Kansas Farm Bureau 98th Annual Meeting
Manhattan, Kansas
December 5, 2016
Roger A. McEowen
Kansas Farm Bureau Professor of Agricultural Law and Taxation
Washburn University School of Law
Website:  washburnlaw.edu/waltr
Twitter:  @WashburnWaltr
Blog:  http://lawprofessors.typepad.com/agriculturallaw/

I. Contemporary (and Future) Estate Planning


The changed estate planning landscape.  2013 marked the beginning of major changes in the estate planning landscape. While there had been significant changes to the transfer tax system before 2013, particularly with respect to the changes wrought by the Economic Growth and Tax Relief Recovery Act of 2001 (EGTRRA), the EGTRRA changes expired after 10 years.  Further extensions of EGTRRA were only of a temporary nature until the enactment of the American Taxpayer Relief Act (ATRA) of 2013 which constituted a major income tax increase, and increased the tax rates on capital gains, dividends and transfer taxes.  ATRA’s changes were of a permanent nature.  Also, the additional 3.8 percent tax on passive sources of income under I.R.C. §1411 that was included in the Patient Protection and Affordable Care Act (Obamacare) which was enacted in 2010 and became effective for tax years beginning after 2012, has important implications for the structuring of business entities and succession planning.  For many retired clients, Obamacare increases their tax burden in a material way. 

Under ATRA, the transfer tax system, beginning in 2013, is characterized by four key components:

  • Permanency;
  • Indexing;
  • Unification of the estate and gift tax systems; and
  • Portability of the unused portion of the applicable exclusion at the death of the first spouse

P r e - 2013 planning.  Before these changes, much of estate planning for moderate to high-wealth clients involved the aggressive use of lifetime asset transfers.  Often, these asset transfers were accomplished through trusts that typically involved the use of life insurance.  However, such strategy came at a cost.  Lifetime transfers preclude the recipient(s) of those transfers from receiving a “stepped-up” basis under I.R.C. §1014.  But, that was often only a minor concern for the transferor because the strategy was to avoid estate tax for the transferor. The strategy made sense particularly when the estate tax exemption was significantly lower than the 2016 level of $5.45 million and estate tax rates were significantly higher than income tax rates.  For example, before 2002, the top estate and gift tax rate was 55 percent and didn’t drop to 45 percent until 2007.  Now, the top income tax rate is 39.6 percent with the potential for an additional 3.8 percent on passive sources of income (for a combined 43.4 percent) and the top estate tax rate is 45 percent.

The standard pre-2013 estate plan for many higher-wealth clients had a common pattern as follows:

  • A lifetime taxable gift (or gifts) utilizing the estate tax exemption equivalent, thereby removing all future appreciation attributable to that property from the decedent’s future estate tax base.  In many instances, the gifted property was used to fund an intentionally defective grantor trust (IDGT).

Note:   An IDGT is drafted to invoke the grantor trust rules with a deliberate flaw ensuring that the individual continues to pay income taxes – i.e., the grantor is treated as the owner of the trust for income tax purposes, but not  the owner of the assets for estate tax purposes.  Thus, the grantor’s estate by the amount of the assets transferred to the trust.  An IDGT is part of an estate “freeze” technique.  In a typical sale to an IDGT, the grantor sells appreciating assets at their fair market value to the trust in exchange for a  note at a very low interest rate. The installment note will be treated as full and adequate consideration if the minimum interest rate charged on the installment note is at least the applicable federal rate (AFR) and all of the formalities of a loan are followed. The goal is to remove future asset appreciation, above the mandated interest rate, from the grantor’s estate.

  • The utilization of trusts (such as a “dynasty trust”) and other estate planning techniques to avoid having assets included in the gross estate for as long as possible by virtue of leveraging the generation-skipping transfer tax (GSTT) and establishing the GSTT trust in a jurisdiction that has abolished the rule against perpetuities.  If the trust was established in a state without an income tax, the trust income would also escape income taxation.

Note:   The Obama Administration, in numerous budget proposals, has proposed to require grantor retained annuity trusts (GRATs) to have at least a 10-year term with a remainder interest value greater than zero, and where the annuity cannot decrease in any year during the annuity term. Also, the same budget proposals seek a 90-year limitation on GSTT “dynasty” trusts, a $3.5 million estate tax exemption, a $1 million gift tax exemption, and a top rate of 45 percent for both estate tax and gift tax purposes.  Also, the budget proposals would include grantor trusts in the grantor’s estate with any distribution being a gift as would conversion to non-grantor status. This would impact irrevocable life insurance trusts in a significant way. Also, the budget proposals would specify that the estate tax lien under I.R.C. §6166 would last for the full period of deferral rather than just 10 years after the date of death. 

Observation:   The typical pre-2013 estate plan deemphasized the income tax consequences of the plan.  The emphasis focused on the avoidance of federal estate tax.  Also, post-2010, the temporary nature of the transfer tax system and the lateness of legislation dealing with expiring transfer tax provisions persuaded many clients to make significant gifts late in the year based on the fear that the estate tax exemption would drop significantly.  In addition, the decedent’s and the beneficiaries’ states of residence at the time of the decedent’s death was typically of little concern because there was a large gap in the tax rates applicable to gifts and estates and those applicable to income at the state level. 

The Changed Landscape - 2013 and Forward

In general.  As noted above, the changes in estate planning beginning in 2013 are characterized by the following:

  • Continuing trend of states repealing taxes imposed at death;

Note:   As of the beginning of 2016, 18 states (and the District of Columbia) have some variation of an estate tax or inheritance tax that is imposed at death. Those states are as follows:  CT, DE, HI, IL, IA, KY, ME, MD, MA, MN, NE, NJ, NY, OR, PA, RI, VT and WA.  See chart later in this outline. 

  • Increase in the applicable exclusion and indexing of the amount (note – with moderate inflation, the exclusion is anticipated to be approximately $6.5 million by 2023 and $9 million by 2033).
  • Reunification of the estate and gift tax;
  • Permanency of portability of the deceased spouse’s unused exclusion;
  • Permanency of transfer taxes.

Other changes that influence estate planning that began in 2013 include:

  • An increase in the top federal ordinary income tax bracket to 39.6 percent;
  • An increase in the highest federal long-term capital gain tax bracket to 20 percent;
  • An increase in the highest federal “qualified dividend income” tax rate to 20 percent;
  • The 3.8 percent net investment income tax (NIIT) of I.R.C. §1411;
  • For agricultural estates, land values more than doubled from 2000 to 2010, and continued to increase post-2010.  From 2009-2013, the overall increase in agricultural land values was 37 percent.  National Agricultural Statistics Service Land Values 2012 Summary , Cornell University, current through August 2, 2013 .  In the cornbelt, from 2006-2013, the average farm real estate value increased by 229.6 percent.  Id.   During that same timeframe, the applicable exclusion increased 262.5 percent.  This all means that even with the increase in the applicable exemption to $5.34 million (for 2014) and subsequent adjustments for inflation, many agricultural estates still face potential estate tax issues; 
  • Other data from Cornell indicates as follows:
    1. The United States farm real estate value, a measurement of the value of all land and buildings on farms, averaged $3,020 per acre for 2015, up 2.4 percent from 2014 values. Regional changes in the average value of farm real estate ranged from a 6.1 percent increase in the Southern Plains region to 0.3 percent decrease in the Corn Belt region. The highest farm real estate values were in the Corn Belt region at $6,350 per acre. The Mountain region had the lowest farm real estate value at $1,100 per acre.
    2. The United States cropland value increased by $30 per acre (0.7 percent) to $4,130 per acre from the previous year. In the Southern Plains region, the average cropland value increased 9.2 percent from the previous year. However, in the Corn Belt region, cropland values decreased by 2.3 percent. 
    3. The United States pasture value increased to $1,330 per acre, or 2.3 percent above 2014. The Southeast region was unchanged from 2014. The Lake States region had the highest increase at 15.4 percent.

State-level impacts and income tax ramifications.  At the state level, the landscape has dramatically changed.  At the time of enactment of EGTRRA in 2001, practically every state imposed taxes at death that were tied to the federal state death tax credit.  Since that time, however, the federal state death tax credit has replaced with a federal estate tax deduction under I.R.C. §2058 and, presently, only 19 states (and the District of Columbia) imposed some type of tax at death (whether a state estate tax or a state inheritance tax).  In those jurisdictions, the size of the estate exempt from tax (in states with an estate tax) and the states with an inheritance tax have various statutory procedures that set forth the amount and type of bequests that are exempt from tax. 

The following table sets forth the various state death tax systems as of April 1, 2016:

States Imposing An Estate Tax States Imposing An Inheritance Tax
StateExemption AmountMaximum Tax RateStateExemption AmountMaximum Tax Rate
DE$5,450,000 (indexed)16%KYVaries16%
HI$5,450,000 (indexed)16%NEVaries18%

Maryland and New York gradually increase the exemption until it equates with the federal estate tax exemption effective January 1, 2019. But, in New York, the exemption is phased out for estates exceeding 105 percent in value of the applicable exemption amount. The Minnesota exemption gradually increases in $200,000 increments annually until 2018 when it is set at $2,000,000.

Note:   Connecticut is the only state that imposes a gift tax. 

Also, numerous states have no state income tax (AK, FL, NV, SD, TX, WA and WY), TN and NH only tax dividend and interest income and other states such as CA, HI, MN, NJ, NY and OR have a relatively high state income tax burden compared to other states having an income tax.

Note:   When taken in conjunction with the income tax provisions of ATRA and the 3.8% NIIT, the combined federal and state income tax as applied to many agricultural estates that are likely to face potential estate tax at death has not decreased, when compared to 2001. 

This all means that the post-2012 estate planning landscape is, generally speaking, characterized by lower transfer tax costs, higher income tax rates, and greater disparity among the states between transfer taxes and income taxes.

Note:   Post-2012, income tax issues play a greater role in estate planning. Because of that, planners will need to consider whether it is possible for a client to minimize the overall tax burden for a particular client (or family) by moving to a state with a reduced (or eliminated) income tax and no transfer taxes.  In general, clients domiciled in relatively higher income tax states will generally place an emphasis on ensuring a basis “step-up” at death. For those clients with family businesses, the ability of the client to be domiciled in a “tax favorable” state at death means that pre-death transition/succession planning will be important. 

Focusing estate planning post-2012.  The key issues for the “estate planning team” beginning in 2013 and going forward would appear to be the following:

  • The client’s life expectancy;
  • The client’s lifestyle;
  • The potential need for long-term health care and whether a plan is in place to deal with that possibility;
  • The size of the potential gross estate;
  • The type of assets the decedent owns and their potential for appreciation in value;
  • For farm estates, preserving the eligibility for the estate executor to make a special use valuation election;
  • For relatively illiquid estates (commonplace among agricultural estates), preserving qualification for various liquidity planning techniques such as installment payment of federal estate tax and properly making the election on the estate tax return;
  • Whether a basis increase at death will be beneficial/essential;
  • Where the decedent’s resides at death;
  • Where the beneficiaries reside at the time of the decedent’s death;
  • If the decedent has a business, whether succession planning is needed;
  • Entity structuring and whether multiple entities are necessary;
  • For agricultural clients, the impact of farm program eligibility rules on the business structure;
  • Asset protection strategies, including the use of a Spousal Lifetime Access Trust 
  • General economic conditions and predictions concerning the future.  For agricultural clients, land values, and commodity prices and marketing strategies are important factors to monitor.

Impact of coupling.  Because of the “coupled” nature of the estate and gift tax systems and portability of the unused exclusion at the death of the first of the spouses to die, it will likely be desirable to use as little of the applicable exclusion during life to cover taxable gifts. For many clients, the applicable exclusion will shelter the entire value of their gross estate and inclusion of assets in the estate at death will allow for a basis increase in the hands of the heirs. Thus, for most clients, there will be little to no transfer tax cost.  Again, that fact will cause most clients to place an emphasis on preserving income tax basis “step-up” at death.  If there are to be asset transfers pre-death, such transfers will most likely occur in the context of business succession/transition planning.  But, for many clients, gifting assets during life will take on diminished importance.

P ortability. Portability of the deceased spouse’s unused exclusion amount (DSUEA) has become a key aspect of post-2012 estate planning.  The Treasury Department issued proposed and temporary regulations addressing the DSUEA under I.R.C. §2010(c)(2)(B) and I.R.C.

§2010(c)(4) on June 15, 2012.  The proposed regulations applied until June 15, 2015, and were then replaced with final regulations.

Note: The inherited DSUE amount is available for use by the surviving spouse as of the date of the deceased spouse's death and is applied to gifts and the estate of the surviving spouse before his or her own exemption is used. Accordingly, the surviving spouse may use the DSUE amount to shelter lifetime gifts from gift tax, or to reduce the estate tax liability of the surviving spouse's estate at death. 

The portability election must be made on a timely filed estate tax return (Form 706) for the first spouse to die. I.R.C. §2010(c)(5)(A). That’s the rule for nontaxable estates also, and the return is due by the same deadline (including extensions) that applies for taxable estates. The election is also revocable until the deadline for filing the return expires.

While an affirmative election is required by statute, Part 6 of Form 706 (which is entirely dedicated to the portability election, the DSUE calculation and roll forward of the DSUE amount) provides that "a decedent with a surviving spouse elects portability of the DSUE amount, if any, by completing and timely-filing the Form 706. No further action is required to elect portability…." This election, therefore, is made by default if there is a DSUE amount and an estate tax return is filed (so long as the box in Section A of Part 6 is not checked affirmatively electing out of portability.

Note:  In Rev. Proc. 2014-18, 2014-7 I.R.B. 513, the IRS provided a simplified method for particular estates to get an extended time to make the portability election in the first spouse's estate.  The relief for making a late portability election applies if the decedent died in 2011, 2012 or 2013 and was a U.S. citizen or resident at the time of death.  Also, the decedent' estate must not have been required to file a federal estate tax return and did not file such a return within  the nine-month deadline (or within an extended timeframe if an extension was involved).  If those requirements are satisfied, the Form 706 can be filed to make the portability election by the end of 2014 and the Rev. Proc. should be noted at the top of the form.

The regulations allow the surviving spouse to use the DSUEA before the deceased spouse’s return is filed (and before the amount of the DSUEA is established).  However, the DSUEA amount is subject to audit until the statute of limitations runs on the surviving spouse’s estate tax return.  Temp. Treas. Reg. §§20.2010-3T(c)(1); 25.2505-2T(d)(1). However, the regulations do not address whether a presumption of survivorship can be established.  If a married couple were able to establish such a presumption that would be recognized under state law, the spouse deemed as the survivor could use the DSUEA of the other spouse. That would allow a spouse with more wealth to use the DSUEA from the less wealthy spouse when simultaneous deaths occur.  Or, property could be transferred via a QTIP trust to the spouse with less wealth for the benefit of the wealthier spouse’s children.  Either way, the DSUEA of the less wealthy spouse should be sheltered.

Requirements of Form 706.   I.R.C. §2010(c)(5) requires that the DSUEA election be made by filing a “complete and properly-prepared” Form 706.  Temporary Regulation §20.2010- 2T(a)(7)(ii)(A) permits the “appointed” executor who is not otherwise required to file an estate tax return, to use the executor's "best estimate" of the value of certain property, and then report on Form 706 the gross amount in aggregate rounded up to the nearest $250,000.

Note:   Treas. Reg. §20.2010-2T(a)(7)(ii) sets forth “simplified reporting” for particular assets on Form 706 which allows for “best faith estimates.”  The simplified reporting rules applies to estates that do not otherwise have a filing requirement under I.R.C. §6018(a). This means that for any estate where the gross estate exceeds the basic exclusion amount ($5,340,000 in 2014) simplified reporting is not applicable. 

The availability of simplified reporting is available only for marital and charitable deduction property (under §§2056, 2056A and 2055) but not to such property if:

  • The value of the property involved “relates to, affects, or is needed to determine the value passing from the decedent to another recipient; the value of the property is needed to determine the estate's eligibility for alternate valuation, special use valuation estate tax deferral, “or other provision of the Code”;
  • “[L]ess than the entire value of an interest in property includible in the decedent’s gross estate is marital deduction property or charitable deduction property.”
  • A partial qualifying terminable interest property (QTIP) election or a partial disclaimer is made with respect to the property that results in less than all of the subject property qualifying for the marital or charitable deduction.

Assets reported under the simplified method are to be listed on the applicable Form 706 schedule without any value listed in the column for "Value at date of death."  The sum of the asset values included in the return under the simplified method are rounded up to the next $250,000 increment and reported on lines 10 and 23 of the Part 5 - Recapitulation (as "assets subject the special rule of Treas. Reg. §20.2010- 2T(a)(7)(ii))."

In addition to listing the assets on the appropriate schedules the Temporary Regulations require that the following be included for each asset must:

  1. Property description;
  2. Evidence of ownership of the property (i.e., a copy of a deed or account statement);
  3. Evidence of the beneficiary of the property (i.e., copy of beneficiary statement); and
  4. Information necessary to establish that the property qualifies for the marital or charitable deduction (i.e., copy of the trust or will).

Note:   These documentation requirements are not contained in the Form 706 instructions, but the regulations require the reporting of these items.  Example 1 under Treas. Reg. §20.2010-2T(a)(7)(ii) provides that a return is properly filed if it includes such documentation and proof of ownership.  The question is whether that means, at least by implication, a return is not properly filed if it does not contain such documentation. 

While the statute for assessing additional tax with respect to the estate tax return is the later of three years from the date of filing or two years from the date the tax was paid), the IRS has the power to examine the DSUE amount at any time through the period of the limitations as it applies to the estate of the deceased spouse. Temp. Treas. Reg. §§20.2010-2T(d) and 3T(d) allows the IRS to examine the estate and gift tax returns of each of the decedent's predeceased spouses. Any materials that are relevant to the calculation of the DSUE amount, including the estate tax (and gift tax) returns of each deceased spouse can be examined.  Thus, surviving spouse will need to retain appraisals, work papers and documentation substantiating the "good- faith" estimate, along with all intervening estate and gift tax returns to be able to substantiate the DSUEA amount.

Note:   The election to utilize portability allows the IRS an extended timeframe to question valuations.  The use of a bypass/credit shelter trust that accomplishes the same result for many clients, does not.  This is an important consideration for estate planners. 

Role for traditional bypass/credit shelter trusts.  Portability, at least in theory, can allow the surviving spouse’s estate to benefit from basis “step-up” with little (and possibly zero) transfer tax cost. While traditional bypass/credit shelter trust estate plans still have merit, for many clients (married couples whose total net worth is less than or equal to twice the applicable exclusion), relying on portability means that it is not possible to “overstuff” the marital portion of the surviving spouse’s estate.  This could become a bigger issue in future years as the applicable exclusion amount grows with inflation, this strategy will allow for even greater  funding of the marital portion of the estate with minimal (or no) gifts.  But, a key point is that for existing plans utilizing the traditional bypass/credit shelter approach, it is probably not worth redoing the estate plan simply because of portability unless there are extenuating circumstances or the client has other goals and objectives that need to be dealt with in a revised estate plan.

For wealthy clients with large estates that are above the applicable exclusion (or are expected to be at the time of death), one planning option might be to use the DSUEA in the surviving spouse’s estate to fund a contribution to an IDGT.  The DSUEA is applied against a surviving spouse’s taxable gift first before reducing the surviving spouse’s applicable exclusion amount. Thus, an IDGT would provide the same estate tax benefits as the by-pass trust would have, but the assets would be taxed to the surviving spouse as a grantor trust. Therefore, the trust assets would appreciate outside of the surviving spouse’s estate.

  Note: Portability planning is slightly less appealing to couples in community property states because, as discussed below, all community property gets a “step-up” in basis on the first spouse’s death. 

P ortability “arbitrage.”  A surviving spouse can utilize multiple DSUEAs by virtue of outliving multiple spouses where the DSUEA election is made in each of those spouse’s estates. The surviving spouse must gift the DSUEA of the last deceased spouse before the next spouse dies.

Transfer Tax Cost As Compared to Saving Income Tax By Virtue of Basis "Step-Up"

In general.  As noted above, for many clients a beginning estate planning step is the attempt to determine the potential transfer tax costs as compared to the income tax savings that would arise from a “step-up” in basis. This is not a precise science because the applicable exclusion will continue to be adjusted for inflation or deflation.  The rate of inflation/deflation and the client’s remaining lifespan are uncontrollable variables.  Also, as indicated above, the tax structure of the state where the decedent and beneficiaries are domiciled matters.

Benefitting from basis “step-up.” The only way to capture the income tax benefits of the stepped-up basis adjustment is for the recipients of those assets to dispose of them in a taxable transaction.  This raises several questions that the estate planner must consider:

  • Whether the asset is of a type (such as a farm, ranch or other closely-held family business) that the heirs may never sell it, or may sell it in the very distant future; 
  • Whether the asset is depreciable or subject to depletion; and
  • Whether the asset involved is an interest in a pass-through entity such as a partnership or an S corporation.

Exceptions to the basis “step-up” rule.  There are also exceptions to the general rule of date- of-death basis:

  • If the estate executor elects alternate valuation under I.R.C. §2032, then basis is established as of the alternate valuation date;
  • If the estate executor elects special use valuation under I.R.C. §2032A, the value of the elected property as reported on the federal estate tax return establishes the basis in the hands of the heirs.  This is true even though the executor and the IRS strike a deal to value the elected land at less than what would otherwise be allowed by statute (for deaths in 2014, the maximum statutory value reduction for elected land is $1,090,000).  For example, in Van Alen v. Comr., T.C. Memo. 2013-235 , the petitioners were two children of  a 1994 decedent and were beneficiaries of a residuary testamentary trust that received most of decedent’s estate, including a 13/16 interest in a cattle ranch. The ranch value was reported on estate tax return at substantially below FMV in accordance with I.R.C. §2032A.  The petitioners signed a consent agreement (one via guardian ad litem) agreeing to personal liability for any additional taxes imposed as result of the sale of the elected property or cessation of qualified use.  The IRS disputed the reported value but the matter settled.   Years later, the trust sold an easement on the ranch restricting development.  The gain on the sale of the easement was reported with reference to the I.R.C. §2032A value and K-1s were issued showing that the proceeds had been distributed to the beneficiaries.  The beneficiaries did not report the gain as reflected on the K-1s and then asserted that the ranch had been undervalued on the estate tax return and that the gain reportable should be reduced by using a FMV tax basis.  The court determined that the I.R.C. §2032A value pegs the basis of the elected property via I.R.C. §1014(a)(3).  The court upheld the consent agreement and an accuracy-related penalty was imposed because tax advice was sought only after the petitioners failed to report any gain.  
  • For land subject to a qualified conservation easement that is excluded from the gross estate under I.R.C. §2031(c), a carryover basis applies to such property.
  • Property that constitutes income in respect of a decedent (includes unrecognized interest on U.S. savings bonds, accounts receivable for cash basis taxpayers, qualified retirement plan assets, and IRAs, among other things); and
  • Appreciated property (determined on date of the gift) that was gifted to the decedent within one year of death, where the decedent transferred the property back to the original donor of such property (or the spouse of the donor).  The donor receiving the property back will take as a basis the basis that the decedent had in the property immediately before the date of death.

Estate Planning Techniques Designed To Achieve Income Tax Basis "Step-Up"

The disparate treatment of community and common law property under I.R.C. §1014 has incentivized estate planners to come up with techniques designed to achieve a basis “step up” for the surviving spouse’s common law property at the death of the first spouse.

In general.  As already noted, effective for tax years beginning after December 31, 2012, an additional tax of 3.8 percent on passive income of certain taxpayers applies.  Also, the same legislation increased the FICA self-employment tax rate from 2.9 percent to 3.8 percent for many taxpayers.  In effect, the Medicare surtax may result in a 3.8 percent tax on dividends C corporations pay to their owners.

From an estate planning, business planning and succession planning perspective, these new taxes have implications for trusts and may encourage many entities to adopt the pass-through tax treatment provided by partnerships, LLCs and S corporations.

The Future of the Federal Estate Tax and Implications for Estate Planning


In recent days, I have often been asked the question by lawyers, CPAs as well as farmers and ranchers of what the impact of the election of Donald Trump as President will be on the future of the federal estate tax.  The President-elect has proposed far-reaching changes to the tax system that will impact practically all taxpayers.  Consequently, tax advisors will be busy keeping up with the changes and determining how to implement them for their clients.  This is particularly true for practitioners trying to determine how to estate plans for clients.  In addition, it’s likely that the President-elect will be able to get many of his proposed tax changes through the Congress given the fact that the Republicans maintained control of both the U.S. House and Senate. 

What About Repeal?

The President-elect has proposed a full repeal of the federal estate tax.  With the ramp-up in recent years of the estate tax exemption to $5 million and the indexing of it to inflation such that it is at $5.45 million for deaths in (and gifts made in) 2016, the tax doesn’t generate much revenue and impacts relatively few estates.  IRS data for 2015 indicates that that just under 5,000 estates (out of 2,626,418 deaths) owed federal estate tax and generated approximately $17 billion in federal estate tax revenue.  That’s 0.6 percent of all federal revenue in 2015, but is an average tax liability of $3.4 million per taxable estate.  That is a huge number for those estates impacted by the tax, but the total revenue generation is less than one percent of all federal revenue in 2015.  Also, about forty-four percent of that amount came from 266 estates.  So, clearly, the estate tax is not much of a revenue-raiser, and it also hasn’t done a good job at minimizing the concentration of wealth – the purported primary reason for the creation of the tax.  Just based on these facts, there doesn’t appear to be much merit in keeping the tax around.

So, if the federal estate tax were to be repealed, when might it occur?  The options are that repeal could be effective January 1, 2017, or perhaps put off until the beginning of 2018.  Another option is that repeal could be phased-in over a certain period of time.  Also, while it appears at the present time that any repeal would be “permanent,” that’s not necessarily a certainty.  Similarly, it’s not known whether the current basis “step-up” rule would be retained if the estate tax is repealed.  That’s particularly a big issue for farmers and ranchers.  It will probably come down to a cost analysis as to whether step-up basis is allowed.  The President-elect has already proposed a capital gains tax at death applicable to transfers that exceed $10 million (with certain exemptions for farms and other family businesses).  One factor to keep in mind is that a repeal bill would require 60 votes in the Senate to avoid a filibuster unless repeal is done as part of a reconciliation bill.  In that event, however, the repeal of the federal estate tax would have to “sunset” in ten years.

Would the federal gift tax also be repealed?  Under current law, the gift tax and the estate tax are “coupled.”  That means that the exemption of $5.45 million can be used to offset taxable gifts during the donor’s life or offset taxable estate value at death.  The President-elect has proposed repealing the gift tax along with repeal of the estate tax.  That’s really interesting because the gift tax is not just simply tied into the estate tax, it also has income tax implications.  For instance, if there is no estate tax and no gift tax, it becomes much easier to shift income with zero tax cost to another person in the family (likely a child) who is in a lower tax bracket.  So, if a parent, for example, wishes to sell an asset, the tax-saving technique would be to gift the asset to the child in the lower tax bracket, have the child sell the asset and recognize the gain and then gift (tax-free) the proceeds of sale back to the parent.  Remember, the strategy works because capital gain tax rates are tied to the income tax rate of the seller.  The lower the income tax rate the seller is in, the lower the applicable capital gain rate on sale of an asset.  But, also remember, with the high level of the gift tax exemption currently, this strategy is largely possible already.  But, what a repeal of the gift tax would do is allow the easy transfer of assets into irrevocable trusts for asset protection planning purposes without gift tax complications.  But, if a capital gains tax at death is imposed will the transfer avoid the tax?  That’s a big question for planners to worry about and determine what to do with existing plans involving trusts particularly in light of planning that might already have been engaged in anticipating the finalization of the proposed I.R.C. §2704 regulations.   Relatedly, what should be done if basis step-up is retained and there is no estate tax?  That would mean that inclusion of property value in the estate at death won’t cause a tax problem, but exclusion would create an income tax problem!

So, with the gift tax in the mix, what are the possible legislative options?  One option is the permanent repeal, effective January 1, 2017, of the estate, gift and generation-skipping transfer tax.  Another option is that all of those taxes would be permanently repealed on a phase-out basis over a period of years.  Still another option is estate tax repeal with the retention of the gift tax.  Or, there could be an estate tax repeal and no step-up in basis.  Or, the estate tax could be repealed and a capital gains tax imposed on death (with certain exceptions). 

Planning Implications

An estate planning option, as always, is to simply wait and see what happens.  Perhaps the only downside to this approach would be an untimely death.  Even in that event it’s hard to see the downside given that the current exemption is relatively high and it doesn’t appear likely that the proposed I.R.C. §2704 regulations will actually get finalized (and even if they do, they will likely get removed by the new Administration).  For those clients that have already started the estate planning process, they could simply stop for the time being and adopt the wait and see approach.  But, there still might be the need for asset protection for high-wealth clients which could be accomplished by following through with the process to completion. 

Should existing plans be modified?  At this point, it’s too early to modify.  If (perhaps more likely, “when”) the estate tax is repealed, there will be many issues to be addressed by planners.  For instance, one of the issues I am addressing at the tax schools this fall concerns the use of Grantor Retained Annuity Trusts (GRATs).  What if one of those is already in place?  Would the note-sale transaction and the related contractual obligations be impacted by repeal?  What if the GRAT no longer serves its purpose and it is modified by a court?  Would that trigger gift tax (assuming the gift tax is retained)?  What’s the responsibility of the trustee in this situation?  What if a GRAT is presently under IRS audit?

For existing wills and revocable trusts, repeal of the estate tax will require a review of those documents.  Estate tax repeal would call into question the purpose and relevance of marital deduction/credit shelter trusts in wills.  Funding language will have to be examined.  Existing language that funds the credit shelter trust with the maximum amount resulting in no federal estate tax could result in wiping out the credit shelter trust.  Does the client want that result?  Practitioners will have to revisit their clients’ goals and objectives.  If there is a capital gains tax at death, will the courts view it as a “federal estate tax” such that the credit shelter trust would still be funded? 

For irrevocable trusts that were set up to minimize or eliminate federal estate tax, does the client still want the trust solely for asset protection purposes?  In addition, how will trust (and will) provisions utilized under prior law be interpreted under a new transfer tax system that wasn’t thought of at the time the language was drafted? 

Continuing with trusts for the moment, what about qualified terminable interest property (QTIP) trusts that have to pay out at least annually to qualify for the marital deduction?  Is that still what the client wants when it no longer has to be done?  Will a court grant any request to end the income interest? 

What about life insurance?  Don’t let clients drop it!  Even if the estate tax is repealed, it could be re-enacted by a subsequent Administration and a new Congress.  Plus, the client has already incurred the cost of getting the policy and is getting a build-up of wealth without income tax.  For many clients, life insurance is a pretty good investment right now. 

Also, factoring into the planning discussion is state-level death taxes.  For those states that have an estate tax, the repeal of the federal estate tax will also kill-off the state death tax.  States, such as Nebraska for example, that have an inheritance tax will still have that tax, but may be forced to reconsider whether they should because they will be putting themselves on a rather small “island” of states having such a tax. 

But, trust planning and usage will remain.  Asset protection from creditors and in the event of divorce (or death and remarriage) indicate why trusts will remain beneficial even without any federal estate tax.  Plus, trusts can be used to distribute income to beneficiaries in lower income tax brackets.  Irrevocable trusts can also be beneficial to provide protection and control to an older client suffering from failing health to help prevent loss of wealth by unscrupulous family members, supposedly trusted professionals and others.  But, from a technical standpoint, any mandatory income distribution provisions should be changed to discretionary.  After all, it won’t be necessary to have mandatory distributions to meet QTIP requirements.  Also, discretionary powers of appointment should be used to get the assets back into the grantor’s estate to get a basis step-up if that rule is retained.  Also, flexible trust language should be used to produce the intended result – inclusion in the estate when that is desired and exclusion when that is desired. 

What To Do Now

Common year-end planning is still the thing to do.  Make annual exclusion gifts to fund an I.R.C. §529 plan, make Crummey-type transfers, or make a zeroed-out gift to a GRAT.  From an income tax perspective, accelerate deductions to 2016 and defer income to 2017 because 2017 rates are likely to be lower than 2016.  One way to accelerate deductions would be to make some of the charitable contributions in 2016 that would have been made in 2017, contribute to retirement plans, and pay state and local taxes this year.

If you had a family member die this year and the estate tax return has not yet been filed (if Form 706 is due, it is due within nine months from the date of death), the return probably should be put on extension to determine whether the extra cost associated with a portability election should be incurred.


The repeal of the estate tax will significantly change estate planning for many clients.  We’ll have to wait and see exactly how repeal shapes up and what is included with it.  But, clients will be asking questions.  Are you prepared to provide them answers?  Hopefully, today’s post helps on that point.

Farm Income Tax Current Hot Topics

IRS Does Double-Back Layout on Self-Employment Tax

Two self-employment tax issues affecting farmers and ranchers have been in the forefront in recent years – the self-employment tax treatment of Conservation Reserve Program (CRP) payments and the self-employment tax implications of purchased livestock that had their purchase price deducted under the de minimis safe harbor of the capitalization and repair regulations.  

On the CRP issue, in 2014 the U.S. Court of Appeals ruled that CRP payments in the hands of a non-farmer are not subject to self-employment tax.  The court, in Morehouse v. Comr., 769 F.3d 616 (8th Cir. 2014), rev’g, 140 T.C. 350 (2013), held the IRS to its historic position staked out in Rev. Rul. 60-32 that government payments attributable to idling farmland are not subject to self-employment tax when received by a person who is not a farmer.  The court refused to give deference to an IRS announcement of proposed rulemaking involving the creation of a new Rev. Rul. that would obsolete the 1960 revenue ruling.  The IRS never wrote the new rule, but continued to assert their new position on audit.  The court essentially told the IRS to follow appropriate procedure and write a new rule reflecting their change of mind.  In addition, the court determined that CRP payments are “rental payments” statutorily excluded from self-employment tax under I.R.C. §1402(a).  Instead of following the court’s invitation to write a new rule, the IRS issued a non-acquiescence with the Eighth Circuit’s opinion.  A.O.D. 2015-02, IRB 2015-41.  IRS said that it would continue audits asserting their judicially-rejected position, even inside the Eighth Circuit (AR, IA, MN, MO, NE, ND and SD). 

Recently, the IRS had the opportunity to show just how strong its opposition to the Morehouse decision is.  A Nebraska non-farmer investor in real estate received a CP2000 notice from the IRS, indicating CRP income had been omitted from their 2014 the return.  The CP2000 notice assessed the income tax and SE Tax on the alleged omitted income.   The CRP rental income was in fact included on the return, but it was included on Schedule E along with cash rents, where it was not subject to self-employment tax.  The practitioner responded to the IRS notice by explaining that the CRP rents were properly reported on Schedule E because the taxpayer was not a farmer.  This put the matter squarely before the IRS to reject the taxpayer’s position based on the non-acquiescence.  So what did IRS do?  Did it stand tall and firm on its claim that the Eighth Circuit got it wrong on the self-employment tax issue?  Not at all!  IRS replied to the taxpayer’s response with a letter informing the taxpayer that the IRS inquiry was being closed with no change from the taxpayer’s initial position that reported the CRP rents for the non-farmer on Schedule E.  Maybe IRS just doesn’t feel so strong in its position that the Eighth Circuit got it wrong after all.

From a more practical standpoint, how do you avoid getting the CP2000 matching notice in situations for non-farm clients with CRP rental income?  Report the CRP rental income on either Schedule F or Form 4835 so that the IRS computer gets a match, and then show an offsetting deduction to move it over to Schedule E. 

On the capitalization and repair issue, taxpayers are permitted to make a de minimis safe harbor election that allows amounts otherwise required to be capitalized to be claimed as an I.R.C. §162 ordinary and necessary business expense.  Treas. Reg. §1.263(a)-1(f).  This de minimis expensing election has a limit of $5,000 for taxpayers with an Applicable Financial Statement (AFS) and $2,500 for those without an AFS.  Farmers will fall in the latter category. In both cases, the limit is applied either per the total on the invoice, or per item as substantiated by the invoice. One big issue for farmers and ranchers is how to report the income from the sale of purchased livestock that are held for productive use, such as breeding or dairy animals for which the de minimis safe harbor election was made allowing the full cost of the livestock to be deducted.  It had been believed that because the repair regulations (Treas. Reg. §1.263(a)-1(f)(3)(iii)) specify when the safe harbor is used, the sale amount is reported fully as ordinary income that is reported on Schedule F where it is subject to self-employment tax for a taxpayer who is sole proprietor farmer or a member of a farm partnership.  In that event, the use of the safe harbor election would produce a worse tax result that would claiming I.R.C. §179 on the livestock. 

An alternative interpretation of the repair regulations is that the self-employment tax treatment of the gain or loss on sale of assets for which the purchase price was deducted under the de minimis safe harbor is governed by Treas. Reg. §1.1402(a)-6(a).  That regulation states that the sale of property is not subject to self-employment tax unless at least one of two conditions are satisfied: (1) the property is stock in trade or other property of a kind which would properly be includible in inventory if on-hand at the close of the tax year; or (2) the property is held primarily for sale to customers in the ordinary course of a trade or business.  Because purchased livestock held for dairy or breeding purposes do not satisfy the first condition, the question comes down to whether condition two is satisfied – are the livestock held primarily for sale to customers in the ordinary course of a trade or business?  The answer to that question is highly fact-dependent.  If the livestock whose purchase costs have been deducted under the de minimis rule are not held primarily for sale to customers in the ordinary course of the taxpayer’s trade or business, the effect of the regulation is to report the gain on sale on Part II of Form 4797. This follows Treas. Reg. §1.1402(a)-6(a) which bars Sec. 1231 treatment (which would result in the sale being reported on Part I of Form 4797).  In that event, the income received on sale would not be subject to self-employment tax.

Now, in an unofficial communication, the IRS appears to believe that the alternative interpretation is the correct approach.  However, the IRS is careful to point out that the alternative approach is based on the assumptions that the livestock were neither inventoriable nor held for sale, and that those assumptions are highly fact dependent on a case-by case basis.  The IRS is considering adding clarifying language to the Farmers’ Tax Guide (IRS Pub. 225) and/or the Schedule F Instructions. 

So, in the spirit of the summer Olympics, the IRS has done a double-back layout on the self-employment tax issue for farmers and ranchers and rural landowners.  Now, that’s some good news!

Handling Depreciation on Asset Trades

When a business (including an agribusiness or farm operation) buys an asset that has a useful life of more than a year, the business gets to depreciate the asset’s cost over its life in order to recover the asset’s gradual deterioration or obsolescence.  If the business later sells the depreciated asset, it could be a taxable event if the asset is sold for more than its depreciated value.  When that could happen, taxpayers often look for ways to avoid reporting gain including trading the asset in a non-taxable exchange.  Computing depreciation on the property received in the exchange can be tricky, and accounting for depreciation recapture complicates the matter. 

Today’s blogpost on this topic is authored by guest blogger Chris Hesse.  Chris is a Principal in the National Tax Office of CliftonLarsonAllen, LLP, Minneapolis, MN.  Chris is also a member of the AICPA Tax Executive Committee and a former chair of the AICPA S Corporation Technical Resource Panel and of the AICPA National Agriculture Conference.

Here are Chris Hesse's thoughts on the matter:

Sales of assets which have been depreciated often result in taxable gain. The taxpayer may have elected to write-off some or the entire purchase price under I.R.C. §179, may have claimed bonus depreciation on new assets together with regular MACRS depreciation, or some combination of all three. In high income years, many taxpayers likely claim the I.R.C. §179 deduction in the year of purchase, resulting in no future depreciation deductions. Since the tax basis was fully expensed, the sale of the asset generates gain.  That gain would normally be capital gain, but it is treated as ordinary income (due to depreciation recapture).

Most taxpayers want to avoid gain. A popular way to defer gain recognition is to exchange the asset in accordance with I.R.C. §1031.  Asset exchanges can be very informal.  For example, a simple exchange can involve  a trade-in of equipment. Agricultural equipment qualifies for tax-deferred exchanges for replacement agricultural equipment. Thus, a combine may be exchanged for a tractor and tillage equipment. Real estate qualifies for exchange treatment for other real estate, as long as neither the property given up nor the property received in the exchange is held as inventory for sale or as inventory of a developer. Whether a simple trade-in of equipment or a more formal exchange of real estate, both result in the deferral of taxable income under I.R.C. §1031.

So, how is the depreciation computed on the replacement property? There are two methods:

  • Add the remaining tax basis (i.e., the undepreciated portion) of the old property to the cost (after trade-in allowance) of the new property.  Then, the replacement property is depreciated as one asset, placed in service when acquired. Or—
  • Continue depreciating the old property over its remaining life, and depreciate the cost (after trade-in allowance) of the new property as a separate asset.

The total depreciation to claim over the life of the replacement asset is the same under both methods. If the old asset was fully depreciated, there is no difference in the timing of depreciation deductions. However, if the old asset was not fully depreciated, the second method will provide depreciation deductions sooner than the first method.

What is the effect, however, when the replacement asset is later sold? Let’s say that the tractor traded-in has substantial value, but was nearly fully depreciated due to bonus depreciation. The replacement tractor ends up with very low tax basis on the depreciation schedule. If it is sold for an amount greater than the amount reflected as cost, does the farmer have I.R.C. §1231 gain, taxable as capital gain? Depreciation claimed on equipment is recaptured upon the sale of the equipment, up to the amount of the total gain (I.R.C.§1245). Gain in excess of the depreciation recapture is I.R.C. §1231 gain, which may be taxed as capital gain.


John purchased a tractor some time ago with a cost of $250,000. He traded it in when its basis was $40,000. The trade-in allowance was $150,000. Replacement tractor has a list price of $200,000; John pays $50,000 after the trade-in. The replacement tractor is put on the books at $90,000 (after trade-in cost of $50,000 plus remaining tax basis of the old tractor of $40,000). John sells the tractor for $120,000 next year.

While the “cost” of the tractor is listed on the depreciation schedule at $90,000 and the sales price is $120,000, is the $30,000 excess a capital gain? No. The depreciation  potential on the old tractor (the trade-in) carries over into the replacement tractor (Treas. Reg. §1.1245-2(c)(4)). In this example, John’s entire gain upon the sale of the replacement tractor is ordinary income due to I.R.C. §1245 depreciation recapture.

Trade-ins are complex enough as it is, and depreciation recapture potential adds to the complexity.

It’s Fall and Time to “Hoop it Up”!


Now that fall is here it’s time for “hoops” season.  Hoops means one thing when it comes to the hardwood, but it can mean something else on the farm or ranch.  A “hoop structure” is basically a shelter that can house livestock (swine, cattle, sheep, goats and horses), but it can also be used to store hay and/or machinery.  If used for storage, they are an alternative to the more traditional pole barn. 

A hoop structure is built with steel arches that are mounted on wood or concrete sidewalls.  The steel arches are securely fastened to the sidewall to transmit the wind forces to the sidewalls and the ground.  They can be used for numerous purposes.  If the structure is used for livestock, then a feed bunk is placed outside the sidewall.  Putting the feed bunk outside the sidewall eliminates and need of an interior drive path.  Also, in this situation, an overhang is added to reduce the rainwater entering the bunk.  A polyethylene fabric tarp is stretched over the steel framing to form the roof of the structure, and the tarp is designed to reflect solar radiation to prevent heat stress.  Lighting is not necessarily utilized.  The structure is either installed directly on the ground or on concrete or wooden walls.  A hoop structure can also be used to store ag commodities or machinery.

What are the tax implications of a hoop structure?  How is it classified for depreciation purposes?  Is it eligible for expense method depreciation under I.R.C. §179?  Is it eligible for first-year bonus depreciation? 

These are issues that myself and Chris Hesse and Paul Neiffer of CLA kicked around earlier this year.  Today’s blog post takes a look at these issues.

Depreciation Recovery Period

Without a doubt a hoop structure is farm real property.  Farm real property can be classified at least four ways (in accordance with Rev. Proc. 87-56):

  • A land improvement (class 00.3) has a cost recovery period of 15 years.
  • A single purpose agricultural or horticultural structure (class 01.4) has a cost recovery period of 10 years.
  • I.R.C. §1245 real property with no class life has a cost recovery of seven years.
  • A farm building (class 01.3) has a cost recovery period of 20 years.

A land improvement is an item that is added directly to land and is either I.R.C. §1245 or I.R.C. §1250 property if it is depreciable.  Fences, landscaping, roads, sidewalks, canals and waterways fit in this category under Rev. Proc. 87-56.  Also, included in this category are silage bunkers, concrete ditches, wasteways and pond outlets as well as irrigation and livestock watering wells.  None of these look like buildings.  Thus, a hoop structure would not fit in this category.

I.R.C. §48(p), even though it has been repealed, contains the current, valid definition of a single purpose agricultural or horticultural structure.  That provision (and subsections thereunder) defined property which qualified for I.R.C. §38 (investment tax credit).  Tax legislation in 1986 moved that language into I.R.C. §1245 for depreciation recapture purposes.  Under that definition, a single purpose ag structure is used for housing, raising and feeding a  particular type of livestock and their produce, and the housing of the necessary equipment.   I.R.C. §48(p)(2).  Structures that fit this definition include hog houses, poultry barns, livestock sheds, milking parlors and similar structures.  Also included within the definition are greenhouses that are constructed and designed for the commercial production of plants and a structure specifically designed and used for the production of mushrooms.  Thus, only livestock structures and greenhouses qualify under this category.  A hoop structure is not a single purpose structure and doesn’t fit in this category. It can house various types of livestock, and store commodities and/or machinery.  If you have any doubt, a flat storage building has been held  not to be a single purpose agricultural or horticultural structure.   Bundy v. United States, 59 AFTR 2d 87-682 (1986).  A flat storage building is pretty much the same as a hoop structure – not a single purpose ag or horticultural structure.

Assets that look like a building but qualify as I.R.C. §1245 assets (and not separately classified as single purpose ag or horticultural structures) are not “buildings.”   Treas. Reg. §1.48-1(e)(1)(i).  These assets are, basically, machinery and equipment which are an integral part of manufacturing or production .  I.R.C. §1245(a)(3)(B)(i).  This category includes storage facilities for potatoes, onions and other cold storage facilities for fruits and vegetables.  If the asset is used for other purposes after the commodities have been removed, the structures are buildings, rather than I.R.C. §1245 property.  So, if the property is easily adaptable to other uses, it is a building and not I.R.C.§1245 real property.  But, if the property is specially designed and unsuitable for other uses, it is not a building.   Olson v. Comr., T.C. Memo. 1970-296 (1970).  It really comes down to what “easily adaptable” means.  That is determined on a case-by-case basis based on the economical cost of the structure in of each situation.  Whether a hoop structure fits in this category either depends on each particular situation.

A farm building, then, by default, is a real property item that is not included in another class.  Such things as shops, machine sheds and other general purpose buildings on a farm that are not integral to the manufacturing, production or growing process are included in this category.  Hoop structures generally fit in this category and would have a cost recovery period of 20 years.  They are a general purpose farm building.  At least that’s the likely IRS position.  Granted, a fact-dependent argument can be made that a hoop structure is used as an integral part of production or is akin to a bulk storage facility used in connection with production.  If that argument prevails, a hoop structure is I.R.C. §1245 property with no class life. 

Depreciation Method

Assets that are used in the farming business (as defined in I.R.C. §168(b)(2)(B)) must use the 150 percent declining balance method rather than the 200 percent declining balance method.  It is the business of the taxpayer that controls the method available for depreciation, rather than the function of the equipment in the business.      

Expense Method Depreciation

To be eligible for expense method depreciation (I.R.C. §179), property must be acquired by purchase, used more than 50 percent in the active conduct of a trade or business,  and be I.R.C. §1245 property that is either MACRS property or off-the-shelf computer software.  We have already established the general rule that a hoop structure is a general purpose ag building that is not I.R.C. §1245 real property.  Thus, under the general rule, a hoop structure is not eligible for I.R.C. §179 depreciation unless it is not a building and is an integral part of production like fences, and drainage tile, machinery and equipment, etc., or is akin to a bulk storage facility.  But, if the argument is that they qualify as a storage facility, the argument is a tough one to make because of the hoop structure’s ability to be adapted to different uses.  If such adaptation is economically reasonable, and the structure provides working space in addition to storage space, a hoop structure won’t qualify as bulk storage.   See Brown & Williamson Tobacco Corporation v. United States, 369 F. Supp. 1283 (W.D. Ky. 1973).  So, the IRS view is likely to be that a hoop structure is a general purpose ag building that is not eligible for I.R.C. §179.  The facts of an individual situation might change that conclusion, however.

Bonus Depreciation

In general, property that is eligible for first year “bonus” depreciation (set at the 50 percent level for 2016) must have its original use commence with the taxpayer, be tangible depreciable property with a MACRS recovery period of 20 years or less and not be “excepted” property (basically, property that is not placed in service and disposed of in the same tax year or be converted from business to personal use in the tax year that it was acquired).  A hoop structure would meet the test if its original use commenced with the taxpayer and it is not excepted property (unlikely).  Unless an election out of bonus depreciation is made, it is claimed before any applicable MACRS depreciation is claimed. 


Hoop structures have been gaining in popularity in recent years due to their economic efficiency and utility.  But, they present some tricky tax issues primarily associated with depreciation.  That’s because of their less than permanent character, and the lack of specific guidance from the IRS.  Fitting them within the existing framework for agricultural assets leads to the likely IRS conclusion that they are a general purpose farm building with a cost recovery period of 20 years, ineligible for I.R.C. §179 and potentially eligible for first-year “bonus” depreciation.  But, the facts of a particular situation could result in a hoop structure being determined to be I.R.C. §1245 real property with no class life that qualifies for I.R.C. §179 and is potentially eligible for first-year “bonus” depreciation.