Tax Law Update 2010-12-01 (1)Tax Law Update 2010-12-01 (1)

Gift and estate tax appeals to be centralized — The Internal Revenue Service will centralize gift and estate tax appeals cases into two nationwide teams, according to John Schooler, an IRS appeals manager, who made the announcement at the annual meeting of the California Tax Bar and California Tax Policy Conference. Schooler explained that the change was made to have appeals handled by a core group of experienced appeals officers familiar with special issues associated with estate and gift taxes, rather than by a larger pool of employees who may have only limited experience in the area. Schooler added that a large number of real estate valuation cases are being appealed, while the number of family limited partnership cases on appeal has declined.

2011 inflation adjustments — In Revenue Procedure 2010-40, Internal Revenue Bulletin 2010-46 (Oct. 28, 2010), the IRS set forth certain inflation-adjusted tax items for 2011. The inflation adjustments include the following, which take effect on Jan. 1, 2011:

Gift tax imposed on transfer by beneficiary who disclaimed bequest under father's will — In Estate of Tatum v. United States, No. 2:09-cv-00048, S.D. Miss. (Oct. 6, 2010), Franklin M. Tatum, Sr. left the residue of his estate, including certain stocks, to his son, Franklin M. Tatum, Jr. The will specified that if Frank Jr. predeceased Frank Sr., Frank Jr.'s descendants would receive his share. Within nine months of his father's death, Frank Jr. executed a disclaimer of his interest in the stocks. After the probate court issued and reaffirmed an order regarding the effect of his disclaimer, Frank Jr. distributed the stocks to his children. The will didn't include any provision regarding the effect of a disclaimer, and Mississippi law didn't address the effect of a disclaimer in this situation. The Southern District Court of Mississippi therefore based its decision on how the Mississippi Supreme Court would have ruled.

In IRS Technical Advice Memorandum 9417002 (1993), the IRS had analyzed how the Mississippi Supreme Court would rule on the effect of a disclaimer where a will provided an alternative distribution in the event that a beneficiary predeceased the testator. Relying on that TAM, the district court found that the Mississippi Supreme Court would conclude that the disclaimer would cause the property to pass via intestacy and not to Frank Jr.'s children. Although the will provided for an alternate disposition if Frank Jr. predeceased his father, it didn't provide for an alternate disposition if a beneficiary disclaimed his interest. The disclaimed property therefore passed back to Frank Jr. (his father's sole heir), rather than to Frank Jr.'s children. Because Frank Jr. didn't disclaim his intestate interest in the stocks, his disclaimer wasn't qualified under IRC Section 2518; as a result, Frank Jr. was liable for gift tax on the transfer of the property to his children.