purposes and kept each one at or under the applicable gift tax present interest annual exclusion (currently $15,000) so that he wouldn’t have to pay gift tax on the transfers.  Over a 14-year period, the daughter-in-law dutifully transferred her gift each year to her husband (the decedent’s son) on the exact same day her father-in-law transferred the stock to her.  The IRS didn’t have trouble picking that one apart.  It took the position that the annual gifts to her were really for her son, exceeded the annual exclusion amount and were subject to gift tax. 

Transferring funds to children can be full of traps.  Be advised.

June 9, 2020 in Estate Planning | Permalink | Comments (0)