From the issuance of the Internal Revenue Service’s Priority Guidance Plan to new COVID-19 relief legislation, we have seen some significant developments in estate planning and business law. To ensure that you stay abreast of these legal changes, we have highlighted a few noteworthy developments and analyzed how they may impact your estate planning and business law practice.

Internal Revenue Service and Department of the Treasury Issue 2020–2021 Priority Guidance Plan

On November 17, 2020, the Internal Revenue Service (IRS) and the US Department of the Treasury released their 2020–2021 Priority Guidance Plan setting forth guidance priorities for July 1, 2020, through June 30, 2021. It includes several projects of interest to estate planners.

Part 1 addresses the implementation of the Tax Cuts and Jobs Act, which includes the release of Treasury Decision 9918 on September 21, 2020, containing regulations clarifying the deductibility of certain expenses set forth in Internal Revenue Code (I.R.C.) section 67(b) that are incurred by estates and nongrantor trusts.

Part 3, aimed at reducing regulatory burdens, includes final regulations regarding basis consistency between estates and persons acquiring property from a decedent. Some commentators hope that these final regulations will lessen several burdensome requirements set forth in Proposed Treasury Regulation sections 1.6035-1 and section 1.1014-10, issued in March 2016. To further reduce regulatory difficulties, final regulations identifying the circumstances and procedures under which an extension of time will be granted for the generation-skipping transfer (GST) tax exemption is also a focus.

Part 6, which identifies general guidance, includes the following items relevant to gifts, estates, and trusts:

• Guidance regarding the basis of grantor trust assets at death under I.R.C. section 1014
• Guidance on a user fee for estate tax closing letters under I.R.C. section 2001
• Regulations under I.R.C. section 2032(a) regarding the imposition of restrictions on estate assets during the six-month alternate valuation period. Proposed regulations were published on November 18, 2011
• Regulations under I.R.C. section 2053 regarding personal guarantees and the application of present value concepts in determining the deductible amount of expenses and claims against the estate
• Regulations under I.R.C. section 7520 regarding the actuarial tables in valuing annuities, interests for life or terms of years, and remainder or reversionary interests

Takeaways: Although the Treasury and the IRS will focus their efforts on these issues through June 30, 2021, there is no guarantee that they will be completed. The Priority Guidance Plan identified 191 guidance projects, but only 57 guidance items had been released as of September 30, 2020.

IRS Issues Proposed Regulation Establishing a User Fee for Estate Tax Closing Letters

85 Fed. Reg. 86871 (Dec. 31, 2020)

On December 29, 2020, the IRS issued proposed rules that would set a new user fee of $67 for authorized persons—a decedent’s estate or other person properly authorized under I.R.C. section 6103—who request an estate tax closing letter, i.e., IRS Letter 627. An estate tax closing letter informs the authorized person of the acceptance of the estate tax return and other important information, such as the amount of the net estate tax, the state death tax credit or deduction, and any GST tax for which the estate is liable. It aids the executor in dividing and distributing the assets of the estate without incurring personal liability for unpaid estate taxes in making the distributions. 

The number of estate tax return filings has increased substantially in recent years due to those filed solely to elect portability of the deceased spousal unused exclusion amount for the surviving spouse of a decedent. Because of budget and resource constraints, the IRS is seeking to recover the costs associated with the provision of estate tax closing letters. In addition, it expects to establish a more convenient, one-step, web-based procedure for requesting the estate tax closing letter and paying the user fee, addressing the negative feedback from taxpayers and practitioners who have complained of having to submit multiple requests through the telephone-based system that existed before the COVID-19 pandemic. Due to COVID-19, an authorized person currently may request an estate tax closing letter only by fax. 

Takeaways: The IRS will continue to offer account transcripts at no charge as an alternative to an estate tax closing letter. Those who are interested in submitting comments are requested to do so by March 1, 2021, and are strongly encouraged to submit them electronically.

American Institute of CPAs Suggests Electronic Filing of Forms 706, 706-NA, and 709

In a December 4, 2020, letter to the Treasury and the IRS, the American Institute of Certified Public Accountants (AICPA) suggested that the Treasury and the IRS allow the e-filing of Forms 706 and 709 and other related, separately filed forms. The AICPA pointed out that e-filing of income tax returns is allowed, but that paper filing is currently required for Forms 706, 706-NA, and 709 (and related, separately filed forms such as Forms 3520, 3520-A, 4768, 5227, 1041-A, 8971, and 8892). Electronic filing would streamline the filing process and enhance efficiency and security for executors, taxpayers, and the IRS.

The AICPA also suggested that electronic payments of federal estate and gift taxes through tax preparation software, as is allowed for individual income tax returns, be implemented in addition to allowing federal estate tax to be paid through the Electronic Federal Tax Payment System.

In response to the COVID-19 pandemic, the IRS permitted the use of digital signatures on several forms that are not permitted to be filed electronically. The AICPA also requested that the IRS make the use of digital signatures permanent.

Takeaways: The documents that must be attached to Forms 706, 706-NA, and 706 may be voluminous, possibly hundreds or even thousands of pages. The AICPA asserts that, particularly in light of the COVID-19 pandemic, taxpayers, practitioners, and the IRS would benefit from the ability to electronically file these documents. The taxpayers and practitioners who may be subject to policies and restrictions limiting their access to their offices aimed at complying with CDC guidance could include attachments as a PDF, eliminating the need to reproduce multiple copies to include with federal and state filings. In addition, the IRS could share the digital files as necessary with staff in multiple locations, eliminating the need for staff to travel to other IRS locations or ship and store paper returns and supporting documentation.

IRS Rules that Donation of Annuity Interest in a CRAT Is a Gift, Not a Sale

I.R.S. P.L.R. 202047005 (Nov. 20, 2020)

In a private letter ruling released by the IRS, a taxpayer (Taxpayer) and the taxpayer’s spouse (Spouse) sought rulings regarding the tax consequences of the proposed termination of a charitable remainder annuity trust (CRAT). Taxpayer and Spouse had created a trust that they asserted qualified as a CRAT. The annuity beneficiaries of the trust were Taxpayer and Spouse, Taxpayer was the trustee, and the remainder beneficiary was a private foundation to which Taxpayer and Spouse were substantial contributors, officers, and members of the board of directors. The trust’s assets were marketable securities.

Under the trust agreement, the trustee had to pay an annuity of 5 percent of the initial fair market value of all property transferred to the trust to Taxpayer and Spouse in equal shares. Upon the death of the Taxpayer or Spouse, the entire annuity payment would be paid to the survivor. When the survivor died, the trustee would have to distribute all remaining trust property to the private foundation for its general purposes.

Taxpayer and Spouse sought to contribute their undivided annuity trust interest in the trust to the private foundation by assigning their undivided annuity interest in the trust to the private foundation (not in trust). They asserted that this transaction would result in a merger of the annuity and remainder interests under the state common law doctrine of merger. After the assignment, Taxpayer and Spouse would seek a court order terminating the trust.

Taxpayer and Spouse requested a ruling that the transfer of their undivided annuity interest in the trust to the private foundation (1) would not entitle them to an income tax charitable deduction, (2) would be recognized as a gift, not as a sale, and (3) they would not recognize taxable income upon the transfer.

The IRS ruled that the transfer

• would not entitle Taxpayer and Spouse to a charitable contribution deduction under I.R.C. section 170, but would be recognized as a gift under Treasury Regulation section 1.170-1(h) and not as a sale causing recognition or realization taxable income;
• would entitle them to a gift tax charitable deduction under I.R.C. section 2522 to the extent of the present value of the annuity interest and under I.R.C. section 2522(a) for the fair market value of the remainder interest;
• would not cause recognition of gain or loss from realized but undistributed capital gain income from prior years; and
• would not result in an act of self-dealing under I.R.C. section 4941(d)(1) or subject the trust or the private foundation to a termination tax.

Takeaways: Taxpayers may wish to terminate a CRAT for a variety of reasons. This private letter ruling clarifies that, under certain circumstances, taxpayers may terminate a CRAT without realizing or recognizing any taxable income (and correspondingly, not receiving an income tax charitable deduction) for transferred annuity payments, while at the same time, becoming entitled to a gift tax charitable contribution deduction.   

New COVID-19 Legislation Provides Relief to Charitable Donors and Business Owners; IRS Reverses Course on the Deductibility of Paycheck Protection Program Eligible Expenses

Pub. L. 116-260, H.R. 133, 116th Cong. (2021); Rev. Rul. 2021-2 (Jan. 6, 2021)

On December 27, 2020, President Trump signed into law H.R. 133, the Consolidated Appropriations Act, 2021 (the Act). Included among the Act’s nearly 5,600 pages are provisions related to COVID-19 pandemic relief.

Previous COVID-19 relief under the Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed individuals and married filers who did not itemize deductions to take up to a $300 above-the-line deduction for cash contributions to qualified charitable organizations. Tax underpayments due to overstated cash contributions were subject to a 20 percent penalty. Section 212 of the new Act extends this relief to 2021 for nonitemizers and allows married filers an above-the-line deduction for cash contributions of up to $600. Underpayments due to overstated cash contributions are subject to an increased penalty of 50 percent for 2021. This relief is not available to those who itemize their deductions.

Key tax provisions for business owners in the Act include (1) Paycheck Protection Program (PPP) updates, including the allowance of deductions for qualified expenses paid for with PPP loan proceeds that are subsequently forgiven, the extension of the program, the introduction of “second draw” PPP loans, and the expansion of eligible expenses for which PPP loan proceeds can be spent; (2) the extension of paid sick and family leave and family credits for wages paid through March 31, 2021; and (3) the extension of the employee retention credit under the CARES Act through June 30, 2021.

Read our full article on the key provisions of the Act for business owners here.

Based on the Act, the IRS issued Revenue Ruling 2021-2 on January 6, 2021, making its prior guidance regarding the deductibility of eligible expenses under the PPP—IRS Notice 2020-32 and Revenue Ruling 2020-27—obsolete. The IRS’s previous position was that PPP borrowers could not deduct certain otherwise deductible expenses if the payment of those expenses resulted or was expected to result in the forgiveness of their PPP loan. The IRS based its new guidance on section 276(a) of the Act, which states that no amount shall be included in the gross income of an eligible recipient due to forgiveness of the recipient’s PPP loan. Revenue Ruling 2021-2 further states that no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied because of the exclusion from gross income under the new legislation.

Takeaways: In addition to providing further relief to mitigate the negative impact of COVID-19, the Act and Revenue Ruling 2021-2 correct a problem identified by commentators and several US senators: The IRS’s previous position—that expenses paid with PPP funds that were expected to be forgiven were not deductible—effectively increased borrowers’ net business income even though CARES Act section 1106(i) explicitly stated that loan forgiveness was excluded from gross income. Allowing PPP borrowers to deduct eligible expenses paid with PPP funds provides additional relief to small business owners who continue to struggle economically due to COVID-19.