Under the compromise between President Obama and leaders of the House and Senate, the Budget Control Act of 2011 created spending reductions of over $900 billion during the next decade.  The bill also requires leaders of the House and Senate to appoint members to a Joint Select Committee.  The committee has three Republican, three Democratic Senators, three Republican and three Democratic Representatives.

House and Senate leaders have now appointed the committee members.  The 12 committee members are tasked with creating a $1.5 trillion budget solution by Thanksgiving.  Their bill will be voted on without amendments by December 23, 2011.

If the committee is not able to develop and pass a bill by Dec. 23, there will be $1.2 trillion in budget cuts.  Half of the cuts will come from the Department of Defense and one-half will be reductions in payments to Medicare providers.

Majority Leader Harry Reid (D-NV) appointed three Senators.  The Co-Chair of the Joint Select Committee will be Sen. Patty Murray (D-WA).  His other two appointees are Sen. John Kerry (D-MA) and Sen. Max Baucus (D-MT).  Sen. Kerry is Chair of the Senate Foreign Relations Committee and Sen. Baucus is Chair of the Senate Finance Committee.

Republican Leader Mitch McConnell (R-KY) appointed Sen. John Kyl (R-AZ), Sen. Pat Toomey (R-PA) and Sen. Rob Portman (R-OH).  Sen. Kyl is the Republican Whip and a senior member of the Finance Committee.  Sen. Toomey is a member of the Budget Committee.  Sen. Portman was previously Director of the Office of Management and Budget.

Speaker John Boehner (R-OH) appointed Rep. Jeb Hensarling (R-TX) as Co-Chair of the committee.  His other appointments are Rep. Dave Camp (R-MI) and Rep. Fred Upton (R-MI).  Rep. Camp is Chairman of the Ways and Means Committee and Rep. Upton chairs the Energy and Commerce Committee.

Democratic Leader Nancy Pelosi (D-CA) appointed Rep. James Clyburn (D-SC), House Ways and Means Member Xavier Becerra (D-CA) and Budget Committee Member Chris Van Hollen (D-MD).

The Joint Select Committee is expected to initiate meetings in September after Congress returns from the August recess.

Editor's Note: There will undoubtedly be a spirited debate.  All of the twelve committee members will want to avoid drastic budget cuts for the Department of Defense or Medicare providers.  The group will need to discuss potential cuts in discretionary expenditures, defense and entitlements.  With the appointments of key taxwriters Baucus and Camp, it is clear that taxes will also be a part of the discussion.  Whether or not there are tax increases as part of the budget solution remains to be seen.

IRS Notice on 2010 Estates

In Notice 2011-66; 2011-35 IRB 1 (4 Aug 2011), the IRS published long-awaited guidance on 2010 estates.

In the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the estate tax was reinstated for individuals who passed away in 2010.  However, the option is granted to executors of 2010 decedents to opt out of the estate tax.  The election to opt out of the estate tax will be made on IRS Form 8939, "Allocation of Increase in Basis for Property Acquired from a Decedent."

Notice 2011-66 clarifies many of the issues arising due to the ability to remain within the estate tax or elect out of the tax for 2010 decedents.  The Sec. 1022 election out of the estate tax requires the executor to file Form 8939 by November 15, 2011.  However, if the IRS receives Forms 8939 from multiple parties who are all claiming a portion of the basis step-up amount, then the IRS will resubmit a letter to each person who filed a Form 8939.  All of the beneficiaries will "collectively sign and file a single, restated Form 8939."  If the restated 8939 is not received within 90 days from the date the IRS has mailed letters to beneficiaries, the IRS will allocate the available increase in basis.

Form 8939 will be published "early this fall."  The executor will be required to report and value all property except cash and Sec. 691 IRD property on that form.

Generation skipping tax was also retroactively reinstated for 2010 decedents.  However, the GST rate was deemed to be zero, which will create an applicable rate of zero.

For inter vivos direct skips that are reported on IRS Form 709, there is an automatic allocation of GST exemption.  It will be possible (and desirable due to the zero GST tax rate in 2010) to elect out of that automatic allocation of exemption.

Because the statute was signed on December 17, 2010, an inter vivos GST transfer made prior to that date should be reported by September 19, 2011.  GST transfers on Schedule R that are attached to Form 8939 may be reported by November 15, 2011.

Final Actuarial Tables

In T.D. 9540 (8 Aug 2011), the IRS published final regulations for actuarial valuations.

Under Sec. 7520, the IRS is required to publish updated actuarial tables every 10 years.  The latest tables were applicable on May 1, 2009 and required for use as of July 1, 2009.

T.D. 95448 was published on May 7, 2009 and included final and temporary regulations for valuing annuities, interests for life or terms of years, and remainder or reversionary interests.

The temporary regulations were submitted for comments and a hearing.  There were no comments and therefore no hearing.  The current regulations are a final version that replaces the temporary regulations.  There is one minor change in that one example under Sec. 2032 has been removed and will be included in a subsequent regulation project.  The balance of the temporary regulations are adopted as final.

Applicable Federal Rate of 2.2% for August – Rev. Rul. 2011-16; 2011-32 IRB 1 (18 Jul. 2011)

The IRS has announced the Applicable Federal Rate (AFR) for August of 2011.  The AFR under Section 7520 for the month of August will be 2.2%. The rates for July of 2.4% or June of 2.8% 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.