TAX 9870 RESEARCH ASSIGNMENT (and situational questions) In answering the research questions cite primary authority (Code Section, Treasury Regulation, Revenue Procedure). You may use secondary authorities to conduct your research, but you must cite primary authority in your answer. RESEARCH QUESTIONS D has three assets which make up the vast majority of D's estate: (i) D's house (real estate) valued at $18,000,000, with an adjusted basis of $1,000,000, (ii) an operating business valued at $72,000,000, and (ii) a bank account with $10,000,000 cash. D has already used the majority of D's unified credit. D would like to transfer these assets to the next generation at as low of a transfer tax cost as possible. D trusts the next generation (his four children) and is not opposed to ceding financial control to them, however, as D has superior working knowledge of the business, D would like to maintain some form of operational control at least until D's children are ready to take over the business, and of course D needs a place to live. D has been told by one of D's financial advisors that if he transfers some or all of his assets to a Partnership and then transfers/gifts non-voting ("limited") partnership interests to D's children, D will receive a transfer tax discount for "lack of marketability" (difficult to sell) and "lack of control" (if recipient can't vote their shares or is in a minority position). D has also been told that there is a ssibility of reducing transfer taxes by transferring just a remainder interest a trust a retaining an income interest for life. Questions: 1. Is there support/authority for D's advisor's suggestion that can receive a transfer tax discount (for marketability and control) if D transfers (gifts) limited partnership interests (non-voting) to his children? (YES or NO and citation). 2. D's advisor has suggested the following: That D transfer some assets to partnership P ("P") in exchange for a 98% limited partnership interest (non-voting) and additionally transfer cash to P in exchange for a general partnership interest (voting and control rights) which could or could not be 100% of the General Partnership. (The General Partner, by majority vote, has the power to make/control partnership distributions, business decisions and operations). D would then transfer/gift the limited partnership interests to D's children. D's advisor believes that will receive a gift tax discount for the transfers of the limited partnership interests to D's children, and thus remove substantial value from D's estate (the limited partnership interest gifted to children). Below are separate additional suggested actions that D can take with regard to the trust. For each additional suggestion state whether the suggestion will "help" or "not help" D achieve the goal of reducing D's transfer tax, a brief statement why, and cite at least one primary authority to support your conclusion: i. Suggestion 1: Include a clause in the partnership agreement which states that D is entitled to live in the house and receive minimum distributions for D's support from P (i.e. not in the partnership's (General Partners) discretion a. 1 ii. Suggestion 2: D would transfer all assets to P, except for $2,000,000, in exchange for a 98% limited partnership interest (which would then transfer to children, and transfer the $2,000,000 to Pin exchange for a General Partnership Interest which D would control 100%. iii. Suggestion 3: D should not transfer all assets to P. D should retain asset (i), D's house, to own personally, iv. Suggestion 4: D's kids should each also contribute assets to the General partnership and kids should receive a proportional share of partnership interest (receive an ownership percentage equal to what they contributed). Kids should receive at least a 50% interest in the General Partnership. Additionally, the partnership should contain a clause which states that all partnership distributions must be made proportionally to the ownership interest. 3. Could it make a difference (in determining the success of obtaining a transfer tax discount) if the children were already in the same business and had obtained work experience? Cite yes or no, state why and give citation of supporting authority. 4. As an alternate structure, D's advisor suggests that transfer all assets to an irrevocable trust. The terms of the trust would be that for a term of 10-years the trust would pay all income to D, and then distribute all assets equally among D's 4 children. D's advisor suggests that D could transfer the property at a discount equal to the FMV of the property transferred less the value of the income interest retained by D. a. Do you believe D will receive a gift tax discount (YES or NO and cite authority)? b. Would it make a difference if the beneficiaries were D's nieces and nephews and not D children (YES or NO cite authority)? SITUATIONAL QUESTIONS (Multiple Choices) (These are not research questions per se - However, feel free to do whatever research you would like in answering them). You are an advisor for client ("client"). Client has been making transfers to an irrevocable life insurance trust ("ILIT") for the past 10 years. Client has been taking annual exclusions for each of the beneficiaries of the ILIT. When preparing the current year income tax return for the trust (FORM 1041), you mention that Client will need to send a notice ("Crummey Letter") to each of the beneficiaries in order to receive the annual exclusion. Client seems unaware of what a Crummey Letter is, but thanks you for informing Client of this requirement and says that it will not be a problem, and the Client will prepare the Crummey letters and send them immediately. At this point in time you should: a. Ask client if they have sent Crummey letters in the past because it kind of seems like they have not, which would be a big problem since client has been taking annual exclusions for years b. Not ask client if they have sent Crummey letters in the past and not press the issue any further because it is not your responsibility to do investigative work for past years which you did not work on, but it would be your responsibility once you had affirmative knowledge of this past neglect. C. Not mention anything further about Crummey Letters to Client, but tell your supervisor that there is a serious problem and let them deal with it. 2 d. Not mention anything further about Crummey Letters to Client, but suggest to your supervisor that you drop this client to avoid potential liability e. Call the IRS and report client as having failed to file Crummey Letters for many past years, Assuming Client pushes you about the Crummey Letters, and upon learning of the Crummey requirement and consequences of not filing a Crummey Letter asks you to back date Crummey Letters for each of the past 10 years, especially since your firm should have informed client of this requirement a long time ago. At this point in time, you should: a. Politely tell the Client that you cannot do that and leave it at that b. Politely tell the Client that you cannot do that and then report Client's actions to the IRS c. Politely tell the Client that you cannot do that and demand from you supervisor that you drop the Client to avoid potential liability d. Prepare back dated Crummey Letters because you know that Client would have prepared the Crummey Letters if they had known of the requirement e. Drop the client because of a conflict of interest. What if shortly after Client asked you to prepare back dated Crummey Letters, Client suddenly says: "guess what? We found the Crummey letter that have been sent for the past 10 years, and produces 10 years worth of Crummey Letters all printed on identical crisp, bright white sheets of paper. You should: a. Breath a sigh of relief carry on b. Reject the Crummey Letters as obvious forgeries C. Take the Crummey Letters, but notify the IRS that Client has committed forgery d. Question Client as to the veracity of the Crummey Letters, and accept them if Client states they are authentic e. Tell the Client you just cannot take this crap anymore, crack open a cold beer, and walk out of the meeting 3 TAX 9870 RESEARCH ASSIGNMENT (and situational questions) In answering the research questions cite primary authority (Code Section, Treasury Regulation, Revenue Procedure). You may use secondary authorities to conduct your research, but you must cite primary authority in your answer. RESEARCH QUESTIONS D has three assets which make up the vast majority of D's estate: (i) D's house (real estate) valued at $18,000,000, with an adjusted basis of $1,000,000, (ii) an operating business valued at $72,000,000, and (ii) a bank account with $10,000,000 cash. D has already used the majority of D's unified credit. D would like to transfer these assets to the next generation at as low of a transfer tax cost as possible. D trusts the next generation (his four children) and is not opposed to ceding financial control to them, however, as D has superior working knowledge of the business, D would like to maintain some form of operational control at least until D's children are ready to take over the business, and of course D needs a place to live. D has been told by one of D's financial advisors that if he transfers some or all of his assets to a Partnership and then transfers/gifts non-voting ("limited") partnership interests to D's children, D will receive a transfer tax discount for "lack of marketability" (difficult to sell) and "lack of control" (if recipient can't vote their shares or is in a minority position). D has also been told that there is a ssibility of reducing transfer taxes by transferring just a remainder interest a trust a retaining an income interest for life. Questions: 1. Is there support/authority for D's advisor's suggestion that can receive a transfer tax discount (for marketability and control) if D transfers (gifts) limited partnership interests (non-voting) to his children? (YES or NO and citation). 2. D's advisor has suggested the following: That D transfer some assets to partnership P ("P") in exchange for a 98% limited partnership interest (non-voting) and additionally transfer cash to P in exchange for a general partnership interest (voting and control rights) which could or could not be 100% of the General Partnership. (The General Partner, by majority vote, has the power to make/control partnership distributions, business decisions and operations). D would then transfer/gift the limited partnership interests to D's children. D's advisor believes that will receive a gift tax discount for the transfers of the limited partnership interests to D's children, and thus remove substantial value from D's estate (the limited partnership interest gifted to children). Below are separate additional suggested actions that D can take with regard to the trust. For each additional suggestion state whether the suggestion will "help" or "not help" D achieve the goal of reducing D's transfer tax, a brief statement why, and cite at least one primary authority to support your conclusion: i. Suggestion 1: Include a clause in the partnership agreement which states that D is entitled to live in the house and receive minimum distributions for D's support from P (i.e. not in the partnership's (General Partners) discretion a. 1 ii. Suggestion 2: D would transfer all assets to P, except for $2,000,000, in exchange for a 98% limited partnership interest (which would then transfer to children, and transfer the $2,000,000 to Pin exchange for a General Partnership Interest which D would control 100%. iii. Suggestion 3: D should not transfer all assets to P. D should retain asset (i), D's house, to own personally, iv. Suggestion 4: D's kids should each also contribute assets to the General partnership and kids should receive a proportional share of partnership interest (receive an ownership percentage equal to what they contributed). Kids should receive at least a 50% interest in the General Partnership. Additionally, the partnership should contain a clause which states that all partnership distributions must be made proportionally to the ownership interest. 3. Could it make a difference (in determining the success of obtaining a transfer tax discount) if the children were already in the same business and had obtained work experience? Cite yes or no, state why and give citation of supporting authority. 4. As an alternate structure, D's advisor suggests that transfer all assets to an irrevocable trust. The terms of the trust would be that for a term of 10-years the trust would pay all income to D, and then distribute all assets equally among D's 4 children. D's advisor suggests that D could transfer the property at a discount equal to the FMV of the property transferred less the value of the income interest retained by D. a. Do you believe D will receive a gift tax discount (YES or NO and cite authority)? b. Would it make a difference if the beneficiaries were D's nieces and nephews and not D children (YES or NO cite authority)? SITUATIONAL QUESTIONS (Multiple Choices) (These are not research questions per se - However, feel free to do whatever research you would like in answering them). You are an advisor for client ("client"). Client has been making transfers to an irrevocable life insurance trust ("ILIT") for the past 10 years. Client has been taking annual exclusions for each of the beneficiaries of the ILIT. When preparing the current year income tax return for the trust (FORM 1041), you mention that Client will need to send a notice ("Crummey Letter") to each of the beneficiaries in order to receive the annual exclusion. Client seems unaware of what a Crummey Letter is, but thanks you for informing Client of this requirement and says that it will not be a problem, and the Client will prepare the Crummey letters and send them immediately. At this point in time you should: a. Ask client if they have sent Crummey letters in the past because it kind of seems like they have not, which would be a big problem since client has been taking annual exclusions for years b. Not ask client if they have sent Crummey letters in the past and not press the issue any further because it is not your responsibility to do investigative work for past years which you did not work on, but it would be your responsibility once you had affirmative knowledge of this past neglect. C. Not mention anything further about Crummey Letters to Client, but tell your supervisor that there is a serious problem and let them deal with it. 2 d. Not mention anything further about Crummey Letters to Client, but suggest to your supervisor that you drop this client to avoid potential liability e. Call the IRS and report client as having failed to file Crummey Letters for many past years, Assuming Client pushes you about the Crummey Letters, and upon learning of the Crummey requirement and consequences of not filing a Crummey Letter asks you to back date Crummey Letters for each of the past 10 years, especially since your firm should have informed client of this requirement a long time ago. At this point in time, you should: a. Politely tell the Client that you cannot do that and leave it at that b. Politely tell the Client that you cannot do that and then report Client's actions to the IRS c. Politely tell the Client that you cannot do that and demand from you supervisor that you drop the Client to avoid potential liability d. Prepare back dated Crummey Letters because you know that Client would have prepared the Crummey Letters if they had known of the requirement e. Drop the client because of a conflict of interest. What if shortly after Client asked you to prepare back dated Crummey Letters, Client suddenly says: "guess what? We found the Crummey letter that have been sent for the past 10 years, and produces 10 years worth of Crummey Letters all printed on identical crisp, bright white sheets of paper. You should: a. Breath a sigh of relief carry on b. Reject the Crummey Letters as obvious forgeries C. Take the Crummey Letters, but notify the IRS that Client has committed forgery d. Question Client as to the veracity of the Crummey Letters, and accept them if Client states they are authentic e. Tell the Client you just cannot take this crap anymore, crack open a cold beer, and walk out of the meeting 3