IRS removes e-file PIN retrieval tool

The e-file PIN retrieval tool was taken offline in June, following a suspicious uptick in attempts to use it, IRS Commissioner Koskinen reported at a security meeting in June. Taxpayers can no longer sign returns that they file online with an electronic filing personal identification number. The IRS is still trying to determine how many PINs may have been compromised.

Refund fraud continues to rise, but more is being caught, Koskinen said. From January through April 2016, the IRS caught $1.1 billion of fraudulent refunds claimed on more than 171,000 returns, compared with $754 million claimed on 141,000 returns in the same period in 2015, about 49% more money and 21% more returns.

(August 2016)

© 2016 M.A. Co. All rights reserved.

Proposed Regulations

In June the ABA’s Section of Real Property, Trust and Estate Law sent its comments to the IRS on the Proposed Regulations on consistent basis. A wide variety of technical improvements were suggested. Four substantive changes also were included:

  • Reporting requirements should cease when an asset has been included in a subsequent estate.
  • Pecuniary bequests are treated as a sale of estate assets, so no basis reporting should be necessary as to these heirs.
  • There is no statutory authority for the “zero basis” rule for property not included in the estate tax return, so these parts of the Regulations should be dropped.
  • Similarly, there is no statutory authority for the “subsequent transfer” reporting requirement, which hypothetically could go on for generations. This also should be dropped, but if not dropped, a time limit should be added to the reporting requirement.

Substantial comments also were offered by the ABA Tax Section, the State Bar of Texas, the American Bankers Association, the New York City Bar Association, and the American Institute of CPAs.

(August 2016)

© 2016 M.A. Co. All rights reserved.

A stand-alone tax bill in September?

That was the hint dropped by Ways and Means Committee Chair Kevin Brady (R-Texas) in a July press conference, referring to the series of hearings held earlier this year. No specific legislation was identified. The key point is that Brady will be overseeing a new process for pushing tax bills through. “We are not bringing the extenders circus back to town. These bills either need to move [on a stand-alone basis]—one by one—or be part of the overall tax reform in 2017,” Brady told 
Tax Notes.

(August 2016)

© 2016 M.A. Co. All rights reserved.

A transfer to an in-law may not be presumed to be a gift.

Cohen v. Raymond, 128 A.3d 1072 (N.H. 2016)

Cohen got along famously with his son-in-law Raymond, who went to work in his father-in-law’s scrap metal company. Raymond became one of Cohen’s most valuable assistants. In 2006, Cohen sold the company. He and Raymond each received three-year employment contracts. However, they were not very happy working for the successor, and began to explore other business opportunities. The pair traveled to Germany together to observe scrap metal operations in that country.

Cohen wanted Raymond to become familiar with the world of investing. To that end, he created a brokerage account in Raymond’s name at Merrill Lynch, depositing $250,000 in the account. Apparently there were no formalities observed in this transaction, such as a loan agreement. Cohen later testified that he thought the account would be “seed money” for a future venture.

Unfortunately, Raymond and Cohen’s step-daughter divorced two years later. Next, Raymond withdrew $50,000 from the Merrill Lynch account. Cohen demanded that Raymond repay the entire $250,000, and filed a lawsuit to get it. The trial court ruled that there is a “weak” presumption that a transfer of assets to an in-law is a gift, which shifted the burden of proof to Cohen to show that there was no gift.

On appeal, the New Hampshire Supreme Court held that the presumption of a gift applies only to transfers to a spouse or children, not to transfers to in-laws. Upon remand, Raymond will have the burden of proof to show that a gift was intended at the time of the transfer.

(August 2016)

© 2016 M.A. Co. All rights reserved.


Extension granted for proving that a surviving spouse has become a U.S. citizen.

Private Letter Ruling 201628011

Decedent’s surviving spouse was not a U.S. citizen, so to secure the marital deduction from the federal estate tax his will created a Qualified Domestic Trust (QDOT) for her lifetime benefit. Some time later, the surviving spouse became a U.S. citizen, but she didn’t mention this development to the QDOT trustee. Under §2056A(b)(12) and §20.2056A-10(a)(1) and (2) of the Estate Tax Regulations, a QDOT is no longer subject to the estate tax imposed under §2056A(b) if the surviving spouse becomes a citizen of the United States, and the spouse was a resident of the United States at all times after the death of the decedent and before becoming a United States citizen, and the U.S. trustee of the qualified domestic trust notifies the Internal Revenue Service and certifies in writing that the surviving spouse has become a United States citizen. Notice is to be made by filing a final Form 706-QDT on or before April 15 of the calendar year following the year that the surviving spouse becomes a citizen, unless an extension of time of up to six months for filing is granted under §6081. The trustee did not timely file the final Form 706-QDT.

Now that the Trustee knows, he has asked the IRS for an extension of time to file the Form. As granting the extension of time will not prejudice the interests of the government, the extension was granted.

(August 2016)

© 2016 M.A. Co. All rights reserved.

Defined value clauses and sales to grantor trusts

Estate planners have been watching the Woebling cases because they included two somewhat aggressive estate planning strategies: use of a defined value formula gift to limit gift tax exposure, and the sale of stock to a grantor trust in exchange for a promissory note. Unfortunately, the resolution of the cases earlier this year will not add to our understanding of these strategies.


The Woebling family owned Carma Laboratories, Inc., a successful maker of skin care products. In 2006 Donald Woebling had the company valued by an independent appraiser. Based upon the appraisal, Donald sold his 1,092,271.53 shares of nonvoting stock in Carma Labs to an irrevocable trust for $59,004,508.05. The Installment Sale Agreement further provided that “in the event that the value of a share of stock is determined to be higher or lower than that set forth in the Appraisal, whether by the Internal Revenue Service or a court, then the $59,004,508.05 purchase price shall remain the same but the number of shares of stock purchased shall automatically adjust so that the fair market value of the stock purchased equals $59,004,508.05.”

This defined value clause was intended to short-circuit any finding that the transaction included a taxable gift. Defined value clauses have been upheld in several cases, most notably Wandry v. Comm’r [T.C. Memo 2012-88]. See also Petter v. Commissioner, [T.C. Memo. 2009-280, aff’d, 653 F.3d 1012 (9th Cir. 2011)] and Hendrix v. Commissioner, [T.C. Memo. 2011-133], in which the excess value passed to charity, rather than having an adjustment to the number of shares transferred.

Donald died in 2009, three years after the estate-freezing transaction. The IRS selected his estate tax return for audit. On September 27, 2013, the IRS sent an estate and gift tax deficiency notice for $32 million. Two days later, Donald’s wife, Marion, died.

The IRS position

The IRS valued the promissory note at zero, which meant that the entire value of the transfer of the stock to the trust in 2006 was a gift. What’s more, the IRS valued those shares at $117 million, nearly double what the independent appraiser had found for the value. Although valued at zero, the Service treated the note as a “retained interest,” causing the entire value of the stock to be fully included in Donald’s taxable estate. By the time that he died, the IRS believed that Carma Labs had grown in value to over $162 million.

A gift tax deficiency also was assessed against Marion’s estate, as she and Donald had split their gifts in 2008. The total estate and gift tax deficiencies for both estates came to over $125 million, and penalties came to another $25 million. In other words, the estates owed the government nearly the entire value (as determined by the government) of Carma 
Labs itself!

Resolution and a takeaway

The estates filed their Tax Court petitions at the end of 2013. After protracted negotiations, earlier this year the IRS and the estates reached a settlement. The deficiencies were cancelled, and a stipulated judgment was entered [ and].

Apparently, the estates conceded a higher value for the stocks, and the IRS conceded that the defined value clause worked as intended, so that fewer shares of stock passed to the trust. The shares that did not so pass would instead pass outright to Marion, and they would be protected from the estate tax by the marital deduction. The settlement included the stipulation that no adjustment was needed in Donald’s estate tax, so apparently the IRS conceded that the date-of-death value of the shares was not included in his estate.

However, an estate tax will be due on those “excess” shares that passed to Marion at Donald’s death. The amount of that tax was not included in the stipulated judgment.

All in all, this would seem to be a pro-taxpayer outcome. The amount potentially owed to the IRS was reduced from about $150 million to zero. On the other hand, the heirs have had to deal with considerable uncertainty, delay, and substantial attorney fees to reach this goal. We don’t know what impact this litigation had on the operations of Carma Labs itself. Donald probably did not realize that his carefully crafted estate plan, assembled by qualified professionals, would lead to this result. Would he have chosen a different approach had he known?

(August 2016)

© 2016 M.A. Co. All rights reserved.


529 Plans: Advanced Questions

During the presidential primary campaigns, the cost of higher education and the burden of education loans upon recent graduates was been a recurring theme.  Families with higher incomes have addressed these costs by contributing to tax-preferred savings vehicles, such as the 529 plan (named for a section of the tax code).

In his 2015 State of the Union address, President Obama called for an end to the tax freedom for distributions from 529 plans for college expenses. The justification for the change was that the tax benefits of 529 plans have been flowing disproportionately to higher-income taxpayers, given that they have the highest marginal tax rates and do the most saving.  Reducing that benefit for them would allow for expansion of the tax credits that have greater value to lower-income families. But after a bipartisan outcry, the President backed off the proposal, his spokesman saying that it had become a “distraction.”

We can be confident that 529 plans are here to stay.  Here are some unusual questions that we’ve heard recently.

Because I am employed by a private university, my child will be attending my school tuition free.  However, the value of the tuition shows up on my W-2 as additional compensation. Can I tap the 529 plan I set up for my child to cover the tax payments?

No, you can’t do that.  Taxes are not among the qualified education expenses permitted for 529 plans, even if the taxes arise in connection with education.  If your child won’t be living at home with you, the costs of room and board may be qualified expenses that the 529 plan can cover.

I know that direct payment of college tuition is not a taxable gift.  How about if I put $50,000 into a 529 plan for my grandchild this year?

Contributions to 529 plans are potentially taxable gifts.  They are shielded by the $14,000 annual gift tax exclusion, so up to that amount no gift tax return is required.  You are permitted to bunch up to five future annual exclusion gifts together, so that a contribution of up to $70,000 in one year ($140,000 for married couples) may be contributed in a single year.  However, you can’t make any other gifts to the individual during the five-year period, and there will be some paperwork to do every year.

If you wanted to contribute $100,000 to a 529 plan, there would be a taxable gift. However, unless you’ve already made more than $5.45 million in taxable gifts, a gift tax won’t be payable. Instead, the gift will reduce the amount of your federal estate tax exclusion at your death.  See your tax advisors to learn more.

It appears that I put too much money in a 529 plan for my child, who just graduated.  What happens to the excess?

There are only three choices for unused 529 plan accumulations.  First, you may roll the funds into another 529 plan for a member of the beneficiary’s family—a brother or sister, for example. Second, wait a couple years to see if the child decides to go to graduate school, and use the money for those expenses. Or third, withdraw the money and pay income taxes and the 10% penalty on the earnings portion of the withdrawal.

Because distributions are split pro rata between earnings and principal, these taxes may not be as serous as you might think.  Assume that a $100,000 529 plan consists of 2/3 contributions and 1/3 earnings.  Next assume that $82,000 was consumed for college expenses, and $18,000 is left.  Of that amount, $12,000 would be a tax-free return of principal, and $6,000 would be subject to tax.  The tax penalty comes to $600; the income tax depends upon one’s marginal tax bracket.  In the 25% bracket, for example, the income tax would be $1,500, for a total expense of $2,100 to withdraw the full $18,000.

(August 2016)

© 2016 M.A. Co. All rights reserved.

Variable Medicare Premiums

Beginning in 2007, the amount a retiree must pay for Medicare Part B had a new component put into the mix: adjusted gross income (AGI).  Higher income retirees began paying more, and the highest income retirees had to pay more than double for the same coverage.  Similar rules began to apply to Medicare Part D in 2011.  The table on page 2 spells out the dollars for 2016.

Technically, these extra payments are not taxes.  They are premium adjustments.  But the way that they work, a single dollar of extra income can result in hundreds, even thousands, of extra dollars in payments.  Accordingly, retirees who are near the boundaries for extra premium payments have an extra incentive to do careful tax planning.

However, there is an additional twist.  The premium adjustments are based upon AGI from two years earlier.  So, for 2016 the premium adjustments depend upon 2014 AGI.

Take control

Retirees have a number of choices to make in taking control of their AGI.  Accelerating deductions, however, is not among them, because deductions are on the path from AGI to taxable income, and come into the picture after AGI has been set.  Ideas that may work include:

  • investing more in growth stocks that do not pay dividends;
  • choosing more tax-efficient mutual funds;
  • bunching distributions from 401(k) or 403(b) distributions;
  • realizing capital losses;
  • bunching stock sales;
  • selling higher basis assets to minimize gains;
  • making intra-family gifts of income producing assets;
  • making qualified charitable distributions from an IRA.


Higher stakes


Tax planning done for 2016 will affect the 2018 excess Medicare premiums.  In 2018, the higher premiums are scheduled to kick in at even lower levels of income.  The threshold for the third bracket will fall to $133,500.  The top bracket will start at $160,000, 25% below today’s threshold.

Lawmakers may have thought that a retiree with $160,000 of income doesn’t “need” that $4,000 or so of excess premiums. But for someone near that boundary line, a slight shift in income can make a meaningful difference to after-tax capital.


Monthly Medicare Premiums for 2016


The standard Medicare Part B premium in 2016 is $121.80.  However, because there was no inflation adjustment this year, the majority of Social Security recipients are paying $104.90 each month.  Those with higher incomes must pay the standard amount plus the amounts indicated in the table below.  For married couples filing jointly, the income threshold is doubled. In 2016 he maximum additional premiums for Part B and Part D is $4,090.80 for singles, $8,181.60 for married couples.


Extra monthly and annualized Medicare Premiums

Modified AGI Additional Part B premium Additional Part D premium Total Annual
$85,000 or less $0 $0 $0 $0
$85,000 to $107,000 $48.70 $12.70 $61.40 $736.80
$107,000 to $160,000 $121.80 $32.80 $154.60 $1,855.20
$160,000 to $214,000 $194.90 $52.80 $247.70 $2,972.40
Over $214,000 $268 $72.90 $340.90 $4,090.80

Source:; M.A. Co.

(August 2016)

© 2016 M.A. Co. All rights reserved.

Clinton v. Trump on estate taxes

The federal estate tax has remained unchanged since 2012, giving estate planners and their clients’ time to adjust to the permanent larger exemption and the portability of the exemption between spouses.  That comfort level could change in 2017, as both Presidential candidates have called for major changes in the federal estate tax.

Donald Trump advocates the complete repeal of the federal estate tax.  Repeal would not mean the end of planning for death taxes, however.  During the year that the federal estate tax was suspended, 2010, executors and heirs had to learn the intricacies of carryover basis, which took the place of the estate tax.  (Current law permits a tax-free step-up in the basis of inherited assets, a very valuable tax privilege.) In effect, the capital gains tax was substituted for the estate tax.

Many estate planning strategies have both tax and nontax objectives. Should Mr. Trump succeed and then persuade the Congress to accept his ideas for the estate tax, the tax planning benefit of many strategies would be reduced or eliminated.

Hillary Clinton goes to the other extreme. She wants to roll the federal estate tax exemption back to the level it was in 2009, $3.5 million, coupled with a bump in the estate tax rate.  She likely also would advocate a range of technical restrictions on estate tax planning strategies, similar to what President Obama has included in his budget proposals.

Unless Republicans lose control of the House of Representatives, enactment of her program seems unlikely. But should it happen, history suggests that there might be a frenzy of major gift giving.  Back in 2012, when the federal exemption was scheduled by law to be reduced, many wealthy families tried to “lock in” the higher exemptions with intra-family transfers.  That phenomenon would be likely to recur.

The two visions for the federal estate tax are not expected to play any role in the outcome of the election, but those who are planning to make or review estate plans might want to keep these points in mind.

© 2016 M.A. Co.  All rights reserved

Portability extensions

Dear Garden State Trust Company:

My spouse died a year ago, leaving me an estate worth several million dollars. Because the estate was less than the federal exemption amount, no federal estate tax was filed. Is that a problem?—Having second thoughts

Dear Having:

It’s complicated.

Not filing the federal estate tax return for an estate less than the exemption amount ($5.45 million in 2016) is perfectly legal.  If you are confident that at your death you will also fall below the federal taxation threshold, it would be the right thing to do.

But married couples lose something if an estate tax return is not filed for the first spouse to die. What is lost is the right to elect the portability of the unused estate tax exemption.  With the election, the surviving spouse can have a federal estate tax exemption of over $10 million. Without the election the exemption will be $5 million (plus inflation adjustments in the year of death).

Recently there has been a surge in private letter ruling requests to the IRS by persons in your situation, who are asking for an extension of time to file the estate tax return simply to make the portability election.  The IRS has granted the vast majority of such requests.

If you feel that your estate might benefit from an enlarged exemption, consult with your estate planning advisors on whether to pursue such an extension for yourself.

Do you have a question concerning wealth management or trusts?  Send your inquiry to

© 2016 M.A. Co.  All rights reserved.