Document Summaries for the week of Aug. 15, 2022

ESTATES, TRUSTS & GIFTS

Chief Counsel addresses estate tax deductions for discretionary interests

The IRS Office of Chief Counsel advised that a decedent's estate is not entitled to an estate tax charitable deduction under Sec. 2055 or an estate tax marital deduction under Sec. 2056 for the portion of the unitrust interest of a testamentary charitable remainder unitrust (CRUT) that may be distributed either to a charity or the decedent's spouse at the discretion of a trustee. The Chief Counsel's Office noted that the terms of the CRUT created two charitable interests — a discretionary interest in a portion of the unitrust amount and a remainder interest — and advised that the estate may claim an estate tax charitable deduction for the value of the remainder interest under Sec. 2055(a), but the estate may not claim an estate tax charitable deduction under Sec. 2055(a) for the value of any portion of the unitrust interest that may be distributed to a charity in the discretion of the trustee, because the charity's interest is not in the form of a fixed unitrust amount to be distributed annually and no part of the unitrust interest is ascertainable or severable from the spouse's noncharitable interest. CCA 202233014 (8/19/22).

INDIVIDUALS

Inflation adjustments for premium tax credit items

The IRS updated the applicable percentage table in Sec. 36B(b)(3)(A)(i) used to calculate an individual's premium tax credit for calendar year 2023 and updated the required contribution percentage in Sec. 36B(c)(2)(C)(i)(II) for plan years beginning after calendar year 2022. Rev. Proc. 2022-34 (8/15/22).

INTERNATIONAL

IRS intends to amend Sec. 987 regulations

The IRS intends to amend the regulations under Sec. 987 to defer the applicability date of the 2016 final regulations and the related 2019 final regulations by one additional year, to tax years beginning after Dec. 7, 2023. Previously, in Notice 2021-59, the IRS had announced that future guidance would defer the applicability date of the regulations to tax years beginning after Dec. 7, 2022. Notice 2022-34 (8/15/22).

Tax Court revises royalty rate to be used in comparable uncontrolled transaction

On remand from the Eighth Circuit, the Tax Court reconsidered whether a comparable uncontrolled transaction (CUT) method was the best method for determining an arm's-length rate for a licensing agreement between a company and its foreign subsidiary. The Tax Court concluded that (1) the taxpayer, a medical device company, did not meet its burden to show that its allocation under the CUT method and its proposed unspecified method satisfied the arm's-length standard; (2) the IRS's modified comparable profits method (CPM) resulted in an abuse of discretion; and (3) the wholesale royalty rate for devices covered by the agreement at issue was 48.8%. Medtronic, Inc., T.C. Memo. 2022-84 (8/18/22).

IRS PROCEDURE

IRS increases interest rates for fourth quarter

The IRS announced an increase in the rates for interest on tax underpayments and overpayments for the quarter beginning Oct. 1, 2022, to 6% (up from 5% for the quarter that began on July 1) for overpayments (5% in the case of a corporation, up from 4%); 6% (up from 5%) for underpayments; and 8% (up from 7%) for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 3.5% (up from 2.5%). Rev. Rul. 2022-15 (8/15/22).

IRS issues applicable federal rates for September 2022

The IRS issued a ruling providing tables of prescribed rates for federal income tax purposes for September 2022. Table 1 contains the short-term, midterm, and long-term applicable federal rates (AFRs) for purposes of Sec. 1274(d). Table 2 contains the short-term, midterm, and long-term adjusted AFRs for purposes of Sec. 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in Sec. 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in Sec. 42(b)(1) for buildings placed in service during September 2022 (although, under Sec. 42(b)(2), the applicable percentage for non–federally subsidized new buildings placed in service after July 30, 2008, is not less than 9%). Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of Sec. 7520. Rev. Rul. 2022-17 (8/16/22).

Guidance issued on clean vehicle tax credit

The IRS issued guidance regarding a new requirement to qualify for the Sec. 30D clean vehicle tax credit, that the car or truck must be assembled in North America. Plug-in Electric Drive Vehicle Credit at a Glance (8/16/22) (see related news story).

LEGISLATION

Inflation Reduction Act enacted with tax provisions

On Aug. 16, President Joe Biden signed into law a budget reconciliation bill that includes tax credits encouraging conservation and cleaner sources of energy, increased IRS funding, and a new corporate alternative minimum tax and an excise on corporate stock repurchases, among other provisions. Inflation Reduction Act, P.L. 117-169 (8/16/22) (see related news story).

TAX-EXEMPT ORGANIZATIONS

IRS revokes organizations' tax-exempt status

The IRS announced the revocation of the tax-exempt status of 21 Sec. 501(c)(3) organizations for failing to meet the applicable Code requirements for tax-exempt status. As a result, contributions made to the organizations by individual donors are no longer deductible under Sec. 170(b)(1)(A). Announcement 2022-16 (8/15/22).