Category Archives: Financial Planning Tips

Son Sells House To Parents To Avoid Foreclosure. What’s Taxable?


The son was unable to make his mortgage payments that became due on his house. In order to avoid foreclosure, he sold his house to his parents. His parents financed the purchase by taking out a loan that was used to pay off $664,048 of the taxpayer’s outstanding mortgage debt. The closing statement showed that “Total Consideration” for the sale and purchase was $975,000. The IRS claimed that the amount realized on the transaction was $975,000. The son argued that the amount realized should be his $664,048 liability relief.

IRC section 1001(b) states that the amount realized from the sale of property is the sum of any money received plus the fair market value of property other than money that is received. The regulations for this code section state that the amount realized includes the amount of liabilities from which the transferor is discharged as a result of the sale.

The son argued that the amount realized should be the $664,048 of liability relief because the transaction was in part a sale and in part a gift to his parents. The IRS argued the total consideration of $975,000 shown on the closing statement controls the determination of the amount realized.

The tax court rejected the IRS argument saying that the son received no cash and no other property from his parents as a result of the sale other than the mortgage debt that was discharged. The court said the IRS failed to understand that the transaction was in part a sale and in part a gift. [Reg. §1.1001-1(e)(1)]

The tax court ruled that the amount realized on the sale was the $664,048 of mortgage debt relief, minus the son’s settlement costs at closing.  (Son must report the gift on Form 709)

If you’re in a similar bind and need tax help, contact Steve Siesser for advice.


IRS Announces New Simplified Portability Election Method


For purposes of the Federal Estate and Gift tax, a portability election allows a surviving spouse to add the decedent’s unused estate and gift tax exclusion amount to the surviving spouse’s own exclusion amount.

Generally, since December 31, 2014, executors needed to apply via a private letter ruling to request the IRS to grant an extension of time to make the election. However, as a result of numerous requests for relief, the IRS has issued a new revenue procedure for a new simplified method to make the election, effective June 9, 2017.

For decedent’s dying in 2017, the inflation adjusted exclusion amount is $5,490,000. This means that for decedent’s dying in 2017, lifetime gifts plus the value of assets included in the gross estate up to $5,490,000 are excluded from the Federal Estate tax. For example, if a decedent dies in 2017 with total lifetime gifts and a gross estate of $3 million, the surviving spouse can elect to add $2,490,000 ($5,490,000 minus $3,000,000) to his or her own exclusion amount.

The executor of the estate of the deceased spouse must elect portability of the unused estate and gift tax exclusion amount by filing an estate tax return for the decedent within nine months of the decedent’s date of death (plus extensions) and include a calculation of the unused exclusion amount on that return.  A return must be filed by the executor to elect portability even if the decedent was not otherwise required to file a Federal Estate tax return. Regulation section 301.9100-3 provides relief for executors who fail to make the election by the due date of the return by allowing an extension of time to make the election under certain circumstances.

The new simplified method is available to the executor of the estate of a decedent if:

1) The decedent:

a) Was survived by a spouse,

b) Died after December 31, 2010, and

c) Was a citizen or resident of the United States on the date of death.

2) The executor is not required to file an estate tax return based on the value of the gross estate and adjusted taxable gifts and without regard to the need to file for portability purposes,

3) The executor did not file an estate tax return by the due date of the estate tax return, and

4) The executor satisfies the following requirements:

a) The executor must file a complete and properly prepared Form 706 on or before the later of January 2, 2018, or the second annual anniversary of the decedent’s date of death.

b) The executor filing the Form 706 states at the top of the Form 706 that the return is “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER Sec. 2010(c)(5)(A).”

If the executor does not satisfy the above requirements, the executor can still request relief by requesting a private letter ruling under the provisions of Regulation section 301.9100-3.

This simplified method does not extend the period during which the surviving spouse or the surviving spouse’s estate may make a claim for credit or refund as a result of making the portability election under this revenue procedure.


Benefits of Flexible Spending Arrangement (FSA)


The Internal Revenue Service reminds eligible employees that now is the time to begin planning to take full advantage of their employer’s health flexible spending arrangement (FSA) during 2017.

FSAs provide employees a way to use tax-free dollars to pay medical expenses not covered by other health plans. Because eligible employees need to decide how much to contribute through payroll deductions before the plan year begins, many employers this fall are offering their employees the option to participate during the 2017 plan year.

Interested employees wishing to contribute during the new year must make this choice again for 2017, even if they contributed in 2016. Self-employed individuals are not eligible.

An employee who chooses to participate can contribute up to $2,600 during the 2017 plan year. Amounts contributed are not subject to federal income tax, Social Security tax or Medicare tax. If the plan allows, the employer may also contribute to an employee’s FSA.

Throughout the year, employees can then use funds to pay qualified medical expenses not covered by their health plan, including co-pays, deductibles and a variety of medical products and services ranging from dental and vision care to eyeglasses and hearing aids. Interested employees should check with their employer for details on eligible expenses and claim procedures.

Under the use or lose provision, participating employees often must incur eligible expenses by the end of the plan year, or forfeit any unspent amounts. But under a special rule, employers may, if they choose, offer participating employees more time through either the carryover option or the grace period option.

Under the carryover option, an employee can carry over up to $500 of unused funds to the following plan year — for example, an employee with $500 of unspent funds at the end of 2017 would still have those funds available to use in 2018. Under the grace period option, an employee has until 2½ months after the end of the plan year to incur eligible expenses — for example, March 15, 2018, for a plan year ending on Dec. 31, 2017. Employers can offer either option, but not both, or none at all.

Employers are not required to offer FSAs. Accordingly, interested employees should check with their employer to see if they offer an FSA. More information about FSAs can be found in Publication 969, available on

If you need further assistance, contact Steve Siesser at


Coverdell ESAs Subject to One Rollover Per Year Rule

Prior to 2014, the IRS applied the one-rollover-per year limitation for IRAs on an IRA-by-IRA basis, meaning each IRA was limited to one rollover per year allowing a taxpayer to make multiple rollovers in one year using separate IRAs for each rollover.  However, beginning in 2015, the IRS withdrew its proposed regulations and followed the Bobrow Tax Court decision (T.C. Memo. 2014-21) in which the court ruled an individual can make only one rollover from an IRA to another (or the same) IRA in any 1-year period regard-

less of the number of IRAs owned.
Are Coverdell ESAs subject to the same one rollover per year limit regardless of the number of ESAs owned by the taxpayer? There is no published guidance interpreting Coverdell ESA rollover limitations.  However, IRS Pub. 970, Tax Benefits for Education, states that only one rollover per Coverdell ESA is allowed during a 12-month period.
In light of the similarity of the language in the code concerning IRA rollovers and Coverdell ESA rollovers, the IRS recently stated in a Program Manager Technical Assistance letter that only one rollover per individual per year is permitted for Coverdell ESAs. The letter
suggested that IRS Pub. 970 should be updated using the following language:
“You can make only one rollover from a Coverdell ESA to another Coverdell ESA in any 12-month period regardless of the number of Coverdell ESAs you own. However, you can make unlimited transfers from one Coverdell ESA trustee directly to another Coverdell ESA trustee because such transfers are not considered to be distributions or rollovers. The once in any 12-month period limitation rule does not apply to the rollover of a military
death gratuity or payment from Service members’ Group Live Insurance (SGLI).”
If you need assistance figuring out the maze of IRS rules governing educational savings plans, please contact Steve Siesser at

Treasury Issues Proposed Regulations to Limit Valuation Discounts


On August 2, 2016, the Treasury Department issued proposed regulations under IRC Section 2704 that would significantly reduce the use of valuation discounts which, for decades, have been used by estate planners in valuing minority interests in family businesses for gift and estate tax purposes. These discounts often range from 15 percent to 40 percent, or even higher. By using discounts, significant wealth can be transferred to the next generation at greatly reduced values. Some of these techniques include transfers of fractional interests in real property or business entities such as limited partnerships, limited liability companies, or closely held corporations.

The size of the discount depends upon a number of factors, including the entity’s organizational structure, provisions of the partnership or operating agreement and if state law places restrictions on control of the entity and on marketability.  If a parent gifted a minority interest in a family business partnership to a child with provisions that restrict voting rights and the ability to sell the interest to a third party or withdraw from the partnership, under the proposed regulations, the parent’s gift to the child is valued as if those restrictions do not exist.  As a result, the value of the interest for gift tax purposes would likely be greater than what the parent would receive if he or she sold the same interest to a third party.

While details of the proposed regulations are important, it is clear that the Treasury is trying to eliminate most if not substantially all valuation discounts for family-controlled entity interests, even including active businesses owned by a family. The regulations accomplish this, in part, by expanding the class of restrictions disregarded under Section 2704 to include those under the governing documents and even under state law (regardless of whether that restriction may be superseded by the governing documents).

Over the years, the IRS has argued that many restrictions (including those currently resulting in discounts for lack of control and lack of marketability) should be ignored for transfers between family members. In most properly structured transactions, the courts have rejected the arguments by the IRS and permitted the taxpayer to take appropriate discounts on the transfer to family members.

These new regulations are particularly important in the context of intra-family gifts and sales to effectively reduce the estate tax payable at a decedent’s death. The proposed regulations will be subject to public comment and a hearing on December 1, 2016.  They are likely to be challenged and will not become effective until 30 days after the date on which Treasury issues them in final form. If you are interested in making such gifts and/or sales and believe that you would benefit from such valuation discounts, you may want to consider completing transactions that could be affected by the new regulations before year-end.