Friday, May 5, 2017
The U.S. House of Representatives approved a bill known as the American Health Care Act (the "House Bill") on Thursday to repeal major parts of the Affordable Care Act ("ACA") also known as Obamacare and replace it with a Republican authored plan. This is the first legislation approved since President Donald Trump came into office. It is widely perceived that there will be a major battle over this plan in the Senate. The vote of 217-213 was barely a majority. No Democrats voted for the bill with 20 Republicans also voting against. Republicans, including Trump, have been promising they would repeal the ACA as soon as possible so this campaign promise is being fulfilled. The House Bill will face major obstacles in the Senate, where the Republican majority is razor thin at 52 seats out of 100. The House Bill is seen as a victory for House Speaker Paul Ryan who had earlier failed to achieve majority support for a healthcare bill. The House Bill would repeal most Obamacare taxes, including the penalty for failing to purchase health insurance; it would reduce Medicaid funding for the poor, and roll back much of the ACA's expansion of Medicaid benefits. A central tenet of the ACA was the treatment of patients with pre-existing conditions. Under the ACA, insurers were forbidden from charging those patients higher rates. The House Bill allows states to dictate terms of policies sold within each state while reducing the rules implemented by the ACA. While insurers under the House Bill may not refuse patients insurance due to pre-existing conditions, they would be permitted to charge those patients more. The House Bill is a compromise on the pre-existing condition issue: the House Bill would add $8 billion over five years to help cover the cost for people with pre-existing conditions who could have difficulty paying the higher insurance costs. The ACA had required everyone to buy insurance or pay a penalty, that provision is eliminated in the House Bill.
Wednesday, February 15, 2017
HUSBAND CAN'T SIGN JOINT RETURN FOR ALLEGEDLY INSANE WIFE In Moss, TC Memo 2017-30, TC Memo 2017-30 (2017), the Tax Court held that a husband who alleged that his wife's mental illness led her to the delusion that she was a victim of the "Madoff fraud" could not file a return over her objection as a married filing joint status taxpayer. Since the husband had no signed power of attorney, he was barred from claiming that he filed a valid joint return with his wife as her agent. The wife had refused to sign the joint return and she filed her own return as married filing separately. I.R.C. § 6012(b)(2), provides that when a person cannot make a return due to incapacity, "the return of such individual shall be made by a duly authorized agent, his committee, guardian, fiduciary or other person charged with the care of the person or property of such individual". Treas. Reg. § 1.6012-(a)(5) provides reasons a person may be unable to make a return include disease, illness, or continuous absence from the U.S. Reg. § 1.6013-1(a)(2) provides that a return for a disabled person must be accompanied by the following even when there is a spouse signing: 1. IRS Form 2848 (Power of Attorney and Declaration of Representative), or, a power of attorney authorizing the agent to represent the taxpayer in making, executing, or filing the return; 2. A statement signed by the spouse who is signing the return confirming that the incapacitated spouse consents to the signing of the return; or 3. A request for permission from, and determination made by, the appropriate IRS district director that good cause exists for permitting an agent to submit the return. (Reg. § 1.6012-1(a)(5)) In this case, Mr. Moss filed the return and attached to it a letter stating that his wife was seriously mentally ill, that IRS should disregard all information she sent, and that the return included her income for 2008 as well as his. He did not attach any power of attorney that would authorize him to act on behalf of his wife. While Mrs. Moss was hospitalized in 2005 and 2006 and was delusional, Mr. Moss never sought official status as a conservator, holder of a power of attorney, or guardian of his wife. Since Mrs. Moss never submitted to IRS any consent for Mr. Moss to file the return for her and instead insisted on filing a separate return, his jointly filed return was rejected by the I.R.S. and the Tax Court. The Court stated that a person's previous commitment to a hospital and a spouse's assertion of mental illness were not sufficient to invalidate an individual's right to file his or her own return. Furthermore, since he did not qualify as his wife's agent and had no power of attorney or Form 2848 and did not file a statement confirming that she consented to the signing of the return, the return was properly rejected. The court did note that in certain circumstances, a joint return may be found, even without a spouse's signature, but only if there is other evidence that the husband and wife intended to file a joint return which in this case was lacking. Conclusion, when dealing with a taxpayer who may lack capacity, be sure to obtain a valid power of attorney or other proof of authority to sign on such person’s behalf to avoid litigation with the Internal Revenue Service.
Friday, December 16, 2016
“Willful” Fail to File FBAR Defined in a California District Court Case In U.S. v. Bohanec, 2016 WL 7167869, 118 AFTR 2d ¶ 2016-5537(DC CA 12/8/2016), a district court in California determined that a taxpayers' failure to timely file a Foreign Bank and Financial Accounts Report (“FBAR”) was willful. U.S. citizens with accounts outside the U.S. must disclose those accounts on an FBAR by June 30 of the year following if the amount is at least $10,000. 31 U.S.C. 5314. In Bohanec, the taxpayers stopped employing a bookkeeper or keeping any books after opening a foreign bank account. They made several misstatements under penalty of perjury when they applied (and were rejected) from participating in the Offshore Voluntary Disclosure Program (“OVDP”). The facts in Bohanec showed that the taxpayers were very deceptive and when they filed their OVDP, they did not even disclose all of their foreign accounts - leaving out accounts in Mexico and Austria while only disclosing the Swiss accounts at UBS. They also claimed the funds were all from income duly reported and on which taxes were paid but that was also untruthful. The reason the term “wilfully” is so important is that if the failure is not willful, the penalty is “only” $10,000 but if the failure to disclose is considered “willful,” the penalty goes up to the greater of $100,000 or 50% of the highest account value for the year! Bohanac ruled that “willful” does not only include knowing failure to disclose but also reckless violations of the filing requirements.
Wednesday, November 30, 2016
Imposition of Attorney’s Fees Unavailable For Undue Influence Absent a Fiduciary Duty New Jersey applies the American Rule when it comes to attorney fees. The American Rule states that each party to litigation pays its own fees. There are certain exceptions outlined by New Jersey Court rules and a few judicially mandated exceptions as well where fee shifting is appropriate. The most well known judicial exception is the imposition of fee shifting for a successful litigation for attorney malpractice. Saffer v. Willoughby, 143 N.J. 256 (1996) The New Jersey Supreme Court in Estate of Folcher, 224 N.J. 496 (2016) has recently proclaimed in a 5-1 decision (Justice Fernandez-Vina did not participate) that an award of reimbursement of attorney fees is not permitted against a tortfeasor who commits the pernicious tort of undue influence but is not a fiduciary. In re Niles Trust, 176 N.J. 282 (2003) had held that an award of attorney’s fees is available against a fiduciary who commits undue influence. Folcher refused to extend the Niles fee shifting to persons who are not fiduciaries. Folcher relied heavily on the American Rule in reaching its result. “New Jersey is an ‘American Rule’ jurisdiction meaning we have a strong public policy against shifting counsel fees from one party to another.” Folcher at 506-07. While the Folcher court was certain to point out that the tortfeasor was particularly perfidious in that case with very strong proofs of undue influence, it still refused to extend the attorney fee award in that case. Rather, the Supreme Court remanded the case back to the trial court to determine whether punitive damages should have been awarded. The sole dissenter, Justice Albin, felt that the award of attorney fees was appropriate but he was the only one willing to extend the attorney fee shifting to undue influence committed by someone who was not a fiduciary.
Monday, October 24, 2016
Stolen Income is Still Taxable Income The Tax Court in Swartz v. Comm., Docket No. 3583-10 (10/17/16) has just entered an order holding that a taxpayer's criminal conviction for theft of $12.5 million from his employer precludes him from arguing that he did not receive such income. The rule of law preventing him from arguing that he did not receive the income is called collateral estoppel. Under the doctrine of collateral estoppel, any issue litigated in a prior legal proceeding is conclusive of the same issue. Code Sec. 61(a) provides that all income including illicit income such as embezzlement, larceny, false pretenses, extortion, or any other types of theft unless there is restitution paid in the same year as the theft. In this case, the Taxpayer, Mark Swartz was a CFO who participated in his company’s Key Employee Loan Program (KELP) for its executive officers. He took a “loan” that was unauthorized in one year and did not pay it back until a later year. Mr. Swartz was convicted of larceny and conspiracy with respect to the $12.5 million. The Tax Court ruled that collateral estoppel applied and that Mr. Swartz's conviction for stealing $12.5 million precludes him from arguing that he didn't have $12.5 million in unreported taxable income. The Court did not address the issue of the tax effects of the later repayment as that issue was not before the court.
Friday, October 14, 2016
Offshore Account Holders Cannot Sue to Enter into More Lax Disclosure Program The District Court in the District of Columbia in the case of Maze v. Internal Revenue Service, Civ. Action No. 2015-1806 (7/25/16) held that taxpayers cannot sue the Internal Revenue Service to be permitted to enter a more favorable program than the one for which they initially applied. Background: The taxpayers failed to report foreign accounts so they entered into the voluntary OVDP (Offshore Voluntary Disclosure Program) which enabled them to come forward without risk of prosecution and pay a fine. The Internal Revenue Service later came out with a simpler and less expensive program called the SFCP or Streamlined Filing Compliance Procedures. While SFCP has different requirements, the taxpayers felt that they would have met those criteria and have been eligible for a much lower penalty – 5% instead of 27.5%. The problem is that the SFCP became available only after the taxpayers already filed and were accepted under the OVDP program. Decision: The Court in Maze determined that the Internal Revenue Service has the authority to set its programs and their parameters and deadlines as it sees fit. Therefore the D.C. Court was unwilling to require the I.R.S. to accept the taxpayers into the easier program. The taxpayers argued for the relief, but the Court ruled that the Anti-Injunction Act found in 26 U.S.C. 7421 prevented the taxpayers from the relief it sought. Moral of the story: Timing is often everything. But now, both programs (OVDP and SFCP) are available and should be carefully considered with counsel before choosing the program to enter.
Monday, September 26, 2016
“BLAME THE LAWYER” NO EXCUSE TO AVOID PENALTIES FOR LATE ESTATE TAX FILING The Court of Appeals for the Sixth Circuit, in Specht v. U.S., 118 AFTR 2d ¶ 2016-5243 (6th Cir. 09/22/2016) has just held that where the attorney for an estate failed to perform numerous duties with respect to the estate, including timely filing the estate tax return, and told the unsophisticated executor that the attorney had received all necessary extensions, the estate did not meet the reasonable cause/not willful neglect standard for avoiding late filing and late payment penalties where the executor had evidence that the attorney was lying. Background. The I.R.C. provides for mandatory penalties for the failure to timely file a return (I.R.C. §6651(a)(1)) and failure to timely pay a tax (Code §6651(a)(2)). But, these penalties are not owed if the taxpayer can establish reasonable cause for the failure and that the failure was not due to willful neglect. (I.R.C. §6651(a)(1), and §6651(a)(2)). In order to meet the reasonable cause exception, Treas. Reg. §301.6651-1(c)(1) requires that a taxpayer show that while he used ordinary care, he nevertheless was unable to file the return within the prescribed time. Previously the U.S. Supreme Court held that reliance on an attorney is normally insufficient to avoid penalties. Boyle, 55 AFTR 2d 85-153555 AFTR 2d 85-1535 (1985), In Boyle, the Supreme Court, held that Congress had charged the executor with an unambiguous, precisely defined duty to file the estate return within nine months and the fact that an attorney, as the executor's agent, was expected to attend to the matter, did not relieve the principal of his duty to comply with the statute. Under Boyle, to meet the reasonable cause exception, the taxpayer bore a heavy burden of proving both that there was reasonable cause and that the failure to timely file did not result from willful neglect. While reliance on a lawyer was common, that reliance couldn't function as a substitute for compliance with an unambiguous statute. In Specht, the Decedent died on Dec. 30, 2008 but her attorney of 50 years in estate planning, and unbeknownst to Specht, was privately battling brain cancer. No federal estate tax return was filed on or before Sept. 30, 2009, nor was an extension sought. And, no federal estate tax payment was made on or before Sept. 30, 2009. But Specht received four notices from the probate court warning her that her attorney was failing to perform her duties and that the Estate had missed probate deadlines. Since the executor knew there was a problem with her lawyer, she was found to have been neglectful. The 6th Circuit held that the relevant question was whether the executor, not the attorney, was reasonable in missing the deadline. In this case the executors blindly relied on an attorney's representations that the filing would be completed on time, and as a result the deadline was missed. The Sixth Circuit reinforced the strict, bright-line rule of Boyle where it concluded that, although the company had exercised ordinary business care and prudence, it also had to demonstrate that it was "rendered unable to meet its responsibilities despite the exercise of such care and prudence". That is, the failure to pay must result from circumstances beyond the taxpayer's control (e.g. postal delays, illness), not simply the taxpayer's reliance on an agent employed by the taxpayer. Specht's reliance on an unreliable agent was her downfall. Therefore pick your attorneys carefully and learn the deadlines and oversee their compliance like a hawk to avoid decisions such as Boyle and now Specht.