• Senate Bill Proposes to Eliminate Short Term GRATs
• August 15, 2011
• Jay J. Freireich

• IRS Rescinds Two-Year Limitation Period for Equitable Innocent Spouse Relief
• July 29, 2011
• Jay J. Freireich

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• Tax Court Sets Value of a Publishing Company Lower than Initially Reported on Estate Tax Return!
• July 15, 2011
• Jay J. Freireich

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• Pending Legal Malpractice Claim Against a Decedent is Disallowed as a Deduction Under the Federal Estate Tax If Claim Amount is Uncertain
• June 6, 2011
• Jay J. Freireich
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• The United States Tax Court has held that a decedent's federal taxable estate for Federal Estate Tax ("FET") purposes may not include, as a deduction, a $30 million potential legal malpractice litigation claim pending against it as of the date of death.  Rather, the amount actually paid during the administration of the estate is deductible for the FET.  The test is whether the amount due is "reasonably certain" as of the date of death.  See (Former) Treas. Reg. 20.2053-1(b)(3) and (Current) Treas. Reg. 20.2053-1(d)(4).  In Estate of Saunders, 136 T.C. No. 18 (2011), the conflicting expert reports on the value of the claim as of the date of death, led the Tax Court to conclude that the value of the claim was too uncertain to be deducted based on estimates as of the date of death.  Therefore, the court concluded that the deduction was required to be based on the ultimate outcome.
  
  Facts:  The taxpayer was an attorney who had a significant claim pending against him which alleged that he was a secret IRS informer against the interest of his client.  The complaint requested over $90 million in compensatory damages plus additional punitive damages. After death, a jury returned a verdict in favor of the taxpayer and on appeal, the estate paid only $250,000.  Prior to the jury verdict, the estate tax return was filed and a $30 million deduction was claimed for the malpractice claim.  The IRS allowed a $1 deduction for the malpractice claim and assessed a $14.4 million deficiency.
  
  Analysis: Code Section 2053(a) permits certain deductions in calculating the taxable estate, including litigation claims against the estate.  However, to be deductible, the amount of the claim must be ascertainable with reasonable certainty. The Tax Court stated that it did not consider the subsequent settlement in its discussion of the question of whether the value of the claim was ascertainable with reasonable certainty as of the date of death.  Instead, the Tax Court ruled based upon the various reports of the value of the claim.  The Tax Court concluded that the claim was not deductible as of the date of death, and only the amount actually paid during the administration of the estate could be deducted in accordance with Prior Reg § 20.2053-1(b)(3).  Current Treas. Reg. 20.2053-1(d)(4) would apply to new cases and the current regulation also requires: "A deduction under this paragraph (d)(4) will be allowed to the extent the Commissioner is reasonably satisfied that the amount to be paid is ascertainable with reasonable certainty and will be paid. In making this determination, the Commissioner will take into account events occurring after the date of a decedent's death."
  
  Conclusion:  It is important to understand the rules concerning claim deductibility when assessing the effect of potential lawsuits pending against a decedent in preparing the estate tax return and when addressing the concerns that the IRS will pose on audit of such claims.
  
   
  Corporation Denied Income Tax Deduction for Management Fees Paid to Related Entity
• June 1, 2011
• William F. Healey

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• Another Case of a Failed Family Limited Partnership
• May 23, 2011
• William F. Healey

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• Tax Court holds that the IRS May Reject a Taxpayer's Offer in Compromise Where He Dissipates Assets Through Day Trading Losses
• April 29, 2011
  Jay J. Freireich
  
  The Tax Court just held in Tucker,TC Memo 2011-67 (Tax Court Memo 2011) , that a taxpayer's day-trading losses while owing taxes constituted the dissipation of assets.  Thus, the lost assets were included in his reasonable collection potential ("RCP") analysis.
  
  The procedure of the case went as follows: Tucker owed taxes, the amounts were not in dispute, but he claimed an inability to pay. In connection with the offer, Tucker submitted a Form 656, "Offer in Compromise" (OIC).  The OIC was evaluated and IRS notified Tucker that it had determined he could pay the liability in full. Tucker requested a collection due process (CDP) hearing after a lien was filed.
  
  The Appeals Office upheld the filing of the lien, and Tucker appealed to the Tax Court. Tucker sought review in the Tax Court, claiming Appeals abused its discretion in rejecting Tucker's OIC.
  
  The Tax court held that the Service properly included the dissipated assets in its calculation of the taxpayer's RCP.  The tax court determined that Tucker's losses from engaging in "the highly speculative and volatile activity of day trading" were not unforeseeable. He had had the cash in hand that would have paid in full the taxes, interest, and penalties that were owing, but chose rather to devote that money to a risky investment.  The tax court therefore opined that Tucker's situation was therefore of his own making.

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  On April 5, 2011, Congress Repeals Expanded 1099 Information Reporting Requirements
• Thursday, April 21, 2011
• Jay J. Freireich

Highlights of the Act include:

Beginning in 2012, recent legislation Patient Protection and Affordable Care Act of 2010 ("PPACA") would have expanded 1099 reporting requirements to all payments for goods or other property.  The PPACA also provided that, beginning in 2012, payments to  non-tax-exempt corporations -- which had previously been exempt from the reporting requirement -- would be subject to information reporting.

Additionally, for payments made in 2011 and thereafter, the Small Business Jobs Act of 2010 provided that a person receiving rental income from real estate of $600 or more to a service provider (for example, a painter or plumber) in the course of earning rental income would have to provide an information return to the service provider and IRS.

The ACT would retroactively repeal all of these onerous reporting requirements, effectively reverting to the previous reporting requirements.

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• Obama Administration States Tax Holiday for Corporations that Repatriate Income from Tax Haven Countries is Poor Policy
  Sunday, April 03, 2011
  Jay J. Freireich
  

  The federal government loses corporate income tax revenue from the shifting of income into low-tax countries, often referred to as tax havens. The revenue losses from this tax planning are hard to estimate, but it has been suggested that the cost of offshore tax abuses may be around $100 billion per year. Pursuant to Section 862 of the Internal Revenue Code ("the Code"), corporations formed in the U.S. are taxable on certain income from outside the U.S. Foreign corporations with U.S. owners, however, can often earn and accumulate certain income without federal tax. For controlled foreign corporations (CFCs), defined in Section 957 of the Code, the non-U.S.-source income may be shielded from U.S. tax until it is actually brought back to the U.S. (i.e., repatriated and distributed to the U.S. owners). Remarkably, the American Jobs Creation Act of 2004 ("AJCA") provided a one year tax special treatment for CFCs to repatriate their income by providing an 85% dividends-received deduction. It has been estimated that approximately $312 billion was repatriated under this provision.

  Recently, in a blog post on March 23 titled “Just the Facts: The Costs of a Repatriation Tax Holiday,” the Treasury Assistant Secretary for Tax Policy, Michael Mundaca, stated that there was no evidence that the AJCA repatriation tax holiday increased U.S. investment or jobs, and that it, in fact, cost taxpayers billions of dollars. He wrote that “just five firms got over one-quarter of the tax benefits of the repatriation holiday, and just 15 firms got more than 50 percent of the benefits,” and cited a Congressional Research Service report that found most of the largest beneficiaries actually cut jobs following the tax holiday and used the repatriated funds to repurchase stock and pay dividends.

  
   

• President Obama Releases Budget Proposals for 2012, Including Permanent Estate and Gift Tax Reforms

  Tuesday, March 01, 2011

  Jay J. Freireich

  
  

  On February 14, the Department of Treasury issued its “General Explanations of the Administration's Fiscal Year 2012 Revenue Proposals.” The proposals include the following significant provisions concerning estate, gift, and GST taxes:

  The estate, gift and GST rates and exemptions in effect in 2009 would become permanent on January 1, 2013. Thus, the top estate, gift and GST tax rate would increase to 45% (from 35%), the gift tax exclusion would go down to $1 million (from $5 million), and the estate and GST basic exclusion amount would go down to $3.5 million (from $5 million);

  The Treasury will be permitted to issue regulations that expand Section 2704(b) of the Code, to ignore certain valuation discounts in valuing partnerships, LLCs, and other entities;

  GRATs would be required to have a positive value in the remainder interest in the GRAT, (no "zero out" GRATs) decreasing payment term GRATs would be prohibited and the minimum term of a GRAT would be 10 years;

  "Portability" of the deceased spousal unused exclusion amount would become permanent; and finally 

  The allocation of GST exemption to a transfer would protect that transfer from GST tax for no more than 90 years.

  These changes give what may be a once-in-a-lifetime opportunity to enter into short-term GRATs, decreasing term GRATs, family limited partnership or LLC planning with discounting before they are forever barred. These techniques can provide tremendous estate and gift tax savings.

  
   

• Avoiding Retention of Transferred Real Estate in Taxable Estate

  Friday, February 18, 2011

  William F. Healey

  
  

  Often, clients wish to transfer ownership in real estate to their heirs during life to remove the value of the asset from their taxable estate, but if the transferor retains control or enjoyment of the property, the planned transfer is likely to fail and the value of the transferred asset will remain in the taxable estate. Tax court memo 2011-22 Re Estate of Adelina C. Van serves as a case study of how to avoid inclusion of transferred real estate in the decedent’s estate.

  Ms. Van resided in a home with her boyfriend. She negotiated to purchase the home from her boyfriend using funds provided by her daughter and son-in-law. Her daughter and son-in-law paid the entire consideration for the property. Ms. Van continued to live in the property until her death. Ms. Van took title to the property in her own name, but ultimately transferred ownership in the property to her daughter and grandchildren prior to her death. At her death, the estate tax return reported the existence of the residence, but did not list the house as an asset of the estate. The IRS responded with a tax deficiency notice determining the house should have been included as an asset of the estate.

  The court first analyzed California law to decide what interest Van held at her death. The estate argued that Van never provided any consideration for the house, and only took title of the house as agent on behalf of her daughter and son-in-law. The court disagreed with the estate, holding that Van not only took title to the residence, but she also lived in the residence rent-free during her lifetime. Thus, Van held an interest in the property under state law during her life.

  The court then had to determine if Van’s transfer of title to the house effectively removed the value of the asset from her estate. The court held that even where a decedent has transferred property before death, the value of such property can be included in the estate if the decedent retained a continuing interest in the property. In this case, Van continued to live in the residence rent-free until her death. Therefore, the court held that under IRS Code Section 2036, Van held possession and enjoyment of the house at her death, and the value of the house should be included in her taxable estate.

  It is important for clients and estate planning to recognize that any transfers of property require the transferee to give up complete control, possession and enjoyment of the property. In this case, Van could have avoided inclusion of the property in her estate, if she had transferred title and retained no right to possess or enjoy the property for a period of more than three years prior to her death. Living in the house rent-free is an example of Van retaining possession of the property. If Van wanted to continue to use the property, she could have transferred title and then become a true tenant of the property with a valid, negotiated lease with rent determined at fair market. By entering into a formal lease, Van would have transferred the property out of her taxable estate and become a true, legal tenant of the property paying fair market rent to the new owners of the property. Van’s possession and rights in the property would have only extended to her right as a tenant and not as an owner of the property.

  
  
   

• Most Recent Challenge to LLC Discounts

  Friday, January 28, 2011

  William F. Healey

  
  

  Any client who uses limited liability companies to transfer wealth must be sure to respect the process of creating and funding the limited liability company (“LLC”) first before transferring ownership of the LLC to her heirs. A recent case decided by the Ninth Circuit Court of Appeals reversed the district court’s grant of summary judgment in favor of the IRS that determined the transfer of ownership of the LLC was actually an indirect gift of the underlying assets of the LLC.

  In Linton, William A. v. U.S., (CA 9 January 21, 2011), the Ninth Circuit addressed a transaction by William Linton whereby he transferred wealth to trusts created for his children. In this case, William Linton created an LLC in November 2002. On January 22, 2003, Mr. Linton met with his attorney and executed documents transferring ownership in the LLC to trusts created for his children. The assignments and trust agreements remained undated after the meeting. The funding of the LLC happened on several dates between January 22 and January 31. A few months later, when the attorney was reviewing the corporate minute book of the LLC, the attorney dated the assignments and the trust agreements as of January 22.

  A gift tax return was filed reporting the gifts of ownership in the LLC. The LLC was valued as if it was fully funded at the time of the gift. A 47% discount was applied to the LLC ownership interest transferred to the trusts. The IRS argued that no discount should be permitted since Mr. Linton had not made gifts of LLC ownership interest, but instead, made indirect gifts of the property contributed to the LLC. Thus, the issue is: did Mr. Linton fund the LLC first and then transfer ownership in the LLC as a gift allowing the gifted LLC interest to be discounted for lack of marketability and a minority interest; or did Mr. Linton gift ownership interest in an unfunded LLC and then indirectly make a gift to the trusts by funding the LLC, which would be valued at the full value of the assets that funded the LLC?

  The Ninth Circuit determined that a gift is complete for federal tax purposes when the donor has parted with dominion and control of the property so that the donor no longer has power to change its disposition. State law dictates when a donor has parted with dominion and control. In this case, Washington state law determines a completed gift when: (1) there is an intention of the donor to give; (2) the subject matter is capable of delivery; (3) there is a delivery; and (4) there is acceptance by the donee. In this case, the Ninth Circuit determined the subject matter was capable of delivery, there was delivery no later than the date of the intent to donate, and acceptance can be presumed since the trustees did not disclaim the gift. The element to be decided was the intent to donate. The fact that the assignments were not dated creates a legal issue as to whether the intent to donate occurred during the meeting or sometime thereafter. Further, the fact that the attorney wrote the date on the assignments is not a sufficient objective manifestation of intent to donate at the time of the writing, or at all. The writing is effective when the donor puts the document beyond retrieval by delivering the document to the donee. The Ninth Circuit held the district court must determine on remand when the intent to donate occurred. Thus, this issue is back to district court for further determination.

  Any client or planner using LLC’s or partnerships to transfer wealth can avoid this issue by creating and funding the entity first. The donor should wait a reasonable period of time after funding the entity before making gifts of ownership in the entity to family members. Further, the donor should maintain clear records on the timing of the transfers. Respecting the process of creating and funding the LLC and then transferring ownership in the LLC to heirs will protect discounts to the value of the gift of ownership in the LLC.

  
   

• Bipartisan Bill Introduced to Repeal the Expanded Form 1099 Reporting Requirement

  Thursday, January 27, 2011

  Jay J. Freireich

  
  
  On January 25, Max Baucus, Senate Finance Committee Chairman (D-MT) and Harry Reid, Senate Majority Leader (D-NV) introduced a bill that, if enacted, would repeal the recent Form 1099 reporting requirements for businesses that would have otherwise become effective commencing in 2012. The bill would repeal the expanded requirements for businesses to report payments made for goods and certain services above the existing requirements. The Act being repealed has been widely maligned by businesses that fear the new paperwork requirements would be too cumbersome and too costly to complete the extra 1099 forms.
  
  If this bill does not become law, Sec. 9006 of the recently enacted Patient Protection and Affordable Care Act requires payments for property and goods to also be reported on 1099s. It would also provide that starting in 2012, payments to taxable corporations which had previously been exempt from the Form 1099 reporting requirement, would become subject to the Form 1099 requirement.
  
  This bill comes as a major relief to businesses and, conversely, as a blow to accountants and payment processors who would have enjoyed new business coming from the extra reporting requirements.
   
  
   

• Tax Planning Under the New Act

  Friday, January 21, 2011

  Jay J. Freireich

  
  

  President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "Act") into law on December 17, 2010. The Act provides several tax and estate planning opportunities. Keep in mind that the Act sunsets on January 1, 2013, so its opportunities will only last for two years, and some for only one year. Thereafter, the provisions of prior law reappear unless Congress makes more changes. Clients should therefore take advantage of these opportunities while they last.

  One important change made by the Act is the unification of the gift, estate and generation-skipping transfer (GST) tax lifetime exemption - all at $5 million per individual or $10 million for a married couple. Another important change is the reduction of the top estate, gift and GST tax rates to 35%.

  Since these rates are much lower than the previous rates, which could exceed 55%, for the next two years, clients should consider lifetime transfers during these next two years, 2011 and 2012. For persons who had used up their $1million exemption through gifts prior to 2011, such person can give another $4 million in assets without paying any gift tax (a gift tax return must be filed for the gift). Better yet, the gift can be to grandchildren or to a dynasty trust for the benefit of children and their descendants; not only are estate and gift taxes avoided, but generation skipping taxes are avoided too as long as the total lifetime gifts do not exceed $5 million per donor.

  Assuming there are no changes to the tax laws before 2013, the exempt amount for estate and gift tax purposes will revert to $1 million per donor and the GST exemption will revert to $1.3 million per donor. The maximum marginal rate will revert to 55%. This is therefore a tremendous opportunity for gift planning now.

  A totally new concept to the estate laws that was introduced for the next two years by the Act is called "portability." Portability permits the use of an unused exempt amount in a predeceasing spouse's estate in the surviving spouse's estate. To achieve portability, an estate tax return must be filed by the estate of the first spouse to die and such estate must elect the portability option. With portability, couples can pass a total of $10 million to the next generation free from federal estate tax regardless of the size of each respective estate. Portability does not apply for purposes of the GST tax.

  For estates of decedents dying in 2010, the Act provides beneficial options. Such estates may elect to either subject the estate to the estate tax, with a $5 million exemption amount and a maximum tax rate above that amount of 35%. If such election is made, the Estate also receives a step-up in basis of the decedent's assets from the decedent’s basis to their fair market value on the date of death. Otherwise, the Estate may elect not to pay estate tax at all but receive only the limited basis step-up of up to $1.3 million of the appreciation inherent in the estate, and an additional $3 million of stepped-up basis for assets passing to the surviving spouse. The decision regarding which election to make is based upon a number of factors, including the size of the estate, the amount of estate tax that would be due, the amount of appreciation in the assets and the time frame that the assets would be anticipated to be sold.

  The use of discounting through family limited partnerships and family limited liability companies is still not disallowed by the Act though there had been a great deal of speculation that these devices would be legislated out of estate planners’ tool kits. Also Irrevocable Life Insurance Trusts ("ILITs") for multiple generations can be accomplished by leveraging the $5 million exemption for even more spectacular savings. The premiums can be paid with GST exempt dollars so that when the policy matures and pays out, they are received estate, gift, income and GST tax free. Grantor retained annuity trusts (GRATs) with less than a ten-year term and "zeroed-out GRATs" (those with no gift component) were also not legislated out.

  New Jersey, like many states, has decoupled its estate tax from the federal estate tax. New Jersey allows only $675,000 of an estate to pass estate tax-free for its estate tax. That leaves a $4,325,000 spread between the amount allowed by the federal exemption and the amount allowed by New Jersey. If not properly planned, the estate may be subjected to a state estate tax on the death of the first spouse, even if the couple desired to defer all taxes until the death of the second spouse.

  Congress had various bills pending (but never enacted) that would have eliminated discounts and short term GRATs, but the Act does not do so. The fact that those restrictions were not enacted is yet another reason to act now to revise one’s estate plan.

  The time for planning is now.

  
   

• S Corp Built-In-Gain Period Temporarily Shortened

  Monday, January 17, 2011

  Jay J. Freireich

  
  
  S corp built-in-gain period temporarily shortened:
  
  For C corporations holding appreciated property, there is a double tax on its sale. First the corporation pays tax on the sale of its appreciated property equal to the difference between the sale price and the property’s basis, multiplied by the corporate tax rate. Then, when the corporation distributes the proceeds to its shareholders as a dividend, the individuals pay a second level of tax on dividends received. To avoid this second level of tax, the C corporation could (if eligible) file an election under Subchapter S and wait ten years and sell the property and only one level of tax on the gain would be paid.
  
  In order to attempt to spur the economy, Congress has temporarily shortened the ten-year built-in-gain holding period. Beginning in 2011, the "Small Business Jobs Act of 2010," the tax title of H.R. 5297, the Small Business Lending Funding Act ( P.L. 111-240 ) provided that for S corporation tax years beginning in 2011, no tax is imposed on the net unrecognized built-in gain of an S corporation if the fifth year in the recognition period preceded the 2011 tax year. Code Sec. 1374(d)(7)(B)(ii). Thus, if a corporation converts now to an S corporation, the built-in gain property cannot be sold for 10 years, but if a conversion was done in 2005 or earlier, the built-in-gains tax on S corporations will not apply to the sale and thus the second level of tax can be avoided. For companies that filed S elections in 2005 and earlier, they are now free to sell their appreciated property and only be subject to a single level of tax.
   
  
   

• The Hiring Incentives to Restore Employment Act Adds Credit for Hiring New Workers

  Monday, January 17, 2011

  Jay J. Freireich

  
  
  In an effort to jump start the economy and employment, Congress is providing a credit of up to $1,000 for so-called "retained workers" in 2011 pursuant to Section 102 of the HIRE Act, P.L. 111-147, for any tax year ending after Mar. 18, 2010. A "retained worker" is defined as any qualified individual (as defined for purposes of the employer payroll tax holiday that was in effect for hiring unemployed workers, who makes a proper certification on Form W-11 and began employment with a qualified employer after Feb. 3, 2010, and before Jan. 1, 2011) and
  
  (1) who was employed by the taxpayer on any date during the tax year,
  
  (2) who was employed by the taxpayer for a period of not less than 52 consecutive weeks, and
  
  (3) whose wages (as defined for income tax withholding in Code Sec. 3401(a) ) for that employment during the last 26 weeks of the period (described in item (2) above) equaled at least 80% of the wages for the first 26 weeks of that period. (HIRE Act §102(b))
  
  Make sure to file the Form W-11 to claim this credit for each such worker hired.