April 2014

April 2014


Significant Developments

Analyzing Hedging under Obamacare’s Net Investment Income Tax Final Regulations

In general.  The net investment income tax (NIIT) is a 3.8% additional tax for individuals with adjusted gross income (AGI) greater than $200,000 ($250,000 for married couples filing jointly). Net investment income for this purpose includes interest, dividends, annuities, rents and royalties, plus passive income from a trade or business activity, and income from the trade or business of trading in financial instruments and income from the trade or business of trading in commodities.  Also included in NIIT are gains from the sales of assets (unless associated with materially participating trade or business income).  Final regulations (along with new proposed regulations) were issued in late November of 2013.

Trading in commodities.  The regulations specify that the NIIT applies to a trade or business that constitutes a passive activity as defined under I.R.C. §469 or involves the trade or business of trading in financial instruments or the trade or business of trading in commodities.  Treas. Reg. §1.1411-5(a)(2).  The regulations specify that the definition of “commodities” for purposes of the NIIT refers to items described in I.R.C. §475(e)(2).  That definition includes any commodity that is actively traded within the meaning of I.R.C. §1092(d)(1) which is personal property that is actively traded. Link to Complete Article

Proposed Regulations Would Largely Expand Reach of Clean Water Act

On March 25, 2014, the Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers (Corps) released a proposed rule defining “waters of the United States” under the Clean Water Act (CWA). If enacted, this proposed rule would likely significantly expand the current scope and coverage of the CWA.

Generally, the CWA prohibits the discharge of any pollutant or fill material into “waters of the United States” without a permit. The Corps issues permits for the discharge of fill material, and the EPA issues permits for the discharge of pollutants. Persons who discharge pollutants or fill material without obtaining a permit (an often expensive and lengthy process) are subject to civil and criminal penalties. Because the CWA regulates “waters of the United States,” the definition of this phrase defines the statute’s reach. If, for example, a wetland qualifies as “waters of the United States,” its owner may not deposit fill material into that wetland without a permit. If, however, the wetland does not fall into that definition (or if the owner’s activity falls under a specific CWA exemption), no such restrictions exist.

Agency regulations created in 1986 define “waters of the United States” to include traditional navigable waters, interstate waters, all other waters that could affect interstate commerce, tributaries, and adjacent wetlands. Several United States Supreme Court decisions have narrowed the agencies’ permitted application of this definition. Link to Complete Article

2012 Estate Tax Numbers

The IRS has released estate tax data for deaths in 2012.  The IRS data can be accessed here.  For deaths in 2012 (when the applicable exclusion was $5.12 million) the total amount of federal estate tax paid was $8,492,115,000. That means that the average federal estate tax burden for a decedent’s estate in 2012 was approximately $3,400.00 (there were 2.5 million deaths in 2012).  9,400 estate tax returns were filed for 2012 deaths, representing approximately four tenths of one percent of all decedents’ estates.  Compared to 2011, estate tax return filings almost doubled in 2012 and the amount of the estate tax paid increased over 70 percent.  Compared to 2003, the number of filings is down significantly, due to the increase in the applicable exclusion.  As a source of revenue for the federal government, the federal estate tax raised approximately 0.42 percent of federal tax collected in fiscal year 2012.  That’s a small percentage amount, but the 2012 number was 31 percent higher than the number for fiscal year 2011. 

Relatedly, various studies show that the compliance costs associated with estate planning exceed the revenue generated by the tax.  See, e.g., Aaron & Munnell, Reassessing the Role for Wealth Transfer Taxes, 45 National Tax Journal 119 (June 1992).  By estate size, real estate made up the smallest proportion of total assets for decedent’s estate in the $20 million-and-up category (13 percent).  It made up the highest proportion for estates under $5 million (25 percent).  Real estate made up approximately 21 percent of the total composition of assets for estates in the $5 million to $10 million range.  That last number, in particular, points out that the federal estate tax is of particular concern to farm and ranch estates and other small businesses. The IRS statistics also reveal that the primary asset likely to be included in a generation-skipping (“dynasty”) trust, is stock rather than agricultural land.  


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