WILL UNAMBIGUOUS DIRECTIONS IN A LAST WILL AVOID ALL DISPUTES OVER BURIAL INSTRUCTIONS?

Last week the Florida court spectacle of where the bodily remains of Anna Nicole Smith should be laid to rest dominated the airwaves and newspapers. This high profile case begs the question whether the court hearing could have been avoided if Anna Nicole Smith had clearly and uniquivocally given burial instructions in her Last Will.

In Florida, the answer appears to be no. The leading Florida case on the issue is Cohen v. Guardianship of Cohen, 896 So.2d 950 (Fla. 4th DCA 2005). Several principles relating to burial/disposition of bodily remains instructions can be gleaned from the case.

First, in the absence of a testamentary disposition in the Last Will, the spouse of the deceased or the next of kin has the right to the possession of a body for burial or other lawful disposition. Thus, where such relatives exist, their desires take precedence over the desire of the appointed Personal Representative/Executor.

Second, when the decedent has expressed his intention as to the disposition of bodily remains in the Last Will, the court should generally follow this expressed intent.

Lastly, however, the court is not uniquivocally bound by the Last Will. If a contrary intent of the deceased can be shown by clear and convincing evidence, the court can overide the intent as expressed in the Last Will. Therefore, even if Anna Nicole Smith's Last Will was very clear on her desires, the court was still obligated to consider and weigh any evidence that indicated a change of intent by Ms. Smith.

Of course, a testator with desires on the subject should place his intent in his Last Will, since the burden will be on others to show a later change in intent to overide these wishes. When there are concerns about relatives seeking to override his or her intent, additional or periodic ratifications of such intent may also be helpful.

INSTALLMENT SALES OF PARTNERSHIP INTERESTS

When a seller of property receives payments in more than one year, the seller may be eligible to report any gain arising on the sale using the installment method of accounting under Code Section 453. This allows a portion of the gain to be allocated to multiple tax years, as payments are received in those years.

The application of Code Section 453 to an installment sale of a partnership interest (or aninterest in a limited liability company taxable as a partnership) raises numerous issues, not all of which have been fully resolved. Richard Harris, in an article in Business Entities journal entitled Installment Sales of a Partnership Interest, discusses several of these issues which practitioners need to be concerned about.

The first issue he discusses is the potential disallowance of installment sale treatment to the portion of partnership/LLC assets made up of "hot assets" under Code Section 751 – namely, unrealized receivables and inventory items. Mr. Harris notes that Rev. Rul. 89-108 disallows these items. However, he notes that not everyone agrees that the ruling is a correct interpretation of the law, and that it did not directly apply to unrealized receivables and to all inventory (since at the time, Section 751 only applied to substantially appreciated inventory) so perhaps it does not provide precedent for those items.

The other principal issues discussed by Mr. Harris relate to the effect that partnership liabilities will have on installment sale treatment. He notes that a partnership's qualifying liabilities under Section 453 may affect the partner's computation of installment sale gain by reducing the contract price. Further, the partnership's liabilities may also be treated at times as payment received in the initial year of sale, thus accelerating the gain recognition.

Harris, Richard, Installment Sales of a Partnership Interest, Business Entities, Jan/Feb 2007.

TOURNAMENT POKER IS NOT A PROFESSIONAL SPORT

In flipping through your cable TV channels, no doubt you have noticed on many of the sports channels more and more coverage of tournament poker. Tournament poker is a hosted poker event that can last from days to weeks. Unlike a regular poker game, a participant cannot exit the game and cash out his chips at will – instead, one plays until he or she loses or is the sole remaining player. To play, a participant pays an entrance fee, which is used to pay administrative expenses and create a prize pot. Prizes are divided among the last players to be eliminated, with more money being paid to those that last the longest.

Internal Revenue Code Section 165(d) provides that wagering losses can be deducted in a year only to the extent of wagering winnings. Professional gamblers can report their wagering income and expenses on Schedule C. Nonprofessionals must report all of their gambling winnings and report their losses as itemized deductions.

In 2000, Gloria Tschetschot had winnings of $11,000 from playing in poker tournaments. Unfortunately, she had also losses from tournament play of $29,993. To try and get around the wagering loss limits of Section 165(d), which would have limited her loss deductions to the $11,000 in winnings, Gloria claimed that tournament poker is more akin to a professional sport like tennis instead of a wagering activity. The IRS disagreed and the issue ended up in Tax Court.

The Tax Court noted that regular poker is a wagering activity. It further noted that simply because a sport or activity is played or conducted in a tournament setting does not transform the underlying activity into something different. Tournament poker play, much like live-action poker, necessitates the use of the word "bet" or "wager." The players are still placing bets, hoping to win.

In distinguishing the treatment of tournament golf or tennis players from tournament poker players, the Tax Court simply noted that Congress had decided to treat wagering activities different from other sporting activities, and it would respect that treatment.

Thus, Gloria's tournament poker play was held to be a wagering activity, subject to the loss limitation provisions of Section 165(d).

Tschetschot, et ux., TC Memo 2007-38 (February 20, 2007)

TRANSFER OF LIFE INSURANCE POLICIES BETWEEN GRANTOR TRUSTS

Generally, when an insured under a life insurance contract dies, the recipient of the policy proceeds is not subject to federal income tax. However, if the contract was previously sold for money or other consideration, this exemption from tax may be lost (except as to the sum of the consideration paid and the premiums subsequently paid by the buyer). This is referred to as the "transfer-for-value" rule.

There are exceptions to the transfer-for-value rule that will allow a policy to be sold but not expose the policy proceeds to income tax. One of these exceptions is for a transfer of the life insurance contract to the insured.

If the grantor trust rules apply to a trust, a life insurance contract (or other asset) held in a trust will be treated as owned by the grantor of the trust. In a recent Revenue Ruling, the IRS addressed two fact patterns involving grantor trusts to determine whether a transfer of a life insurance contract between the two trusts will be subject to the transfer-for-value rule (and thus result in the ultimate income taxation of the policy proceeds), or whether an exception to the transfer-for-value rule will apply.

Under the first fact pattern, a life insurance policy was sold for cash by one grantor trust to another grantor trust (the same individual was the grantor of each trust under the grantor trust rules). Because the grantor is deemed to own the assets of both trusts, when the policy is transferred by one trust to the other, there is no transfer occurring for federal income tax purposes. Therefore, the transfer-for-value rule has no application, and the policy proceeds will not be subject to income tax at the death of the insured.

Under the second fact pattern, the life insurance policy is owned by a nongrantor trust, and a grantor trust holds cash. The insured is the grantor of the grantor trust. The grantor trust purchases the policy from the nongrantor trust. Since both trusts are not grantor trusts, there is a transfer for purposes of the transfer-for-value rule. However, since the insured, as grantor of the grantor trust, is deemed to own all the assets of the purchasing trust, the grantor/insured is treated as the buyer of the insurance policy. Thus, the exception to the transfer-for-value rule for transfers to the insured applies, and again, the policy proceeds payable at the death of the insured will continue to be exempt from income tax.

A practical benefit of these rulings will be to allow for more certainty in dealing with insurance policies owned in trusts, so as to allow for transfers of policies that are no longer desired with policies that are better suited to trust purposes or to deal with changes in circumstances. While nothing in the ruling is of great surprise to tax practitioners, it is always helpful for the IRS to confirm by way of ruling or regulation what is generally otherwise believed to be the case.

Rev Rul 2007-13, 2007-11 IRB.

APPLICABLE FEDERAL RATES - MARCH 2007

March 2007 Applicable Federal Rates Summary:

-Short Term AFR - Semi-annual Compounding - 5% (4.87%/February -- 4.82%/January -- 4.91%/December)

-Mid Term AFR - Semi-annual Compounding - 4.8% (4.64%/February -- 4.53%/January -- 4.68%/December )

-Long Term AFR - Semi-annual Compounding - 4.95% (4.80%/February -- 4.68%/January -- 4.84%/December )

DIRECTION OF RATES: Up

WAIVER OF ESTIMATED TAX PENALTIES FOR INTERNATIONAL TAXPAYERS

Under the Tax Increase Prevention and Reconciliation Act, substantial changes were made to the Section 911 foreign earned income and housing cost exclusions available to taxpayers who live and work abroad. These changes occurred in May 2006, but they apply for tax years beginning after 2005.

Therefore, taxpayers that calculated their estimated tax based on the old law may have paid less than required. In recognition of the retroactive changes, the IRS has announced that it will waive payments for underpayments of estimated tax that are attributable to these law changes. The IRS is authorized to waive such penalties since Section 6654(e)(3) allows IRS to waive penalties for underpayments of estimated tax in unusual circumstances to the extent its imposition would be against equity and good conscience.

The waiver applies only to individuals who file a Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, with their timely filed Form 1040, U.S. Individual Income Tax Return, or Form 1040X, Amended U.S. Individual Income Tax Return. While the IRS does not specifically advise how taxpayers who may have already filed may recover any penalties they paid, presumably they can get these back through an amended tax return filing.

Notice 2007-16

FLORIDA STATUTORY INTEREST RATE ON JUDGMENTS MODIFIED [FLORIDA]

Under Florida law, uncollected court judgments accrue interest at a rate established by law. As of January 1, 2007, this statutory rate has been increased from 9% per annum to 11% per annum.

For historical interest, the following summarizes the annual rates for recent years:

PRIOR YEAR RATES

YEAR	PER ANNUM	DAILY RATE
2006	9%	.0002466
2005	7%	.0001918
2004	7%	.0001918
2003	6%	.0001644
2002	9%	.0002466
2001	11%	.0003014
2000	10%	.0002740
1999	10%	.0002740
1998	10%	.0002740
1997	10%	.0002740
1996	10%	.0002740
1995	8%	.0002192

10/01/81 thru 12/31/94: 12% .0003333

CAN AN EXCESS CONSTRUCTION ALLOWANCE BE A NONTAXABLE CONTRIBUTION TO CAPITAL?

Landlords often provide a construction allowance to tenants to build-out or improve the leased premises. Under Code Section 110, for retail establishments such a construction allowance will often be excluded from income. However, if the construction allowance is not fully used to improve the premises, the excess is taxable to the tenant.

The IRS Chief Counsel recently addressed a situation where a construction allowance was not fully used by the tenant. Since the tenant was a corporation, the issue was raised whether the unused portion could be treated as a nontaxable contribution to capital.

Under Code Section 118, a contribution to the capital of a corporation is not included in the corporation's gross income. This is true even if the contributor is not a shareholder.

In analyzing the situation, the IRS first addressed the general requirements for treatment as a capital contribution under Section 118. Section 118 does NOT apply if the transferor is motivated by a desire to obtain specific, quantifiable benefits. If the transferor expects to receive only vague, uncertain, or incidental benefits, a transfer is likely to be a contribution to capital, if it satisfies five factors: (1) it must become a permanent part of the transferee's working capital structure; (2) it can't be compensation, such as a direct payment for a specific, quantifiable service provided for the transferor by the transferee; (3) it must be bargained for; (4) the asset transferred must foreseeably result in benefit to the transferee in an amount commensurate with its value; and (5) the asset ordinarily, if not always, will be employed in or contribute to the production of additional income and its value assured in that respect.

The IRS noted that a construction allowance provided by a landlord to a tenant is motivated by the landlord's desire to have the lessee operate a retail store in the lessee's retail property and receive rent. The existence of a lease under which rent is payable to the lessor was held by the IRS to be a sufficient direct benefit to take the construction allowance outside the scope of Section 118 and thus tax the portion not applied to construction.

EMISC 2007-003

RESTORATIVE PAYMENT TO IRA ALLOWED

The Internal Revenue Code has strict limitations on amounts that may contributed to an individual retirement account ("IRA"). In a recent Private Letter Ruling, the IRS characterized a contribution to an IRA with funds received from an investment advisor for indemnification of investment losses in an IRA as restorative payments and not "contributions" subject to contribution limits. In allowing for this treatment, the IRS applied the reasoning of Revenue Ruling 2002-45 which allowed similar treatment for qualified plans.

So when will a transfer of funds to an IRA constitute a qualified "restorative" payment? According to the Private Letter Ruling, payments to an IRA are restorative payments only if the payments are made in order to restore some or all of the IRA losses resulting from breach of fiduciary duty, fraud or federal or state securities violations (such as payments made pursuant to a court-approved settlement or independent third party arbitration or mediation award.) In contrast, payments made to an IRA to make up for losses due to market fluctuations or poor investment returns are generally treated as contributions and not as restorative payments.

PLR 200705031

MERE CONFLICT NOT ENOUGH TO DENY APPOINTMENT OF PERSONAL REPRESENTATIVE [FLORIDA]

Under Florida law, an individual may appoint a Personal Representative ("PR") in their Last Will. Such appointment is to be given significant deference by the probate court when the individual dies and a PR is appointed.

A recent Florida case addresses the issue of what happens if the person designated PR in the Last Will has a conflict with estate beneficiaries. In the case, the designated PR was a brother of another estate beneficiary. The probate court noted that the designated PR and the beneficiary were fighting over some estate issues, and instead appointed an unrelated attorney to serve as PR. The designated PR appealed the ruling.

The complaining beneficiary alleged that the designated PR had the original Last Will and had taken too long to act upon it, and was thus delaying the administration of the estate. He also alleged that the designated PR had withdrawn more funds than he was entitled to from an account, but the probate court did not agree as to that.

The appellate court noted that the mere presence of a conflict between a named PR and beneficiaries is not enough to deny the appointment, and it reversed the probate court and directed that the brother be apopinted as PR. However, this does not mean that in no case will a conflict disallow a named PR from serving. If the named PR has actual hostility towards a beneficiary, or if a dispute will cause unnecessary litigation and impede the estate's administration and other exceptional circumstances exist, a probate court could name another person to serve.

ANGEL RUBEN LOPEZ HERNANDEZ, Appellant, v. ANGEL RAUL LOPEZ HERNANDEZ, ET AL., Appellee. 5th District. Case No. 5D06-1230. Opinion filed January 19, 2007.

WHY APRIL 17?

Pretty much everyone knows that federal income tax returns are usually due on April 15, unless that day is on a weekend. This year, April 15 is on Sunday, but returns are not due until April 17. How come?

April 16 is Emancipation Day, a legal holiday in the District of Columbia. Under a federal statute enacted decades ago, holidays observed in the District of Columbia have impact nationwide on tax issues, not just in D.C. Thus, the whole country gets until the 17th to file their returns.

IR-2007-15, Jan. 24, 2007