IRS rules that a proposed issuance of stock under an Incentive Stock Bonus Plan ("Plan") would not cause a Sub-S corporation (the “Corporation”) to have more than one class of stock within the meaning of § 1361 (b)(1)(D) of the Internal Revenue Code ("Code"). (Ltr Rul 200537010 )
Prior to the creation of the Plan the Corporation had a single shareholder who had been issued two classes of common stock differentiated only by voting rights. The Corporation now wants to create an incentive stock bonus plan for key employees without creating a second class of stock that would violate Section 1361. The Plan was quite complex and creative without violating the single class of stock rule.
IRS has issued a new Form 1098-C in August under new IRC section 170(f)(12) regarding reporting of contributions of motor vehicles, boats and airplanes to public charities or foundations.
The form is to be used by recipient organizations to report the contribution and also to provide the donor with a written confirmation of the contribution. (REV RUL/PROC 2005-66, 2005-39, I.R.B. 613 (9/26/2005)
Father’s gift of various equity interests in a business started and run by son who needed his father’s backing for credit purposes in order to get started did not constitute a taxable gift to son. (Ltr Rul 200534014)
Son was the "driving force" behind Company. He provided his father with the funds for the initial purchase of shares in Company. His father agreed to take title to shares in Company for the benefit of his son. The stock was issued in Father's name so that Company could benefit from Father's creditworthiness. Father was willing to execute personal guarantees to enable Company to obtain financing. At the time of Company's organization, Son was experiencing credit difficulties. Father, while the majority shareholder of the company, was not involved in the business and all of the parties involved knew that the father was holding his shares for the benefit of his son.
Citing Burnet v. Guggenheim, 288 U.S. 280 (1933) and Rev. Ruls. 74-365 and 54-537, the Service concluded that transferring complete ownership to the son would not be a taxable gift under IRC § 2511.
QTIP Election granted because a belatedly discovered asset was found and reported on a supplemental estate tax return (Ltr Rul 200536015).
The original estate tax return showed that all of the husband’s property had passed to the spouse. No QTIP election was made but after the 706 was filed, the spouse petitioned to exercise her statutory right to a life estate in certain real property owned by the decedent, and that petition was granted.
Given these new circumstances, the estate requested a ruling and an extension of time in order to confirm that it could amend the 706 to provide for a marital deduction for the statutory life estate and make a QTIP election. Citing Regs. § 301.9100-1 and 3, the Service granted the estate additional time to make the QTIP election.
Service approves a transfer of 50 % of a rental property from parents to daughter where a portion is treated as a gift and a portion as a sale.
(Ltr Rul 200540008)
Taxpayers want to give their daughter a gift of a fifty percent undivided tenancy in common interest in a rental property through a grant deed. The taxpayers will retain a fifty percent undivided community ownership interest in the property, and will remain the sole obligors for the loan that encumbers the property. The daughter will be responsible for repaying one half of the loan's principal balance, computed as of the time of the transfer of the interest in the property to her. Thus, under § 1.1001-2(a)(1) the taxpayers will be discharged from liability to that extent. Taxpayers will elect out of the installment method so the amount of the consideration received will equal one half of the principal balance of the loan, determined as of the date of the transfer to their daughter. The transfer will be treated as a sale or exchange for capital gain tax purposes under § 1001 to the extent of the amount of the consideration which the taxpayers receive from their daughter for that property interest.
Finally, the transfer of the property from the taxpayers to their daughter will not result in any income from discharge of indebtedness under § 61(a)(12). The transfer by the taxpayers of a fifty percent undivided tenancy in common interest to their daughter under the circumstances described above will be treated as a gift. Finally, the daughter's basis in the portion of the property acquired by gift is the same as it would be in the hands of the taxpayers and the amount of increase, if any, in basis authorized by § 1015(d) for any gift tax they may pay.
Recent Cases
In a case of first impression, District Court rules that Section 2703(a) found applicable to restrictive transfer provisions in FLP agreements, stating: “A plain reading of Section 2703(a) and the regulations promulgated thereunder make clear that the restrictive provisions set forth in the Smith’s FLP partnership agreement are precisely the type of restrictions to which Section 2703(a) was intended to apply.” As a result the surviving partners could not recover gift taxes and interest that were assessed and collected by the Internal Revenue ice on gifts made in 1998.
The gifts in question were fractional interests in a family limited partnership that was formed by the father and his son and daughter on December 29, 1997, in accordance with the Pennsylvania Uniform Limited Partnership Act. There were two general partners, the father, who held a 2% general partner interest, and the son who held a 1% interest. The sole asset of the partnership was 100% of the common stock of an operating company known as Erie Navigation Company, Inc. ("ENC"), which, until then, had been owned by the senior Mr. Smith.
In February 1999, senior Smith filed a Form 709, 1998 United States Gift Tax Return, on which he reported that the total value of the limited partner interests he gifted to his children in 1998 was $ 1,025,392. He paid $262,243 in gift taxes. However, in 2001 the Service increased the value of the gifts to $1,828,598, resulting in an assessment of additional gift taxes of $306,803. Senior Smith being dead, the son paid the additional taxes and filed a Form 843 claim for a refund, asserting that the increased value and assessment were wrong.
Both the Service and the Smiths agreed that the only issue was the value of the interests gifted in 1998. Because of the restrictions on transfer, the Smiths asserted that the FLP was subject to a significant marketability discount. The Service disregarded the transfer restriction provisions in arriving at the fair market value of the gifted interests citing 26 U.S.C. § 2703(a), which generally provides that, for purposes of calculating estate, gift, and generation-skipping taxes, the fair market value of property is to be determined without regard to: (i) any option, agreement, or other right to acquire or use the property at a price less than its fair market value; or (ii) any restriction on the right to sell or use such property. The children disputed the applicability of Section 2703(a) asserting they came under the “safe harbor” exception found in 26 U.S.C. § 2703(b). In essence, their position was that Section 2703(a) did not apply to family limited partnerships—a position the court rejected completely.
United States District Court for the Western District of Pennsylvania
SIDNEY E. SMITH III, ET AL.,
EXECUTORS OF THE ESTATE OF SIDNEY E. SMITH, JR.,
Plaintiffs
v.
UNITED STATES OF AMERICA,
Defendant
Docket No. 02-264 Erie
Doc 2004-15535
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