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BHBM Tax Alert 6/22/2010

Tuesday, June 22, 2010

FEDERAL
 
Extenders Bill Still Working Its Way Through Congress

On May 28, 2010, the House of Representatives passed a scaled-back version of the American Jobs, Closing Tax Loopholes and Preventing Outsourcing Act of 2010 by a slim majority vote of 215-204.  The House version of the Bill extended many tax breaks for an additional year, including the following:  1)  The credit for increasing research activities; 2)  The active financing exception from Subpart F of the Code; 3)  The current law look-through treatment of payments between related CFCs; 4)  Fifteen-year straight-line cost recovery for qualified leasehold improvements, restaurant buildings and improvements, and retail improvements; and a host of other tax breaks related to special interest items.  However, the Bill also includes a number of controversial revenue raisers, such as eventually treating three-quarters of carried interest as ordinary income, a crackdown on using certain S corporations as a way to minimize Medicare and Social Security taxes, and an assault of foreign tax loopholes.  Nonetheless, the Bill faced a great deal of scrutiny when it reached the Senate.

Attempts to advance an even further scaled-back version of the Bill failed in the Senate on June 17, 2010 when an impromptu cloture vote on the measure demonstrated that Democrats remain four votes shy of passing the measure.  An analysis of the Bill still showed that it would increase the federal budget deficit by $55 billion and therefore moderate Democrats refused to support it.  Further amendments to the Bill are expected early this week in an attempt to garner the 60 votes needed in the Senate.
 
Estate Tax Update

As all tax professionals are aware, there is currently no estate tax for decedents dying in 2010.  Furthermore, there has not been any movement on an estate tax bill as Congress is currently considering the Tax Extenders bill as mentioned above.  Thus, with no estate tax, many professionals have fielded questions pertaining to the rules in place for determining the basis of descendants in property acquired from decedents dying in 2010.

The basis of property that was acquired from a decedent dying before January 1, 2010, with certain exceptions, was its fair market value at either the date of death or an alternative valuation date.  This rule is commonly referred to as the stepped-up basis rule.

The stepped-up basis rule applied only to decedents dying before January 1, 2010.  For decedents dying during 2010, this rule does not apply.  Rather, the modified carryover basis rules found in IRC §1022 apply in determining the descendant's basis in property acquired from a decedent.  Generally, the descendant's basis will be the lessor of the decedent's adjusted basis of the property or the fair market value of the property at the decedent's date of death.  However, the executor of the estate may generally increase the basis of property held at the decedent's death by $1.3 Million.  The increase to the basis of the property cannot exceed the fair market value of the property at the date of the decedent's death.  In addition, for certain property passing to a surviving spouse, the executor may elect to increase the basis of that property by an additional $3 Million.  In order to claim the aforementioned basis increases, taxpayers must file an informational return in accordance with IRC §6018(b) and (c) if the fair market value of the estate is greater than $1.3 Million.  The IRS has yet to publish the actual informational return form but there is a list of items which must be included on such return.

There are other complications to the modified carryover basis rules as well.  Just be aware that the modified carryover basis rules of IRC §1022 replace the stepped-up basis rule of IRC §1014 for decedents dying in 2010. 

If you have any questions relating to the modified carryover basis rules, please do not hesitate to contact us.
 
Limited Partnership Interest Gift Fails Present Interest Test for Purposes of Annual Exclusion

The recent decision in Price, TCM 2010-2, illustrates the dangers of gifting limited partnership interest using the annual exclusion.  In Price, the Tax Court held that a couple's gifts of interests in a family limited partnership (FLP) to their adult children did not qualify for the annual gift tax exclusion under IRC §2503(g) because the taxpayers failed to demonstrate that the gifts were not of future interests in property.  The court stated that the taxpayers failed to demonstrate that the gifts of the FLP interests conferred upon the donees the immediate use, possession, or enjoyment of either the transferred property or the income therefrom.  The court specifically analyzed the restrictions placed upon the interests with regard to the withdrawal of capital and the transferability of the partnership interests to determine that the parties had nothing more than a future interest in the property owned by the FLP.
 
Depreciation Reminder

As mentioned in a previous tax alert, the IRS held in TAM 201001018 that offshore support vessels which are primarily used to transport supplies, equipment and personnel in offshore oil and gas operations should be classified in asset class 13.0 rather than asset class 0.28 under Rev. Proc. 87-56.  The taxpayer in question was allowed to depreciate its offshore support vessels over a five (5) year period rather than a ten (10) year period.

Reminder:  This TAM cannot be cited as precedent pursuant to IRS §6110(k)(3), but this TAM may give an indication as to how the IRS will view certain support vessels.
 
STATE
 
Forced Heirship

In a recent case, Succession of Patricia Lee Forman¹, the Louisiana Third Circuit Court of Appeal held that two sisters with mental diseases were forced heirs under Louisiana law.  In this case, a mother left a family home and all of her immovable property to her sister rather than to her children, who were all over forty (40) years old.  The children objected to this distribution because they claimed they were forced heirs under Louisiana law. 

Generally, under La. Civ. Code Art. 1493 a forced heir is a descendant of the first degree who, at the time of the death of the decedent, is twenty-three years of age or younger, or descendants of the first degree of any age, who because of mental incapacity or physical infirmity, are permanently incapable of taking care of their persons or administering their estates at the time of the death of the decedent.  For this purpose, the definition of permanently incapable of taking care of an estate includes descendants who at the time of the death of the decedent have, according to medical documentation, an inherited, incurable disease or condition that may render them incapable of caring for their persons or administering their estates in the future.

In this case, the medical experts testified that the children had bipolar disorders that can be treated through medication.  However, the experts determined that children's' past history rendered them incapable of taking care of their person or estates in the future. The children had suffered from mental illness for several years and these diseases have gradually decreased the ability of the children to take care of themselves.

¹ This decision has not been published in a reporter to date. The current citation is 2010 WL 1780087 (La.App. 3 Cir.)

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