Washington Hotline – November 3, 2015


Washington Hotline

Candidates Debate over Tax Proposals

In the CNBC debate on October 28, ten Republican Presidential candidates responded to questions on their tax proposals.

Businessman Donald Trump proposed a plan to reduce personal and corporate tax rates. The nonpartisan Tax Foundation estimated the cost of his plan to be approximately $10 trillion over a decade. When asked to respond to the cost estimate for his plan, Trump replied by noting that CNBC commentator Larry Kudlow “loves my tax plan.”

At the debate, Sen. Ted Cruz (R-TX) advocated a flat tax plan. He proposed a 10% flat tax for individuals and a 16% flat tax rate on businesses. Cruz stated, “Imagine a 10% income tax, with every American filling out his or her taxes on a postcard or iPhone app. And abolishing the IRS as we know it.”

The plan by Cruz eliminates nearly all itemized deductions. He would retain mortgage interest deductions for loans up to $500,000 and would also permit charitable tax deductions.

Retired neurosurgeon Ben Carson has not yet published a detailed plan. He initially discussed a 10% flat tax plan based on the Biblical tithe. At the debate, Carson suggested that the flat tax rate for his plan will be closer to 15%. When questioned about a potential budget shortfall, Carson responded, “You also have to get rid of all the deductions and all the loopholes. You also have to have strategic cutting in several places. Remember, we have 645 federal agencies and sub-agencies. Anyone who tells me that we need every penny and every one of those is in a fantasy world.”

Ohio Governor John Kasich suggested that these three plans would lead to “trillions in debt.” He continued, “I am the only one on this stage that has a plan that would create jobs, cut taxes, balance the budget, and can get it done because I am realistic. You just do not make promises like this.”

Editor’s Note: As a service to our readers, your editor will continue to report tax proposals from the presidential candidates of both parties.

House Ways and Means Chairman?

On October 29, the House Ways and Means Chairman Paul Ryan (R-WI) was elected speaker of the House on a 236-184 vote. Reps. Kevin Brady (R-TX) and Patrick Tiberi (R-OH) immediately announced their desire to be selected as the incoming Chairman of the House Ways and Means Committee.

Tiberi sent a letter to the House Ways and Means Republicans. He pointed to the House and Senate failure to pass tax extenders for 2015 and stated, “On day one we need to provide leadership to address tax extenders before year’s end.”

Tiberi established three major goals. The next Chairman of Ways and Means must fix the federal infrastructure through a long-term highway bill. The second goal involves advocating free trade agreements such as the Transpacific Partnership. Finally, Tiberi plans to build a fair, simpler tax code through comprehensive tax reform.

Rep. Brady was second to Paul Ryan in the last election for Chairman of the House Ways and Means Committee. Brady stated, “The next Chairman of the Ways and Means Committee will have to hit the ground running. In addition to major accomplishments as leader of two subcommittees and Chairman of the Joint Economic Committee, I have worked hard to earn a reputation for fairness, hard work and respect for members’ opinions across the spectrum.”

Editor’s Note: Speaker Paul Ryan is expected to move quickly to fill the Ways and Means Committee position. There are imminent votes on the Highway Bill and tax extenders. It will require leadership from the Chairman of the Ways and Means Committee to move this legislation forward.

No Gift Tax on 1972 Stock Transfer

In Estate of Edward S. Redstone et al. v. Commissioner; 145 T.C. No. 11; No. 8401-13 (29 Oct 2015), Judge Lauber held that a 1972 stock transfer to children was the result of a bona fide litigation settlement and therefore was not a taxable gift.

Mickey Redstone, father of decedent Edward Redstone, built and operated a number of drive-in movie theaters in the Northeast during the 1940s and 1950s. Mickey created the NAI holding company in 1959 to own and operate various properties. Mickey, son Edward and son Sumner each held 100 shares in the NAI corporation. However, their respective contributions for the stock were different. These amounted to $30,328 for Mickey, $17,845 for Edward and $18,445 for Sumner.

Due to family conflicts in the 1960s, Edward demanded delivery of his 100 shares of stock. His father Mickey refused. Litigation ensued and Mickey claimed that there was an “oral trust” for part of the 100 shares allocated to Edward. Because Mickey had contributed more value to the company, a portion of those shares of stock were deemed subject to this “oral trust” for the benefit of Edward’s children.

Following extended litigation and negotiation, there was a settlement by all parties in 1972. 33⅓ shares of NAI stock held by Edward were transferred to trusts for his two children with Sumner as trustee. 66⅔ shares were transferred to Edward and immediately sold back to NAI for $5 million.

Because Edward considered this transaction to involve an arms-length business settlement of the litigation, he and his tax advisors did not file a federal gift tax return for 1972.

As a result of later family litigation, the IRS became aware of the 1972 gift transfer. Following an examination, on January 11, 2013, the IRS issued a deficiency for gift taxes in the amount of $737,625. With added amounts for penalties and interest, the total assessment was in excess of $1.3 million.

The tax court noted that gift tax is not applicable if there is a “transfer for a full and adequate consideration in money or money’s worth, or to ordinary business transactions.” Reg. 25.2511-1(g)(1).

The definition of a gift in the ordinary course of business has three elements. The gift or transfer must be bona fide, at arms-length and there may be no donative intent.

With respect to the 1972 transfer, there had been protracted litigation and negotiations between decedent Edward and his father Mickey. Therefore, the factual basis for a bona fide and arms-length transfer was present.

However, the transfer was a substantial stock gift to trusts for the children of Edward. The IRS contended that the children would be natural recipients of gifts by Edward and could not provide consideration for the transaction.

Judge Lauber observed that consideration did not need to come from the donee. The consideration was present through settlement of the protracted litigation. Therefore, there was no taxable gift because the transfer was made in the “ordinary course of business.”

Applicable Federal Rate of 2.0% for November — Rev. Rul. 2015-22; 2015-44 IRB 1 (20 October 2015)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2015. The AFR under Section 7520 for the month of November will be 2.0%. The rates for October of 2.0% or September of 2.2% 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 2015, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.

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