Regulation and Legislation Update
Dana Fitzsimons, Jr., and Kristen Hager

UP AND UP FOR EXEMPTION AMOUNTS, FOR NOW

As provided in the Economic Growth and Tax Relief Reconciliation Act of 2001, the estate tax unified credit applicable exclusion amount increased from $2,000,000 to $3,500,000 as of January 1, 2009. The estate tax rate remains at a flat rate of 45 percent. The 2001 Tax Act purported to abolish the federal estate tax as of January 1, 2010, but this abolition will only occur if Congress acts to override the sunset provision that in 2011 automatically reinstates the law as it was before the 2001 Tax Act ($1,000,000 exemption and a top estate tax rate of 55 percent).

Many commentators expect that Congress will act on the estate tax this year. In one of what likely may be several proposed bills related to the future of the estate tax, on January 9, 2009, Representative Earl Pomeroy introduced H.R. 436: Certain Estate Tax Relief Act of 2009. This bill states that its purpose is to “[t]o amend the Internal Revenue Code of 1986 to repeal the new carryover basis rules in order to prevent tax increases and the imposition of compliance burdens on many more estates than would benefit from repeal, to retain the estate tax with a $3,500,000 exemption and for other purposes.” In addition to freezing the exemption at $3,500,000, this bill seeks to limit the use of valuation discounts by disallowing them for any “nonbusiness assets” held by an entity, such as cash and cash equivalents or real estate as to which the transferor does not materially participate.

INFLATION ADJUSTMENTS UP FOR GIFTS AND MORE

On October 16, 2008, the Internal Revenue Service released Revenue Procedure 2008-66 that provides adjustments to certain figures for inflation for taxable years beginning in 2009.

For calendar year 2009, the first $13,000 (increased from $12,000 in 2008) of gifts to any person are not included in the total amount of taxable gifts made during the year under Internal Revenue Code section 2503. The first $133,000 (increased from $128,000 in 2008) of gifts to a spouse who is not a citizen of the United States are not included in the total amount of taxable gifts made during the year under Internal Revenue Code sections 2503 and section 2523(i)(2). For the estate of a decedent dying during calendar year 2009, the dollar amount used to determine the “2-percent portion” (for purposes of calculating interest under Internal Revenue Code section 6601(j)) of the estate tax deferred under section 6166 is increased from $1,280,000 to $1,330,000.

If the executor of an estate of a decedent dying in calendar year 2009 elects to use the special use valuation method under Internal Revenue Code section 2032A for qualified real property, the aggregate decrease in the value of qualified real property resulting from electing to use section 2032A for purposes of the estate tax cannot exceed $1,000,000 (increased from $960,000 for a decedent dying during calendar year 2008).

Additional inflation adjusted figures include the so-called “Kiddie Tax,” Child Tax Credit, Hope and Lifetime Learning Credits, Standard Deduction, and the Personal Exemption.

REQUIRED MINIMUM DISTRIBUTION REQUIREMENTS WAIVED FOR 2009

President Bush signed H.R. 7327, titled the “Worker, Retiree, and Employer Recovery Act of 2008” into law on December 23, 2008. Section 201 of this Act suspends the 50 percent penalty for failure to take a 2009 required minimum distribution from retirement plans that hold each participant’s benefit in an individual account, such as Internal Revenue Code section 401(k) plans, section 403(b) plans, and certain section 457(b) plans. In addition, the Act waives required minimum distributions from individual retirement accounts. Most participants and beneficiaries who otherwise would have been required to take a minimum distribution from one of these accounts will not be required to do so for 2009.

The Act does not suspend a 2008 required minimum distribution for an individual who reached age 70-1/2 during 2008 and elected to delay taking the 2008 required distribution until April 1, 2009. Any such individuals are still required to take their 2008 required minimum distribution by April 1, 2009. The waiver of the required distribution does apply to individuals who reach age 70-1/2 during 2009 and are eligible to postpone taking a 2009 required minimum distribution until April 1, 2010.

On January 9, 2009, the Internal Revenue Service issued Notice 2009-9 in order to provide guidance to financial institutions on reporting waived minimum distributions. If a financial institution sends a required minimum distribution statement to an Individual Retirement Account owner, the institution must either show the required minimum distribution as zero or show the minimum distribution that would have been required for 2009 but for the waiver and include an explanation of the waiver for 2009. In order to avoid confusion, Notice 2009-9 encourages financial institutions to remind IRA owners who delayed their 2008 minimum distributions until the first quarter of 2009 that they are still required to take such distributions.

NEW TRANSACTION OF INTEREST – SUBPART F INCOME PARTNERSHIP BLOCKER

On December 30, 2008, the Internal Revenue Service issued Notice 2009-7, which identified a “transaction of interest” involving the use of partnership structures. A transaction of interest is a transaction that the IRS has identified as being the same as, or substantially similar to, transactions previously identified by the IRS as being listed transactions, but the IRS lacks sufficient information to determine whether the transaction at issue should be specifically identified as a tax avoidance transaction.

Notice 2009-7 describes a transaction in which taxpayers use partnership structures, such as a lower-tier controlled foreign corporation held by a domestic partnership, to claim that the partners owe no taxes on Subpart F income under Internal Revenue Code section 951. Taxpayers entering into transactions that are the same or substantially similar to the transactions described in Notice 2009-7 must make disclosures as described in Regulation section 1.6011-4. In addition, material advisors who make tax statements regarding such transactions after November 2, 2006, have disclosure and list maintenance obligations.

UPDATED (BUT NOT BY MUCH) PROCEDURES FOR OBTAINING ADVICE FROM THE INTERNAL REVENUE SERVICE

On December 18, 2008, the Internal Revenue Service issued Revenue Ruling 2009-1, in which the Service updated the procedures for obtaining advice from the IRS for issues under the jurisdictions of the Associate Chief Counsel (Corporate), the Associate Chief Counsel (Financial Institutions and Products), the Associate Chief Counsel (Income Tax and Accounting), the Associate Chief Counsel (International), the Associate Chief Counsel (Passthroughs and Special Industries), the Associate Chief Counsel (Procedure and Administration), and the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). Revenue Procedure 2009-1 contains no significant changes from the procedures set forth in Revenue Procedure 2008-1.

Dana Fitzsimons Jr. and Kristen Hager are attorneys with the Private Wealth Services and Fiduciary Advisory Services groups at McGuireWoods LLP in Richmond, Virginia. Dana focuses his practice on fiduciary litigation, estate and trust administration, and estate planning. Kristen focuses her practice on estate and business succession planning, and estate and trust administration.