STATE BAR OF CALIFORNIA TAXATION SECTION ESTATE AND GIFT TAX COMMITTEE 1 ESTATE AND GIFT TAX DISCUSSION POINTS

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1 STATE BAR OF CALIFORNIA TAXATION SECTION ESTATE AND GIFT TAX COMMITTEE 1 ESTATE AND GIFT TAX DISCUSSION POINTS This proposal was written by and Dennis I. Leonard for the Taxation Section of the State Bar of California. The authors sincerely thank Wayne R. Johnson, Esq. and Anthony P. Vecino, Esq. for their contributions in the preparation of this paper. 2 Contact Persons:, Esq. Wagner Kirkman Blaine Klomparens & Youmans LLP Mather Blvd., Suite 200 Mather, CA Phone: (916) , Esq. Ramsbacher Prokey LLP 1255 Market St., Suite 1150 San Jose, CA Phone: (408)) The comments contained in this paper are the individual views of the authors who prepared them, and do not represent the position of the State Bar of California or of the Los Angeles County Bar Association. 2 Although the authors and presenters of this paper might have clients affected by the rules applicable to the subject matter of this paper and have advised such clients on applicable law, no such participant has been specifically engaged by a client to participate on this paper. {RLK.SEM / DOC.1 }{RLK.SEM / DOC.1 }

2 EXECUTIVE SUMMARY The authors are proposing three quick points for discussion in the estate and gift tax area. They are as follows: 1. Streamlining the procedure for filing a claim under IRC 2053(a)(3) for related claims; 2. Simplifying the portable credit election for estates under $5 million gross; and 3. Providing guidance for the IRC 754 election for 2010 repeal was elected. All of these above topics have been discussed among practitioners and various personnel in Washington, D.C. It is believed that while excellent guidance has been issued under IRC 2053 on filing protective claims that these procedures can be further streamlined. Similarly, the current portability election requires the filing of a formal 706 which is costly and will often be missed by those very persons who would utilize such an election. Thus, guidelines should be issued on simplifying this election where possible. Finally, there has been no guidance issued regarding the interplay between the IRC 754 election for a decedent who died in 2010 who elected repeal. While time is running out on this issue, guidance would be extremely helpful, particularly as to whether certain assets in a partnership can be selected to receive the step-up in basis since basis step-up in 2010 is limited where repeal was chosen. {RLK.SEM / DOC.1 }{RLK.SEM / DOC.1 }2

3 DISCUSSION I. STREAMLINING THE PROCEDURE FOR FILING MULTIPLE RELATED CLAIMS UNDER IRC SECTION 2053 The government has issued very helpful guidance for filing a protective claim under IRC Section The guidance suggests that for each claim a separate protective claim must be filed. This procedure will be burdensome in some cases and presumably unnecessary. Also, this burdens the government officials working in the field and will also cause additional work for the accountant, practitioner and/or fiduciary. It is understandable that the government would want separate claims that are unrelated to be filed separately. This makes sense so that when a claim is resolved, it does not affect other protective claims filed. But, when claims are related such that resolving one of the related claims will naturally lead to resolution of all related claims, combining these would make administrative sense. For example, assume there is a protease claim for toxic liability and related claims for consultants, attorney's fees and clean up. Once the toxic liability claim is resolved, there will be known the following: fees and costs owed to the environmental agency, fees and costs for the clean-up, fees and costs for counsel and fees and costs for any consultants. Thus, multiple claims will be known at the end of resolution of the primary claim. It would save the practitioner, fiduciary and government, time and money by allowing related claims to be grouped together. This may actually be acceptable to the service now, but since it is not set forth in the revenue procedure, practitioners, judiciaries and accountants are filing each claim separately as set forth in the revenue procedure so as not to be later barred from a refund. II. SIMPLIFYING THE PORTABILITY ELECTION FOR ESTATES UNDER $5 MILLION GROSS The government's position is that for a spouse to claim the portability election they must file a complete 706. This position is not {RLK.SEM / DOC.1 }{RLK.SEM / DOC.1 }3

4 without its own issues as the 706 instructions make clear that a 706 is filed when a decedent's estate exceeds $5 million. There have already been many instances where the portability election has been compromised as several accountants and/or practitioners have missed the extension deadline. The Service has stated relief is available for a late filed extension. The problem lies in the fact that portability is supposed to simplify planning and use of a first spouse's exemption. But, requiring a taxpayer with an estate under $5 million gross to file a 706 is in no way shape or form simple. Also, the election does not start any statute of limitations running on the first spouse's estate so time is not a consideration and the government is not barred from later auditing or opening up values on the first spouse's estate. Filing a 706 is costly and complex and requires a tax professional s assistance as well as appraisals for any non-cash, non-marketable assets. As a practical matter, most taxpayers who seek a tax attorney s counsel will be told that portability is only a good option in a case where the client has a home and retirement or annuities as assets. This leaves a huge trap for the unwary who believe portability is available yet do not realize the complexities and procedural requirements. We propose one of the following but only in estates that are less than $5 million gross: 1. A 706 E-Z. This would allow the surviving spouse to provide general information: names, birth dates, citizenship, date of death and the election. It could also contain an area to generally list a summary of assets with estimates if the service thought that would be helpful; or 2. Allow a simplified portability election in estates of certain sizes based on a formula: less than one-half or two-thirds of the available unified credit on the first spouse's death; or 3. Allow a simplified portability election in estates of certain sizes based on a dollar amount: $2 million, $1 million, etc. In community property states the number above would be the decedent's one-half of any community property and 100% of any separate property. {RLK.SEM / DOC.1 }{RLK.SEM / DOC.1 }4

5 III. PROVIDING GUIDANCE FOR UTILIZING A 754 ELECTION FOR 2010 DEATHS WHERE REPEAL WAS ELECTED Once again the service has issued lots of guidance for 2010 deaths on a variety of issues. This is one area, however, where no real guidance has been issued. The service has merely stated that IRC 754 and other related sections still apply. The problem comes in as to how to apply IRC 754. IRC 754, coupled with other code sections, allows an inside basis step up on assets held by the partnership to equal the outside basis of the partners in the partnership. In 2010, with a limited $1.3 million basis step up combined with a possible $3 million step up for assets transferred to a surviving spouse, it is unclear how the election works. The authors propose that under 754 and other related sections, the service should allow a taxpayer making a 754 election to increase or decrease the inside basis to fair market value. Alternatively, if no election to fair market value is allowed, the taxpayer in a situation where inside basis is lower than outside basis, should be able to elect on which assets inside the partnership the step-up will apply as long as the election is reasonably and equitably applied. There are other areas where the taxpayer is permitted to choose which assets relieve the step-up. The authors realize that this is a very complex issue and that it is only relevant for those 2010 deaths where repeal was affirmatively elected by filing an 8939; hence, the proposal to have simplicity. Also, in some states, like California, the basis statute did not conform to federal law, so in California there will automatically be two sets of partnership books required to be kept per taxpayer on anyone making the election unless a step up to fair market is allowed on inside basis. IV. CONCLUSION The authors hope to discuss these issues with various government personnel. While resolution will likely not be reached, it is important to start b a dialogue. {RLK.SEM / DOC.1 }{RLK.SEM / DOC.1 }5