Posts Tagged: IRS

PLR 201942006: IRS Allows Extension to Elect Portability for Decedent’s Estate

PLR 201942006 (10/18/2019)

IRS Allows Extension to Elect Portability for Decedent’s Estate Because Estate Acted Reasonably and In Good Faith, and Granting Extension to Elect Portability Would Not Prejudice the Government’s Interests

Author: Katelyn L. Allen  of Nutter

In PLR 2019420006, the IRS granted an extension of time to a decedent’s estate to elect portability because (i) the decedent’s estate established it acted reasonably and in good faith, (ii) the requirements of Sections 301.9100-1 and 301.9100-3 were satisfied, and (iii) the granting of an extension by the Commissioner would not prejudice the interests of the government.

The circumstances under which the taxpayer requested a Private Letter Ruling from the IRS are as follows: A U.S. decedent died and was survived by a spouse. Based on the value of the decedent’s gross estate and taxable gifts made, the decedent’s estate was not required to file an estate tax return and did not file an estate tax return by the deadline of nine months after the decedent’s date-of-death. Once the decedent’s estate discovered that, in failing to file an estate tax return and elect portability, the decedent’s spouse’s estate would not be entitled to the unused portion of the decedent’s exclusion amount, the decedent’s estate filed a request for extension of time under Section 301.9100-3 to make a portability election. Section 301.9100-3 allows the Internal Revenue Commissioner to grant discretionary extensions of time to make an election in the case of tax filing due dates that are prescribed by regulation rather than by statute.

Section 2010(c)(5)(A) provides that an election is required for a surviving spouse to use a deceased spouse’s unused exclusion amount, and no election may be made if an estate tax return is filed after the filing deadline (including extensions). However, in this case no return was statutorily required to be filed.  Section 301.9100-1gives the IRS the discretion to grant a taxpayer a reasonable extension of time to make any election in situations where the due date is prescribed by regulation, under all subtitles of the Code except E, G, H, and I. Because requests for extension to elect portability are not granted automatically under Section 301.9100-2, the IRS looks to Section 301.9100-3 for the factors to be considered in granting a discretionary extension to make a portability election, as follows: (i) reasonable action and good faith; and (ii) prejudice to the interests of the government. The IRS ultimately concluded in this PLR that the decedent’s estate had provided evidence to establish that it acted reasonably and in good faith and that allowing the extension of time to elect portability would not prejudice the interest of the government. The IRS granted an extension of time of 120 days for the decedent’s estate to make the portability election, and upon the filing of a compete Form 706 electing portability, the surviving spouse would be entitled to the decedent’s unused exclusion amount.

Massachusetts SJC Grants Appellate Review to Consider Legal Relationship Between Commercial Custodian of IRAs and Named Beneficiary

UBS Financial Services, Inc. v. Donna M. Aliberti, SJC-12662, slip op. (October 22, 2019)

Author: Kaitlyn Sapp of Day Pitney LLP

On October 22, 2019, the Massachusetts Supreme Judicial Court issued a slip opinion that considered the legal relationship between UBS Financial Services (“UBS”), as a commercial custodian of individual retirement accounts (“IRAs”), and Donna Aliberti (“Aliberti”), as a named beneficiary of such accounts upon the death of the original account holder.



Patrick Kenney (“Kenney”) opened three IRAs with UBS in 2008 with the help of his sister-in-law, Margaret Kenney.  At this time, he designated Aliberti, his long-term girlfriend, as the sole primary beneficiary of all three IRAs.  In November 2013, Patrick completed two “IRA Beneficiary Designation Update Forms” in connection with two of the smaller IRAs (“IRA #1” and “IRA #2”).  These forms named Aliberti, Aliberti’s son, Patrick’s niece, and Patrick’s friend Craig Gillespie (“Gillespie”) as his beneficiaries, all to receive 25% each.  The third, unchanged IRA (“IRA #3”) was the largest of the three, with an approximate balance of $276,000.  Unfortunately, Patrick had incorrectly completed these forms and UBS declined to process them.  Margaret Kenney arranged to have the beneficiary update forms corrected, but Kenney died suddenly on December 2, 2013 without ever having them completed.


Near the end of December, UBS received a letter from Gillespie’s attorney incorrectly stating that Kenney was in the process of changing the third account’s beneficiaries when he passed.  The letter went on to say that Gillespie was going to have a court of law resolve the beneficiary issue with respect to IRA #3 and asked UBS to not make any distributions.  This prompted UBS to classify IRA #3 as “disputed,” which effectively froze the account until UBS received a court order with instructions, Gillespie withdrew any claim to the account, or the statute of limitations expired.  Shortly thereafter, Aliberti began contacting UBS asserting that she was the sole beneficiary of all three accounts.  IRA #1 and IRA #2 were liquidated and equally distributed to Aliberti, Aliberti’s son, Patrick’s niece and Gillespie.  At the time, Aliberti did not dispute this action.  However, over the course of the next year and eight months, Aliberti struggled with UBS to obtain information about the supposed dispute with Gillespie over IRA #3, forcing her to retain counsel.


Aliberti demanded distribution of IRA #3 multiple times and sent UBS a c. 93A demand letter alleging that UBS violated the consumer protection statute.  Finally, in August of 2015, UBS filed an interpleader complaint asking the court to determine ownership of IRA #3, joining Aliberti and Gillespie as defendants.  In March of 2016, all parties stipulated to partial dismissal of claims by Gillespie, resulting in his waiver to any ownership of IRA #3.  UBS still delayed distribution to Aliberti.  Aliberti agreed to release UBS from liability regarding the disbursement in exchange for prompt distribution, but retained her claims against UBS for breach of contract, breach of fiduciary duty, and violation of c. 93A.


Aliberti continued to pursue her counterclaims against UBS, and after several additional months of litigation, UBS filed a motion for judgment on the pleadings.  The Superior Court granted the motion, Aliberti appealed, and the Appeals Court reversed in part, finding Aliberti’s counterclaims well-pleaded.  The Supreme Judicial Court granted further appellate review of whether the claims for relief as to breach of fiduciary duty and violation of c. 93A were plausible.[1]



  1. Breach of Fiduciary Duty

To establish a claim for breach of fiduciary duty in Massachusetts, there must be a fiduciary duty owed to the plaintiff by the defendant, and injury to the plaintiff must have been proximately caused by defendant’s breach.[2]  Fiduciary duties may arise by (a) a matter of law, “such as trustee and beneficiary, or attorney and client,”[3] or (b) “as determined by the facts established,”[4] upon “evidence indicating that one person is in fact dependent on another’s judgment in business affairs or property matters.”[5] 


The Supreme Judicial Court found that no fiduciary relationship existed as a matter of law because the relationship between the custodian of a nondiscretionary IRA and a named beneficiary is not among the traditional familiar and well-recognized relationships giving rise to fiduciary duties.  The record did not support finding a fiduciary duty since the IRAs were not “trusts” and there was nothing to suggest that Patrick intended to create a trust.  Further, the court found that federal law did not change its analysis.  The Internal Revenue Code, which governs the tax aspects of IRAs, does not require an IRA to be a “trust.”  It could take the form of a custodial account, which was the case here.


The Court found that the facts also did not give rise to a fiduciary relationship.  Fiduciary duties may arise wherever “faith, confidence, and trust” is reposed by one party “in another’s judgment and advice.”[6]  Aliberti never claimed to repose trust and confidence in UBS’s judgment and advice, she simply relied on their cooperation in order to gain access to the assets of the IRA.  The court found this relationship was akin to a retail consumer relationship governed by contract, which did not establish any higher duty owed to Aliberti.  UBS only had a contractual duty to transfer the IRA proceeds in accordance with Patrick’s agreement, not a fiduciary duty.


  1. Violation of G. L. c. 93A

To establish a valid c. 93A claim, one must show that (a) the company has committed an unfair or deceptive act or practice, (b) the unfair or deceptive act or practice occurred in the conduct of any trade or commerce, (c) the claimant suffered an injury, and (d) the company’s unfair or deceptive act or practice was the cause of the injury.[7]  The court first determined that Aliberti was a proper plaintiff despite the absence of privity between Aliberti and UBS.  No privity was required because c. 93A allows any person injured by trade or commerce, even if indirectly, to bring a cause of action.[8]  The Court also held that the business context requirement of c. 93A was met because the interactions between an IRA custodian and a named beneficiary following the account holder’s death typically occurs in a business context within the meaning of c. 93A.


G.L. c. 93A does not define what constitutes “unfair” or “deceptive,” so the courts instead look to the circumstances of the case to determine if the company acted as such. Here, the Court found that UBS clearly acted unfairly by (1) denying Aliberti the funds she was entitled to; (2) for years; and (3) without good reason; (4) until she was forced to take legal action and incur unnecessary costs and fees.[9] The Court also determined that UBS filed an unjustified interpleader, considering there was never any real question as to whether or not Aliberti was entitled to IRA #3 as the sole designated beneficiary.



After determining that there was a plausible claim for violation of the consumer protection statute, the case was remanded to Superior Court for further proceedings.  However, the Supreme Judicial Court agreed with the Superior Court, that there was no plausible claim made for a breach of fiduciary duty owed to Aliberti as a beneficiary.  The court expressly found that the relationship between a commercial custodian of an IRA and a named beneficiary of such is similar to that between a retailer and consumer.  Unless the agreement between the original account holder and the service provider expressly creates a trust for the benefit of the designated beneficiary, then the custodian of the account owes no fiduciary duty to the beneficiary.

[1] UBS did not seek further review of the Appeals Court’s determination that the breach of contract claim was well-pleaded by Aliberti as an intended third-party beneficiary.

[2] Estate of Moulton v. Puopolo, 467 Mass. 478, 492 (2014).

[3] Smith v. Smith, 222 Mass. 102, 106 (1915).

[4] Warsofsky v. Sherman, 326 Mass. 290, 293 (1950).

[5] Markell v. Sidney B. Pfeifer Found., Inc., 9 Mass. App. Ct. 412, 444 (1978).

[6] Doe v. Harbor Sch., Inc., 446 Mass. 245, 252 (2006).

[7] Rafferty v. Merck & Co., 479 Mass. 141, 161 (2018).

[8] Ciardi v. F. Hoffman-La Roche, Ltd., 436 Mass. 53, 60 (2002).

[9] UBS Fin. Servs., Inc. v. Aliberti, 94 Mass. App. Ct. 180, 191 (2018).

IRS: Valuation of Publicly Traded Stock Must Consider Anticipated Merger

Office of Chief Counsel Internal Revenue Service Memorandum Number 201939002 (9/27/2019)

IRS: Valuation of Publicly Traded Stock Must Consider Anticipated Merger

Author: John H. Ramsey  of Goulston & Storrs PC

On September 27, 2019, the Office of Chief Counsel (“OCC”) of the Internal Revenue Service released a Chief Counsel Advice Memorandum (the “Memorandum”)[1] addressing the valuation of stock of a publicly traded corporation for gift tax purposes, where the corporation was engaged in negotiating a pending merger at the time of the gift.


The donor of the gift in question (the “Donor”) made a gift of shares of a publicly traded corporation, of which the Donor was both a co-founder and the Chairman of the Board, to a newly formed grantor retained annuity trust.  Prior to the gift, the corporation was engaged in exclusive negotiations with another corporation regarding a merger.  Sometime after the gift, the merger was announced and the price of the corporation’s stock increased substantially.

The OCC was asked whether, under such circumstances, the “hypothetical willing buyer and seller of shares in a publicly-traded company would consider a pending merger when valuing stock for gift tax purposes.”  The OCC concluded that yes, a hypothetical willing buyer and seller would consider a pending merger when valuing stock.

Section 25.2512-1 of the Gift Tax Regulations provides that the value of the property given as a gift is the “price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts.”  If there is a market for shares of stock given as a gift, the mean between the highest and lowest quoted selling prices on the date of the gift is the fair market value per share.[2]  However, if it is established that quoted selling prices on the date of the gift do not represent the fair market value of the shares “then some reasonable modification of the value determined on that basis or other relevant facts … shall be considered in determining fair market value.”[3] 

In the Memorandum, the OCC cited case law stating that hypothetical willing buyers and sellers are presumed to have “reasonable knowledge of relevant facts” and are presumed to have made a reasonable investigation into the facts, concluding that “reasonable knowledge includes those facts that a reasonable buyer or seller would uncover during the course of negotiations over the purchase price of the property.”[4]    In addition, the OCC concluded that post-valuation events may be considered, if they are relevant to the question of value,[5] even if such events are unforeseeable as of the valuation date.[6]

Conclusion of the Office of Chief Counsel

The OCC concluded that the high and low quoted selling prices on the date of the gift did not represent the fair market value of the shares and that other relevant facts, including the pending merger, must be considered. 

In support of this conclusion, the OCC cited two cases in particular.  In Silverman v. Commissioner, T.C. Memo. 1974-285, aff’d, 538 F.2d 927 (2d Cir.1976), cert. denied, 431 U.S. 938 (1977), the Tax Court rejected expert testimony regarding the valuation of shares of a corporation that was, at the time of a gift, in the process of reorganizing ahead of a public sale because the testimony failed to take into account the future public sale.  In Ferguson v. Commissioner, 174 F.3d 997 (9th Cir. 1999), aff’g 108 T.C. 244 (1997), a case involving the anticipatory assignment of income doctrine, the court concluded that transfers of stock prior to a planned merger “occurred after the shares had ripened from an interest in a viable corporation into a fixed right to receive cash” because “the surrounding circumstances were sufficient to indicate that the tender offer and the merger were practically certain to proceed.”

The OCC concluded that, through analogy to these two cases, the value of the stock of the corporation “must take into consideration the pending merger” because a hypothetical willing buyer and willing seller “would be reasonably informed during the course of negotiations over the purchase and sale of [the shares] and would have knowledge of all relevant facts, including the pending merger.”  The OCC went on to conclude that “to ignore the facts and circumstances of the pending merger would undermine the basic tenets of fair market value and yield a baseless valuation.”

While this final conclusion may be true in this case, as the Donor would, if the pending merger were not considered, have the opportunity to act on insider information to transfer shares by a gift at an understated valuation, it is unclear from the Memorandum how the hypothetical willing buyer and seller would have reasonably obtained non-public information regarding the pending merger, particularly because, as the OCC states, the hypothetical buyer and seller are not “specific individuals or entities, and their characteristics are not necessarily the same as those of the donor and the donee.”[7]

It will be interesting to monitor the application of the Memorandum in this case and to cases in the future, in particular its applicability to donors who are not privy to non-public information relating to the value of publicly traded companies.  In the meantime, donors may want to consider engaging in this type of planning early, before generalized appreciation potential is reduced to a specific and anticipated sale or merger.

[1] Office of Chief Counsel Internal Revenue Service Memorandum Number 201939002 (9/27/2019). 

[2] Section 25.2512-2(b)(1).

[3] Section 25.2512-2(e).

[4] Estate of Kollsman v. Commissioner, T.C. Memo. 2017-40, aff’d, 123 A.F.T.R.2d 2296 (9th Cir. June 21, 2019).

[5] (citing Estate of Noble v. Commissioner, T.C. Memo. 2005-2, n.3)

[6] (citing Estate of Gilford v. Commissioner, 88 T.C. 38, 52-55 (1987))

[7] Citing Estate of McCord v. Commissioner, 120 T.C. 358 (2003), rev’d on other grounds, 461 F3d 614 (5th Cir. 2006); Estate of Newhouse v. Commissioner, 94 T.C. 193 (1990). 

Favorable Tax Court ruling upholds trustees’ activities as qualifying trust for material participation exception under IRC Section 469 (and the net investment income tax under IRC Section 1411)

Author:  Alison E. Lothes, Esq., Gilmore, Rees & Carlson, P.C.

In Frank Aragona Trust et al. v. Commissioner, 142 T.C. No. 9, the Tax Court ruled in favor of the taxpayer, holding that a trust could and did materially participate in real estate rental activities, qualifying for the exception to the passive activity rules under IRC Section 469.  This case is helpful, as there are currently no regulations and very few rulings on how to apply the “material participation” rules to trusts.  The IRS has been interpreting the exception to be very limited but the Court agreed with the taxpayer that the activities of the trustees, including those in their capacity as employees of an entity owned by the trust, could be considered when determining whether the trust materially participated in the real estate rental business.

A majority of the trust’s business was operated through a wholly owned LLC but the trust also operated some of its real estate business directly and some through other entities.  The trustees were intertwined in the LLC, other entities and the business.  The LLC employed three of the trustees as full time employees (along with other employees, including a controller, maintenance workers, leasing agents and clerks).   Two of the trustees also held minority interests in several of the entities in which the trust was also a member.

The trust filed fiduciary income tax returns claiming losses relating to its rental real estate activities and characterized those activities as non-passive.  The IRS disagreed and determined that the rental real estate activities were passive, and as a result limited certain deductions and net operating loss carrybacks.

Under IRC Section 469, a passive activity is any activity which involves the conduct of a trade or business in which the taxpayer does not materially participate.  Generally, rental activities are considered passive activities unless (1) more than one-half of the personal services provided by the taxpayer during the taxable year are performed in real property trades or businesses in which the taxpayer materially participates and (2) the taxpayer performs more than 750 hours of services during the year in real property trades or businesses in which the taxpayer materially participates.  “Material participation” requires that the taxpayer be involved in the operation of an activity on a “regular, continuous and substantial” basis.

The IRS argued that a trust cannot qualify for the exception because it cannot perform “personal services.”  It claimed that the legislative history indicates that “personal services” can only be performed by an individual.  In the alternative, the IRS argued that even if the trust could perform personal services, when assessing whether the trust materially participates in an activity, only the activities of the trustees (and not the employees) can be considered.  In addition, the IRS sought to exclude the activities of the trustees that were not solely related to their fiduciary duties.  For example, the IRS argued that the activities of the trustees who were employees of the LLC could not be taken into account because those activities should be attributed to them as employees, not fiduciaries.  It also argued that a portion of the activities of the trustees who owned interests in the entities should be attributed to their personal ownership in the entities, rather than to their activities on behalf of the trust.

The Tax Court disagreed.  It noted that the trustees’ fiduciary duties to administer the trust in the interest of the beneficiaries are not put aside when they work for the LLC owning the real estate.  Therefore, their activities as employees of the LLC should be considered when determining whether the trust materially participated in its real estate operations.  It is interesting to note that the Tax Court did not determine whether the activities of the non-trustee employees should be considered because it was not necessary to the decision.  Lastly, the Tax Court held that the trustees’ individual minority interests in entities of which the trust was also a member did not impact the trust’s material participation because the combined minority interests in each entity held by the trustees were less than 50% and in all cases were less than the trust’s interest.

This case is very helpful for taxpayers in that the Tax Court adopted a relatively broad interpretation of whose activities (and in what capacity those activities are undertaken) may be attributed to the trust when determining if the trust materially participates in an activity.  This has recently become even more important because of the new 3.8% tax on net investment income under IRC Section 1411.  Non-passive trade or business income is not considered net investment income and so is not subject to the tax under IRC 1411.  This ruling may make it a little easier for trusts to prove that they are “materially participating” in a trade or business to avoid the 3.8% tax.

2014 Inflation-Adjusted Figures

Nikki Marie Oliveira, Esq., LL.M., Bass, Doherty & Finks, P.C.
Michelle B. Kalas, Esq., Riemer & Braunstein LLP

The IRS recently announced the following inflation-adjusted items for 2014:

Gift Tax 

  • Annual Exclusion for Gifts.  The annual exclusion for gifts remains at $14,000 for 2014.
  • Annual Exclusion for Gifts to Non-U.S. Citizen Spouse.  The annual exclusion for gifts to a non-U.S. citizen spouse under §§ 2503 and 2523(i)(2) increases to $145,000 for 2014 (up from $143,000 in 2013).
  • Notice of Large Gifts Received from Foreign Persons.  For 2014, gifts from foreign persons in excess of $15,358 in a taxable year are required to be reported (the threshold in 2013 was $15,102).

Estate Tax

  • Federal Estate Tax Applicable Exclusion Amount.  For estates of decedents dying in 2014, the federal estate tax applicable exclusion amount under § 2010 is $5,340,000 (an increase of $90,000 from 2013).
  • Valuation of Qualified Real Property in Decedent’s Gross Estate.  For estates of decedents dying in 2014, if the personal representative elects to use the special use valuation method under § 2032A for qualified real property, the aggregate decrease in the value of qualified real property resulting from the election for purposes of the estate tax cannot exceed $1,090,000 (formerly $1,070,000 in 2013).
  • Interest on a Certain Portion of the Estate Tax Payable in Installments.  The dollar amount used to determine the “2-percent portion” for calculating interest under § 6601(j) of the estate tax extended as provided in § 6166 is $1,450,000 for 2014 (up from $1,430,000 in 2013).

Income Tax

  • Foreign Earned Income Exclusion.  Under § 911(b)(2)(D)(i), this figure is now $99,200 (previously $97,600 in 2013).
  • Tax Responsibilities of Expatriation. The exemption for appreciation in assets recognized by a covered expatriate is increased to $680,000 for expatriations that occur in 2014.
  • Expatriation to Avoid Tax. The standard for determining whether an expatriate is a “covered expatriate” under section 877A(g)(1) is based on whether his or her average annual net income tax exceeded $157,000 for the five taxable years ending before the date of expatriation for tax years beginning in 2014.

Long-Term Care Insurance Premiums

  • For 2014, the limitations under § 213(d)(10) regarding a portion of eligible long-term care insurance policy premiums to be treated as a medical expense for itemizing deductions is based on the taxpayer’s age, as follows:

Age                             Per Individual
40 and under               $370
41-50                           $700
51-60                           $1,400
61-70                           $3,720
71+                              $4,660

Please see Rev. Proc. 2013-35 for additional inflation updates.