IRS Protects Estates After 2025 for Gifts Made Now
The IRS recently issued final regulations protecting individuals who take advantage of the increased estate and gift tax exclusion amount in effect from 2018 to 2025 from being adversely impacted after 2025, when the exclusion amount is scheduled to decrease to the pre-2018 level.
The rules largely adopt the proposed regulations issued November 2018, with a few revisions, e.g., the examples in the final regulations reflect hypothetical inflation-adjusted exclusion amounts and illustrate how the deceased spousal unused exclusion (DSUE) amount is calculated.
In general, the final regulations provide that the exclusion amount used in the computation of estate taxes will be the greater of the exclusion at the date in question or the total of gifts previously excluded from tax due to the use of the exclusion amount in place at the time of the transfer.
Further, in clarifying the interaction of the increased exclusion amount with the DSUE amount, the final regulations provide that if an individual dies before 2026 and a DSUE election is made to transfer the unused exclusion to the surviving spouse, that higher DSUE will survive the reduction in the exclusion amount in 2026 if the surviving spouse dies after that date.
Ultimately, the final regulations ensure that the estate of a decedent is not inappropriately taxed with respect to gifts that were sheltered from gift tax by the increased exclusion amount when made.
Private Equity Funds Lacked Requisite Control Over Bankrupt Company to Be Liable for Pension Fund Withdrawal
In Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, No. 16-1376 (1st Cir. Nov. 22, 2019), private equity funds that formed and created subsidiary limited liability companies (LLC), through which they acquired and controlled portfolio companies, including a company that eventually went bankrupt (Company A), did not exhibit the requisite common control necessary to be jointly and severally liable for that company’s multiemployer pension fund withdrawal.
The Multiemployer Pension Plan Amendments Act of 1980 imposes joint and several withdrawal liability on entities under common control with the obligated organization that qualify as engaging in trade or business to prevent evasion of the payment of withdrawal liability. To determine whether the funds created an implied partnership-in-fact constituting a control group, the court looked to Luna v. Commissioner, 42 T.C. 1067 (1964). In Luna, the Tax Court provided the following list of factors, none of which is conclusive, which bear on the issue of whether a partnership exists:
1. The agreement of the parties and their conduct in executing its terms;
2. The contributions, if any, which each party has made to the venture;
3. The parties’ control over income and capital and the right of each to make withdrawals;
4. Whether each party was a principal and co-proprietor, sharing a mutual proprietary interest in the net profits and having an obligation to share losses, or whether one party was the agent or employee of the other, receiving for his services contingent compensation in the form of a percentage of income;
5. Whether business was conducted in the joint names of the parties;
6. Whether the parties filed Federal partnership returns or otherwise represented to the IRS or to persons with whom they dealt that they were joint venturers;
7. Whether separate books of account were maintained for the venture; and
8. Whether the parties exercised mutual control over and assumed mutual responsibilities for the enterprise.
In Sun Capital, the court found that several factors supported the finding of a partnership-in-fact. For example, the funds jointly developed restructuring and operating plans for target companies before acquiring them. In addition, the same two individuals essentially ran both the funds and the management company in charge of the portfolio company. The court also noted that there was a pooling of resources and expertise that both the funds and the portfolio company utilized.
However, the court in Sun Capital, ultimately held that the funds did not form a partnership-in-fact to assert common control over Company A because the funds expressly disclaimed any form of partnership, filed separate tax returns, kept separate books and bank accounts, and did not make investments in the same companies. In addition, the court noted that the creation of the LLC to acquire Company A was indicative of the funds’ intent not to form a partnership. Specifically, the court stated that the formation of the LLC prevented the funds from conducting business in their joint names and limited the control over and responsibility for managing Company A.