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HomeWealth ManagementTax Legislation Replace: July/August 2022

Tax Legislation Replace: July/August 2022


• Merger negotiations aren’t related to the worth of public shares used to fund GRAT—Baty v. Commissioner (U.S.T.C. Docket No. 122-1621, June 23, 2021, March 24, 2022) includes a valuation controversy within the context of funding a grantor retained annuity belief (GRAT). Daniel R. Baty funded a GRAT with shares of a publicly traded firm (Firm) whereas serving as Firm’s chairman of the board and amid negotiations between Firm and different third events concerning Firm’s potential merger/acquisition. Negotiations concerning the merger started within the first half of 2013, and Daniel participated in them. Daniel funded a 2-year GRAT utilizing shares in Firm on Jan. 14, 2014 and valued the contribution to the GRAT primarily based on the imply of the excessive and low public share worth of Firm’s shares on the date of contribution (that’s, the methodology espoused in Treasury Rules Part 25.2512-2(b)). The phrases of the GRAT represented the annuity funds as a proportion of the preliminary worth of the asset contributed (that’s, the annuity funds have been “self-adjusting”).

A merger settlement between Firm and a competitor was in the end reached, with the phrases of the deal finalized weeks later in mid-February 2014, and the deal was publicly introduced on

Feb. 20, 2014. The merger wasn’t accomplished till July 31, 2014, after the events labored by means of shareholder approval, regulatory approval, third-party consents and different hurdles.  

The Inner Income Service assessed a tax deficiency premised on the notion that the contribution to the GRAT shouldn’t have been valued primarily based on the imply of the excessive and low share worth on date of contribution however reasonably on the buying and selling worth when the merger truly occurred (greater than six months later). Due to the details at hand and the gross underpayment within the annuity funds, Daniel was accountable for an intentional undervaluation (and couldn’t avail himself of provisions referring to incorrect valuations and the adjustment clause within the GRAT as to the annuity funds), was topic to reward tax on the total worth of the switch to the GRAT (as a result of annuity failing to be a “certified annuity” beneath Inner Income Code Part 2702) and was topic to penalties. In Chief Counsel Recommendation 201939002, the IRS Chief Counsel responded to the details of the case by formally opining {that a} pending merger should be taken into consideration in valuing shares of a publicly traded firm for reward tax functions (citing Treas. Regs. Part 25.2512-2(e)).

Finally, Daniel filed a movement for abstract judgment in favor of utilizing the imply excessive and low buying and selling worth of Firm inventory for valuation functions, and the federal government conceded to Daniel previous to issuance of a call on the movement. In his movement, Daniel argued that: (1) the valuation methodology was nicely established for instances involving publicly traded inventory within the reward tax context and particularly cited instances that famous that public inventory costs mirrored potential merger negotiations, (2) occasions happening subsequent to a present can’t be used to worth the reward in hindsight,

(3) the “hypothetical keen purchaser” that’s used because the touchstone for reward tax valuation wouldn’t have recognized concerning the merger negotiations, (4) Treas. Regs. Part 25.2512-2(e) is inapplicable, (5) the merger wasn’t “virtually sure” to happen, as was the case within the “anticipatory task of earnings” instances cited in CCA 201939002, and (6) the IRS’ proposed valuation methodology is unworkable. 

• IRS points proposed regs on calculating deductible quantities of sure bills by property—On June 24, the IRS issued proposed laws (proposed regs) (REG-130975-08) beneath IRC Part 2053. The proposed regs present steering on correct use of current worth rules in figuring out quantities deductible by an property for funeral bills, administration bills and claims in opposition to the property. Particularly, the proposed regs require calculating the current worth of an expense that’s deductible beneath Part 2053 that isn’t paid or anticipated to be paid on or earlier than the third anniversary of decedent’s demise. That’s, there’s a 3-year grace interval earlier than a gift worth calculation should be made with respect to a Part 2053 deductible expense. The current worth calculation is topic to adjustment if the precise date of cost differs from the estimate used. The current worth calculation will probably be made utilizing the long-term or mid-term relevant federal charge within the month of demise relying on the anticipated date of cost. The proposed regs additionally require a supporting assertion exhibiting calculations of current worth to be filed with the decedent’s Kind 706. 

The proposed regs additional present steering as to the deductibility of curiosity bills accruing on taxes and penalties owed by an property. They are saying that curiosity that accrues on property tax deferred beneath IRC Part 6166 (for instance, deferral accessible for sure estates holding pursuits in carefully held companies) would now not be deductible. Curiosity beneath IRC Part 6601 for late tax federal funds received’t be deductible and regarded truly and essentially incurred until as a result of executor’s negligence or disregard of relevant guidelines or fraud, supplanting the principles in Income Ruling 79-252 and Rev. Rul. 81-154.

Curiosity on different loans incurred by the property will probably be deductible supplied the curiosity satisfies the present necessities in Treas. Regs. Sections 20.2053-1(b)(2) and 20.2053-3(a) (that’s, the curiosity should be “bona fide” and “truly and essentially incurred” within the administration of the property). Curiosity accruing on mortgage obligations incurred by an property would observe these identical guidelines—such curiosity is deductible to the extent it’s “bona fide” and “truly and essentially incurred.” Nonetheless, the proposed regs set forth components that assist a discovering that an curiosity expense is “bona fide” (beneath Treas. Regs. Part 20.2053-1(b)(2)). Two of the components famous are: (1) the phrases of the mortgage (whether or not between associated or unrelated events), together with any prepayment penalty, are affordable given all details and circumstances and are similar to an arm’s-length mortgage transaction, and (2) the mortgage time period doesn’t prolong past what’s moderately vital. These new components drastically cut back the deductibility of curiosity on “Graegin loans” as a result of such loans aren’t prepayable and will not have phrases similar to an arm’s-length transaction.

Treas. Regs. Sections 20.2053-4(b) and (c) permit an property to deduct the worth of claims and counterclaims in a associated matter and the worth of unpaid claims totaling no more than $500,000. The proposed regs set forth new necessities for an appraisal with respect to such deductions. Beforehand, the appraisal necessities have been tied to the necessities of a “certified appraisal” for a charitable donation beneath IRC Part 170. Underneath the proposed regs, post-death occasions occurring earlier than a deduction is claimed in addition to occasions moderately anticipated to happen should be taken into consideration for valuing the deduction. Sure people and entities who’re associated to the decedent are additionally disqualified from appearing as appraiser. 

The proposed regs additionally embrace new necessities as to the deductibility of a decedent’s private assure. For such a assure to be deductible, the decedent should have acquired consideration reducible to cash worth in alternate for the assure.  

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