2023 Marcum Year-End Tax Guide

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THE MARCUM YEAR-END TAX GUIDE 2023

There was also significant IRS guidance issued, and cases decided during the year. • The IRS issued guidance stating that property held in an Intentionally Defective Grantor Trust (IDGT) is not eligible for a tax basis increase if it is not included in the decedent’s taxable estate. Some argue that a basis increase should occur since the IDGT is disregarded for income tax purposes and the grantor holds the trust assets. The argument is that there is a deemed transfer of asset to a new trust after death on the change of trust status to a regarded entity. However, the Service focused on the language in IRC sec 1014(b)(1), which applies to property acquired by bequest, devise, or inheritance, and determined that the shift in trust status does not qualify for a basis increase. This ruling aligns with the majority opinion but may surprise taxpayers who expected a basis increase in an IDGT program. • The Third Circuit Court of Appeals upheld the Tax Court seven uncashed checks were includible in the decedent’s estate and were not completed gifts under Pennsylvania law. It is important to note that when in the Estate of Demuth v. Commissioner, holding that

making year-end gifts by check, the check should be cashed before year-end. The Service takes the position that the donor has the right to cancel the check before it is deposited, which constitutes a retained right that can make the gift incomplete. • The Kalkow v. Commissioner case notes the importance of understanding the governing terms of a trust before entering into any agreements with the Service. In this case, over $6.5 million of income was not distributed from a Qualified Terminable Interest Property (QTIP) Trust to the spouse at the time of the spouse’s death as required under the trust terms. Since the assets of the QTIP Trust (which had used a marital deduction to cause its assets not to be taxed on its formation) were includible in the deceased spouse’s taxable estate, the advisors probably thought that this unpaid amount had no impact. However, the Service claimed that the $6.5 million receivable was a separate asset of the estate included in the spouse’s taxable estate. When the estate claimed there should be an offsetting liability in valuing the trust, the Tax Court did not allow the reduction since there was a prior stipulation concerning the value of the QTIP trust.

• In the Estate of Spizzin v. Commissioner , the Tax Court held that without any other credible explanation, payments over five years to seven women and the taxpayer’s daughter and stepdaughter were taxable gifts. The court noted that no Form W-2 or Form 1099 was issued to characterize the transfers as being something other than gifts. The Tax Court did issue a taxpayer friendly decision in the Estate of Cecil v. Commissioner. The court upheld “tax affecting” in valuing S corporation shares for gift tax purposes. Previously, the Tax Court had considered tax affecting on a case-by-case basis. Both the Service and the taxpayer’s valuation experts agreed that tax affecting projected earnings was appropriate in this case. However, the court clarified that this decision does not establish a rule that tax affecting is always suitable for valuing an S corporation. Additionally, the court ruled that a higher valuation based on an asset approach could not be used for a minority interest when the minority shareholder had no control over the sale of assets and a disposition was unlikely. The court allowed discounts of 20% for lack of control and 19.27% for lack of market.

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