The 12-member Joint Select Committee on Deficit Reduction is now preparing for its fall meetings.  The committee is comprised of six members from each party from both the House and Senate.

The Joint Committee co-chairs are U.S. Senator Patty Murray (D-WA) and Rep. Jeb Hensarling (R-TX).  They issued a joint statement this week that indicated there were "serious discussions" underway.

The topics of discussion are focused on three areas.  First, the committee is creating its rules of operation.  Second, it is scheduling meetings.  Third, committee members are reviewing the prior deficit discussions and work of other committees.

Editor's Note: There are three principal efforts by other committees that will be reviewed.  The Fiscal Commission appointed by President Obama and co-chaired by Sen. Alan Simpson and former White House Chief of Staff Erskine Bowles provided a starting point.  Earlier this year, Vice President Biden chaired a bipartisan committee that continued discussions and negotiations.  Finally, there were multiple proposals submitted during the negotiations between President Obama and Speaker John Boehner (R-OH).  Therefore, there is no shortage of potential deficit solutions.  The challenge will be for the Senators and Representatives who hold widely-different opinions to come to an agreement.

Estate Tax Refund Denied

In D. Charles Dicow v. United States et al.; No. 10-2151 (1st Circuit 19 Aug 2011), the Court determined that the executor was outside the required time limit in filing a suit for a refund.

Margaret Dicow passed away on January 15, 2003.  Her federal estate tax was due on October 15, 2003.  Prior to that date, Executor Charles Dicow filed IRS Form 4768 to request a six month extension for filing IRS Form 706 and sent a check for the estimated tax of $945,000.  The Form 706 filing date was automatically extended until April 15, 2004.

On March 23, 2004, Executor Dicow filed a second request for an extension until October 15, 2004.  He typed in capital letters "REQUEST FOR SECOND EXTENSION" at the top of that page.

The IRS noted internally that the extension was denied but did not inform Dicow.

The Form 706 was filed on September 30, 2004.  Dicow requested a refund of $337,139.81. Even though the filing was late, the IRS paid the refund amount.

On September 10, 2007, Dicow filed an amended estate tax return and requested in an additional refund of $237,813.48.

On October 15, 2007, the IRS denied the additional requested refund.  On May 14, 2009, Dicow filed an action in the U.S. District Court for the State of Massachusetts and requested a refund.

The District Court noted that Sec. 6511(b)(2)(A) indicated the IRS could issue a six-month extension.  However, Reg. 20.6081-1 limited the IRS to one six-month extension.  Relief was denied.

The 1st Circuit observed that Sec. 6511 specifies the period of limitation for an estate tax refund to be "within three years from the time the return was filed or two years from the time the tax was paid, whichever of such periods expires the later."  The IRS position is that the regulation under that statute is appropriate.

The Court noted that the statute authorizes a reasonable extension of time.  However, the provision in the statute that allows the IRS to extend for six months does not mandate that the IRS issue multiple extensions.  Otherwise, the IRS would be permitting "unreasonable and illogical" extensions that could indefinitely postpone filing a return.  Therefore, the Court determined that the IRS was limited to granting only one six-month extension.

Dicow also claimed that the IRS was subject to the doctrine of equitable estoppel.  By failing to reply to the request for a second extension, Dicow claimed the IRS had "misrepresented" in a substantial manner and therefore is estopped from denying the claim.

However, the Court noted that equitable estoppel applies only if there is a "definite misrepresentation of fact."  The failure of the IRS to affirmatively deny the extension does not meet that standard.  Therefore, the refund request was untimely and was denied.

Appraisers' Requirements and Certification

The Pension Protection Act of 2006 created new standards for appraiser certification.  Most appraisers are certified by the American Society of Appraisers (ASA), the Appraisers Association of America or they are a Member of the Appraisal Institute (MAI).

The ASA is a very respected appraisal organization.  Their members must practice in the field for five years and then must complete a four-course program.  The course covers the Uniform Standards of Professional Appraisal Practice (USPAP).

With several exceptions, gifts of property over $5,000 in value ($10,000 for closely-held stock) will require a qualified appraisal or the charitable deduction may be denied. Reg. 1.170A-13(c). Qualified appraisal exceptions include stock traded on a public exchange, inventory and vehicles sold by the donee without significant intervening use or material improvement. Sec. 170(f)(11)(A)(ii).

The appraisal must be made not earlier than 60 days prior to the gift and not later than the date the return is due (with extensions). The qualified appraisal requirement applies to individual taxpayers, partnerships and corporations.

For gifts of art valued at over $20,000 or if the noncash gift deduction exceeds $500,000, the appraisal must be appended to the return. Sec. 170(f)(11)(D). If the appraised property is a home in a historic district, the appraisal must include photos of the four sides of the home, a $500 fee and an agreement with a qualified conservation charity. The historic easement appraisal must be submitted with the tax return. The agreement states under oath that the conservation charity is qualified to receive the easement and has the resources and commitment to enforce the agreement. Sec. 170(h)(4)(B)(ii). If a donor gives personal property "not in good used condition," valued over $500, an appraisal must also be appended to the tax return.

The appraisal document also should include the name, address and other applicable information about the appraiser. The appraiser must affirm that the appraisal was done on a specific date, that the property was valued as of the date of the gift, that the appraisal was done for income tax purposes and the appraisal must disclose the methodology used in deriving the property value. Reg. 1.170A-13(c)(3).

In addition to specific requirements for the appraiser, there may be substantial accuracy-related penalties. The appraiser will be qualified if he or she has an appraisal designation from a recognized organization, has otherwise met comparable education experience requirements, regularly performs and is paid for appraisals, has verifiable education and experience with the type of property appraised, has not been prohibited from practicing before the IRS and has not been excluded by Treasury regulations from serving as an appraiser. Sec. 170(f)(11)(E)(ii).

For real property gifts, the appraiser meets the required standards if he or she is licensed or certified for the type of real property by the appropriate state agency. Some state agencies have a separate certification for residential real estate and other types of real estate such as commercial real estate. In these states the appraiser must have the appropriate designation for the type of real estate gifted to charity. Notice 2006-96; 2006-46 IRB 1.

For gifts that are not real property, the appraiser must fulfill three requirements. He or she must have completed "college or professional-level coursework," must have two years of experience in buying, selling or valuing the type of gifted property and must thoroughly describe in the appraisal his or her education and qualifying experience.

Generally, appraisals will qualify if consistent with the Uniform Standards of Professional Appraisal Practice set forth by the Appraisal Standards Board of the Appraisal Foundation. Notice 2006-96, Section 3.03.

Appraisals must also include a statement that the appraiser recognizes that a substantial or gross valuation misstatement that he or she knew or reasonably should have known would be used on a tax document could lead to a civil penalty. Sec. 6695A(b). The appraiser penalties for incorrect appraisals are the greater of $1,000 or 10% of the understatement from a substantial or gross valuation misstatement, with a cap of 125% of the appraiser's gross income from the appraisal. Sec. 6695A(b). The IRS may also discipline appraisers after notice and a hearing. Disciplinary action may include suspending or barring an appraiser from preparing or presenting appraisals to the IRS.

Accuracy related penalties are applicable with specific floors. The substantial valuation misstatement floor is 150%. Sec. 6662(e)(1). The penalty for a substantial valuation misstatement is 20% of the underpayment. A gross valuation misstatement is 200% or more of correct value. Sec. 6662(h)(2)(A)(i). The penalty on a gross valuation misstatement is 40% of the underpayment. There is an exception for underpayments of $5,000 or less and a reasonable cause exception to the accuracy-related penalty for substantial valuation misstatements, but it does not apply in the case of gross valuation misstatements.

Applicable Federal Rate of 2.0% for September – Rev. Rul. 2011-20; 2011-36 IRB 1 (18 Aug. 2011)

The IRS has announced the Applicable Federal Rate (AFR) for September of 2011.  The AFR under Sec. 7520 for the month of September will be 2.0%.  The rates for August of 2.2% or July of 2.4% also may be used.  The highest AFR is beneficial for charitable deductions of remainder interests.  The lowest AFR is best for lead trusts and life estate reserved agreements.  With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable.  During 2011, pooled income funds in existence less than three tax years must use a 2.8% deemed rate of return. Federal rates are available by clicking here.

Mutual Fund Sales Charges, Fees, and Expenses

Key Points

With thousands of mutual funds to choose from, selecting the funds
appropriate for your needs can be a challenge. Many investors choose to work
with qualified financial advisors who can assist them in choosing funds to
pursue their financial goals.

Before you begin making investment selections, you should review your
situation. What is your investment goal? How long do you plan to keep your
money invested? How comfortable are you with changes in the value of your
investment over short and long periods? You should also familiarize yourself
with the principles of asset allocation and diversification. And finally,
before you invest in a mutual fund, carefully examine its performance, fees,
and any sales charges.

All funds have annual fees and expenses, which are used to compensate their
professional managers and cover operating expenses. These fees may include a
12b-1 fee, which is collected to cover marketing and distribution costs and is
periodically deducted from the fund's earnings each year.

Some funds also apply a sales fee. These funds are known as "load"
funds. The sales load, or fee, compensates the broker who helps you determine
which fund is right for you (if you buy the fund from a broker or registered
representative). If you are working with a fee-based financial advisor to
select your investments, you may want to avoid buying shares that charge a
front-end sales load unless the fund offers exceptional performance potential.
When evaluating load funds, which charge either a front-end load (A shares), a
back-end load (B shares), or a level load (C shares), consider your investment
goals and time frame as they relate to how and when the fees are paid.

Glossary of Terms

Contingent-Deferred Sales Charge (CDSC) -- A fee that may be charged when a shareholder sells fund shares.12b-1 Distribution Fee -- An annual asset-based sales charge that is used to pay for sales-related expenses. Income Distribution -- Payments to shareholders resulting from interest or dividend income earned by a fund's portfolio. Service Fee -- Payments by a fund for personal service to investors and/or for maintenance of shareholder accounts by the distributor or a financial representative.

1. Before you invest in a mutual fund, consider
   the fund's performance, fees, and any sales charges.
2. All funds have annual fees and expenses.
3. These fees may include a 12b-1 fee. In
   addition, funds may charge a sales fee, known as a load.
4. Load funds are classified as either A shares,
   B shares, or C shares.
5. A shares -- front-end loads -- means the sales
   charge is deducted from your up-front investment. This reduces the amount of
   money that goes to work for you. These funds are more appropriate for long-term
   investors.
6. B shares -- back-end loads -- typically charge
   a contingent-deferred sales charge, usually at the time you withdraw the funds.
   These funds may charge a higher 12b-1 fee; therefore, they are more appropriate
   for an investor with an intermediate investment time frame.
7. C shares -- level loads -- may collect a sales
   charge based on net asset value each year and may include a small front- or
   back-end load or a 12b-1 fee. These funds are more appropriate for time frames
   of less than five years.
8. No-load funds do not charge a sales fee but
   may charge an annual 12b-1 fee of up to 0.25%.
9. Before you invest in no-load funds because of
   their lower fees, consider if it would be more beneficial to you to take
   advantage of the assistance that a financial advisor can offer.

With the naming of the 12-person Joint Select Committee, the process to determine $1.5 trillion in deficit reductions has commenced.  Previous negotiations between President Obama and Speaker Boehner (R-OH) have been private.  Similarly, the fiscal committee chaired by Vice President Biden committed to secrecy during their discussions.

Other members of Congress and the media have expressed concern about the secrecy.  Several members suggest that deliberations should be public and available via webcast.

Committee Co-chairs Jeb Hensarling (R-TX) and Patty Murray (D-WA) will hold the first meeting in September.  A decision on the committee publication rules will be made at that time.

Editor's Note: Lobbyists normally pursue the 535 members of the Senate and House.  However, because any bill that is supported by seven or more of the 12 committee members will be voted on by the House and Senate with no amendments, only these 12 members will have input on the final language.  Lobbyists are likely to converge in great numbers on these 12 Senators and Representatives.  The secrecy of the meetings is likely necessary to facilitate frank discussion of these major fiscal changes.

On December 17, 2010, the President signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.  This bill increased the estate and GST tax exemptions to $5 million and established a 35% transfer tax rate.  It also created an exemption for 2010 estates.  The estate tax provisions apply in 2010 but executors are permitted to elect out of estate tax for 2010 decedents.

The election to not apply the estate tax must be made by November 15, 2011.  Electing estates must file IRS Form 8939 by that date.  There is no provision for extension of that time period.

If an executor makes the Sec. 1022(a)(1) election, an estate may treat bequests of assets as though they had been transferred by gift.  Therefore, if the adjusted basis of the transferred assets is less than or equal to the fair market value on the decedent's date of death, the decedent's basis will carry forward to the recipient.  See Sec. 1022(a)(2)(A).

Sec. 1022(b) permits a General Basis increase of $1.3 million.  There is also a potential Spousal Basis increase of $3 million under Sec. 1022(c).

Section 4 of Rev. Proc. 2011-41; 2011-35 IRB 1 (5 Aug 2011) sets forth guidelines for executors and includes helpful "safe harbor" procedures.

Subsection .01.  The adjusted basis of the property will carry through and may be increased by the General Basis or Spousal Basis amount only if the property is acquired from the decedent.  This section includes specific qualification rules for assets such as powers of appointment or various types of trusts.  Revocable trust assets are qualified.  Assets that have been transferred during life with any retained interests generally do not qualify, even if included in the estate.

Subsection .02.  The amount of the general basis increase will also reflect the amount of net operating loss  and capital loss carryovers. The basis increase may include both the General Basis increase and the Spousal Basis increase.

Assets sold during the period of estate administration may qualify for the Spousal Basis increase.  The executor must certify on Form 8939 that the sale proceeds will be distributed to the surviving spouse and must also attach the applicable documents for that bequest or devise to the surviving spouse.

Subsection. 03.  Assets may be transferred and basis increase may be allocated on a property-by-property determination by the executor.  The basis of an asset may not be increased above fair market value at date of death.

Subsection. 04.  Fair market value of the assets will be determined under Sec. 2031 Code and Regulations.  Appraisals of certain property will be required as specified in that section.

Subsection. 05.  Community property to the extent owned by the decedent will qualify for the basis step-up.  The basis step-up for community property under Sec. 1022(d)(1)(B)(iv) will allow an increase in basis for both the decedent's one-half and the surviving spouse's one-half interest in community property.

Subsection. 06.  The holding period for determining long-term capital gain status will reflect the period of the asset ownership by the decedent.  In essence, "tacking" of holding periods is permitted.

Subsection. 07.  Charitable remainder trusts will continue to qualify even if the estate is subject to a Sec. 1022 Election.  While a charitable remainder trust normally must qualify for a charitable deduction under Sec. 2055, the statute will continue to permit qualification even though there is no estate tax applicable for a 2010 decedent.

Editor's Note: The estates in which executors make the Sec. 1022 election will be larger estates.  There undoubtedly will be a detailed analysis by the estate CPA on the specific calculations of all of these items.  It will be important for the CPA and the estate attorney to carefully review all of the technical rules on property ownership and basis adjustments for net operating losses or capital losses.  The estate attorney will also need to provide extensive documentation of the various agreements and determinations with respect to the specific allocations of increased basis to different properties.  Because 2010 estate beneficiaries may hold assets for years prior to sale, the clarity of basis records for these estates will have significance for decades to come.

The IRS has announced the Applicable Federal Rate (AFR) for September of 2011.  The AFR under Sec. 7520 for the month of September will be 2.0%.  The rates for August of 2.2% or July of 2.4% also may be used.  The highest AFR is beneficial for charitable deductions of remainder interests.  The lowest AFR is best for lead trusts and life estate reserved agreements.  With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable.  During 2011, pooled income funds in existence less than three tax years must use a 2.8% deemed rate of return. Federal rates are available by clicking here.