Planning and the Death of the Death Tax

On Wednesday afternoon the White House again proposed eliminating the so-called death tax as part of its tax reform plan, but the details remain sparse.  When pressed for specifics Director Cohn simply stated that with the implementation of the administration’s tax plan, the death tax would disappear.

The phrase “death tax” entered the popular lexicon by way of tax reformers wanting to summarize and caricature the several parts of the Federal transfer tax system.

What is the Death Tax?

The death tax could refer to the estate tax alone or to any combination of other taxes that grew out of the estate tax regime.  The modern estate tax was introduced in 1916.  In its current form it imposes a top rate of 40% on transfers above $5,490,000 per person made at death.

After the estate tax was instituted, savvy taxpayers quickly realized that a deathbed gift would avoid the estate tax altogether.  To prevent this, Congress passed the gift tax in 1936.  The current gift tax has the same top rate as the estate tax and shares the $5,490,000 exemption.  This means any gifts that use gift tax exemption during life reduce the available estate tax exemption at death.  The gift tax also excludes gifts up to $14,000 per year to any one person.

Under the estate tax, if a taxpayer pays estate tax and leaves the entire estate to his or her children, the children would again pay estate tax when the estate is passed to the taxpayer’s grandchildren. To avoid this problem, wealthy taxpayers began leaving a large portion of their estate to their grandchildren (or to trusts for their children for life, then to grandchildren), effectively leapfrogging one generation of the estate tax.  Not to be outmaneuvered, Congress passed the generation-skipping transfer (“GST”) tax on transfers to or for anyone in a generation below the taxpayer’s children.  The current GST tax has the same top rate and exemption level as the estate tax.

To avoid double taxation, Congress also introduced stepped-up basis at death.  This provision resets the basis of property acquired from a decedent to the date of death fair market value.  Thus heirs will not pay capital gains tax on later sales of property that already may have been subject to the estate tax.  Any or all of these tax regimes may (or may not) be targeted by the administration’s planned repeal.  But it is unclear what the tax landscape will look like once the dust settles.

What exactly will be repealed?

It is certain that the White House repeal will target the federal estate tax.  But this may not mean the end of the estate tax altogether, because some states have their own estate or inheritance taxes.  New Jersey may reinstate its previously repealed estate tax regime and California has proposed a new state estate tax based on the existing Federal system, in response to a Federal repeal.  Other states may follow suit.

If the estate tax is repealed it is unclear what will happen to the gift tax.  It could be repealed with the estate tax or retained – as it was under the Bush tax cuts.  Some argue that even if the estate tax is repealed the gift tax is necessary as a backstop against capital gains shifting.  But, if the income tax rates are collapsed, and depending on the capital gains rate, there might not be much need for such a backstop.

The White House plan does not mention what will become of the GST tax.  The House Republican Blueprint eliminates the GST tax.  And indeed it would seem obvious that a GST tax is unnecessary without an estate tax.  But repeal could create a problem if taxpayers unwind all of their GST tax exempt trusts only for the GST tax regime to be reinstated sometime in the future.  For exactly this reason, the GST tax regime was maintained under the Bush tax cuts with a 0% rate for 2010.

It also is unclear whether estate tax repeal would eliminate the rationale for providing a stepped-up basis at death.  At one point the administration thought so.  According to the administration’s 2016 proposal, the estate tax repeal would be accompanied by a repeal of stepped-up basis.  Instead the administration proposed a tax on capital gains at death at a rate of 20% with a Ten Million Dollar exemption.  This tax has not been mentioned in the most recent proposal and it is unclear whether it is still on the table.

The longevity of the death tax repeal may well depend upon the method used to move the tax bill through Congress.  Senate rules dictate that any legislation which increases the budget deficit beyond ten years requires the vote of 60 Senators.  Because the Republicans hold only 52 seats in the Senate, such legislation would require negotiation with the Democrats.  If the Republicans can’t attract votes from Democrats, they can pass their own version of the tax plan but the changes must be revenue neutral or they will sunset after ten years.

Until the details of the death tax repeal are made public and a final bill is passed, it would seem premature to plan for any specific scenario.


Charitable Income Tax Deductions: The Rockefeller Edition

Billionaire David Rockefeller passed away this week at the age of 101.  According to Forbes magazine, during his lifetime, the well-known philanthropist gave away nearly $2 billion.

In light of this newsworthy charitable donation, we thought now would be a good time to remind everyone of some of the basic income tax deductions available for gifts to charities.

Section 170 of the Internal Revenue Code (the “Code”) governs income tax deductions for charitable contributions. In the case of an individual making a cash gift to a Section 501(c)(3) organization classified as a “public charity” (such as churches, schools, hospitals, and governmental units), the gift is deductible for federal income tax purposes so long as the aggregate gifts do not exceed fifty percent (50%) of the taxpayer’s adjusted gross income (“AGI”) for the taxable year.

In the case of a contribution of capital gain property to a public charity, a taxpayer can only deduct such contributions up to thirty percent (30%) of the taxpayer’s AGI for the taxable year. The amount of capital gain property contributed is taken into account after all other charitable contributions to public charities. Therefore, if the taxpayer contributes 30% of his or her AGI in non-capital gain assets and 30% of his or her AGI in capital gain assets, the non-capital gain assets will be applied first, then 20% of the capital gain property will be allowed, with the remaining 10% exceeding the taxpayer’s total 50% limit. Any excess contributions will be treated as a contribution in each of the five succeeding taxable years.

If a taxpayer contributes cash to a Section 501(c)(3) organization that is not classified as a public charity, such as to a private non-operating foundation, then the deductions for such contributions may not exceed the lesser of thirty percent (30%) of the taxpayer’s AGI or the excess of fifty percent (50%) of the taxpayer’s AGI for the taxable year over the amount of contributions of cash made to public charities.

If a taxpayer contributes capital gain property to a Section 501(c)(3) organization that is not classified as a public charity, then the amount of the contributions allowable for deduction purposes shall not exceed the lesser of twenty percent (20%) of the taxpayer’s AGI for the taxable year, or “the excess of thirty percent (30%) of the taxpayer’s AGI for the taxable year over the amount of the contributions of capital gain property” to public charities. Contributions of capital gain property to which this twenty percent (20%) limitation apply shall be taken into account after all other charitable contributions. Any excess contributions will be treated as a charitable contribution of capital gain property in each of the five succeeding taxable years.


Important Information on W-2/SSN Data Theft Scam

A dangerous email scam currently is circulating nationwide and targeting employers, including tax exempt entities, universities and schools, government and private-sector businesses. The scammer poses as an internal executive requesting employee Forms W-2 and Social Security Number information from company payroll or human resources departments. They may even send an initial “Hi, are you in today” message before the request.

The IRS has established a process that will allow employers and payroll service providers to quickly report any data losses related to the W-2 scam. See details at Form W-2/SSN Data Theft: Information for Businesses and Payroll Service Providers. If notified in time, the IRS can take steps to prevent employees from being victimized by identity thieves filing fraudulent returns in their names. There also is information about how to report receiving the scam email even if you did not fall victim.

As a reminder, tax professionals who experience a data breach also should quickly report the incident to the IRS. Tax professionals may contact their local stakeholder liaison. See details at Data Theft Information for Tax Professionals.

Written by in: General

Benefactors Beware: Fake Charities Included in IRS List of Top Tax Scams for 2017

Every year, the IRS issues its “Dirty Dozen” Tax Scams list, a compilation of tactics and devices used by scam artists against taxpayers.  While the threat exists year-round, the IRS promulgates the list ahead of filing season. As susceptible taxpayers prepare their returns, they face a higher risk of being targeted.

Included in the 2017 “Dirty Dozen” list are fake charities; however, this is hardly a new occurrence. Fraudulent charities and organizations have a long-standing history of soliciting donations from unsuspecting individuals. In its 2017 report, the IRS notes three steps taxpayers should take in making charitable contributions.

One: Keep your information private. Individuals are advised against sharing their personal information, such as a Social Security Number or passwords, as this is commonly used in identity theft. The IRS reminds individuals that a legitimate charity will never ask for such information in soliciting or receiving donations.

Two: Avoid cash. When making a donation, individuals should use check or credit card. In the case of the latter, credit card information should only be used over a secure network.

Three: Do your homework. As a matter of good practice, the IRS recommends using the Exempt Organization Select Check Tool to ensure that your donation is directed to a legitimate organization. The Tool allows donees to view an organization’s federal tax filings, and other   information, such as whether exempt status has been revoked or suspended. The Tool is available here.

The Dirty Dozen also advises donors to be wary of fraudsters in the wake of natural disasters. During such times, fake charities may solicit donations under the guise of disaster-relief funds. The IRS encourages donors to make contributions to officially recognized organizations, such as the Red Cross or UNICEF. The Exempt Organizations Select Check Tool is another way to verify a relief or human-rights organization as legitimate.

Find the IRS complete list of Dirty Dozen scams for 2017 here.

Written by in: General

IRS Notice: Conservation Easements for Charitable Giving

In Notice 2017-10, the Internal Revenue Service recently issued guidance on syndicated conservation easement transactions presumed to be used as tax shelters. This addition to the “listed transactions” under Section 1.6011-4(b)(2) requires both participants and material advisors involved in such transactions to report their activity to the IRS. Failure to report involvement in such a transaction, or to correct previously filed returns, will subject individuals to penalty under Section 6707.

Conservation easements provide a tax deduction aimed at furthering the public good. Most often, conservation easements involve historical, endangered, or otherwise valuable property. The property is contributed to a charitable organization, encumbered by a right or restriction in the form of an easement. The easement guarantees to maintain or change the current use of the land, so that it is properly conserved.  However, like many tax deductions, conservation easements are susceptible to abuse by individuals seeking to shelter large investments from taxation. The Notice pertains to using conservation easements through a pass-through entity to effectuate an improper charitable tax deduction.

Notice 2017-10 describes a transaction whereby a pass-through entity solicits prospective investors for a charitable tax deduction through a conservation easement. In such a transaction, the pass-through entity holds real property that is eligible for a conservation easement. The investors purchase direct or indirect interests in the pass-through entity. In turn, the pass-through entity contributes a conservation easement encumbering the property to a tax-exempt organization. This contribution entitles the pass-through entity to a charitable tax deduction, which it allocates to the taxpayer investors. The investors then claim a deduction on their federal tax returns. Notice 2017-10 requires investors as well as the pass-through entity, and any sub-tiers thereof, to report participation in such transaction.

Ordinarily, the donor of a qualified conservation easement is properly entitled to a tax deduction. The contribution is usually made through a deed executed in favor of the charitable organization, which grants the perpetual right to use the property for purposes other than its current use. The deduction for a gift of a conservation easement, or similar restriction, is the fair market value of the restriction at the time the gift is made. Due to the conservation restriction, this is typically calculated by the decrease in the property value. However, solicitation materials described in Notice 2017-10 offer investors a charitable deduction that equals or exceeds two and a half times the original amount invested.

Written by in: Tax Shelters

What a Difference an “H” Makes

Late on Monday, House Republicans revealed, in two parts (here and here, with summaries here and here) the American Health Care Act (“AHCA”) that is designed to meet the Republicans’ promise to “repeal and replace” the ACA.  In many respects, the AHCA is less “repeal and replace” and more “retool and repurpose,” but there are some significant changes that could affect employers, if this bill becomes law as-is.  Below is a brief summary of the most important points:

  • Employer Mandate, We Hardly Knew You. The ACA employer play or pay mandate is repealed retroactive to January 1, 2016, so if you didn’t offer coverage to your full-time employees, then this is the equivalent of the Monopoly “Get out of Jail Free” card.
  • OTC Reimbursements Allowed from HSAs and FSAs, Without a Prescription. This goes back to the old rules that allowed these reimbursements. This would begin in 2018.
  • Reduction in HSA Penalty. One of the pay-fors for the ACA was an increase in the penalty for non-health expense distributions from HSAs from 10% to 20%. The AHCA takes it back to 10% starting in 2018.
  • Unlimited FSAs Are (or Would Be) Here Again. AHCA repeals the $2,500 (as adjusted) limit on health FSA contributions starting in 2018.
  • Medicare Part D Subsidy Expenses Would Be Deductible Again. The ACA still allowed Medicare Part D subsidies to be excluded from a company’s income, but denied the deduction, for tax purposes, for any expenses that were subsidized.  This reinstates the prior law that allowed a “double tax benefit” of both the exclusion of the subsidy from income and the deduction for the costs funded by the subsidy starting in 2018.
  • A New COBRA Subsidy. The AHCA does away with ACA’s income-based subsidies in favor of age-based subsidies from $2,000 to $4,000 per individual (with a max of $14,000 for a family) with a phaseout for incomes over $75,000 per year ($150,000 for married filing jointly). However, unlike the ACA subsidies (which could only be used for individual market insurance), the new subsidies would also be available for unsubsidized COBRA coverage.   This would not kick in until 2020.  The subsidies are adjusted based on the CPI+1, which means they are probably unlikely to keep pace with medical inflation.  Additionally, any excess subsidy (which seems unlikely) would be put into an HSA for the individual’s benefit.
  • Trading in The Cadillac Tax for a Newer Model Year. Hearing the outcry of employers who did not want their health benefits taxed, the bill instead kicks the Cadillac Tax down the road. Instead of applying in 2020, it now applies in 2025.  There is no adjustment to the thresholds in this bill, so it will still pick up coverage that is not all that “Cadillac” (despite its name). Despite being highly unpopular, the Cadillac Tax has basically survived.
  • HSA Enhancements. The HSA contribution limits would be increased effective in 2018 so that they are the same as the out of pocket maximums that apply to HSAs (currently $6,550 for self-only coverage and $13,100 for family coverage). Additionally, expenses incurred up to 60 days before the account is established could be reimbursed from the account.
  • Continuous Coverage Requirement. In lieu of the individual mandate, the law would require individuals to maintain continuous coverage (with no more than a 63-day break). If they did not, then insurance companies could assess a 30% enrollment surcharge above their regular premium for twelve months.  This is designed to encourage individuals to stay in the insurance market, even if they don’t need coverage.  Employers will recognize the 63-day break rule from the old HIPAA creditable coverage rules.  This is basically the same concept, only applied across both employer plans and the individual market (the HIPAA rules did not apply to the individual market).  And unlike the HIPAA rules, the penalty here is a 30% premium increase, whereas under the HIPAA rules, pre-existing conditions could be excluded for a period of time if the individual did not maintain creditable coverage.  For employers, this probably mostly would mean a return to having to issue creditable coverage certificates.

The proposed AHCA makes many other changes that are beyond the scope of this post, but these are the ones that are most likely to have an impact on employer plans.  Of course, at this point, this is just proposed legislation and there’s no telling how much (if any) of this will survive the legislative process.   At least now, however, some legislators have something specific with which to work (and others have something specific to criticize).


EO Update: e-News for Charities & Nonprofits

Two new Issue Podcasts available for viewing
Go to the Stay Exempt Issue Podcast page on to see Issue Podcasts on:

  • When are Commercial-Type Activities a Substantial Nonexempt Purpose for an IRC 501(c)(3) Organization?
    Learn about determining when commercial-type activities further a substantial nonexempt purpose for an IRC 501(c)(3) organization
  • IRC 501(c)(3) Proposing Denial
    Learn about the five-step roadmap the IRS uses to determine whether proposing denial is appropriate for an organization requesting recognition of tax exemption under IRC 501(c)(3)

What is an Issue Podcast?

An Issue Podcast is a resource the IRS uses for sharing technical knowledge.

An Issue Podcast is a short (approximately 15 minute), on-demand audio and visual presentation that includes:

  • A brief summary and analysis of an issue
  • References to key resource materials
Written by in: General

EO Update: e-News for Charities & Nonprofits

IRS makes approved Form 1023-EZ data available online

The IRS announced today that publicly available information from approved applications for tax-exemption using Form 1023-EZ, Streamlined Application for Recognition of Exemption, is now available electronically for the first time.

Read news release.

Resources for 403(b) retirement plans

Review the following information.

IRS summarizes “Dirty Dozen” list of tax scams for 2017

The IRS recently announced the conclusion of its annual “Dirty Dozen” list of tax scams. The annual list highlights various schemes that taxpayers may encounter throughout the year, many of which peak during tax-filing season. Taxpayers need to guard against ploys to steal their personal information, scam them out of money or talk them into engaging in questionable behavior with their taxes.

Read news release.

Written by in: General

Just Push Pause: Revisiting Proposed Regulations

On January 20, 2017, President Trump signed an executive order entitled “Regulatory Freeze Pending Review” (the “Freeze Memo“).  The Freeze Memo was anticipated, and mirrors similar memos issued by Presidents Barack Obama and George W. Bush during their first few days in office.  In light of the Freeze Memo, we have reviewed some of our recent posts discussing new regulations to determine the extent to which the Freeze Memo might affect such regulations.

TimeoutThe Regulatory Freeze

The two-page Freeze Memo requires that:

  1. Agencies not send for publication in the Federal Regulation any regulations that had not yet been so sent as of January 20, 2017, pending review by a department or agency head appointed by the President.
  2. Regulations that have been sent for publication in the Federal Register but not yet published be withdrawn, pending review by a department or agency head appointed by the President.
  3. Regulations that have been published but have not reached their effective date are to be delayed for 60 days from the date of the Freeze Memo (until March 21, 2017), pending review by a department or agency head appointed by the President. Agencies are further encouraged to consider postponing the effective date beyond the minimum 60 days.

Putting a Pin in It: Impacted Regulations

We have previously discussed a number of proposed IRS regulations which have not yet been finalized.  These include the proposed regulations to allow the use of forfeitures to fund QNECs, regulations regarding deferred compensation plans under Code Section 457, and regulations regarding deferred compensation arrangements under Code Section 409A (covered in five separate posts, onetwothreefour and five).

Since these regulations were only proposed as of January 20, 2017, the Freeze Memo requires that no further action be taken on them until they are reviewed by a department or agency head appointed by the President.  This review could conceivably result in a determination that one or more of the proposed regulations are inconsistent with the new administration’s objectives, which might lead Treasury to either withdraw, reissue, or simply take no further action with respect to such proposed regulations.

A Freeze on Reliance?

The proposed regulations cited above generally provide that taxpayers may rely on them for periods prior to any proposed applicability date.  Continued reliance should be permissible until and unless Treasury takes action to withdraw or modify the proposed regulations.

The DOL Fiduciary Rule

The Freeze Memo does not impact the DOL’s fiduciary rule, which was the subject of its own presidential memorandum, discussed in detail elsewhere on our blog.


Reminder: Filing Requirements for New 501(c)(4) Organizations

With lobbying efforts on the rise, the IRS has issued notice requirements for new 501(c)(4) social welfare organizations. These requirements follow the addition of Section 506 to the Code, where notification requirements for new 501(c)(4) organizations were outlined by the legislature.

A newly formed 501(c)(4) is required to notify the IRS within 60 days from the date it becomes a new legal entity. In providing notice, the organization must include the following information:

(1) the organization’s name, address, and taxpayer identification number;

(2) the date and state law under which the organization was formed; and

(3) a statement of the organization’s social welfare purpose.

The IRS has developed a new form – Form 8976 – that organizations should use to provide this notification. Note that continuing to file a Form 1024 is optional, and does not waive the requirement to provide notice. A Form 8976 can only be completed electronically through the IRS Electronic Notice Registration System. The system allows organizations to complete the notification process, keep account information current, and receive secure, digital communications from the IRS. You can access the Form 8976 here. Once notice is received, the IRS will issue a receipt of confirmation to the 501(c)(4) organization. However, this acknowledgement does not constitute approval of the organization’s qualifications for tax-exempt status under 501(c)(4), which is a separate determination.

Written by in: 501(c)(4)

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