From modifications to the Paycheck Protection Program to temporary IRS procedures allowing the electronic submission of requests for advice, we have recently seen some significant developments in estate planning and business law. To ensure that you stay abreast of these legal changes, we’ve highlighted a few noteworthy developments and analyzed how they may impact your estate planning and business law practice.
Congress Passes Paycheck Protection Program Flexibility Act of 2020
On June 3, 2020, the Senate unanimously passed a bipartisan bill providing more flexibility to borrowers who have obtained loans under the Paycheck Protection Program. The Paycheck Protection Program Flexibility Act, which has now been signed into law by President Trump, was passed by the House of Representatives on May 28, 2020.
Though brief, the new law will provide important relief to borrowers by lengthening the amount of time PPP recipients have to spend their loan proceeds from 8 weeks to 24 weeks or through December 31, 2020, whichever comes first. The legislation also lowers the percentage of PPP funds borrowers must spend on payroll costs to qualify for full loan forgiveness from 75% to 60%, which will allow borrowers to direct more funds to non-payroll costs such as rent, mortgage interest, and utilities.
The Paycheck Protection Program Flexibility Act expands borrowers’ ability to obtain maximum forgiveness of their loans by extending the deadline for businesses to make a "good faith" effort to rehire employees from June 30 to December 31, 2020, with exceptions based on employee availability. Specifically, a borrower’s loan forgiveness amount will not be reduced because of a reduction in the number of full-time equivalent employees, if in good faith, the borrower is able to document:
(1) an inability to rehire individuals who were employees on February 15, 2020 or to hire similarly qualified employees for unfilled positions by December 31, 2020, or
(2) an inability to return to the same level of business activity as existed before February 15, 2020 because of its compliance with safety requirements or guidance related to COVID-19 issued by the Secretary of Health and Human Services, the Center for Disease Control, or the Occupational Safety and Health Administration.
In addition, the legislation will allow companies whose loans are forgiven to defer payment of payroll taxes. It also increases the period for repayment of loans not forgiven from two years to five years and allows borrowers to defer their principal and interest payments until the Small Business Administration compensates lenders for any forgiven amounts (at least 10 months after the PPP expires).
Takeaways: The new legislation will provide businesses that have obtained PPP loans, many of which have been forced to close, with more flexibility to pay operational costs such as rent, mortgage interest, and utilities. In addition, the extension of the time period during which businesses are allowed to spend the loan proceeds will provide borrowers that have delayed using the money because of confusion about the PPP’s rules additional time to take full advantage of the funds. The time extensions are also beneficial to business owners because government-mandated shutdowns have lasted longer than many anticipated. Although the SBA and the Department of the Treasury recently made the loan forgiveness application available, there will potentially be modifications based on the new legislation, and refined implementation guidance is likely to be issued. For those who have not yet applied for a PPP loan, applications can be submitted until June 30, 2020, and there is currently approximately $100 billion remaining to be allocated to qualified borrowers.
New Interim Final Rule Providing Guidance for Paycheck Protection Program Loan Forgiveness
Business Loan Program Temporary Changes; Paycheck Protection Program—Requirements—Loan Forgiveness, 13 C.F.R. 120 (May 22, 2020)
The SBA and the Department of the Treasury issued long-awaited guidance for borrowers on May 22nd, which among other issues, expands the definition of payroll costs to include hazard pay, bonuses, and compensation for furloughed employees, defines who is a full-time equivalent employee, and provides additional exemptions from reductions in the amount of loan forgiveness based upon reductions in the number of full-time equivalent employees. Further details regarding the new guidance are available here.
Takeaways: Although there has been substantial confusion regarding the calculation of the amount of loan proceeds eligible for forgiveness, the new guidance answers several of borrowers’ most pressing questions. However, some of the guidance will likely be refined as a result of the passage of the Paycheck Protection Program Flexibility Act: For example, the section dealing with the PPP covered period may be amended to reflect the extension of the time period in which borrowers were required to utilize the loan proceeds from 8 weeks to 24 weeks under the new law. The Small Business Administration has also indicated that further guidance will be issued regarding an appeal process for those whose forgiveness applications are partially or fully denied.
Federal Courts Lack Authority to Consider Declaratory Judgment Seeking Declaration that IRS Form 5173 Is Unnecessary to Re-Register Brokerage Account
Rivero v. Fidelity Investments, Inc., 2020 WL 2541963 (E.D. Tex. May 19, 2020).
Carmela Rivero opened an individual brokerage account with Fidelity in 2010, but later that year, converted the account to a joint tenancy with a right of survivorship, naming her husband Jorge Diaz-Gonzalez Medrano, a Mexican citizen and resident, as a joint tenant. Medrano, who died in 2016, predeceased Rivero, and Rivero once again became the absolute owner of the account. Rivero and Fidelity disputed whether an Internal Revenue Service (IRS) transfer certificate, Form 5173, was necessary for Rivero to re-register the account as an individual account. When Rivero attempted to re-register it as an individual account, Fidelity restricted the account based upon Treasury Regulation § 20.6325-1, preventing her from doing so. Rivero then sought a declaratory judgment that a Form 5173 was not necessary to re-register the account.
The United States District Court for the Eastern District of Texas, Sherman Division, noting that a federal court’s authority to adjudicate a matter is predicated on subject-matter jurisdiction and that it is obligated to examine its own jurisdiction, found that with only a few exceptions, a federal court lacks jurisdiction over any declaratory judgment action in which it is asked to construe an Internal Revenue Code provision, Treasury regulation, or Revenue Ruling relating to the assessment or collection of taxes.
Because Medrano, a non-resident and non-citizen, had died with property located in the United States, that property may be subjected to the estate tax, and the estate may be required to file an estate tax return if his gross estate located in the United States is valued at greater than $60,000. If Medrano’s estate does owe an estate tax, the tax will be a lien on the gross estate until it is paid. Anyone who transfers property included in the gross estate that is not administered by an executor acting within the United States may be subject to liability unless a transfer certificate is demanded and received to ensure that the IRS can recover the tax owed. The transfer certificate is only issued after the IRS is satisfied that any estate tax owed has been paid.
However, because a transfer certificate is not strictly required in all circumstances, the court would be required to determine the value of Medrano’s gross estate. This would require the court to construe various Internal Revenue Code provisions and Treasury regulations. Because the substance of the declaratory judgment requested by Rivero was that a transfer certificate is not necessary to remove the restriction imposed by Fidelity and re-register the account without liability to Fidelity, the court found that it “necessarily involve[d] a determination ‘with respect to Federal taxes’” precluded by the Declaratory Judgment Act. As a result, the court ruled that it lacked the authority to consider Rivero’s claim.
Takeaways: Generally, in situations involving non-U.S. citizens or non-residents who have brokerage accounts, upon their death, the brokerage firm may only transfer or release the assets in a brokerage account after the executor, surviving joint tenant, trust beneficiary or other person legally entitled to receive the decedent’s assets provides a transfer certificate (IRS Form 5173) received from the IRS to the brokerage firm, although a transfer certificate is not required for property administered by an executor or administrator appointed, qualified, and acting within the United States. Transfer certificates, which are issued after an investigation when the IRS is satisfied that any tax imposed upon the estate has been fully discharged or provided for, can be requested from the Department of the Treasury, Internal Revenue Service Center, Cincinnati, Ohio 45999, USA. A copy of the estate tax return and supporting documentation will likely be requested. If the value of the decedent’s taxable assets in the United States is $60,000 or less on the date of death, supporting documentation should be submitted to the IRS. The IRS will issue correspondence stating that a transfer certificate is not required and will not be issued if it determines that the documentation supports that there is not a filing requirement.
IRS Releases Multiple Private Letter Rulings Granting Portability Election Extension Requests
PLR 202018002, PLR 202019022, PLR 202020003, PLR 202020004, PLR 202021008
For federal estate and gift taxes purposes, a portability election allows a decedent’s unused exclusion amount (deceased spousal unused exclusion (DSUE) amount) to be applied to the surviving spouse’s subsequent transfers during life or at death. When it issued Revenue Procedure 2017-34 in 2017, the IRS made it easier and less costly to obtain an extension of time to file a portability election by granting an automatic extension of two years under certain conditions, alleviating the need to request a private letter ruling, which is a lengthy and expensive process that may not be successful. Nevertheless, many estates fail to meet even the extended deadline for making a portability election.
The IRS continued its recent trend of granting portability election extension requests in five private letter rulings (PLRs) released in May 2020:
- In PLR 202018002 (May 1, 2020), after discovering that an estate tax return was not timely filed and that a portability election was not made, the decedent’s estate submitted a request for an extension of time to make the portability election, which was granted by the IRS.
- In PLR 202019022 (May 8, 2020), although an estate tax return was not timely filed and a portability election was not made, the IRS granted the extension of time for the portability election for various reasons, including that the tax advisors failed to inform the surviving spouse about the availability of the portability election and because the value of the decedent’s gross estate was not high enough to require a return to be filed.
- In PLR 202020003 (May 15, 2020), the IRS granted the extension of time to make the portability election because the surviving spouse’s legal counsel and accounting firm did not advise the surviving spouse to make the portability election.
- In PLR 202020004 (May 15, 2020), the surviving spouse sought an extension of time to make a portability election after an accounting firm failed to timely file an estate tax return and make the portability election.
- In PLR 202021008 (May 22, 2020), the IRS granted the surviving spouse’s request for an extension of time to make a portability election based on “information, affidavits, and representations” submitted on behalf of the decedent’s estate explaining the circumstances that resulted in the failure to file a timely election.
Takeaways: Although the IRS has been liberal in granting additional extensions of time for surviving spouses to make portability elections, there is no guarantee that it will continue to do so. To qualify for the simplified late election under Rev. Proc. 2017-34, the executor of the decedent’s estate must file a complete and properly prepared IRS Form 706 within two years of the date of death of the deceased spouse. Form 706 should be filed if there is any chance that a portability election will be beneficial, which may be even more common once the current estate and gift tax exemption amount sunsets on December 31, 2025.
IRS Temporarily Allows Electronic Submission of Requests for Letter Rulings, Closing Agreements, Determination Letters, and Information Letters
Rev. Proc. 2020-29
The IRS’s new Revenue Procedure 2020-29, effective April 30, 2020, modifies Revenue Procedure 2020-1, which generally requires taxpayers to submit paper copies of written materials with wet signatures, to allow taxpayers to electronically submit requests for letter rulings, determination letters, and information letters to the IRS Office of Chief Counsel and requests for determination letters to the IRS Large Business and International (LB&I) Division. Electronic submissions for requests for advice may be:
(1) transmitted by facsimile using a secure electronic facsimile service or compressed and encrypted email attachments (though the revenue procedure emphasizes that this involves more of a security risk than the use of facsimiles) in accordance with the standards set forth in the revenue procedure, and
(2) signed using an electronic signature that complies with the required image formatting, or in the case of digital signatures, the required encryption software.
Taxpayers are not required to submit original documents under the temporary procedure. Although the option for paper submission still exists, the IRS will likely have limited personnel available, which could result in substantial delays in the processing of those requests. The IRS expects electronic submission to allow for more expeditious processing than paper submission.
Rev. Proc. 2020-29 is effective until it is modified or superseded.
Takeaways: This temporary procedure will enable the IRS to process requests for advice more quickly despite decreased staffing due to COVID-19. Care should be taken to comply with the security standards set forth in the revenue procedure to avoid the interception of sensitive taxpayer information.
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