Estate Litigation – Father Held Not to Have Abandoned Son and Therefore Entitled to a Share of His Deceased Son’s Estate

Estate Litigation – Father Held Not to Have Abandoned Son and Therefore Entitled to a Share of His Deceased Son’s Estate A father, who had very little contact with his child for nine years prior to the child's death, was not deemed to have "abandoned" him or "willfully forsaken" him. Thus he was not barred from a share of the child's estate. The case was one of first impression in New Jersey and the New Jersey Appellate Division in In the Matter of the Estate of Michael Fisher II, __ N.J. Super. __, 2015 WL 8484786 (N.J. App. Div. 2015) reversed the lower court’s ruling which had determined that the father had, in fact, abandoned his son and was therefore excluded from sharing the son’s estate. There were facts that pointed toward abandonment such as, the father moved away, was late with child support payments and failed to attend court-ordered counseling in order to have his visitation rights reinstated. However, the Appellate Court held that these facts alone were insufficient to declare abandonment of the child. At issue were essentially the proceeds from a wrongful death lawsuit against the child’s cardiologist who allowed him to play hockey though he had a congenital heart defect. But the court required that the father “clearly manifested a settled purpose to permanently forego all parental duties and relinquish all parental claims to the child. That purpose was not demonstrated here." N.J.S.A. 3B:5-4.1 states that one can be held to have given up parental rights when he "abandoned" or was "willfully forsaking the decedent." The standard applied required was that “through his or her unambiguous and intentional conduct, has clearly manifested a settled purpose to permanently forego all parental duties and relinquish all parental claims to the child,” Since the father paid $37,000 in child support, had one face-to-face meeting and had exchanged some messages on Facebook, those facts precluded a finding of abandonment.

What do you do when dad wants to leave everything in his estate to you but you know your brother is going to contest the will?

What do you do when dad wants to leave everything in his estate to you but you know your brother is going to contest the will? When a will is contested because family members don’t agree with how a family member’s estate is being parceled out, it can get ugly . . . and very expensive – and gut wrenching to see the fight through to resolution. No one really wants to engage in that kind of battle, especially when you are grieving, but there are steps that beneficiaries can take now before their parent or other family member passes to preclude protracted conflict. There are purposeful steps now that one can take to at least reduce the pain of the process later. First step is to have a will drawn. But, don’t make the mistakes that many others have made in getting Dad to do a new will. Here are some do’s and don’ts: Don’t use your own attorney – suggest that your Dad hire his own attorney to draft his will; if your father has his own lawyer that does not also represent you, then use him or have him recommend the estate planning lawyer; Don’t rely on the family attorney that could possibly be unduly influenced by family members who also have business affairs with him or her. Don’t be in the room with your Dad if your other siblings are not when they are discussing the will. You never want to be accused of influencing the process. Do suggest that the will signing be videotaped to demonstrate that Dad was of sound mind and judgement at the time. Do suggest that dad say in his will that he is excluding someone from the will but do not say why. Do take steps to include your brother in activities with your Dad. Keeping them apart is a hallmark indication of undue influence. Make sure that Dad includes your brother in invitations and even invite her to family functions that you are throwing. Do make sure to remember that the will is just one part of the estate planning process. But many assets such as joint accounts go to loved ones outside of the probate process. Thus if there are joint accounts between your Dad and brother, remember to remind him to go to the bank or financial institution to change the designation. Of course, be certain not to attend or to drive him to the bank. Do remember to check beneficiary designations as annuities, IRA’s and 401(k)’s pass to the designated beneficiary rather than through his will. Do remember to make sure that the insurance is paid how your father would want. If he included your brother way back when, make sure he calls to have the change of beneficiary handled. Of course, don’t be on the call and don’t act as the witness on the change of beneficiary form. Plan now to avoid the costly and challenging ordeal that would otherwise result from a poorly planned estate. Jay J. Freireich, Esq. is a member of the wills, trusts and estates practice group at Brach Eichler LLC in Roseland, N.J. Contact him at jfreireich@bracheichler.com .

IRS EXPLAINS DEDUCTIBILITY OF BUSINESS DONATIONS TO ENTITIES WHERE PERCENTAGE OF SALES PROMOTION ARE DONATED

IRS EXPLAINS DEDUCTIBILITY OF BUSINESS DONATIONS TO ENTITIES WHERE PERCENTAGE OF SALES PROMOTION ARE DONATED The Internal Revenue Service just issued Chief Counsel Advice 201543013 (“CCA”) which discusses deductibility of payments to charities and non-charities where a business advertises that it will give a certain percentage of its sales to organizations devoted to a particular cause, such as environmental conservation or eradicating hunger. The CCA addresses not only charities described in Code §170 but also non-Code §170(c) organizations, and even for-profit entities with a social mission included in their corporate bylaws. But specifically rejected was recipients engaged in political activity. A question not answered explicitly was who gets the donation, the customer who bought the product at full price leading the business to pay the charity, or the business itself? While the CCA does not answer the question, it does not appear that the funds are donated by the customers. Normally, a business expense deduction is not permitted for contributions to charities. But under this plan which is directly related to the taxpayer's business and is made with a "reasonable expectation of financial return commensurate with" the amount transferred, the payment is deductible as a business expense rather than a charitable contribution under Code §162(b) and Treas. Regs. §1.162-15(a) and §1.170A-2(c)(5)). Under the percentage of sales plan, the Taxpayer appears to have acted with the reasonable belief that it would enhance and increase its business. The CCA went on to permit as a business deduction the payments to organizations not described in Code §170. The CCA reiterated for that type of organization that Taxpayer had a reasonable expectation of commensurate financial return from the donations it is making through the promotion. The only exception is for donations to lobbying organizations under Code §162(e)(1). No business expense deduction is allowed for amounts paid in connection with influencing legislation or participation or intervention in any political campaign on behalf of, or in opposition to, any candidate for public office. Conclusion: Donating a percentage of sales to charity leads to the business being entitled to a deduction for the payment to charity as a business expense.

Autism Spectrum Disorder No Excuse For Late Filing and Payment Penalty Abatement

Autism Spectrum Disorder No Excuse For Late Filing and Payment Penalty Abatement In Poppe v. Comm., TCM 2015-205 (2015), the taxpayer’s autism spectrum disorder (“ASD”) was held not to constitute reasonable cause for failure to file and pay. The Taxpayer was an active day trader. He argued that he had reasonable cause for failing to timely file his return because, as a result of his ASD, he became "despondent" from all of the money he had lost and could not organize himself to timely file a tax return. The Tax Court in its memorandum decision rejected that argument. First, the Court did provide that reasonable cause may exist if a taxpayer's or a family member's illness or incapacity prevents the taxpayer from filing his or her tax return. But the Tax Court went further to state that if the taxpayer is able to continue his or her business affairs despite the illness or incapacity, the excuse will not be sustained. In Poppe, the Taxpayer’s mental condition did not prevent him from engaging in activities that required a high degree of concentration and ability to analyze and organize information. Poppe's work station as a day trader was equipped with six monitors showing the status of his trades. He was able to collect, analyze, and organize information on which to base his trades. Thus, the Court reasoned, if he could attend to his affairs despite his ASD, he could file and pay his taxes timely. The Court did not state that ASD is no excuse generally. But under the facts and circumstances in Poppe, the Court would not sustain the excuse. Had the Taxpayer been so overcome by his ASD that he could not attend to his business affairs, the ASD would have provided reasonable cause for penalty abatement.

IRS Determines Year Taxpayer Had Theft loss From Ponzi Scheme

IRS Determines Year Taxpayer Had Theft loss From Ponzi Scheme The IRS Chief Counsel’s office released a legal memorandum - ILM 201511018 - which sets forth the proper year a taxpayer can claim a theft loss deduction when victim of a Ponzi scheme. I.R.C. §165(a) permits a deduction for losses sustained during the tax year (and not compensated by insurance or otherwise). A loss arising from criminal fraud or embezzlement in a transaction entered into for profit is a theft loss, not a capital loss, under §165. Pursuant to §165(e) any loss arising from a theft is deemed sustained in the tax year a taxpayer discovers the loss. But the Regulations state that if, in the year of discovery, there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss for which reimbursement may be received is sustained until the tax year in which it can be ascertained with reasonable certainty whether or not the reimbursement will be received. Whether a reasonable prospect of recovery exists is a question of fact to be determined upon examination of all facts and circumstances. Treas. Reg. §1.165-8(a)(2) and 1.165-1(d). Rev. Proc. 2009-20 provides a safe harbor under these schemes for the timing and amount of the theft loss in Ponzi schemes which are defined as a fraudulent arrangement in which a party (the lead figure) receives cash or property from investors; purports to earn income for the investors; reports income amounts to the investors that are partially or wholly fictitious; makes payments, if any, of purported income or principal to some investors from amounts that other investors invested in the fraudulent arrangement; and appropriates some or all of the investors' cash or property. Where the lead figure is indicted, Rev. Proc. 2009-20 states that a taxpayer's discovery year is the tax year of the investor in which the indictment, information, or complaint is filed. And if the lead figure died, then Rev. Proc. 2011-58 provides the discovery year as the later of the civil claim becoming public, a receiver appointed or funds frozen or the death of the lead figure. In ILM 201511018, the Internal Revenue Service determined that the year of discovery was the year when: (1) the civil complaint was filed by the Agency that alleged facts that comprise substantially all of the elements of a specified fraudulent arrangement conducted by the lead figures; (2) one of the lead figures died before being criminally charged; and (3) a receiver was appointed with respect to the arrangement. While these Ponzi schemes are becoming all too frequent, at least the Government is easing the path for taking the loss as a deductible theft.

District Court affirms FBAR penalties but disallows FBAR late payment penalty and interest

District Court affirms FBAR penalties but disallows FBAR late payment penalty and interest In Moore v U.S., 2015 WL4508688, 116 AFTR 2d ¶ 2015-5094 (W.D. Wa. 7/24/2015), a district court found that the Taxpayer did not provide an adequate explanation for not imposing FBAR penalties, so those penalties were affirmed. But, the Court also found that tacking on additional late payment penalties was excessive. As a result, the court disallowed IRS's assessment of interest and late payment penalties with respect to the original FBAR penalties and treated the FBAR penalty as if it were assessed on the date of the judgment imposing the penalties. Background. The Bank Secrecy Act (BSA) provides that the Treasury Department has the authority to collect information from U.S. persons who have financial interests in or signature authority over financial accounts maintained with financial institutions located outside of the U.S. Taxpayers are required to file a Form 114, Report of Foreign Bank and Financial Accounts (FBAR) if the values of the foreign financial accounts (“FFA”) exceed $10,000. For non-willful violations, the maximum civil penalty is $10,000 per failure. (31 CFR 5321(5)(b)(i)) However, no penalty is imposed if the violation was due to reasonable cause. (For willful violations, in addition to possible criminal penalties, the maximum civil penalty is the greater of $100,000 or 50% of the FFA per year) In Moore, the Court affirmed the imposition of the non-willful penalties of $10,000 per year for four years since the IRS demonstrated that its decision to assess FBAR penalties of $10,000 for each year for four years was not arbitrary, not capricious, and not an abuse of its discretion. However, the IRS's conduct in seeking further late payment penalties and interest on those FBAR penalties, was determined to be arbitrary since the IRS disclosed no adequate basis for its decision to assess the penalties until the litigation forced its hand. The IRS had even promised not to assess penalties in an earlier communication until an internal appeal was exhausted. Thus any late fee or interest that IRS attempted to tack on to the FBAR penalties was void. The government had to treat the FBAR penalties as if they were first assessed on the date of the court's order. In addressing FBAR penalties, taxpayers are well served to consult with tax counsel prior to making disclosures.

Third Circuit holds that the IRS can compel production of foreign bank records over a Fifth Amendment assertion

Third Circuit holds that the IRS can compel production of foreign bank records over a Fifth Amendment assertion The Court of Appeals for the Third Circuit in U.S. v. Chabot, 2015 WL 4385279 (3rd Cir. 2015) affirmed a New Jersey District Court decision and held that the "required records" exception to the Fifth Amendment privilege against self-incrimination applies to allow the IRS to enforce a summons of foreign bank account records. Background 31 CFR 1014.420 requires a taxpayer to file a Report of Foreign Bank and Financial Accounts (“FBAR”) to report financial accounts in foreign countries where the aggregate of such accounts exceeds $10,000. The Fifth Amendment states that "[no] person... shall be compelled in any criminal case to be a witness against himself." An individual may claim this privilege if compelled to produce self-incriminating, "testimonial communications." The act of producing documents may trigger the Fifth Amendment privilege. Fisher v. U.S., 425 U.S. 391 (1976). But there is an exception to the 5th Amendment called the “required records exception.” This exception states that when records are required to be maintained for a legitimate purpose, the 5th amendment does not apply to such records. In Shapiro v. U.S., 335 U.S. 1 (1948), the Supreme Court held that the Fifth Amendment privilege is not abrogated by requiring that taxpayers maintain records as long as the records closely served the purpose of a valid, civil regulation. As set forth in Grosso v. U.S., 390 U.S. 62 (1968), three prongs must be met to fall within the required records exception: (1) the reporting or recordkeeping scheme must have an essentially regulatory purpose; (2) a person must customarily keep the records that the scheme requires him to keep; and (3) the records must have "public aspects." The Chabot case. IRS issued summonses to Mr. and Mrs. Chabot requesting documents required to be maintained under 31 CFR 1014.420. The Chabots refused claiming the 5th Amendment privilege. The New Jersey District Court ruled that the summonses were proper under the required records exception and the Third Circuit just affirmed. The Third Circuit analyzed the three Grosso prongs and determined all three were met. Conclusion For anyone still holding assets abroad without disclosing them, be aware that the IRS may obtain the records through summons enforcement. As such, such taxpayers should consult counsel and strongly consider entering into either the offshore voluntary disclosure program or the streamlined program.

Innocent Spouse Taxpayer Recovers Litigation Costs by Making a “Qualified Offer” and Then Prevailing in Court

Innocent Spouse Taxpayer Recovers Litigation Costs by Making a “Qualified Offer” and Then Prevailing in Court The Court of Appeals for the Ninth Circuit, reversed the Tax Court in Knudsen v. C.I.R., 116 AFTR 2d ¶2015-5051 (9th Cir. 2015) finding that Taxpayer was a prevailing party eligible to recover reasonable litigation costs. The Ninth Circuit determined that she was entitled to an award of costs as a "qualified offer" because she offered to settle her tax liability, the offer was not acted upon and her ultimate liability was zero. Innocent spouse (equitable relief) - background Each spouse is liable jointly and severally for the tax, interest, and most penalties when they file a joint return. Code §6015(f) permits equitable relief to a requesting spouse if, taking into account all of the facts and circumstances, it is inequitable to hold the requesting spouse liable. Litigation costs - background. Under Code §7430, taxpayers who prevail against the U.S. in court may be awarded reasonable litigation and administrative costs unless the IRS's position is substantially justified (Code §7430(c)(4)(B)), or the taxpayer fails to substantiate his claim for reasonable litigation costs. But a taxpayer may also make a qualified offer (“QO”) under Code §7430(g)(1) to settle a tax controversy. If that offer is rejected by the IRS and the amount of the QO is greater than the taxpayer's ultimate liability, will be treated as a prevailing party. Using the QO, the taxpayer's qualification as a prevailing party does not depend on whether IRS's position was substantially justified or whether the taxpayer substantially prevailed in the proceeding. Ninth Circuit reverses. The Ninth Circuit Court found that its decision to grant costs to the taxpayer was consistent with the purpose of the QO, that is: to encourage settlements by imposing costs on the party who was unwilling to settle. Conclusion. The use of the QO tool is one that all tax practitioners should have in their arsenal to use to even the playing field when sometimes it seems the Government has endless funds to fight the taxpayer.

VICTIM OF A “PUMP AND DUMP” SCHEME NOT ENTITLED TO THEFT LOSS DEDUCTION FOR LOSSES INCURRED

VICTIM OF A “PUMP AND DUMP” SCHEME NOT ENTITLED TO THEFT LOSS DEDUCTION FOR LOSSES INCURRED In a recent decision: Greenberger v. U.S., 115 AFTR 2d ¶2015-844 (D. Oh. 6/19/15). The District Court of Ohio ruled that a taxpayer was only entitled to a capital loss on the loss from the sale of stock rather than a theft loss as the taxpayer claimed. The taxpayer was the victim of a “pump and dump.” “Pump and dump” is a scheme whereby schemers “pump” up the value of shares through fictitious or fraudulent sales, then “dump” their shares at the inflated prices leaving the public with worthless shares. The taxpayer in Greenberger was one such victim. Yet, the Ohio District court ruled consistent with an Internal Revenue Service Notice. In Notice 2004-27, 2004-1 CB 782, the Internal Revenue Service stated that theft losses for declines in stock value resulting from corporate misconduct where the stock was purchased on an open market and not from the officers who may have made misrepresentations were to be disallowed. The Internal Revenue Service, in that Notice, said such losses due to corporate misconduct may only qualify as capital losses. I.R.C. Sec. 165(c)(3) allows individual taxpayers to deduct from their taxable income losses arising from theft crimes such as "larceny, embezzlement, and robbery." Treas. Reg. §1.165-8(d)) amplifies this stating: To deduct a theft loss, a taxpayer must show that the loss resulted from a taking of property that is illegal under the law of the state where it occurred, and that the taking was done with criminal intent. (Rev Rul 72-112, 1972-1 CB 60). In many cases, this requires that the perpetrator have specific intent to deprive the victim of his property, which in turn requires a degree of privity (i.e., close connection or relationship) between the perpetrator and the victim. Even though the court said the executives of the company committed a "theft offense," the court ruled that the fact that the taxpayer bought his shares on the open market meant that there was no direct transfer of funds to the culprits, and thus the taxpayer was ineligible for a theft loss deduction. The case was decided under Ohio law so a case similar to this in another state may be decided differently.

ESTATE TAX CLOSING LETTERS ISSUED ONLY UPON REQUEST

ESTATE TAX CLOSING LETTERS ISSUED ONLY UPON REQUEST The Internal Revenue Service has just announced that, estate tax closing letters will be issued only upon request by the taxpayer for estate tax returns filed on or after June 1, 2015. It also clarified the circumstances under which it will issue closing letters for estate tax returns filed prior to June 1, 2015. Prior to the recent pronouncement, the Internal Revenue Service would issue an estate tax closing letter indicating the return is accepted as filed or send an audit notice within four to six months of filing. It is often prudent for an estate executor to wait for the closing letter before distributing the majority of the estate. On its website, the I.R.S. asks that estate tax filers wait at least four months after filing the return to request the closing letter.

Lawsuit settlement payments not deductible for income tax purposes after claiming same as a deduction for estate tax purposes.

Lawsuit settlement payments not deductible for income tax purposes after claiming same as a deduction for estate tax purposes. In a recent decision by the Eleventh Circuit Court of Appeals, Batchelor-Robjohns v. United States, No. 14-10742, 2015 WL 3514674 (11th Cir. June 5, 2015), the Court denied an income tax deduction for an estate that already took an estate tax deduction for lawsuit settlement payments. The Estate had filed suit concerning $41 million in payments it made to settle various lawsuits against the Estate. The Estate deducted the payments from its gross estate for estate tax purposes as claims against the estate pursuant to I.R.C. §2053(a)(3). The estate and Internal Revenue Service agreed that this deduction was proper, and the estate tax liability was not at issue before the district court. However, after taking the estate tax deduction, the Estate also claimed an $8.3 million credit on its income tax return for the settlement payments. The district court rejected the Estate's claim, finding that I.R.C. §642(g) barred the Estate from claiming both an estate tax deduction under § 2053 and an income tax deduction for the same payment. The Eleventh Circuit agreed. The government maintained that the Estate cannot use the $41 million repayment to reduce both its estate and income tax obligations, and instead may only deduct the payments from either one tax or the other. The Eleventh Circuit agreed. The Estate argued on appeal, as it did in the district court, that sections 162 and 212 provide the basis for permitting the “double deduction” of the settlement payments at issue because the payments arise out of the Decedent’s business activities in selling his corporate assets, and thus are ordinary and necessary business expenses. The Eleventh Circuit disagreed. The Eleventh Circuit’s analysis focused on the I.R.C. provisions relating to overlapping estate and income tax deductions. I.R.C. §642(g), entitled “Disallowance of double deductions,” generally prevents an estate from claiming both an estate tax deduction under I.R.C. §2053 and an income tax deduction for the same payment. The statute provides: Amounts allowable under §2053 or §2054 as a deduction in computing the taxable estate of a decedent shall not be allowed as a deduction ... in computing the taxable income of the estate or of any other person, unless there is filed ... a statement that the amounts have not been allowed as deductions under §2053 or §2054 and a waiver of the right to have such amounts allowed at any time as deductions under §2053 or §2054. I.R.C. §642(g) contains an exception, however, for “income in respect of decedents.” A double deduction is permitted for “taxes, interest, business expenses, and other items accrued at the date of a decedent's death” that fall within § 2053(a)(3) as claims against the estate, as long as they are also allowable under §691(b). See 26 C.F.R. § 1.642(g)–2. Section 691(b), in turn, provides that a decedent's estate may claim both deductions if the expense falls within one of six statutes: sections 162, 163, 164, 212, 611, or 27. When there are claims that could potentially be available as a deduction for federal estate tax, federal income tax, or both, competent counsel should be consulted to determine how best to take available deductions to minimize estate and/or income tax liability.

U.S. Flight Attendants living abroad owe tax when flying over the U.S. or international airspace

U.S. Flight Attendants living abroad owe tax when flying over the U.S. or international airspace The D.C. Circuit in Rogers v. C.I.R., 115 AFTR 2d 2015-1534 (D.C. Cir., 2015), has just affirmed the Tax Court's decision that a flight attendant providing services in or over the United States. and international waters could not use the foreign earned income exclusion under Code Sec. 911. Background: U.S. Citizens and U.S. Residents must pay tax on their worldwide income unless there is an exclusion that applies. Code Sec. 911 provides an exclusion for U.S. persons residing outside the U.S. and earning “earned income” to exclude same up to a limit. The limit is $80,000 plus inflation adjustment. The adjustment brings the maximum foreign earned income exclusion to $100,800. The taxpayer in Rogers did not earn more than that amount but the Internal Revenue Service determined that some of her earnings were attributable to time flown in and over the U.S. and some while flying over international waters. The portion of her earnings in the U.S. or over international waters was determined not to qualify as foreign earned income and both the Tax Court and the D,C. Circuit agreed with the Commissioner’s interpretation. The Circuit Court relied on the Regulation found at Treas. Reg. 1.911-3(a) which provides “earned income is from sources within a foreign country if it is attributable to services performed by an individual in a foreign country or countries.” Treas. Reg. 1.911-2(h) defines foreign country to include territorial waters of and airspace over the foreign country. But income earned over waters not subject to any foreign country's jurisdiction is not income earned in a foreign country. Thus, the Courts sided with the regulations. Flight attendants, pilots, ship crew members etc. must consider the Rogers ruling and keep logs of earnings in foreign countries versus the U.S. and international waters and report the income from those areas without claiming the foreign earned income exclusion on those earnings.

House Ways and Means Committee Votes to Repeal the Estate and GST Taxes

House Ways and Means Committee Votes to Repeal the Estate and GST Taxes By a vote of 22 to 10, the House Ways & Means Committee (“W&M”) on March 25, 2015, voted to pass H.R. 1105, the “Death Tax Repeal Act of 2015.” Currently the Estate Tax is imposed on estates valued at $5,430,000 (the basic exclusion amount) or higher for taxpayers dying in 2015. There is also a Generation Skipping Tax (“GST”) which is imposed on either outright transfers or transfers in trust to beneficiaries more than one generation below the transferor's generation. Both the estate and GST taxes are imposed at 40% (I.R.C. Sec. 2001(c)) of the amount in excess of the basic exclusion amount. The tax is based upon a unified system so that lifetime taxable gifts are added to transfers at death. The Republican dominated W&M has proposed estate tax repeal. The Death Tax Repeal Act of 2015 – if enacted - would repeal the estate and GST tax for estates of decedents dying, and generation-skipping transfers made, on or after the date of enactment. While the Estate and GST taxes would be eliminated, the proposed bill would retain the gift tax with its current tax rate of 35%. The lifetime gift tax exemption amount ($5,430,000 for 2015) under the proposed bill would remain the same as under present law and the gift tax annual exclusion ($14,000 for 2015) would continue to apply. The proposed bill does not change the basis rules for income tax purposes. Thus the basis of assets acquired by gift would retain its current basis while assets acquired from a decedent would obtain a stepped up basis - the fair market value of the asset on the date of death or on the alternate valuation date (the earlier of six months after the decedent's death or the date the property was sold or distributed by the estate). Should this bill make it through the House of Representatives and Senate, the likelihood that it will be signed by the President is remote. President Obama has indicated (through The President's Budget for Fiscal Year 2016 issued earlier this year) that not only does he want to retain the estate and GST taxes, but believes the current threshold for imposing the taxes ($5,430,000) is too high and wants to tax estates and skips starting at $3,500,000. Stay tuned as the path that this bill might take strongly affects estate planning. For those readers in states that impose an estate tax, this bill, if enacted, may have an effect on the state tax as well but states looking for estate tax revenue may choose to decouple their laws from the federal laws (if they have not done so already). As this author is in New Jersey, I can state that the New Jersey State Estate Tax has remained since 2001 at the same number: there is a tax on estates in excess of $675,000. Thus, estate planning at this time must be done very carefully by an estate planner familiar with the laws of the state and federal governments to weave through the morass of laws.

Final Regs Issued on $1 million pay limit

Final Regs Issued on $1 million pay limit The Internal Revenue Service has issued final regulations on I.R.C. §162(m) in Treas. Reg. §1.162-27. These regulations make clear what was permitted under temporary regulations (with certain modifications) and now yields more certainty in the area of planning executive pay by public companies. Background. I.R.C. §162 allows a deduction for trade or business expenses. I.R.C. §162(m) limits the deduction that a public corporation may take for payment of compensation to the principal officer and three highest paid employees to $1 million. However, pay that is performance based is exempt if certain criteria are met. I.R.C. §162(m)(4)(C) and Treas. Reg. §1.162-27(e)(2)) We now have permanent regulations further defining the terms and issues. A discussion of the rules is beyond the scope of a blog. Suffice it to say that anyone seeking to be paid more than $1 million ought to have competent legal advice and any company seeking to pay more than $1,000,000 ought to have competent legal advice.

Even Minority Shareholders Can Be Hit With Transferee Liability for Unpaid Taxes When the Corporation Does Not Pay the Taxes

Even Minority Shareholders Can Be Hit With Transferee Liability for Unpaid Taxes When the Corporation Does Not Pay the Taxes The Tax Court in Kardash v. Comm., T.C. Memo 2015-51 (2015) has just held that minority shareholders who are also high-level employees were liable for unpaid taxes as transferees, with respect to some of the monies the taxpayers received from the corporation. I.R.C. Sec. 6901(a) authorizes the IRS to pursue a transferee of property to assess and collect tax owed by the transferor. State law determines the liability, while Sec. 6901 authorizes the enforcement of that liability. In Kardash, taxpayer and another minority owner held less than 10%, and the company’s president, and its board chairman, owned the balance. Kardash was an engineer and was involved in the company's financial affairs. The company paid no income tax despite though it owed more than $120 million, and its majority shareholders siphoned substantially all of the cash out of the company. Kardash received his usual salary, which was not at issue but also "advances" and “dividends,” which were at issue. Pursuant to Sec. 6901, the IRS asserted approximately $5 million that Kardash received from the company in “advances.” In ruling for the Government, the Tax Court, citing several other decisions looked to Florida law to determine whether IRS has an obligation to pursue all reasonable collection efforts against a transferor before proceeding against a transferee. It determined that Florida law does not require a creditor to pursue all reasonable collection efforts against the transferor so the taxpayers could still be held liable. The Kardash Court also noted that the IRS could pursue Kardash without first exhausting collection efforts against the majority shareholders. Under Florida state law and the law of many states, transfers that are not in exchange for reasonable value while a debtor corporation was insolvent at the time of the transfer or became insolvent as a result of the transfer results in transferee liability. Kardash argued that the advances were actually payments of compensation and thus were reasonably equivalent value, i.e., the value of their work. The IRS urged that the advances were loans that the taxpayers never paid back, and, therefore the corporation did not receive reasonable equivalent value. The Court ruled the advances were payments of compensation but that the dividends were not compensation and thus the corporation did not receive equivalent value for the dividends. Therefore, the taxpayers were liable as transferees under Code Sec. 6901(a). Moral of the story is that anyone receiving funds from an entity that does not pay its taxes can be subject to transferee liability and the recipient of the funds should be sure to document the goods or services provided to the company for which payment is received or risk transferee liability.

Bartender beats IRS in Tax Court

Tax Court rules for Bartender on his Tip reporting method over IRS's reconstruction method The United States Tax Court held that the actual tip income from a bartender's own records was a better reflection of his income than the Internal Revenue Service’s version based upon reconstructing his tip income. By way of background, I.R.C. Sec. 6001 and Treas. Reg. Sec. 31.6053-4 require those who earn tips to keep accurate and contemporaneous records of their income. The IRS has the authority to recompute tip income as it determines if the tip earner fails to produce adequate records. In Sabolic v. Comm., TC Memo 2015-32 (T.C.M. 2015), a bartender had a set routine of how he recorded his tips at the end of each shift but IRS claimed that the bartender had underreported his tip income and because his tip logs were recorded in whole numbers; he did not keep track of how much he paid to the bar backs; and the logs did not include all days. IRS reconstructed the bartender's tip income by determining a “charge tip rate” for each tax year. But, the Court sided with the bartender fully reported his tip income. In the Court’s analysis, it did state that the IRS does have great latitude in adopting a suitable method for reconstructing tip income and its method of recomputing income carries with it a presumption of correctness and therefore, the burden of proof was on the bartender. But the Court sided with the taxpayer on all three challenges: round numbers, payments to bar backs and missing days. In sum, the Court concluded that the bartenders actual records were more accurate than the IRS’s reconstructed method and therefore ruled for the bartender. Many bartenders receive tips that are higher than the Internal Revenue Service method and therefore this case is not helpful. But for those who are not earning tips as high as the IRS method, any tip earner should keep accurate records and fight the IRS if necessary.

Another Estate Tax Repeal Bill Is Proposed

Another Estate Tax Repeal Bill Is Proposed

Many Republicans have been urging a repeal of the Federal Estate Tax for years.  During the time that we have a democratic president, the chances of such a bill becoming law are remote.  In fact, President Obama has set forth his proposal to actually increase the tax by lowering the threshold for an estate to be taxable.  The latest bill was sponsored by Rep. Kevin Brady (R-Tx).  He introduced H.R. 1105, 114th Cong., 1st Sess. (March 6, 2015), which would repeal the federal estate and GST taxes. The bill already has 32 co-sponsors, and has been referred to the House Committee on Ways and Means.

The upshot of this is that it is unlikely that any changes will occur during this administration but if a Republican takes the white house and the Republicans continue to control both Houses, the possibility of absolute repeal may very well become a reality.

Obama’s Budget Proposal Includes Estates, Gifts, and Trusts Taxation Changes

Obama’s Budget Proposal Includes Estates, Gifts, and Trusts Taxation Changes

The Treasury Department has just issued “General Explanations of the Administration's Fiscal Year 2016 Revenue Proposals,”  http://www.treasury.gov/resource-center/tax-policy/Pages/general_explanation.aspx.  In it, the President’s Administration includes a budget proposal that contains proposals to change estate, gift, and trust taxation.  Some of these proposals include:  1. imposing a capital gains tax on the transfer of appreciated assets by gift or upon death;  2. reverting the estate, gift, and GST rates and exemptions beginning in 2016 to the levels and rates that existed in 2009 (i.e., $3.5 million estate tax applicable exclusion amount and GST exemption, and $1 million gift tax exemption with a top estate and gift tax rate and sole GST tax rate of 45 percent);   3. requiring that grantor retained annuity trusts (“GRATs”) have a minimum length of 10 years and at the end of the term there be a minimum remainder value of 25 percent of the value of the transferred assets (or $500,000, if greater);  4. Making sales to grantor trusts moot by  treating such trusts as an incomplete transfer for gift and estate tax purposes;  5. limiting the protection from the GST tax afforded by allocation of GST exemption to 90 years;  6.  causing the lien from  estate tax deferrals for taxes attributable to interests in a closely-held business interest to continue throughout the deferral period;   7.  limiting the annual exclusion for gifts to most trusts, gifts of interests in passthrough entities, gifts of interests subject to a sales prohibition, and other transfers of property that cannot be liquidated immediately by the donee to $50,000 per year;  8. eliminating stretch IRAs by requiring non-spouse beneficiaries of a decedent's IRA or retirement plan to take inherited distributions over no more than five years;  9. Capping IRA and qualified plan contributions by prohibiting future contributions by a taxpayer with an IRA or qualified plan to $210,000 per year (indexed).

While it is always relevant to read the administration’s proposals,  with a Republican dominated House and Senate, the likelihood of any of this passing as actual legislation seems low.