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Tax Probate & Trust Section
Fall 1999 Newsletter Articles |
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New Public Disclosure Rules for Tax-Exempt Organizations Current Federal Estate and Gift Tax Cases by Gabriel Heiser, Waller Lansden Dortch & Davis, PLLC Note from the Editor by Richard A. Johnson Voluntary Correction Programs for Tax-Qualified Plans by M. Sean Sullivan, Waller Lansden Dortch & Davis, PLLC Final regulations were issued by the IRS this year that require tax-exempt organizations to make available for public inspection certain information about the organization.1 Effective June 8, 1999, all tax-exempt organizations, except private foundations,2 are subject to the new disclosure requirements. The organization generally must provide copies of its annual information return and application for tax-exemption to any member of the public who requests such a copy or, in the alternative, make such documents widely available on the Internet. Specific rules are provided in the final regulations that outline: (1) the place and time the organization must make these documents available for public inspection, (2) conditions the organization may place on requests for copies of the documents, and (3) the amount, form and time of payment of any fees the organization may charge. In addition, the final regulations also prescribe the appropriate method for posting the documents on the Internet. Certain standards are prescribed in determining whether an organization is the subject of a harassment campaign with respect to document requests and the applicable procedures for obtaining relief from such harassment. A tax-exempt organization must make available the exemption application form (Form 1023 or Form 1024) and any supporting documents filed by, or on behalf of, the organization in connection with its application. Any letter or document issued by the IRS in connection with the application must also be made available. In addition, the organization must make available its three most recent annual information returns (Form 990), including all schedules and attachments filed with the IRS. The organization, however, is not required to disclose the parts of the return that identify names and addresses of contributors, nor is it required to disclose Form 990-T. Public inspection must be made available without charge at the organization’s principal, regional and district offices during regular business hours. An exception applies for certain sites that will not be considered a regional or district office. Generally, when a request for copies is made in person, the copies must be provided on the day of the request. If the request for copies is made in writing, the organization must mail the copies within 30 days from the date it receives the request. Certain exceptions apply. An organization is permitted to charge a reasonable fee for the cost of copying and mailing documents in response to a request for copies (currently $1 for the first page and $0.15 for each subsequent page, plus the actual cost of postage). The final regulations provide that a tax-exempt organization is not required to comply with requests for copies if the organization has made the requested documents “widely available.” An organization can make its application for tax exemption and/or its annual information returns widely available by posting such documents on the organization’s World Wide Web page on the Internet or by having the applicable document posted on another organization’s World Wide Web page as part of a database of similar materials. Certain requirements must be met, including: (1) the World Wide Web page through which the document is available clearly informs readers that the document is available and provides instructions for downloading it; (2) the document is posted in a format that, when accessed, downloaded, viewed and printed in hard copy, exactly reproduces the image of the application for tax exemption or annual information return as it was originally filed with the IRS, except for any information permitted to be withheld from public disclosure; and (3) any individual with access to the Internet can access, download, view and print the document without special computer hardware or software required for that format (other than software that is readily available to members of the public without payment of any fee) and without payment of a fee to the tax-exempt organization or to another entity maintaining the World Wide Web page. Organizations that have posted their application for tax exemption and/or an annual information return on the Internet must notify the person requesting a copy where the documents are available on the Web. If the request is made in person, the organization must provide notice to the individual immediately. If the request is made in writing, the notice must be provided within 7 days of receiving the request. If the organization can demonstrate to the IRS that it is the subject of a harassment campaign and compliance with the request for documents that are part of the harassment campaign would not be in the public interest, the organization is not required to fulfill a request for copies of its information returns or application for exemption that it reasonably believes is part of the campaign. Requests for an organization’s application for tax exemption or annual information returns is indicative of a harassment campaign if the requests are part of a single coordinated effort to disrupt the operations of the organization, rather than to collect information about the organization. Specific procedures for organizations that believe they are being harassed are detailed in the final regulations. ____________________ 1. See T.D. 8818, 64 F.R. 17279. 2. Proposed regulations that provide for essentially identical disclosure requirements for private foundations were issued on August 9, 1999. Final regulations for private foundations are expected to be released by the end of this year. 1. Non-Aggregation of QTIP and non-QTIP Assets in Spouse’s Gross Estate. The IRS has acquiesced (AOD-1999-006) in the opinion of the Tax Court in Estate of Mellinger v. Commissioner, 112 T.C. 26 (1999). The issue there was whether, for estate tax valuation purposes, a minority interest in a closely-held corporation held in a Qualified Terminable Interest Property (QTIP) trust, which is includible in the gross estate under I.R.C. Section 2044, is aggregated with a minority interest in the same corporation that is includible in a decedent’s gross estate under other provisions of the Code. The IRS has now agreed that the interests should not be aggregated for valuation purposes. For example, if there is a 40 percent block of XYZ Corp. owned by the QTIP trust and 20 percent owned by the spouse (or by the spouse’s revocable trust), at the spouse’s death these separate blocks must be valued as minority blocks (and therefore entitled to a minority interest discount). The corollary of this is that in funding the QTIP trust, the stock must also be discounted in determining how many shares will need to be transferred to the trust to satisfy the marital bequest. This also applies in the case of fractional interests in real estate: a husband and wife may wish to own real estate as tenants in common rather than as tenants by the entirety, so that the interest of the first spouse to die may pass into a martial trust for the benefit of the surviving spouse. Upon the spouse’s death, both the 50 percent interest held by the QTIP trust and the 50 percent owned outright by the spouse may qualify for a fractional interest discount for estate tax purposes. 2. Checks Not Completed Gift Unless Cashed Before Donor’s Death.A U.S. District Court has confirmed the result expected, that a gift check not cashed prior to the donor’s death is not a completed gift and is therefore includible in the deceased donor’s gross estate. Although the question of whether “delivery” is complete upon the receipt of the check by the donee is a matter of state law, the court cited Estate of Newman, 111 T.C. No. 3, 1998 (U.S. Tax Ct. July 28, 1998), which stated that “[p]etitioner does not direct us to, nor have we found, any state that recognizes delivery of a check to be a complete gift of the underlying funds.” As the court stated, because a donor can order a bank to stop payment on a check any time while the check is still outstanding, a completed gift will not be deemed to have occurred until the check is paid by the bank, unless the “relation-back” doctrine applies. The “relation-back” doctrine applies to charitable gifts by check, but has limited applicability to non-charitable gifts. In Estate of Metzger v. Commissioner, 38 F. 3D 118 (4th Cir. 1994), the court held that “in … limited circumstance, where noncharitable gifts are deposited at the end of December and presented for payment shortly after their delivery but are not honored by the drawee bank until after the New Year holiday, we agree with the Tax Court that the gifts should relate back to the date of deposit.” The IRS has adopted a similar test, which is set forth in Rev. Rul. 96-56: “the delivery of a check to a noncharitable donee will be deemed to be a completed gift for federal gift and estate tax purposes on the earlier of (i) the date the donor has so parted with dominion and control under local law as to leave in the donor no power to change its disposition, or (ii) the date on which the donee deposits the check (or cashes the check against available funds of the donee) or presents the check for payment, if it is established that: (1) the check was paid by the drawee bank when first presented to the drawee bank for payment; (2) the donor was alive when the check was paid by the drawee bank; (3) the donor intended to make a gift; (4) delivery of the check by the donor was unconditional; and (5) the check was deposited, cashed, or presented in the calendar year for which completed gift treatment is sought and within a reasonable time of issuance.” The United States Tax Court, in the Estate of Newman v. Commissioner, 111 T.C. No. 3 (1998) (U.S. Tax Ct., July 28, 1998), declined to extend the relation-back doctrine to non charitable gifts where the donor had died prior to the payment of the checks. Conclusion: It is important to advise clients to make non-charitable gifts at least several days prior to the end of the calendar year, to give the donees time to deposit the checks within that calendar year. Even if the checks don’t clear before the end of the year, they will be deemed to be gifts made in the year the donor wrote the checks. However, if the donor dies after the date of the gift and before the checks clear, the relation-back rule will not apply, no gifts will be deemed made, and the amount of the checks will still be part of the donor’s gross estate. 3. Value of an Assignee Interest in a General Partnership.A recent case decided in Texas (Patricia M. Adams, et al. v. U.S.A., No. 82 AFTR2d Par. 99-691 (ND TX, March 17, 1999)) dealt with the determination of the fair market value of a decedent’s 25 percent interest in a family partnership. The 25 percent owner died and under state law (because the partnership agreement did not provide otherwise), the partnership dissolved and the estate heirs all became assignees of the 25 percent interest. The remaining partners all decided not to wind up the affairs of the partnership but to continue its business. As under Tennessee law, the assignees were entitled to receive the assignor’s interest in the partnership. The court noted that a hypothetical buyer of the interest could either demand a dissolution or continue on as an assignee. However, as an assignee, the buyer’s position would be “economically unfavorable,” since he would have no control over the partnership and would only be entitled to periodic distributions of net income from the partnership’s business. He could not later realize the value of his interest by selling it, pursuant to state statute (this differs from TN law, however). Accordingly, the court held that the hypothetical buyer would not stay on as an assignee but instead opt for a 25 percent interest in the partnership’s net asset value. The court refused to apply any discounts for lack of control, unattractive mix of portfolio assets, lack of marketability, or the uncertainty of the assignee’s rights. The only discount it allowed was a 5.4 percent discount for the liquidation costs that would be incurred upon selling the assets of the partnership. This is the first of, hopefully, a quarterly Tennessee tax newsletter for the members of the tax section of the Tennessee Bar Association. This newsletter will not only include notices of upcoming bar events pertaining to tax matters, but will include short articles or summaries of current tax law issues and cases. You will note that the articles in this first newsletter are from members of my law firm. This was not by design, but by necessity, in that it was easier to persuade and recruit my fellow members to submit a few short articles by simply walking down the hall and requesting them. I hope that you will submit short articles as well as mere blurbs of new and current laws that you discover in your everyday practice. You may send them either to my attention, Richard A. Johnson, Waller Lansden Dortch & Davis, PLLC, 511 Union Street, Ste. 2100, Nashville, TN 37219 or the attention of Stephanie Smith at the Tennessee Bar Association. Hopefully, this will be the beginning of a newsletter that will be helpful in your everyday tax practice. A tax-qualified retirement plan provides substantial tax benefits, allowing employers to deduct contributions while permitting employees to defer taxation on those contributions until distribution. In addition, earnings on trust assets accumulate tax-free. However, to achieve and maintain qualified status a plan must satisfy a series of complex and burdensome requirements. These requirements, generally set forth in section 401(a) of the Internal Revenue Code, include amending the plan document for all applicable law changes, meeting testing requirements to ensure that the plan does not unfairly discriminate in favor of highly compensated employees, and operating the plan in compliance with the plan document. Under a literal reading of the Code, failure to satisfy any requirement of section 401(a), even a relatively minor condition with insignificant effects, results in the disqualification of the plan and a loss of all tax-favored benefits. Until recently, plan sponsors who had unintentionally breached section 401(a) were forced to choose between ignoring the problem in the hope that the plan would never be audited, treating the plan as disqualified, or voluntarily disclosing the failure to the IRS and facing an uncertain future. Most sponsors chose to “hide in the weeds,” hoping the IRS would never examine their plans. Understanding the disproportionality of the penalty to the crime, and the difficult decisions this presented for plan sponsors, the IRS took steps in the early 1990s to allow some flexibility. From 1991 to 1994, the IRS created various correction methods for plans that had failed section 401(a) in some way. These correction methods were recently consolidated and revised in Revenue Procedure 98-22, designated as the Employee Plans Compliance Resolution System (EPCRS). EPCRS includes three voluntary correction programs. Voluntary Compliance Resolution (VCR) enables a sponsor to voluntarily disclose to the IRS operational failures and to propose a correction. The VCR application must include a compliance fee that ranges from $500 to $10,000, depending on the size of the plan. If the IRS agrees with the proposed correction method, the IRS will issue a compliance statement addressing the terms of correction and providing that the IRS will not treat the plan as disqualified on account of the operational failures. Walk-in Closing Agreement Program Walk-in CAP), like APRSC and VCR, can be used to cure operational failures. In addition, Walk-in CAP can be used for plans whose provisions, on their face, violate section 401(a), and for plans that have failed the nondiscrimination and minimum coverage requirements. Plan sponsors seeking relief under Walk-in CAP must submit a detailed description of the plan failure to the IRS, along with a proposed methodology for correcting the failure. Once the IRS and the plan sponsor agree upon the method of correction, the parties sign a closing agreement. Upon the signing of the closing agreement, the plan sponsor must pay a compliance correction fee that can range from $500 to $70,000, depending on the size of the plan. It should be noted that VCR and Walk-in CAP are not available for plans and plan sponsors that are under examination by the IRS. Further, VCR and correction of significant operational failures through APRSC are available only for plans that have received a current determination or opinion letter. EPCRS provides relatively simple and inexpensive programs for voluntarily correcting plan failures. Plan sponsors who have unintentionally violated the plan qualification requirements for the Internal Revenue Code should consult their tax advisors to determine if they are eligible for EPCRS. |
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