FIRST DAY OF CLASS

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FIRST DAY OF CLASS

• Want to ask a question outside of class? E-mail
  me at
• All the power point slides are on the web for all
  of my classes. They will be updated almost daily
  for class, and will be complete on the web before
  the end of the semester.
• The web address is www.law.und.nodak.edu/class/t
  ax

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FIRST DAY INTRODUCTION

• The estate tax has been in existence since 1916,
  with a gift tax to supplement it, except there
  was no gift tax before 1924 and between 1926 and
  1932.
• The exemptions were intended to tax only the
  rich. However, the exemption was only 60,000
  until 1976, then it rose to 176,000 today it is
  2,000,000, and the tax is repealed in 2010,
  with an exemption of 3.5 million in 2009.
• The exemption is actually a credit, once called
  the unified credit and now is named the
  applicable credit. The actual amount of the
  credit in 2006 is 780,800 which is exactly the
  amount of tax on 2,000,000.
• For gifts there is an additional exemption
  annually of 11,000 per donee, indexed for
  inflation.

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INTRODUCTION

• The repeal of the tax in 2010 is doubtful in
  2011 it resumes as before, with only a 1 million
  exemption.
• The gift tax exemption (again, really a credit)
  never rises above 1 million, so even with a 3.5
  million exemption or repeal of the tax the only
  way to use the exemption above 1 million is to
  die, a solution advisors are hesitant to
  recommend.

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HOW THE APPLICABLE CREDIT WORKS

• The credit is available for both the gift and the
  estate tax. Once it is used up it is gone unless
  Congress increases the amount of the credit.
• For example, a donor makes a gift of 1,111,000
  this year to a child. First the annual exemption
  is subtracted, leaving a taxable amount of
  1,100,000 the tax on that amount is 384,800,
  and we then subtract the applicable credit of
  345,800 this is the amount of tax on
  1,000,000 leaving a gift tax to pay of 39,000.
  The donors applicable credit is now zero for
  the gift tax but 1,000,000 in 2006 for the
  estate tax.

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Patty Alevas picture of an owl on her
windowsill.
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PERCENTAGE OF TAX REVENUES CONTRIBUTED BY THE
ESTATE TAX FOR SEVERAL COUNTRIES
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CONGRESSIONAL ACTION IN THE SUMMER OF 2005

• Early in 2005 the House of Representatives
  repealed the estate and gift tax, in its
  entirety.
• A vote was scheduled for early August, 2005 in
  the Senate, but the proponents of repeal did not
  have enough votes.
• There was a considerable effort to reach a
  compromise, but that fell through as well, so the
  vote was postponed again and again.

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CONGRESSIONAL ACTION, SUMMER, 2006

• A compromise was worked out between the
  democrats, who favor the tax, and the republicans
  who sought to repeal it. The plan included an
  increase in the applicable credit to cover 5
  million of tax for each decedent, that is, 10
  million for a married couple. The bill has
  passed the senate but was coupled with an
  unpopular minimum wage bill in the house and was
  defeated in early August.
• I will keep you posted on the bills progress.

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FIRST DAY

• All transfers between spouses are gifts even
  true sales between spouses are gifts, and are
  exempt from the gift and estate tax as well as
  being non-income taxable.
• You need to learn many income tax rules in this
  course. For example, the free step up in basis
  doctrine. E.g., Blackacre cost dad 50 but is
  worth 1 million when you do his estate plan. He
  wants to give it to a child? What advice do you
  give him? Assume he will die later today and his
  childs intention is to sell at once.

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FIRST DAY

• Taxes arent everything This class will
  emphasize estate planning, and we will cover
  small estates, and many considerations other
  than taxes.
• Providing for the future of the family, and loved
  ones, or financing a business or investment or
  ones charitable objectives are important as well.

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SOURCE OF LAW

• The gift tax law is found in Chapter 25 of Title
  26, USC. The estate tax law is found in Chapter
  20, Title 26, USC.
• Treasury Regulations are cited to the chapter of
  the US Code. Thus, a regulation on the annual
  exemption, found in Section 2503, IRC, would be
  cited as T.R. 25.2503(a). An estate tax reg,
  e.g., is T.R.20.2036 which deals with life
  estates.

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SOURCES OF THE LAW

• IRS publishes three main types of rulings known
  as Revenue Rulings, Revenue Procedures and
  Private Letter Rulings. Rev Ruls and Rev Procs
  are published in Cumulative Bulletin (C.B.) Such
  a ruling might be cited as Rev. Rul. 04-135,
  2004 CB 458. This tells us it is the 135th
  ruling published in 2004.
• Revenue Procedures, called Rev. Procs. address
  procedural matters. Revenue Rulings address
  substantive issues.

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SOURCES OF THE LAW

• Tax cases may be litigated in the tax court, the
  claims court, or the US District Courts. The
  latter two are referred to as refund suits, as
  the taxpayer must pay the tax and interest before
  bringing suit. In refund suits after 1954 the
  defendant is always the United States.
• The amount at issue in the tax court is called
  the deficiency and one need not pay the tax to
  litigate. The tax court has nationwide
  jurisdiction and the defendant is now always the
  Commissioner.

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APPEALS

• An appeal from the tax court goes to the circuit
  in which the taxpayer resides. Appeals from a
  US District court go to the circuit for that
  district and from the claims court to the federal
  circuit.
• The supreme court accepts the occasional estate
  or gift tax case and we have several in the
  casebook.

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IRS ENFORCEMENT

• The IRS agents that audit estate and gift tax
  returns are know as Estate Tax Examiners. They
  all have law degrees.
• All estate tax returns are audited, though
  sometimes only with a cursory glance. Very few
  gift tax returns are audited. Today there are no
  estate tax examiners based in North Dakota all
  audits are conducted by examiners from out of
  state. In 1965 there were 6 Estate Tax Examiners
  in this state.

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Where to find a tax case decision

• Tax court decisions are found in two official
  publications, the tax court reporter and tax
  court memo decisions. Commerce Clearing House
  CCH and Research Institute of America RIA
  also publish their versions of those two
  reporters.
• District Court, Claims Court and the Supreme
  Court federal tax decisions are found in the
  traditional reporters, but CCH also publishes
  them in USTC, United States Tax Decisions while
  RIA publishes the same decisions in AFTR,
  American Federal Tax Reporter.

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EXPATRIATION

• Forbes magazine, in a recent article, reported
  that each year some 450 U.S. citizens leave the
  United States to live in countries without an
  estate tax. Their spouse remains here, and the
  expatriate visits his family for several months
  each year.
• Forbes claims that the income taxes lost to the
  US each year from these people would exceed the
  estate tax paid at the expatriates death.