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Advisor
N E W S L E T T E R
TM
IRS Announces Exemptions for
2019 and Clarifies Post-TCJA Issues
The Tax Cuts and Jobs Act (TCJA) of of $500,000 to charity for 20 years,
2017 amended Internal Revenue after which the remainder will pass
Code Section 2010(c)(3) to provide to the donor’s children. Because the
that, for decedents dying and gifts present value of the charity’s income
made after December 31, 2017, and is approximately $7.2 million, only
before January 1, 2026, the “basic the balance of approximately $2.8
exclusion amount” that acts as an million will be treated as a taxable
equivalent exemption against federal transfer. Regardless of how much
gift and estate tax be increased from the trust grows during the trust term,
$5 million per taxpayer to $10 million no additional amount will ever be
per taxpayer, indexed for inflation. subjected to gift or estate tax when
the remainder is distributed to the
Even after this significant increase in children.
Together with our millions of the amount individuals can pass on
supporters, the American Cancer free of estate or gift tax, careful and Recent actions by the IRS related to
Society is on a mission to save creative charitable planning remains gift and estate taxes may affect how
lives, celebrate lives, and lead the a vital tool—especially for those with taxpayers will conduct their planning,
fight for a world without cancer. estates that exceed the maximum both charitable and noncharitable.
equivalent exemption.
For 2019 the IRS has announced that
For instance, high-net-worth the inflation-adjusted amount will
IRS Announces individuals can reap significant be $11.4 million (Revenue Procedure
Exemptions for transfer-tax savings by employing 2018-57). This means that a couple
a nongrantor charitable lead trust could make up to $22.8 million of
2019 and Clarifies that directs a stream of payments tax-free transfers. The amount of
to charity during the trust term current gifts of present interests that
Post-TCJA Issues and then distributes the remaining are excluded from gift tax remains at
Volume XXVII, Issue 27 assets to noncharitable beneficiaries. $15,000 per donee.
While such vehicles do not generate
2019 income-tax deductions, they TCJA also added IRC § 2001(g)
do generate gift- or estate-tax (2), which directs the Treasury to
deductions equal to the present prescribe such regulations as may
value of the charitable interest in the be necessary or appropriate to
trust at the time of creation. carry out IRC § 2001 with respect
IN THIS ISSUE to any difference between the basic
A donor who regularly makes exclusion amount (BEA) applicable
large annual charitable gifts could at the time of a decedent’s death and
decide, for example, to create a the BEA applicable with respect to
When a Gift Is Not a Gift
$10 million nongrantor lead trust any gifts made by the decedent for
IRS: Advertising Income Is that will make annual distributions estate-tax purposes.
Not UBTI
BRIEFLY…The issues this presents are to the language of the proposed to allow any amount sheltered from
especially important in light of the regulations, “[T]his would effectively gift tax by some or all of a BEA higher
fact that, absent further action by reverse the benefit of the increased than the BEA in effect at the date of
Congress, the increased exemption BEA available for gifts made during death to be exempt from estate tax.
amount created by TCJA goes away the increased BEA period.”
at the end of 2025 and the exemption It is important to note that the
reverts to $5 million adjusted for 4. Effect of decrease in BEA on proposed regulations also indicate
inflation on January 1, 2026. While estate tax. How does a drop in the that only the amount of the
it is theoretically possible that the BEA after 2025 affect the estate increased BEA used to shelter gifts
equivalent exemption amount could tax for a decedent who dies after during the increased BEA period will
go down from one year to the next 2025 and who made gifts during be available in determining estate
between 2019 and 2025, the major life the tax on which was fully or tax after 2025. For example, if a
question is what happens starting in partially sheltered by a BEA larger taxpayer makes $9 million of taxable
2026. than the amount in effect at the transfers prior to 2026 and, therefore,
date of death? Conclusion: A literal uses $9 million of the available $10
The Treasury has responded to IRC § reading of the application of IRC § million equivalent exemption, the
2001(g)(2) by announcing Proposed 2001(b), which sets out the steps for balance of $1 million will not carry
Regulations. It has announced a calculating estate tax, would subject forward to be used against post-2025
public hearing on those proposed any amount of the BEA in effect at estate tax. (NOTE: The equivalent
regulations for March 13, 2019, and the time of the lifetime transfer that exemption amounts noted in the
set a deadline of February 21, 2019, is in excess to the BEA in effect at the examples above are not adjusted
for receiving comments. time of death to federal estate tax. for inflation.)
These proposed regulations attempt That, of course, is a huge potential
to address the thorny issues raised problem. The proposed regulations When a Gift Is Not a Gift
by the increase in the equivalent offer an example of a decedent who A recent Tax Court case addresses
exemption and its subsequent made an $11 million gift in 2018 the intriguing question of when
reversion to pre-2018 levels under when the BEA was $10 million and transfer of funds constitutes a gift
TCJA. The Background section of dies in 2026 with a taxable estate of and when it constitutes taxable
the proposed regulations discusses $4 million when the BEA is $5 million. income (Felton v Commissioner, T.C.
several scenarios: A literal reading of IRC § 2001(b) Memo. 2018-168, October 10, 2018).
would lead to a conclusion that the
1. Impact of pre-2018 gifts on decedent’s taxable estate would Members of a St. Paul, Minnesota,
which gift tax was actually paid on be $9 million—the $4 million the church could choose to make their
the BEA available. Conclusion: The decedent has at the date of death contributions in three different
increased BEA is reduced only by the and the $5 million by which the BEA envelopes, each of a different
amount of BEA allowable against in effect in 2018 exceeded the $5 color. According to church policy,
the pre-2018 gifts, not by the entire million BEA in effect in 2026. Estate contributions in white envelopes
amount of the transfer. tax would be $3,600,000 (40% of $9 were deemed to be contributions
million). for general purposes for the general
2. Impact of pre-2018 gifts on operation of the church. Those in
which gift tax was actually paid It follows with an even more extreme gold envelopes were for special
when a decedent dies during the example in which the facts are the programs and projects. The church
increased BEA period. Conclusion: same except the decedent dies with provided reports and receipts to
The results are the same as in no taxable estate. Even with no members for funds received in
number 1 above. The increased BEA taxable estate at death, estate tax white and gold envelopes and
is reduced only by the amount of BEA would be $2 million (40% of the $5 treated them as tax-deductible
applied to the pre-2018 gift, not the million by which the BEA in existence contributions.
entire transfer. in 2018 exceeds the $5 million in
effect in 2026). However, if church members wanted
3. Effect of decrease in BEA on gift to make what they understood
tax. In other words, if the amount of The proposed regulations would to be a nondeductible gift
exemption used between 2019 and address this problem by amending directly to their pastor, Reverend
2025 is greater than the exemption Regs. § 20.2010-1 to provide Wayne Felton, they did so in blue
amount available after 2025, will the a special rule in these kinds of envelopes—understanding that the
excess be deemed to be a taxable situations. That rule would, in effect, contributions would not be recorded
transfer? Conclusion: No. According change the computation of estate taxas tax-deductible gifts but rather amounts given in those envelopes The charity in question publishes a
treated as personal gifts to the were intended to provide incentive scholarly journal. It has contracted
pastor. for Reverend Felton to continue with a company to publish the
preaching at their church, which journal. The agreement provides that
Based on this long-standing process, would call into question whether the the charity will cover all expenses
Reverend Felton did not report any gifts were given in “detached and of gathering and preparing editorial
of the gifts earmarked for him in disinterested generosity.” materials in the journal and also
the blue envelopes when he filed provides that the publisher will pay
his income tax. The IRS, however, It also believed receipt of those an annual stipend for salaries and
viewed them differently and wants donations was pursuant to a expenses of the journal’s editorial
back taxes and penalties for 2008 “routinized, highly structured office and expenses for the annual
and 2009, the years in question in program.” Ironically, the court editorial board meeting.
this case. The amounts given in blue opined that the very existence of
envelopes for those years were, the blue envelope system itself Beyond that, the publisher will
respectively, $258,001 and $234,826. was evidence of such a structured “publish, produce, sell, distribute,
program. This weighed against and internationally promote the
The court was personally finding the contributions to Journal at its own expense” and
complimentary of Reverend Felton be gifts as opposed to taxable will be responsible for fulfilling
and his wife for their hard work in compensation. subscription orders. In essence, this
serving the church and in planting allows the charity to be able to have
multiple additional churches around In addition, the Court determined a journal at little or no expense to the
the country and around the world. It that the fact that Reverend Felton organization.
noted that he regularly followed the did not receive a separate salary
direction and policies of the board from the church supported a This raises the question of what is in
and that while the board did budget conclusion that the “gifts” in the it for the publisher? The publisher
a salary for him, he did not take it. He blue envelopes really were intended also has the sole responsibility for
did though, take a $6,500 per month to be his primary compensation, selling advertising space in the
parsonage allowance that Reverend notwithstanding the extremely journal at rates determined in the
Felton himself classified as a “very, generous nature of his parsonage publisher’s sole discretion, with the
very nice and handsome housing allowance. Accordingly, the charity reserving only the right to
allowance” that was nontaxable to Court upheld the IRS’s claim for ensure the advertisements meet its
the extent it was used for qualifying underpayment of taxes and also reasonable advertising standards.
housing expenses. upheld the application of penalties Subject to a few minor provisions,
for failure to timely file and for the publisher retains the revenue
The white envelopes did have a line accuracy-related penalties. from the sale of advertisements.
that could be checked to designate
gifts for compensation for Reverend The agreement does call for
Felton—and which the donors IRS: Advertising Income Is payment of “earned royalties” to
understood to be deductible for Not UBTI the charity based on a percentage of
themselves—and the Feltons also Many charitable organizations “revenues,” but advertising revenues
received funds from a separate publish journals, yearbooks, and are specifically excluded from the
counseling business. As such, they various other publications in the definition of “revenues” for this
reported approximately $70,000- course of and in pursuit of their purpose. Presumably, the majority of
$80,000 for taxable compensation exempt purposes. Occasionally such revenues would come in the form of
each year in 2008 and 2009. However, publications contain advertisements, subscriptions for the magazine.
they also claimed approximately a fact that reasonably raises the
$50,000 each year for charitable In analyzing the case, the IRS turned
question: “When does receipt of
contributions which, along with to IRC § 512(a) for definition of the
advertising revenue constitute
other deductions and exemptions, term “unrelated business taxable
unrelated business activity giving
resulted in no taxable income. income.” A key element of that
rise to unrelated business taxable
definition is a requirement that the
income?”
The court conceded that blue activity generating the revenue be
envelopes were not routinely The IRS addresses such a situation “regularly carried on” by the entity.
distributed but only given out by in a recent Technical Advice
ushers when one was requested The memorandum also noted that
Memorandum (TAM 201837014).
by a member of the congregation. Regs. § 1.513-1(b) provides that
However, they also concluded that activities of soliciting, selling, andpublishing commercial advertising Rule 10-b(5)-1 and volume issues would be subject to determination by
do not lose identity as a trade under SEC Rule 144(e), the nature an independent trustee to be at least
or business even though the of involvement and activity of an the minimum amount that would be
advertising is published in an exempt additional trust and an additional deemed not to be de minimis—and
organization periodical that contains LLC came into play in the analysis. the balance of the required annual
editorial matter related to the exempt unitrust amount would be payable to
purpose of the organization. The ruling relied on representations charitable beneficiaries. Because the
that the collective parties had not amount payable to the noncharitable
That turned the focus clearly on contributed an aggregate of more beneficiaries was required to be more
whether or not the charity was than 10% of the corporate stock to a than de minimis, the trusts would
regularly involved in the business nonoperating private foundation and qualify as CRUTs.
of selling advertising. After citing that no transfers would otherwise run
several prior cases for purposes afoul of SEC requirements. Therefore, Further, the ruling found that since
of comparison, the memorandum since the stock contributed had the settlor had retained the right to
concluded that, based on the appreciated beyond its adjusted revoke his wife’s survivor interest
facts in this case, there was no basis, had been held more than and to change the identity of the
indication that the charity engaged one year, and was publicly traded charitable income beneficiaries,
in any advertising activities or that on exchanges for which there those gifts would not be complete
any portion of the payment from were readily available quotes, it for gift or estate tax. In addition, it
the publisher was attributable to constituted qualified stock within the confirmed that upon the death of the
the advertising. Thus it was the meaning of IRC § 170(e)(5)(B) and settlor the amount passing to charity
publisher, not the charity, involved was deductible at fair-market value. in the trust in which he was the only
in the business of selling advertising, noncharitable beneficiary would
and the charity did not receive any CRUTs with charitable and qualify for an estate-tax charitable
unrelated business taxable income noncharitable beneficiaries deduction—and in the case of the
from advertising. qualified. The IRS has determined other trust, any interest passing to
that a pair of charitable remainder his wife, if she survives him, would
unitrusts with both charitable and qualify for the estate-tax marital
Briefly… noncharitable income beneficiaries deduction and the interest passing to
Gift to private foundation deemed will be treated as qualifying CRUTs charity would qualify for the estate-
“qualified stock.” A recent private (PLR 201845014). A taxpayer had tax charitable deduction.
letter ruling determined that a proposed to create a pair of trusts,
contribution of stock by an LLC the first of which would name him
constituted a gift of “qualified stock” an income beneficiary along with
and was deductible at fair-market one or more qualified charities. The
value (PLR 201848005). A revocable second would be similar except that
trust was the sole member of the his wife, if she survives him, would
LLC, and the taxpayer ultimately be an income beneficiary along with
affected by the outcome was the charitable beneficiaries.
sole settlor and trustee of the trust.
Because of application of insider The trusts provided that the amount
trading considerations under SEC paid to either the taxpayer or his wife
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