- Detailed discussion of the application of the IRC §67(e) 2 percent reduction rules and the controversial proposed regulations that are based upon the government’s “win” in the Knight (nee Rudkin) decision in the Second Circuit. Knight expanded the application of IRC §67(e) to items that could have been incurred by an individual, in extension of the law that used the word would have been incurred. The proposed regulations were issued despite the granting of certiorari by the Supreme Court, which then heard the arguments in November 2007 and affirmed the decision of the Second Circuit.
- Coverage of Other events affecting fiduciary income tax include:
- Denial of use of the constructive trust doctrine by the IRS to determine taxable individuals;
- Additional rejection of the business trust plan for offsetting personal expenses with business or wage income (such claims resulted in accuracy-related penalties);
- Sham trust formation that resulted in jail sentencing and fraud penalties;
- Recognition of switch to total return from an “income” distribution provision based upon change in state law; how tax withholding, primarily foreign taxes, are factored into DNI by a “gross-up,” the withholdings then subject to credit or deduction based upon taxpayer election;
- No charitable deduction to a trust if the distribution is restricted by the governing instrument;
- A termination distribution is not subject to sale/exchange taxability treatment; the IRS issued a TAM that all but denies material participation by a fiduciary that owns a trade or business, so PAL treatment results;
- Designation of a trust or estate as beneficiary of an IRA or other retirement plan is not a taxable event—taxable income only results from plan distributions;
- A trust and its beneficiaries can engage in a IRC §1031 tax-free like kind exchange; and
- Use of the combined return election under IRC §645 to bring a revocable trust under favorable rules involving a foreign estate by a combined return election of the trust and the foreign estate. (including no accumulation distribution).
- Discussion of significant activity occurred affecting split-interest trusts:
- A trustee’s sprinkling powers for determining individual payees cannot be subject to change by the donor unless the donor is the sole beneficiary of a CRT;
- CRTs must qualify from day one or qualified CRT status is not recognized;
- Special care is required regarding a testamentary CRT; it cannot be the source of payment of any related estate tax or non-qualification results;
- The IRS is liberal with respect to reformations by local court action to meet qualification tests; the Service denies such action where donor desired higher return from a NIMCRUT, when the document that was followed for years provided for a CRUT—no scrivener’s error existed;
- The IRS determines valuation of NIMCRUT interest on early termination using approach other than Treasury tables used for CRATs and CRUTs;
- Use of “corporate blocker” to eliminate exposure to unrelated business income (UBI);
- UBI does not arise from merger of two private foundations;
- Investment in university endowment fund and its redemption of CRT “unit” is sanctioned as avoiding UBI or self-dealing and other private foundation sanctions;
- The IRS reaffirmed its conclusion that no special ordering rules are allowed; and
- funding of CLAT payments with appreciated property results in gain recognition and a completed gift has taken place even though the trustee has the discretion to choose the actual charitable distributee.
- Analysis of the special scrutiny given grantor trusts, highlighted by an IRS Notice that treated as a “matter of interest” (the next step to its being a “listed transaction”), an arrangement where a pre-planned “toggle on-toggle off” arrangement was utilized to shift deductions and gain through use of a grantor trust for a 30-day period, after which the toggling off made it a regular taxable trust.
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