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Tax Law Update: March 2023

David A. Handler and Alison E. Lothes highlight the most important tax law developments of the past month.

• Cryptocurrency donation needs a qualified appraisal for income tax deduction—In Chief Counsel Memorandum 202302012, the Internal Revenue Service assessed how Internal Revenue Code Section 170(f)(11)(C) applies to cryptocurrency. That section provides that when a charitable contribution deduction of more than $5,000 is made, a qualified appraisal is required. There are exceptions for certain kinds of property, including: cash, publicly traded securities and intellectual property inventory.

The taxpayer had purchased cryptocurrency on an exchange and donated it to a charity. The taxpayer prepared her own income tax return and claimed the deduction valued at $10,000 based on the trading price on the exchange on the date of the donation.

The Chief Counsel explained that cryptocurrency isn’t a security under the Treasury regulations and didn’t fall into a category that would be excepted from the appraisal requirement. Further, the fact that the cryptocurrency was traded on an exchange didn’t provide reasonable cause to omit a qualified appraisal. Therefore, the charitable deduction was denied.

• Complaint filed for estate tax refund by executors of billionaire’s estateThe executors of the estate of billionaire Richard Mellon Scaife have filed a claim in the U.S. District Court for the Western District of Pennsylvania to recoup an estate tax refund based on a deduction for a liability under an indemnity agreement (H. Yale Gutnick et al. v. United States, 2:23-cv-00139). Richard had been a beneficiary of a trust established by his mother in 1935. The trust allowed for discretionary distributions of principal to him; on Richard’s death, the remaining trust property would benefit his two children. However, over his lifetime, he had requested and received over $400 million in principal distributions, which completely exhausted the trust. In exchange for each distribution, he signed an indemnity agreement in which he agreed, on behalf of his heirs and executors, among others, to indemnify and hold harmless the trustees for any action related to the distribution.

Richard died, survived by his two children whom he completely excluded from his estate plan. The children sued the trustees of the trust for breach of duty, claiming that the distributions made to Richard during his life were improper. They argued that the distributions made to support Richard’s newspaper business and for “estate-planning purposes” were a breach of duty. Meanwhile, the estate paid over
$239 million in estate taxes and advised the IRS of the claim and its obligation to defend the trustees and pay its legal and administrative expenses.

After six years of litigation, the trustees and the children signed a settlement agreement in which the estate was obligated to indemnify the trustees for an agreed $200 million reimbursement to the trust. The estate has filed a claim for a refund of nearly $70 million in estate taxes, but the IRS hasn’t responded with any notice of disallowances, so the estate filed the complaint.

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