Free Help For Tax Returns
On March 3, 2020, the Service published a Tax Time Guide letter to explain how taxpayers can receive free assistance with filing their income tax returns. There are 11,000 volunteer locations nationwide. During 2019, volunteers helped over 3.5 million taxpayers prepare their returns.
The Volunteer Income Tax Assistance (VITA) program offers assistance for taxpayers who make $56,000 or less, elderly individuals, those with disabilities or a person with limited English proficiency. The Tax Counseling for the Elderly (TCE) program is similar in operation and will assist individuals age 60 or older. The volunteers for these centers receive training in tax preparation and learn about tax credits that are most frequently applicable, including the Earned Income Tax Credit (EITC) or the Child Tax Credit (CTC).
The EITC is an important credit for workers who earned $55,952 or less in 2019. The EITC transferred $61 billion to taxpayers in 2019. The average EITC amount was $2,504. A maximum amount for a family with children could be $6,557.
To locate a VITA or TCE site, use the tool available on IRS.gov. You may also find a location on the IRS2GO app or by calling 800–906–9887. Select locations also have assistance available in languages such as Chinese, Mandarin, Hindi, Korean, Russian, Spanish, Tagalong and Vietnamese.
There are multiple items that a taxpayer must bring to obtain assistance at one of the volunteer locations:
Proof of identification with a photo ID
Social Security cards or an Individual Taxpayer Indentification Number for the taxpayer, spouse and dependents
Proof of foreign status, if applicable
Birthdates for the taxpayer, spouse and dependents
Wage and earnings statements, such as Form W–2, Form 1099–R or Form 1099–MISC
Interest and dividend statements from banks
A copy of 2018 federal and state tax returns
A blank check to prove bank account routing and account numbers
If filing a joint return electronically, both spouses must be present
If the taxpayers has used day care services, the provider’s tax ID number, such as a Social Security number or a business Employer Identification Number
Form 1095–A Health Insurance Marketplace Statement to reconcile any advance payments of the Premium Tax Credit
SECURE Act CRT Solution
On February 25, the American Bar Association’s Real Estate, Property, Trust and Estate Law Section held a webinar on the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act created a mandatory 10-year rule for distribution of IRA and other qualified retirement plan assets if left to a non-spouse beneficiary. The speaker for the webinar was Professor Christopher Hoyt of the University of Missouri–Kansas City School of Law.
Hoyt offered a solution to the tax problems created by the mandatory 10-year IRA payout to most beneficiaries. He stated, “You know that IRA that has to be liquidated in 10 years? How would you like to have that IRA paid to your child for the rest of his or her life? I have a way you can do that.”
Hoyt recommended that IRA owners consider a charitable remainder trust (CRT). The CRT makes 5% or greater unitrust payments to an individual for a term of 20 years or his or her lifetime.
Hoyt suggested that qualified plan owners designate the trustee of a CRT as the IRA beneficiary. The heirs, usually children, will receive an income stream from the CRT. A traditional IRA or other retirement plan that holds potential taxable income may be transferred tax free to the CRT. Because the qualified plan is transferred to the CRT there is no income tax due, the full plan value is available to benefit children for a term of years or their lifetimes.
Hoyt stated, “The question is: if I leave this charitable remainder unitrust for my children, can they have more wealth than if I give them the IRA outright?” While the answer depends in part on the duration of the CRT, Hoyt explained there is at least a possibility the CRT could be financially better.
Hoyt compared the CRT to either an outright distribution or an accumulation trust. If both options were funded with $1 million, the CRT would hold and invest the full $1 million for the term of 20 years or life of the child. However, with an outright distribution or accumulation trust, there would be an estimated 40% federal and state tax due in the 10th year, thereby reducing the $1 million amount to $600,000.
The question is whether the income from a $1 million CRT is better than the benefit from $600,000 outright or in an accumulation trust. While the income earned on $600,000 will obviously be less than the income on the $1 million CRT, the child also has access to the principal.
If the unitrust lasts for a significant number of years, Hoyt suggested that the actual benefit could be equal or greater with the CRT. However, he emphasized that advisors and IRA owners should consider a CRT only if the individual has charitable intent. Hoyt concluded, “You do not want to just foist CRTs on people with no charitable intent, because a lot of people might not be happy.”
Editor’s Note: Thousands of qualified retirement plan owners with a “creative spender” child have created conduit trusts to receive the IRA or other qualified retirement plan. These IRA owners create a trust in order to protect both the child and the qualified plan value. With the mandatory 10 year payout for most beneficiaries (there are some exceptions), the majority of conduit trusts will fail to function as originally designed. These IRA owners must visit with their attorney to update their plan. The presentation by Professor Hoyt is a useful comparison of an outright inheritance or trust payout with a charitable remainder trust.
Tax Court Rejects IRS Appraiser Condition Subsequent
In Pierson M. Grieve v. Commissioner; No. 8249-18; T.C. Memo. 2020-28 (2020), the Tax Court reviewed appraisals of gifts of LLC units in 2013. The Tax Court accepted the taxpayer appraisal values and rejected the IRS appraiser’s assumption that a subsequent condition should affect valuation.
Pierson M. Grieve was married to Florence and they had three children. Florence passed away October 1, 2012. Attorney Margaret Grieve was their oldest child and was selected to manage the Grieve assets.
Grieve was CEO of Echolab, Inc. from 1983 to 1996. He acquired substantial holdings of Echolab and other securities. Around 1990, he established the Grieve Family Limited Partnership. The general partner of the partnership was Pierson M. Grieve Management Corporation (PMG).
Margaret purchased PMG from Grieve in 2008 for $6,200 and became president of the management company. She owned the controlling shares and managed the assets. The various LLC investments were valued at approximately $70 million.
In 2013, Grieve created two limited liability companies. Rabbit, LLC (“Rabbit”) had 2 members, PMG and the Pierson M. Grieve Revocable Trust. PMG owned 0.2% of Rabbit. Angus, LLC (“Angus”) was also formed in 2012. Angus had a controlling interest by PMG of 0.2%, and Grieve owned 99.8%.
On October 6, 2013, the Pierson M. Grieve Revocable Trust transferred Rabbit Class B nonvoting units valued at $9,102,757 into a grantor retained annuity trust (GRAT). The two-year GRAT required payments to Grieve that totaled 100% of the discounted valuation. On November 1, 2013, the Class B units Grieve owned in Angus were transferred in exchange for a single–life private annuity with an annual payment of $1,420,000.
Grieve filed IRS Form 709 for 2013 and reported the transfer of Class B Rabbit and Angus units. The Class B nonvoting units were discounted for lack of control and lack of marketability. The net discount for both transfers was approximately 35%. The IRS audited the gift tax return, increased the fair market value of both gifts and assessed a penalty and gift tax.
Taxpayer appraiser Mr. Frazier estimated the values using a market and an income approach. He analyzed 33 closed-end funds and also a number of restricted stock studies. Based on his nonmarketable investment company evaluation (NICE) method, he determined that the discounts for lack of marketability and minority interest should be 34.97% for Rabbit and 35.14% for Angus.
IRS appraiser Mitchell determined that there were discounts available for lack of marketability and lack of control. He used a discounted net asset value formula to estimate a 10% lack of control discount and a 20% lack of marketability discount. This method, in theory, created a 28% total discount. However, he also assumed that a purchaser would be able to purchase the PMG controlling 0.2% interest with a 5% purchase premium. Based upon this purchase assumption, Mitchell substantially reduced the 28% discount factor.
The Court noted, “Elements affecting value that depend upon events or combinations of occurrences which, while within the realm of possibility, are not fairly shown to be reasonably probable should be excluded from consideration, for that would be to allow mere speculation and conjecture to become a guide for the ascertainment of value – a thing to be condemned in business transactions as well as in judicial ascertainment of truth.”
The valuation must be based upon actual circumstances on the date of the transfer, not on possible future events. Therefore, the Court determined that the assumption of IRS appraiser Mitchell that the valuation should be based on the assumed acquisition of the controlling units by a hypothetical purchaser is not valid. The Tax Court accepted the valuation of the taxpayers and there was no penalty.
Applicable Federal Rate of 1.8% for March — Rev. Rul. 2020-6; 2020-11 IRB 1 (18 Feb 2020)
The IRS has announced the Applicable Federal Rate (AFR) for March of 2020. The AFR under Section 7520 for the month of March is 1.8%. The rates for February of 2.2% or January of 2.0% 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 2020, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.