Sen. Chuck Schumer (D-NY) and Sen. John Thune (R-SD) co-sponsored the United States Appreciation for Olympians and Paralympians (USA Olympians and Paralympians) Act. On a recent visit to the Winter Olympic Training Center in Lake Placid, New York, Schumer joined Olympic medal winners Andrew Weibrecht (Alpine skiing), Justin Olson (Bobsled) and Gordy Sheer (Luge) to urge the House of Representatives to pass the bill.

Schumer stated, “Our Olympian and Paralympic athletes should be worried about breaking world records, not breaking the bank, when they earn a medal. Most countries subsidize their athletes; the very least we can do is make sure our athletes don’t get hit with a tax bill for winning. After a successful and hard-fought victory, it’s just not right for the U.S. to welcome these athletes home with a tax on that victory. We worked hard to pass a bill that would exempt athletes from these tax penalties in the Senate, and now I’m hopeful that this bill will earn strong bipartisan support in the House and quickly become law.”

The U.S. Olympic Committee awards $25,000 for a gold medal, $15,000 for silver and $10,000 for a bronze medal. Under current law, the cash awards and medals are “earned income abroad” and therefore taxable.

Editor’s Note: Athletes devote thousands of hours and years of preparation for the Olympics. Most other countries provide a generous subsidy for athletes. Schumer and Thune believe that our USA athletes who excel at the Rio Olympics should not face a tax bill.

Proposed Regulations Limit Estate Valuation Discounts

On August 2, the IRS published Proposed Regulations (REG-163113-02) under Sec. 2704. The Prop. Regs. attempt to reduce valuation discounts by modifying the rules on lapsing rights and restrictions.

In the view of the Service, there were four problems with the existing regulations. First, courts concluded that Sec. 2704(b) applied only to restrictions on the ability to liquidate an entire entity. Kerr v. Commissioner, 113 T.C. 449, 473 (1999), aff’d, 292 F.3rd 490 (5th Cir. 2002).

Second, the definition of an applicable restriction excludes a restriction on liquidation that is no more restrictive than that of the state law that would apply in the absence of the restriction. The result is that the provisions of a partnership agreement restricting liquidation generally fall within the regulatory exception for restrictions that are no more restrictive than those under state law, and thus do not constitute applicable restrictions under the current regulations.

Third, taxpayers have attempted to avoid the application of Sec. 2704(b) through the transfer of a partnership interest to an assignee rather than to a partner. Finally, taxpayers have avoided the application of Sec. 2704(b) through the transfer of a nominal partnership interest to a nonfamily member, such as a charity or an employee.

The proposed regulations would amend Sec. 25.2701-2 with respect to control, deathbed transfers and assignee interests. The state law comparison is eliminated. Insubstantial interests held by non-family members are disregarded.

If an applicable restriction is disregarded, the fair market value of the transferred interest is determined under generally applicable valuation principles as if the restriction does not exist. Under Prop. Reg. 25.2704-3, any restriction for a family-owned entity on an owner’s right to liquidate his or her interest in the entity will be disregarded if the restriction will lapse at any time after the transfer, or if the family may remove or override the restriction.

Under the proposed regulations, a disregarded restriction includes one that: (a) limits the ability of the holder of the interest to liquidate the interest; (b) limits the liquidation proceeds to an amount that is less than a minimum value; (c) defers the payment of the liquidation proceeds for more than six months; or (d) permits the payment of the liquidation proceeds in any manner other than in cash or other property, other than certain notes.

Editor’s Note: If they are finalized in current form, the Prop. Regs. will have major impact on many estate planning valuation strategies. Mark Mazur, Assistant Secretary for Tax Policy at the U.S. Department of the Treasury, justified the IRS position by stating, “It is common for wealthy taxpayers and their advisors to use certain aggressive tax planning tactics to artificially lower the taxable value of their transferred assets. By taking advantage of these tactics, certain taxpayers or their estates owning closely held businesses or other entities can end up paying less than they should in estate or gift taxes. Treasury’s action will significantly reduce the ability of these taxpayers and their estates to use such techniques solely for the purpose of lowering their estate and gift taxes. These proposed regulations are subject to a 90-day public comment period. The regulations themselves will not go into effect until the comments are carefully considered and then 30 days after the regulations are finalized.”

Applicable Federal Rate of 1.4% for August—Rev. Rul. 2016-18; 2016-31 IRB 1 (17 July 2016)

The IRS has announced the Applicable Federal Rate (AFR) for August of 2016. The AFR under Section 7520 for the month of August will be 1.4%. The rates for July of 1.8% or June of 1.8% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2016, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.