IRS Regulations Clarify Definition of Spouse for Federal Tax Purposes in Light of Obergefell v. Hodges

Tax Filing StatusThe IRS has issued final regulations clarifying the definitions of “spouse,” “husband,” “wife,” and “husband and wife” for federal tax purposes. The final regulations now define “spouse,” “husband” and “wife” as any individual lawfully married to another individual, and “husband and wife” as any two individuals lawfully married to each other, regardless of the individuals’ sex.

The clarification was needed after the Supreme Court ruled in Obergefell v. Hodges in 2015 that state bans on same-sex marriage violated the Equal Protection guarantees of the Fourteenth Amendment. Obergefell struck down same-sex marriage bans as unconstitutional in four states (Ohio, Michigan, Kentucky and Tennessee), resolving a circuit split on the issue. (As previously discussed here, the Obergefell decision was anticipated after the Court ruled in U.S. v. Windsor that the authority to define marriage lay with the states, but declined to rule on the constitutionality of same-sex marriage. For more on the Windsor case, click here.)

Following Obergefell, the IRS issued proposed regulations redefining “spouse” for federal tax purposes. The proposed regulations also provided that a recognized marriage for federal tax purposes was a marriage recognized by any U.S. state, possession or territory. However, commentators pointed out that such a definition was too broad. For example, the proposed regulations’ definition of marriage could have caused taxpayers living in common-law marriages not recognized by their state to nonetheless be treated as married if any other U.S. state or territory would recognize their marriage. As a result, the final regulations provide that a marriage is recognized for federal tax purposes if the marriage is recognized in the U.S. state, possession or territory where the marriage is entered into – also known as the “state of celebration” rule. The final regulations do not recognize as a marriage for federal tax purposes alternative legal relationships such as registered domestic partnerships or civil unions. The final regulations also contain rules on recognition of foreign marriages. The full text of the final regulations can be found here.

These regulations should offer clarity to same-sex partners for estate and tax planning matters. For more information on how these regulations affect you or your family, please contact Amanda Tate ( or Chad Makuch (

Beyer Beware: An Examination of a Family Limited Partnership Gone Wrong

tax iStock_000006743485_LargeThe opinion issued on Sept. 29, 2016, in the case of Estate of Edward G. Beyer v. Commissioner of Internal Revenue was the culmination of an estate planning exercise that had an unfortunate ending for everyone involved (other than the IRS). The case involved a number of failed estate planning techniques.


The situation began when Edward Beyer, a Chicago resident and longtime executive at Abbott Laboratories, and Mr. Beyer’s nephew, Craig Plassmeyer, were introduced to attorneys at the firm of Madonia & Associates (Madonia) for the purpose of discussing and considering certain wealth transfer techniques. On the advice of Madonia, Mr. Beyer decided to form a limited partnership, the general partnership interest of which would be owned by revocable trust established by Mr. Beyer (GP revocable trust), with the limited partnership interest owned by a separate revocable trust also established by Mr. Beyer (LP revocable trust). The plan called for Mr. Beyer to form an irrevocable trust sometime after the formation of the limited partnership, which would purchase the limited partnership interest from the LP revocable trust.

Mr. Beyer named himself, Craig Plassmeyer and another of Beyer’s nephews, Bruce Plassmeyer, as the co-trustees of the LP revocable trust. The provisions of the LP revocable trust instrument obligated the LP revocable trust to pay any transfer taxes imposed by reason of Mr. Beyer’s death. Mr. Beyer also named his nephews Craig and Bruce Plassmeyer as the co-trustees of the GP revocable trust. Continue Reading

Possible Congressional Action May Undercut Proposed 2704 Regulations

Justice_453626233Republicans in the House of Representatives and the Senate have introduced bills to derail the Proposed Regulations under Section 2704 of the Internal Revenue Code (“Proposed Regulations”), including bills to (1) nullify the Proposed Regulations and prevent future regulations, and (2) cut federal funding associated with the enforcement of such Proposed Regulations.

The first bill, introduced by Jim Sensenbrenner, R-Wis., in the House of Representatives, would invalidate the Proposed Regulations. It is a short bill and essentially states that the Proposed Regulations and any substantially similar regulations promulgated shall have no force or effect. The second bill, sponsored by Warren Davidson, R-Ohio, in the House of Representatives, is similar to the first bill but adds another element. It too states that the Proposed Regulations shall have no force or effect. It then seeks to block federal funding for the rules: “No Federal funds may be used to finalize, implement, administer, or enforce such proposed regulations or any substantially similar regulations.”

Republicans in the Senate are also actively pursuing action against the Proposed Regulations. Marco Rubio, R-Fla., introduced companion legislation to Rep. Davidson’s bill, stating that the Proposed Regulations shall have no force or effect, with identical language blocking federal funding. In addition, numerous Republican Senators co-signed a letter sent to the Honorable Jacob Lew, Secretary of the Treasury, asking the Treasury to withdraw the Proposed Regulations.

It remains to be seen whether the congressional actions will gain traction. A public hearing on the Proposed Regulations is scheduled for Dec. 1.

Proposed Regulations Under IRC Section 2704 Seek to Eliminate Discounts on Transfers of Family Business Interests

Justice_453626233On Aug. 2, 2016, the Treasury Department and the Internal Revenue Service released proposed regulations under Internal Revenue Code (Code) section 2704 (the “Proposed Regulations”). The Proposed Regulations, if finalized in their proposed form, would eliminate most valuation discounts on redemptions and transfers of family business interests among family members when a single family “controls” the business both before and after the transfer.

Set forth below are summaries of the following:

  1. What Code section 2704 covers under current law.
  2. Some examples where the proposed, much-expanded coverage of Code section 2704 under the Proposed Regulations may be unenforceable.
  3. The process for comment, hearing and review before the Proposed Regulations are finalized and become effective.
  4. What family business owners should consider (from an estate planning perspective), given the scope of restrictions in the Proposed Regulations.

1. Scope of Code Section 2704 Under Current Law

Congress enacted “Chapter 14” (sections 2701 through 2704) of the Code back in 1990, to curb perceived abuses in the discounted valuation of property transfers between family members. In general terms, Code section 2704 addressed “certain lapsing rights and restrictions” affecting control of family businesses and/or rights to liquidate interests in family businesses. Continue Reading

The Donor Advised Fund Alternative to a Family Foundation

Money GiftThere are several gifting vehicles that provide donors and their families with the opportunity to participate in their philanthropy on an ongoing basis. Frequently, families will consider creating and funding a private family foundation or, in special circumstances, an organization that supports one or more public charities. A cost-efficient option for many families is to coordinate their charitable giving through a donor advised fund (DAF) sponsored by a reputable public charity.

To create such a fund, a donor simply enters into a gift agreement with a public charity such as a community foundation, or a national or local religious foundation like the Presbyterian Church Foundation or a United Jewish Appeal Federation. Such a gift agreement typically provides for:

  • Establishing a fund to accept irrevocable, tax deductible contributions of assets identified by name with the donor or donor family.
  • Naming a fund advisor and successors to make recommendations regarding distributions from the DAF for charitable purposes.

In some instances, a DAF agreement may also permit fund advisors to recommend investments from a menu of preapproved investment options. Continue Reading

IRS Simplifies Rules for Correcting Failed Rollover

Money_Tax_516634417On August 24, 2016 the IRS published Revenue Procedure 2016-47, which simplifies the steps for correcting a missed rollover from a qualified plan or IRA to another qualified plan or IRA. Amounts distributed from a qualified plan or IRA will be taxable unless they are rolled over into another plan or IRA within 60-days of the original distribution.

Previously, the IRS had established a procedure whereby taxpayers who missed the 60-day period could request a private letter ruling granting a hardship waiver of the 60-day period.   This procedure necessitated a filing with the IRS and the payment of a user fee by the individual.

Revenue Procedure 2016-47 simplifies this process by allowing a qualifying taxpayer to self- correct the delayed rollover without having to seek advanced approval from the IRS for the most common causes for such inadvertent delays. The taxpayer must certify that he is eligible for the relief under Rev. Proc. 2016-47 and provide that certification to the trustee or custodian of the plan or IRA accepting the late rollover.  The recipient trustee or custodian will generally be able to rely on this certification as evidence of a waiver of the 60-day requirement.  A sample copy of this certification is included with the Revenue Procedure. Continue Reading

What do Prince, Michael Jackson, and Whitney Houston Have in Common?

Michael Jackson, Prince and Whitney Houston each revolutionized the music industry and impacted popular music for decades. We all appreciate how Michael Jackson moonwalked across the stage, Prince made it (purple) rain and Whitney Houston will always love you. These impactful artists changed, and continue to change, the music landscape. What do Michael Jackson, Whitney Houston and (possibly) Prince have in common? The Internal Revenue Service (“IRS”) is interested in their ability to continue to profit from the music industry through royalties, released music, unreleased music and the use of image. What is the value of the right to use an image, sell music, earn royalties and benefit from intellectual property after death?

Both Whitney Houston’s and Michael Jackson’s estates are engaged in tax litigation with the IRS. The IRS valued Whitney Houston’s assets at around $36 million, whereas the estate valued the assets at $13.9 million. Among other things, the IRS asserts that royalties, publicity rights and intellectual property are worth approximately $22 million more than the estate’s valuation. In Michael Jackson’s case, the numbers are much more substantial, and much farther apart. The IRS valued Michael Jackson’s estate at $1.32 billion, while the estate asserted that the value was only around $7 million. For the posthumous image and likeness, the IRS valued those rights at $434 million, and the estate valued Michael Jackson’s publicity rights at $2,105. The Michael Jackson case is docketed for trial in February 2017. Continue Reading

Governor Kasich Signs House Bill 229 to Create Ohio Family Trust Company Act

Ohio Statehouse originalOn June 14, 2016, Governor Kasich signed House Bill 229 into law. The bill, which was over two years in the making, allows an Ohio family to establish its own trust company to serve as trustee for its family trusts. The legislation, co-authored by Rob Galloway of BakerHostetler’s Private Wealth Team, had been through a series of amendments to earn the acceptance of the Ohio Division of Commerce’s Department of Financial Institutions.

Family trust companies (FTCs) have seen increased use as a wealth succession planning tool in the past several years as more states have enacted FTC legislation. Currently, there are over 15 states with such legislation, the most recent being the state of Florida.

FTCs provide the benefit of a permanent trustee (in the form of a corporation or limited liability company) along with the ability of a family to substantially control its operations. Under current Ohio law, the trustee for a family trust was either (a) one or more individuals or (b) a commercial trustee. This meant that an Ohio family seeking to use an FTC was required to form and operate the FTC in another state. Such out-of-state operations resulted in increased operating costs, extra administrative effort and a loss of revenue from the state of Ohio.

Similar to laws in several other states, Ohio’s legislation allows for two types of FTCs: licensed and unlicensed. A licensed FTC is subject to the following requirements: (1) it must have a minimum capital balance of at least $200,000, and up to $500,000, at the discretion of Ohio’s superintendent of financial institutions; (2) it may provide services to “family members,” certain nonfamily members and certain affiliated entities; (3) it must maintain office space and at least one part-time employee in Ohio; (4) it must hold at least two governing board meetings per year in Ohio; (5) it must perform certain administrative activities in Ohio; and (6) it must maintain a fidelity bond and directors/officers insurance, each in the amount of $1 million. A licensed FTC is also subject to supervision by Ohio’s Department of Financial Institutions and will be audited every 18 months. Continue Reading

The Three Most Important Provisions for S Corporations Under PATH Act

Tax Words MedIt has become a tradition that at the end of each year, Congress passes legislation to extend previous legislation. In late 2015, Congress passed Public Law 114-113, which contains the Protecting Americans from Tax Hikes Act (“PATH”). PATH’s benefits to donors and charities were detailed in a previous post, which is available here: Donors and Charities Benefit Under New Tax Legislation. This post focuses on noteworthy extenders for S corporations.

The three most important sections for S corporations (and S corporation shareholders) in PATH include the built-in gains (“BIG”) tax, bonus depreciation, and contributions to charity.

  1. BIG recognition period set at five years permanently, IRC §1374: This provision is beneficial because it permanently reduces the amount of time that an S corporation’s assets are subject to the BIG tax (and its taint). The BIG tax imposes a corporate-level tax on the inherent gain in an S corporation’s assets for a prescribed time. The BIG tax taints the S corporation’s assets, and applies if the S corporation converted from a C corporation or received assets from a C corporation. If the S corporation sells or otherwise disposes of those assets during the recognition period, the BIG tax applies. The recognition period was 10 years, but has fluctuated between five years (tax years 2012-2014) and seven years (tax years 2009-2011). This provision makes the recognition period for the BIG tax permanent at five years, and is effective for tax years beginning after December 2014.
  2. Bonus depreciation continues through 2019, IRC §168(k): This provision is beneficial because it extends bonus depreciation, which allows an additional first-year depreciation deduction. In general, this provision extends the additional first-year depreciation deduction through 2019, effective for property acquired and placed in service after December 31, 2014. The bonus depreciation percentage is now 50 percent, applicable to property placed in service after December 31, 2014, and is reduced by 10 percent per calendar year beginning in 2018. This provision also extends the election to increase the alternative minimum tax credit limitation in lieu of bonus depreciation for five years.
  3. Charitable contribution reduces shareholder’s stock basis by pro rata share of contributed property’s basis permanently, §1367: This provision is beneficial because it limits the stock basis reduction. If an S corporation contributes money or property to a charitable organization, the charitable contribution flows through the S corporation to the S corporation shareholders. The S corporation shareholder must adjust his, her, or its stock basis accordingly. This provision makes permanent that the amount of a stock basis reduction arising from a charitable contribution is equal to the shareholder’s pro rata share of the adjusted basis of the contributed property. The provision applies to charitable contributions made in taxable years beginning after December 31, 2014.

New Basis Reporting Requirements (and Penalties) for Decedents’ Estates

Wealth Preservation & Estate Planning statement on old paper

FEBRUARY 2, 2016 UPDATE: The final version of Form 8971 and the Instructions have been posted by the IRS.

On July 31, President Obama signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act (the “Act”) to reauthorize the Highway Trust Fund’s spending authority for another three months. To offset the legislation’s costs, the Act makes a number of changes to the tax code, including provisions with respect to the income tax basis of property acquired from a decedent.

The Act amends the Internal Revenue Code by (i) amending Section 1014 to add a new subsection, 1014(f), and (ii) adding Section 6035. With respect to “any interest in property included in the decedent’s gross estate for Federal estate tax purposes” that is reported on a federal estate tax return, new Sections 1014(f) and 6035 operate together to require executors and/or beneficiaries of decedents’ estates to file “statements” with the Internal Revenue Service (and furnish copies to each affected beneficiary) that identify “the value of each interest in such property as reported on such return and such other information with respect to such interest as the Secretary may prescribe.” For convenience, the required new statements are referred to (solely for purposes of this blog) as “Basis Statements,” since such Basis Statements would declare the value of property acquired from a decedent that the filing party believes to be the correct value to be used as the income tax cost basis of the property in the hands of the beneficiary who received the property by reason of a decedent’s death. Continue Reading