Update from the IRS Estate and Gift Tax Department

By William J. Cronin, CPA
Weyrich, Cronin & Sorra, Chtd.
Chair, Taxation and Planning for Estates, Gifts and Trusts Committee

Recently, Ronald Watt, manager of the IRS Office of Estate and Gift Tax Administration for the Delaware/ Maryland District, met with the MACPA Estate and Gift Tax Committee to provide an update on current developments. He discussed the current status of the internal reorganization of the IRS Estate Tax Division and areas of concern in the preparation of estate and gift tax returns.

The IRS desires to reorganize in such a way that there will no longer be districts. Instead, there will be a more functional organization. Eventually all estate tax returns will be filed in either Cincinnati, Ohio or Ogden, Utah. These offices will be staffed with attorneys who will review the returns and assign an audit classification. Taxpayers in Maryland will file with the Cincinnati filing center when this process is complete. The target date for this change is January 2001.

Currently, returns are to be filed with the appropriate service center. Mr. Watt noted that the Philadelphia Service Center is experiencing some personnel problems, primarily due to budget constraints. In spite of these problems, more estate tax returns are being processed and closing letters are being issued promptly.

Mr. Watt also mentioned that the main areas of concern in the examination of gift and estate tax returns relate to the valuations and discounts. Family Limited Partnerships are a major issue and the IRS has appointed a national coordinator to handle related cases. Mr. Watt acknowledged that the allowable discount can vary widely depending on the facts and circumstances. There is no "safe harbor" for the size of any discount. Mr. Watt also remarked that improperly drafted will provisions result in many controversies with the IRS and the audit department reviews this area closely.

A recent Tax Court case was highlighted by Mr. Watt because it involved the disallowance of trustee commissions and other "administration" expenses and involved a Maryland taxpayer. The Estate of Constance R. Grant v. Commissioner, T.C. Memo 1999-396 involved a fairly common situation in which the bulk of the decedent's assets were held by a revocable trust. The probate estate was minimal. The estate tax return was filed and claimed deductions for executor fees as well as travel costs and substantial expenses related to the decedent's residence, which was held by the trust until it was sold approximately two years and eight months after decedent's death. The IRS disallowed most of the executor's fees and other expenses on the basis that they did not qualify as valid expenses under IRS section 2053. After a detailed analysis of the law, the Court agreed with the IRS on most of the disputed items because they did not believe the expenses were essential to the proper settlement of the estate. This case provides useful guidance to anyone preparing an estate tax return in Maryland and alerts us to a potential area of disagreement with the IRS.

Another case mentioned by Mr. Watt involved a grantor retained annuity trust with a revocable spousal interest. Revocable spousal interests are often used to reduce the value of a gift to a GRAT. Generally, when a revocable spousal interest is used, the GRAT provides for the annuity payment to be paid to or for the benefit of the grantor's spouse if the grantor dies before the end of the stated annuity term. In Cook v. Comr., 115 T.C. No.2 (2000), the Tax Court held that the revocable spousal interest did not constitute a qualified interest under IRC Sec. 2702 and, therefore, could not be used to reduce the value of the remainder interest for gift tax purposes. Mr. Watt stated that the IRS will be looking closely at any GRAT containing these provisions so planners may want to advise their clients of the potential risk with the use of two-life GRATs.

This content has not yet been Rated.

To Rate content, please Login.