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ESTATE TAX REPEAL

As we mentioned in the January edition of ONESOURCE Trust Tax Alert, Congress allowed the estate tax to expire at the end of 2009. For decedents dying in 2010, there is no estate tax, and there is a modified carryover basis for inherited property.

As of this writing, it appears unlikely that Congress will reinstate the estate tax retroactively for 2010 (if at all). Practitioners and fiduciaries should be prepared for the possibility that there will be no estate tax for at least most of 2010, and for the possibility that a modified carryover basis regime will apply.

Under the modified carryover basis rules, property acquired from a decedent dying in 2010 is treated as transferred by gift. The basis of the property is the lesser of the decedent's adjusted basis or the fair market value of the property at the date of the decedent's death. Another consequence of

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TAX RATE ON CAPITAL GAINS AND QUALIFIED DIVIDENDS

Under current rules, most net long-term capital gain is taxed at a maximum rate of 15%. If the long-term capital gain would otherwise be taxed at a rate below 25% if it were ordinary income, then it is taxed at a zero percent rate. Qualified dividends are taxed to noncorporate shareholders at the same rates that apply to long-term capital gain.

Beginning in 2011, if Congress doesn't make changes, long-term capital gains will be taxed at 20%. Additionally, dividends paid to individuals will be taxed at the same rates that apply to ordinary income.

INTERIM GUIDANCE ON SECTION 67 LIMITATIONS ON ESTATES AND TRUSTS

On April 1, 2010, the IRS issued Notice 2010-32. The Notice provides that taxpayers will not be required to determine the portion of a bundled fiduciary fee that is subject to the 2-percent floor under § 67 for any taxable year beginning before January 1, 2010. Instead, for each such taxable year, taxpayers may deduct the full amount of the bundled fiduciary fee without regard to the 2-percent floor. Payments the fiduciary makes to third parties for expenses subject to the 2-percent floor are readily identifiable and must be treated separately from the otherwise Bundled Fiduciary Fee. We are still awaiting guidance on bundled fiduciary fees for the 2010 tax year.

PROCEDURES FOR CERTAIN TRUSTS THAT QUALIFY AS TYPE III SUPPORTING ORGANIZATIONS

On March 18, 2010, the IRS issued Announcement no. 2010-19. The Announcement applies to trusts that met the requirements to be classified as a Type III supporting organization through the end of the 2008 tax year, but erroneously filed Form 990-PF and paid the excise tax on net investment income for the 2008 tax year.

The Announcement provides procedures that a trust may use to request a ruling that it was and continues to be a Type III supporting organization described in IRC § 509(a)(3), and to obtain a refund of the excise tax paid for the 2008 tax year.

The Announcement also describes procedures for charitable trusts that became private foundations after August 16, 2007, and wish to terminate their private foundation status by operating as Type III supporting organizations.