• Deduction for income in respect of a decedent (IRD) denied—In Schermer v. Commissioner, T.C. Memo. 2019-28 (April 4, 2019), the Internal Revenue Service disputed an income tax deduction taken on Jill Schermer’s 2014 income tax return. Jill’s husband Robert died in 2002. His father, Albert, had predeceased him in 1999 and left him two individual retirement accounts and an annuity. In 2014, Jill inherited the IRAs and annuity from Robert, and she reported distributions she received in 2014 as income but also claimed a miscellaneous deduction of $156,789. She claimed the deduction was for the estate tax attributable to her father-in-law’s estate, relating to the distributions she received.
However, the Tax Court disagreed, noting that deductions are a matter of legislative grace and that the taxpayer must prove that she’s entitled to the deduction. Under Internal Revenue Code
Section 691(c), the recipient of IRD is allowed an income tax deduction equal to the amount of the federal estate tax attributable to the IRD. Even though most itemized deductions have been eliminated under recent changes to the IRC, the deduction under Section 691(c) is still permitted (See Notice 2018-16). However: (1) there was no estate tax paid for Robert’s estate, and (2) the IRD wasn’t included in Albert’s estate. Because the IRD wasn’t included and taxed in either estate, Jill wasn’t entitled to any deduction.
• Proposed regulations (proposed regs) regarding certain life insurance transfers and the transfer-for-value rule—IRC Section 6050Y imposes reporting requirements for certain sales of life insurance contracts. The IRS has now issued proposed regs that detail how and when to make the necessary filings relating to “reportable policy sales” and payments of “reportable death benefits.”
The proposed regs define “reportable policy sales” as any direct or indirect acquisition of an interest in a life insurance contract if the acquirer has no substantial family, business or financial relationship with the insured at that time. Section 6050Y requires that any person who acquires a policy by a reportable policy sale during a taxable year must report information about the transaction, including each recipient of proceeds.
The proposed regs also provide guidance on the reporting requirements applicable to payments of “reportable death benefits.” Reportable death benefits are any amounts paid by reason of the death of the insured under a life insurance contract that had been transferred in a reportable policy sale. The proposed regs clarify that the reporting obligations only apply to amounts attributable to the contract being transferred in a reportable policy sale.
In addition, because Section 6050Y relates to IRC Section 101, the proposed regs coordinate and update Section 101, clarify the rules that determine the amount of death benefits excluded from gross income following a transfer for value or gratuitous transfer, including a reportable policy sale, and adopt the necessary definitions by cross reference.
Lastly, the proposed regs address the notice requirements that apply to transfers of insurance contracts to foreign persons.
In general, the proposed regs apply to transactions after Dec. 31, 2017, with certain special rules to provide transition relief for transactions occurring before the date of the final regulations.