Executors themselves can be personally liable for IRS Penalties

In a Chief Counsel Advice (201212020) recently announced, the IRS has set forth the situations whereby an executor can be found to be personally liable for the tax liabilities of an estate and the assets of the estate were already distributed to the estate's beneficiaries.  If the executor knew or should have known of the tax when the estate still had assets to pay it, her can be held liable for the tax and penalties.  He may also be liable as a transferee if he was also a beneficiary of the Estate pursuant to Sec. 6901 of the Internal Revenue Code.

Background - Executor Liability:  The United States Code provides that the IRS must be paid tax debts before beneficiaries receive distributions.  31 U.S.C. 3713(b).  An Executor who pays an Estate debt before paying debts due to the IRS “shall become answerable in his own person and estate” to the extent of the amount paid to preferred creditors. If an Executor pays other creditors before paying the IRS, the Executor can be held personally liable to the extent of the payments that he turned over to creditors other than the IRS.  An Executor is only liable if he had notice of the tax debt (or a reasonably prudent person would be on notice) before making a distribution to another creditor.

Background - Transferee Liability.  Sec. 6901(a) of the Code provides that the liability of a transferee of a taxpayer's property may be “assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred.”  The IRS is thus authorized to collect taxes from transferees of Estates that failed to pay taxes. 

Ruling. The Chief Counsel advice makes clear that the penalties asserted against the Decedent for failure to file the appropriate information returns required for foreign trusts can cause liability to the Executor if he paid out any money or assets to beneficiaries or other creditors.

Lesson. If you become an Executor / administrator of an estate with any foreign holdings or trusts, be certain that all information returns were properly filed and do not distribute to any beneficiaries or even pay other debts, until potential liability for failure by the Decedent to properly file all information returns is made.

Tax debt is not discharged in bankruptcy where taxpayer’s late return is filed after IRS already assessed the tax

In re Wogoman, --- B.R. ----, 2012 WL 2562323 (10th Cir. BAP (Colo.) 2012)

The United States Bankruptcy Appellate Panel (BAP) for the Tenth Circuit has held that a debtor's Form 1040 filed after IRS had assessed the tax liabilities for the year involved did not qualify as a return, as defined in 11 USC 523(a)(19). As a result, the tax debt relating to this return was excepted from discharge under 11 USC 523(a)(1)(B)(i).

Background:  A Bankruptcy filing can discharge taxes as long as the tax return is filed more than three years prior to the bankruptcy filing.  However, where the return was filed late and the Internal Revenue Service already assessed tax based upon no return being filed in that year, the 10^th Circuit determined the taxes for such year is not dischargeable in bankruptcy.

Thus, before filing bankruptcy, one should learn whether a late return was filed after an Internal Revenue Service assessment and be guided accordingly.

First Circuit Court of Appeals finds no abuse of discretion in the I.R.S.'s rejection of O.I.C.

First Circuit Court of Appeals finds no abuse 

of discretion in the I.R.S.'s rejection of O.I.C.

The Court of Appeal for the First Circuit, in reversing the Tax Court, determined that the Internal Revenue Service did not abuse its discretion in rejecting a taxpayers' offer-in-compromise (OIC).  The 1st Circuit based its ruling on the fact that the taxpayers had failed to include in their asset disclosure trust property in which they retained a beneficial interest. Applying a more deferential standard in reviewing IRS's determinations, the 1st Circuit held that IRS acted reasonably in determining that the taxpayers were the owners of the property.

Background:  An OIC is an agreement between the IRS and a taxpayer that settles the taxpayer's tax debt for less than the full amount owed. Pursuant to Treasury Regulations, OIC's will only be rejected by the IRS when the IRS determines that no basis for compromise is present or that the offer is unacceptable under IRS's policies and procedures. (Code Sec. 7122(d)(3)(A), Treas. Reg. § 301.7122-1(f)(3))

Facts in Dalton:  The IRS sought to collect trust fund recovery penalties from the Daltons but after a collection due process (CDP) hearing, the IRS rejected the Daltons' OIC because it failed to include in their asset disclosures a nominee interest in trust property.  The IRS determined that the Daltons retained a beneficial interest in the trust property under a nominee ownership theory and rejected their OIC.

In Court, the Daltons contended that IRS's determination was an abuse of its discretion because the Daltons did not retain a nominee interest in the trust property after the trust was created, and thus didn't need to include the trust property in their assets for purposes of the OIC.

Tax Court Decision:  The United States Tax Court determined that the trust wasn't a nominee of the taxpayers under Maine law so the Tax Court found that IRS had abused its discretion in rejecting the taxpayers' offer because it had premised that rejection on an erroneous view of the law. Dalton v. Comm., 135 TC 393 (2010).

1st Circuit decision. The First Circuit, reversing the Tax Court's ruling, found that IRS's nominee determination was reasonable and shouldn't be disturbed.

Preliminarily, the First Circuit concluded that the Tax Court had applied the wrong standard of review.  The First Circuit held that it was not a court's job to review IRS's CDP determinations afresh. Rather, its job was to decide whether: (1) IRS's factual and legal determinations were reasonable; and (2) the ultimate outcome of the CDP proceeding constituted an abuse of IRS's wide discretion.

The Court reasoned that the judicial review must be tailored to the purpose of the CDP process—that is, ensuring that IRS's determinations, whether of fact or of law, were not arbitrary. A court should set aside determinations reached by IRS during the CDP process only if they were unreasonable in light of the record compiled before the agency. Any more intrusive standard of review would result in the courts inevitably becoming involved on a daily basis with tax enforcement details that judges were neither qualified, nor had the time, to administer. The Court concluded that its analysis was applicable whether an IRS determination reached during the CDP process was based on a purely factual question, a purely legal question, or (as here) a mixed question of fact and law.

The 1st Circuit therefore held that the IRS acted within its discretion in refusing to accept the OIC because the evidence before the IRS was ample to justify its conclusion that the Daltons' valuable ownership interest in the property had to be considered when evaluating their OIC.

Import of decision:  The 1st Circuit teaches us two things:  First, failure to disclose assets in an asset disclosure can cause the IRS to reject an OIC.  Second, the determination by the IRS will rarely be disturbed by the Courts (at least those within the 1st Circuit.)

Tax Court states that timely proper receipts for charitable contributions from a charity are required for a donation to be deductible

Tax Court states that timely proper receipts for charitable contributions from a charity are required for a donation to be deductible

The United States Tax Court In Durden v. Commissioner, T.C. Memo. 2012-140 (May 17, 2012), held that an income tax deduction was properly disallowed by the Internal Revenue Service for a charitable contribution, because the charity did not provide a statement that no goods or services were provided in consideration for the contributions. The Tax Court had found that the first acknowledgement received by the taxpayer lacked a statement regarding whether any goods or services were provided in consideration for the contribution, and the second acknowledgment, which included that statement, was not contemporaneous.  I.R.C.  Sec. 170(f)(8)(A) provides: “No deduction shall be allowed under subsection (a) for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B).”  For donations of money, the donee's written acknowledgment must state the amount contributed, indicate whether the donee organization provided any goods or services in consideration for the contribution, and provide a description and good faith estimate of the value of any goods or services provided by the donee organization. I.R.C.  170(f)(8)(B) and Treas. Reg. 1.170A-13(f)(2). A written acknowledgment is contemporaneous if it is obtained by the taxpayer on or before the earlier of: (1) the date the taxpayer files the original return for the taxable year of the contribution or (2) the due date (including extensions) for filing the original return for the year. I.R.C.  170(f)(8)(C) and Treas. Reg. 1.170A-13(f)(3).  While the taxpayers argued they substantially complied, the Tax Court would have none of it holding:  Petitioners have failed strictly or substantially to comply with the clear substantiation requirements of section 170(f)(8), and their deduction for the charitable contributions in issue for 2007 must be disallowed.

 

Moral of the story: when making contributions to charities, obtain a statement from the charity indicating whether or not there was value received from the charity and maintain that receipt with your records in case you are audited.  This should be obtained before the tax return claiming the deduction is filed.

 

 

Clock is ticking on estate planning in 2012.

In estate planning, there is a “use it or lose it” situation which might need to be completed before the end of the year.  On December 17, 2010, President Obama, signed the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010.  The Act made significant changes to the estate, gift and generation-skipping tax regimes.  It reduced the rates of estate, gift and GST tax to 35% and increased the estate, gift and GST tax exemptions to $5,000,000.  It also reunified the estate and gift-tax exemptions where previously they were disparate.  These provisions of the Act, will remain in effect only through the end of 2012.  The Act is scheduled to sunset.  This means that it will no longer be effective and the estate, gift and GST law will revert to the old law with not nearly the advantages.  Unless Congress enacts new legislation prior to then, beginning in January of 2013, the law will revert to the laws in effect in 2001 and the top estate, gift and GST tax rates would revert to 55% with an exemption of only $1,000,000 and the GST exemption of $1,000,000 but the GST would be indexed for inflation.  Accordingly, in order to avail yourselves of the benefits available under the 2010 Act, clients must consider engaging in the planning techniques that are discussed below as soon as possible.  These techniques will significantly, likely reduce the taxable estate but only if they are taken advantage of during the period of the applicability of the 2010 Act.  The tools at our disposal this year, but not necessarily after this year is the ability to make a non-taxable gift of $5,000,000.00.  This amount is set to sunset back to $1,000,000.00.  Gifting can be accomplished through trusts where one is unwilling to divest full authority to the client.  Leveraging the full $5,000,000 can be accomplished through the use of LLC’s or Family Limited Partnerships.  Where the taxpayer is desirous of gifting more than $5,000,000 this can be done subject to gift-tax but at the lower 35% rates.  The sale to an intentionally defective grantor trust is also an available tool which is recommended in many circumstances.  GRATs are also possible under current law.  It is recommended that estate planning be taken advantage of during the year 2012.  Accordingly, take action now or perhaps lose this valuable opportunity forever.

 

IRS Has Invited Practitioners to Comment on the Tax Treatment of Decanting

Decanting is the estate planning practitioners term for pouring over (decanting so to speak) the assets of one irrevocable trust to another.  Typically this is done when a trust has a provision that no longer is consistent with the desires of the original parties and they wish to make changes to the Trust.  Since the original trust was irrevocable, the initial trust cannot be amended, so the concept of decanting the assets of the first irrevocable trust into a second irrevocable trust is considered.  The issue has become so popular that it is now on the radar of the Internal Revenue Service that is trying to figure out what tax consequences, if any, such decanting should cause.

In I.R.S. Notice 2011-101, 2011-52 IRB issued on December 27, 2011, the IRS requested that practitioners and any other interested parties provide comments on the income, estate, gift, and generation-skipping transfer tax treatment of the transfer of assets from one irrevocable trust to another irrevocable trust. The IRS asked for comments in writing by April 25, 2012.

 

IRA Charitable Rollover Expired on Dec. 31, 2011

Congress did not extend the IRA charitable rollover prior to Dec. 31, 2011, the date on which the rollover expired.  
In 2011, taxpayers age 70 ½ or older could make tax-free charitable gifts of up to $100,000 per year directly from their Individual Retirement Accounts to eligible charities, including colleges, universities and independent schools. I.R.C. 408(d)(8).  According to I.R.C. 408(d)(8)(F) that rollover expired at the end of 2011.
Earlier in 2011, Senators Charles Schumer (D-N.Y.) and Olympia Snowe (R-Maine) and U.S. Representatives Wally Herger (R-Calif.) and Earl Blumenauer (D-Ore.) introduced the Public Good IRA Rollover Act of 2011 (S. 557, H.R. 2502). The PGIRA would permanently extend and expand the IRA charitable rollover.  As of this writing, the PGIRA has yet to occur.  There is still a possibility that a short-term retroactive extension of the IRA charitable rollover will happen in 2012.
In the meantime, a taxpayer can still pull money out of an IRA as taxable income and receive a corresponding deduction for the amount given to the charity (assuming she meets the other criteria for deductibility).  Under pre-2012 law, the rollover to charity was neither taxable nor deductible.