U.S.- BRAZIL EXCHANGE OF TAX INFORMATION AGREEMENT

The U.S. does not presently have an income tax treaty with Brazil. Due to differences in opinion between the two countries as to the proper scope and provisions of such a treaty, it is unknown if one will ever be forthcoming.

Nonetheless, the U.S. and Brazil have now entered into an Exchange of Information Agreement. Such agreements provide a mechanism for each country to assist the other in tax investigations and administration.

The Agreement only provides for the delivery of tax information upon request by one country of the other. It does not have any provisions for spontaneous exchange (that is, where one country has an obligation to deliver tax information to the other country because the first country simply thinks it would be of interest to the other country.

http://www.ustreas.gov/press/releases/reports/braziltiea2007.pdf for the text of the Agreement.

IRS PROPOSES MAJOR REWRITE OF THE RULES IN REGARD TO ESTATE TAX DEDUCTIONS

Section 2053 of the Internal Revenue Code allows for the deduction of funeral expenses, administration, claims against the estate, and certain indebtedness of a deceased in computing federal estate tax. Under the estate tax, the value of assets against which the estate tax is applied is measured on the date of death (or under the alternative date election, 6 months after the date of death.) Likewise, the amount of deductions is generally computed as of the date of death. However, some deductions clearly arise after death (e.g., funeral expenses and administrative expenses) so these are not fixed as of the date of death. Further, the question of what post-death events can be considered in determining the deductible amount of a claim against an estate has been the subject of numerous (and inconsistent) pronouncements by the courts and the IRS.

What happens with claims against an estate that are contested, contingent, unenforceable, become unenforceable after the decedent's death, or are not in fact presented for payment? How much can an estate deduct on its return? Oftentimes, a fair amount of speculation and guesswork goes into such determinations (both by taxpayers and the IRS). Further, if the IRS does not agree with the amount claimed, expensive and time consuming administrative proceedings and court cases result.

In an effort to bring more certainty to the deduction question, and to limit disagreements between the IRS and taxpayers, the IRS has issued proposed regulations that radically vary the current procedures. Under the proposed regulations, for claims against an estate arising in contract or tort, an estate may not deduct such a claim under Section 2053 UNTIL THE CLAIM IS PAID BY THE ESTATE. The regulations specifically provide that post-death events are thus considered.

A principal effect of these rules will be that for claims not paid by the time the estate tax return is filed, no deduction will be initially allowed, and thus tax may be overpaid. If the claim is later paid, a claim for refund can then be filed based on the deduction that is then allowable. If the statute of limitations for filing for a refund has expired, the estate is generally out of luck – however, it can file to extend the statute of limitations by filing a protective refund claim before the statute of limitations expires (if the protective claim is not timely filed, the later refund claim will not be allowed) to allow for a later claim.

If a claim becomes unenforceable, and it is paid after that, no deduction will be allowed. The regulations also provide for a presumption against the validity of claims to related parties and entities. The proposed regulations also provide rules when a court decree can be relied upon to fix a deduction amount, and when a settlement of a claim will be respected for this purposes.

These new rules would be a mixed blessing for taxpayers. On the plus side, taxpayers would have more certainty in regard to what should be reported as deductible claims, and will also spend less time and money fighting with the IRS on those issues. They can also avoid the problem of underestimating a claim and thus not getting a full deduction if the final claim amount is not determined until after expiration of the statute of limitations for refund. On the negative side, and this is a big negative, estates must first pay estate taxes without a deduction for contested or uncertain claims, and then later ask for taxes back once the claim is paid. This can have significant cash flow implications to estates.

The proposed regulations are not yet effective, and will not be until final regulations are actually issued.

LESSOR CANNOT ARBITRARILY WITHHOLD CONSENT TO ASSIGNMENT OF LEASE [Florida]

An important provision in leases is assignability. Usually, the landlord is very interested in requiring its consent to an assignment of a lease since it wants to control who its tenant is. The tenant usually wants the ability to assign the lease so it can minimize its economic loss if it wants to move or otherwise cease to be the tenant during the term of the lease.

In SPEEDWAY SUPERAMERICA, LLC, v. TROPIC ENTERPRISES, INC., SUNOCO, INC. (R&M), and MASCOT PETROLEUM COMPANY, INC., the lease provided that "Lessee shall not assign or transfer this lease, or any interest therein, without the prior written consent of Lessor." The tenant sought to assign the lease to a third party, and the Lessor refused to consent. In legal proceedings, the landlord argued that per the express terms of the lease, it could refuse to consent to an assignment, and was not obligated to be reasonable in its refusal. The trial court agreed.

On appeal, the 2^nd District Court of Appeal reversed the trial court. It held that even though there is no express obligation that the landlord needed to act reasonably in reviewing a request to assign the lease, the implied covenant of good faith that is present in all contracts imposes a duty of commercial reasonableness on the landlord.

This probably does not mean that a landlord always has to act reasonably in determining whether to approve a lease assignment. The 2^nd DCA noted that the lease did not expressly provide that the landlord's discretion to withhold consent was "absolute." Presumably, if the lease had expressly provided for "absolute discretion" in the landlord on this issue, then the duty of commercial reasonableness would not have been applicable.

SPEEDWAY SUPERAMERICA, LLC, Appellant, v. TROPIC ENTERPRISES, INC., SUNOCO, INC. (R&M), and MASCOT PETROLEUM COMPANY, INC., 32 Fla. L. Weekly D1032b (2^nd DCA, April 20, 2007).

PAYROLL SERVICE STEALS TAX PAYMENT – TAXPAYER STILL LIABLE

Like thousands of businesses, Pediatric Affiliates PA outsourced its payroll to a payroll firm. Such firms generally prepare and file payroll tax forms for businesses. As part of this function, such firms typically calculate the taxes due, request the funds from their client, and then pay them over to the IRS on behalf of their clients. Unfortunately, for Pediatric Affiliates PA, the company they were using was stealing the tax deposits instead of paying them over to the IRS.

Eventually, the IRS sought to collect the missing tax deposits from Pediatric Affiliates. The company claimed it didn't owe the taxes or interest on the taxes since they had paid them over to the payroll firm. The District Court held that this was not reasonable cause, and found Pediatric Affiliates responsible for the missing taxes and interest. This decision has now been upheld by the 3^rd Circuit Court of Appeals.

The IRS is not entirely unsympathetic to taxpayers. While holding employers liable for such embezzeled taxes and interest, it does offer advice to employers to avoid becoming a victim. Their suggestions include:

--Keeping the IRS address of record with the employer's address and not with the payroll service provider. In this way, the IRS will contact the employer if there are any problems with the account.

--Try to use payroll service providers that have a fiduciary bond.

--The employer, through the service provider, should be enrolled in and use the Electronic Federal Tax Payment System (EFTPS). Since the system maintains payment history online, the employer can regularly confirm that payroll payments are being made (for example, as part of regular bank reconciliations).

Pediatric Affiliates P.A., 99 AFTR 2d ¶2007-845 (CA3 4/07)

APPLICABLE FEDERAL RATES - MAY 2007

May 2007 Applicable Federal Rates Summary:

-Short Term AFR - Semi-annual Compounding - 4.79%
(4.84%/April -- 5%/March -- 4.87%/February)

-Mid Term AFR - Semi-annual Compounding - 4.57%
(4.56%/April -- 4.8%/March -- 4.64%/February)

-Long Term AFR - Semi-annual Compounding - 4.84%
(4.75%/April -- 4.95%/March -- 4.80%/February)

DIRECTION OF RATES: Mixed

IRS CANNOT DEMAND A BOND OR LIEN FOR ALL SECTION 6166 ELECTIONS

An estate may elect under Internal Revenue Code Section 6166 to pay the portion of federal estate tax attributable to a closely held business interest in up to ten equal annual installments starting no later than five years after the regular due date for payment if certain requirements are met, including the requirement that the value of the business interest is more than 35% of the decedent's adjusted gross estate. The purpose of the deferral is to protect businesses – without it, many times a business would have to be sold to pay estate taxes which are due within 9 months of the date of death. By obtaining a substantial deferral to pay the tax, the heirs have a long time to spread out the payments and/or make arrangements for sale or payment of the tax.

The Internal Revenue Code allows the IRS to demand a bond or lien to secure the payment of the tax. For many years, the IRS has flipped back and forth on whether a bond or lien is required in all events, or only after a determination of need. Presently, the Internal Revenue Manual REQUIRES estates to furnish a surety bond as a prerequisite for granting the installment payment election. Instead of furnishing a surety bond, the estate may choose to elect a special lien on property. This property must have a value equal to the total deferred tax plus four years of interest and must be expected to exist until the entire tax is paid.

The Tax Court has now ruled that this mandatory bond or lien was not intended by Congress and is inappropriate. Instead, the IRS needs to examine each situation to see if a bond or lien is needed and appropriate.

Estate of Edward P. Roski, Sr., et al. v. Commissioner, 128 T.C. No. 10, 04/12/2007

NO TAX – NO INTEREST

Under the Internal Revenue Code, payments of interest or dividends to foreign persons may be subject to a 30% withholding tax. The person paying out the interest or dividend (the "withholding agent") is required to withhold the tax from the payment absent the receipt of proper documentation showing a reduced or eliminated obligation to withhold tax.

If the withholding agent does not withhold the tax, it will be responsible for the tax, as well as applicable penalties and interest. The Treasury Regulations provide that if the withholding agent should have withheld but doesn't, and then it is LATER determined that no tax (or a reduced tax) was due, the withholding agent is still responsible for interest on the tax he should have withheld based on the information and documentation available to him on the date the withholding tax was due. That is, the withholding agent is liable for interest on tax, even if it turns out no tax was even due!

Well, that used to be the case. On April 11, 2007 the IRS did the right thing and issued T.D. 9323 which revokes the above interest due from withholding agents when it is determined that no tax was actually due.

CONSIDERATION OF POST-DEATH EVENTS IN REGARD TO ESTATE TAX DEDUCTIONS

In computing federal estate tax, both assets and liabilities of the decedent's estate are valued as of the date of death (subject to alternate value of assets at the 6 month anniversary). If an estate has a liability to a third party as of the date of death, which liability eventually disappears because the creditor does not timely assert its rights, is there a deduction allowed for the liability? Applying the date of death rule, it would appear that a deduction should be allowed since as of the date of death the liability existed.

Nonetheless, courts are understandingly hesitant to allow a deduction for an item that will never be paid. As such, they have developed an exception to the general rule and will look to post-death events to examine the viability of claims against the estate.

In Estate of Heister, 99 AFTR 2nd 2007-1288 (DC VA 2007), a decedent misappropriated funds while acting as a trustee, in breach of his fiduciary duties. His estate asserted that it should be able to deduct, for federal estate tax purposes, the estate's theoretical liability to the beneficiaries. At the time of death, the statute of limitations for a claim against the decedent had not expired, but they did expire shortly thereafter, so the theoretical liability would never be paid. The District Court determined that such post-death expiration of the statute of limitation should be considered in valuing the deduction for the claim, and disallowed the deduction. The Court noted a similar Florida case where a potential estate claimant failed to timely file a claim in a Florida probate proceeding, and thus had its claim barred. In that case, (Estate of Hagmann v. Commissioner, 60 T.C. 465 (1975), aff'd per curium, 492 F.2d 796 (5th Cir. 1974), the Tax Court likewise barred a deduction for such an expired claim.

The Court in Heister also noted that a "theoretical liability" is not the same as a deductible claim for estate tax purposes. Where a creditor in fact does not assert a claim against the estate, this is a "theoretical liability" only and is not deductible.

DO YOU NEED TO PAY YOUR FEDERAL TAXES ELECTRONICALLY?

EFTPS is the Electronic Federal Tax Payment System developed by the U.S. Treasury Department that enables taxpayers to pay their federal taxes electronically. The system allows taxpayers to use the phone, personal computer (PC) software, or the Internet to initiate tax payment reports to EFTPS directly. Any individual taxpayer making payments for Forms 1040, 706 estate, 709 gift taxes or installment payments can use EFTPS-OnLine. Business taxpayers can also use the EFTPS system. The system allows business taxpayers to eliminate paper Federal Tax Deposit coupons and individual taxpayers to eliminate paper vouchers.

Some business taxpayers are required to use EFTPS. Specifically, if your total deposits of designated federal taxes (including employment taxes, income taxes, Railroad Retirement taxes, Social Security taxes, and various other types of non-payroll withholding) during a calendar year exceed $200,000, you are required to use EFTPS beginning in the second succeeding calendar year. For example: if you had more than $200,000 in deposits of designated taxes in calendar year 2002, you will be required to use EFTPS beginning January 2004. Once you are required to use EFTPS, you will continue to be required in subsequent years, even if your annual tax deposits fall below $200,000.

A 10% penalty will apply if you are required to use EFTPS but instead pay your taxes by check. However, if you voluntarily use EFTPS (that is, you are not required under the above criteria to use it) and then stop using it, the penalty will not apply.

For more information, visit the EFTPS website at https://www.eftps.com/eftps/home.do.

DIRECT DEPOSIT OF REFUNDS TO IRA ACCOUNTS

This filing season is the first time that taxpayers are allowed to direct that their tax refunds be deposited directly to an IRA (among other qualified savings accounts). The Form 1040 allows direction to one account and Form 8888 allows direction to up to three accounts. This saves the taxpayer from having to write a check or otherwise fund an IRA contribution.

IRA contributions must be completed by April 17, 2007 (regardless of whether the taxpayer has an extension to file his or her income tax return) if a taxpayer wants the contribution to be counted for the 2006 tax year. While it appears that for taxpayers that have not yet filed yet that they still have 10 days to file and get a contribution in for 2006, this is not the case. The tax refund must be actually processed by the IRS and paid out to the IRS by April 17, 2007, which is highly unlikely for returns filed at this late date, even for electronic filers.

However, such direct deposits can be made from 2006 tax refunds for 2007 contributions. Care is still needed - the direct deposit amounts must be limited to the IRA contribution dollar limits applicable to the taxpayer. Contributions beyond the limits can result in penalties. Taxpayers also need to make sure the designated IRA account is open when the tax return is filed so that the IRS can do the direct deposit.

COMPARING AND CONTRASTING HEALTH EXPENSE ACCOUNTS

Health Savings Accounts (HSA) are the newest addition to an array of tax advantaged accounts that people can use to pay for unreimbursed medical expenses, such as deductibles, copayments, and services not covered byinsurance. First available January 1, 2004, HSAs have largely replaced the similar but more restrictive Archer Medical Savings Accounts (MSAs), which never attracted many participants. In addition, people may have access to two employment-based accounts, Health Reimbursement Accounts (HRAs) and health care Flexible Spending Accounts (FSAs). Collectively, these accounts have some features and objectives in common, but they also differ in important respects. Keeping these accounts straight can be difficult, especially when they are discussed informally using different names.

To help taxpayers learn the differences between the various types of plans, the Congressional Research Service has summarized the key attributes of each. Be warned - even with this summary it is still difficult to tell the relative advantages and disadvantages of each. This area is crying out for simplification - are four different types of accounts really needed. The summaries follow below:

HEALTH CARE FLEXIBLE SPENDING ACCOUNTS (FSAs)

-In General--These are employer-established arrangements that are usually funded through salary reduction agreements under Code Sec. 125. The employee's contribution isn't subject to either income or employment taxes.

-Eligibility--Employees whose employers offer this benefit. Former employees may be included. Employers not restricted by size.

-Definition of Qualifying Health Insurance--No health insurance requirements.

-Contributions--By employer, employee, or both. Usually funded by employee through salary reduction agreement.

-Annual Contribution Limits--None required, though employers usually impose a limit.

-Qualifying Expenses--Most unreimbursed medical expenses, though employers may impose additional limitations. May not be used for long-term care or health insurance premiums.

-Allowable Nonmedical Withdrawals--None.

-Carryover of Unused Funds--Balances remaining at year’s end (or up to 2½ months after year’s end, if employer permits) are forfeited to employer. A limited, one-time rollover to an HSA is allowed.

-Portability--Balances generally forfeited at termination, although COBRA extensions sometimes apply.

HEALTH CARE FLEXIBLE SPENDING ACCOUNTS (FSAs)
-In General--These are employer-established arrangements that are usually funded through salary reduction agreements under Code Sec. 125. The employee's contribution isn't subject to either income or employment taxes.
-Eligibility--Employees whose employers offer this benefit. Former employees may be included. Employers not restricted by size.
-Definition of Qualifying Health Insurance--No health insurance requirements.
-Contributions--By employer, employee, or both. Usually funded by employee through salary reduction agreement.
-Annual Contribution Limits--None required, though employers usually impose a limit.
-Qualifying Expenses--Most unreimbursed medical expenses, though employers may impose additional limitations. May not be used for long-term care or health insurance premiums.
-Allowable Nonmedical Withdrawals--None.
-Carryover of Unused Funds--Balances remaining at year’s end (or up to 2½ months after year’s end, if employer permits) are forfeited to employer. A limited, one-time rollover to an HSA is allowed.
-Portability--Balances generally forfeited at termination, although COBRA extensions sometimes apply.

ARCHER MEDICAL SAVINGS ACCOUNTS (MSAs)
-In General--These accounts under Code Sec. 220 can be established generally only when account owners have qualifying high deductible insurance and no other coverage. Contributions made by employers are exempt from income and employment taxes, and contributions by account owners (which are allowed only if the employer doesn't contribute) are deductible. Withdrawals are not taxed if used for medical expenses, but those used for other purposes generally are and are subject to an additional 15% penalty.
-Eligibility--Individuals with qualifying health insurance who are employees of a small employer (50 or fewer workers) with a high deductible plan or self
employed. Ineligible individuals may keep previously established accounts but cannot make contributions.
-Definition of Qualifying Health Insurance--Self-only deductible must be at least $1,900 but not over $2,850; the family deductible must be at least $3,750 but notover $5,650. Annual out-of-pocket expenses for covered benefits cannot exceed $3,750 and $6,900, respectively. Deductible need not apply to preventive care if absence of deductible is required by state law.
-Contributions--By employer or account owner, but not both.
-Annual Contribution Limits--65% of the deductible for self-only coverage and 75% of the deductible for family coverage.
-Qualifying Expenses--Most unreimbursed medical expenses. May be used for premiums for long term care insurance, COBRA, and health insurance for those receiving unemployment compensation under federal or state law.
-Allowable Nonmedical Withdrawals--Permitted, subject to income tax and 15% penalty except in cases of disability, death, or attaining age 65.
-Carryover of Unused Funds--Full amount may be carried over indefinitely.
-Portability--Portable.

HEALTH SAVINGS ACCOUNTS (HSAs)
-In General--These are tax-exempt accounts under Code Sec. 223 that can be established (and to which contributions can be made) only when the owner has qualifying high deductible insurance and generally no other coverage, including Medicare. Contributions made by employers are exempt from income and employment taxes, and account owners may deduct contributions they make. Withdrawals for medical expenses are not taxed, but those for other purposes are and are subject to an additional 10% penalty, except in cases of disability, death, or attaining age 65.
-Eligibility--Individuals with qualifying health insurance. Ineligible individuals may keep previously established accounts but cannot make contributions.
-Definition of Qualifying Health Insurance--Self-only deductible must be at least $1,100; the family deductible must be at least $2,200. Annual out-of-pocket expenses for covered benefits cannot exceed $5,500 for self-only coverage and $11,000 for family coverage. Deductible need not apply to preventive care.
-Contributions--By any person on behalf of an eligible individual.
-Annual Contribution Limits--$2,850 for self-only coverage and $5,650 for family coverage. Account owners 55 years old or older and not in Medicare can contribute an
additional $800 in 2007.
-Qualifying Expenses--Most unreimbursed medical expenses. May be used for premiums for long-term care insurance, COBRA, health insurance for those receiving unemployment compensation under federal or state law, and health insurance (other than Medigap policies) for individuals who are 65 years of age and older.
-Allowable Nonmedical Withdrawals--Permitted, subject to income tax and 10% penalty except in cases of disability, death, or attaining age 65.
-Carryover of Unused Funds--Full amount may be carried over indefinitely.
-Portability--Portable.