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Tuesday, October 30, 2007


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. 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.

Earlier this year, the Tax Court 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.

The IRS now acknowledges and agrees to make the examination on a case-by-case basis for each estate electing under Section 6166. Pending the issuance of Regulations, it has issued a notice that it will consider the following factors in examining whether a bond or special lien is needed, namely:

--The duration and stability of the business.

--The ability of the estate and business to pay the installments of tax and interest timely.

--The tax compliance history of the business.

Note, however, that special effective provisions detail to which estates these provisions will apply.

Notice 2007-90.

Saturday, October 27, 2007


If a decedent's IRA is payable to his or her estate, the ultimate beneficiary typically must withdraw the IRA at a rate now slower than that which would have been imposed on the decedent if he or she had lived (based generally on life expectancy). If the decedent had named the beneficiary directly, the beneficiary could withdraw it out over his or her own life expectancy (that is, slower, if the beneficiary is younger than the decedent). Taxpayers like to take funds out of an IRA as slow as possible (if not actually needed) so that tax on the withdrawals can be deferred and deferral of tax on earnings continues for the assets retained in the IRA.

In a recent private letter ruling a decedent had inadvertently left off his daughter from his beneficiary designation (she had been on a prior version). A new form was requested by the IRA custodian to correct the error, but the decedent died first.

The interested parties were able, after the death of the decedent, to obtain a reformation of the beneficiary designation form by a state court to add the daughter. A ruling was then sought from the IRS, confirming that the reformation would be respected and the daughter could use her own life expectancy.

The IRS did not issue a favorable ruling, citing rules that require a beneficiary designation to be in place prior to death to be effective for these purposes. This was likely a surprise to the daughter and her advisors, since on similar facts in the past the IRS had given effect to such reformations by way of private letter ruling. Further, the IRS has also respected modifications to trusts post-death to qualify them as proper designated beneficiaries. Since private letter rulings are not binding on the IRS except as to the taxpayers to whom they are issued, such a reversal of policy is permissible, albeit unexpected.

PLR 200742026

Tuesday, October 23, 2007


Social security taxes (FICA) are imposed at the rate of 6.2% on the wages of taxpayers, with a matching 6.2% tax on their employers - the self-employed pay a tax of 12.4%. This tax is not applied against all wage income - wages higher than the wage base are not taxed.

In 2007, the wage base limit was $97,500. In 2008, it will increase for inflation to $102,000. Therefore, wage earners who earn at or above these levels will see a $279 tax increase, and their employers will also see a $279 tax increase. A self-employed wage earner will pay an additional $558.

Taxpayers who earn wages at these levels are often pleasantly surprised when their take home pay increases during the calendar year after their wages have passed the wage base limit since withholding for social security taxes disappears. For taxpayers who do not get a significant raise, they will be waiting longer for this happy day in 2008 than in 2007.

Saturday, October 20, 2007


2008 adjustments to pension contribution, benefit and computation limits have been released. While many inflation adjustments are in fact unchanged, here are some changes that are of interest:

-The limitation on the annual benefit under a defined benefit plan increases from $180,000 to $185,000.

-The limit on the annual additions to a participant's defined contribution plan account increases from $45,000 to $46,000.

-The maximum amount of annual compensation that can be taken into account for various qualified plan purposes increases from $225,000 to $230,000.

Wednesday, October 17, 2007


November 2007 Applicable Federal Rates Summary:

-Short Term AFR - Semi-annual Compounding - 4.07% (4.15%/October -- 4.76%/September -- 4.94%/August)

-Mid Term AFR - Semi-annual Compounding - 4.34% (4.3%/October -- 4.73%/September -- 5.03%/August)

-Long Term AFR - Semi-annual Compounding - 4.83% (4.82%/October -- 5.03%/September -- 5.24%/August)


Monday, October 15, 2007


The Treasury Inspector General for Tax Administration recently issued a report raising concerns about taxpayer compliance with the like-kind (Section 1031) exchange rules. It is likely that this report will eventually result in greater IRS scrutiny of reported Section 1031 exchanges. The following concerns were mentioned, and thus such issues may garner more scrutiny in regard to such reviews:

-transactions involving property that is not "like-kind;"

-incorrect basis figures, especially upon ultimate disposition of property acquired in the exchange;

-related party exchanges; and

-exchanges involving second homes or vacation homes.

You can read the report here.

Saturday, October 13, 2007


To be taxed as an S corporation, an election must be filed with the IRS at any time during the tax year before the election year, or it can be made effective retroactively to the first day of the tax year if made on or before the 15th day of the third month of that tax year. Taxpayers seem to have a lot of problems meeting this deadline, and for years the IRS has offered various methods of relief for late filed elections.

The relief continues - in Rev.Proc. 2007-62, an additional method for having a late election accepted by the IRS has been promulgated. Under this Revenue Procedure, the IRS will respect a late filed election under the following conditions:

--The entity fails to qualify for its intended status as an S corporation on the first day that status was desired solely because of the failure to file a timely Form 2553 with the applicable campus;

--It has reasonable cause for its failure to file a timely Form 2553;

--It has not filed a tax return for the first tax year in which the election was intended;

--The application for relief is filed no later than 6 months after the due date of the tax return (excluding extensions) of the entity seeking to make the election for the first taxable year in which the election was intended; and

--No taxpayer whose tax liability or tax return would be affected by the S corporation election (including all shareholders of the S corporation) has reported inconsistently with the S corporation election, on any affected return for the year the S corporation election was intended.

While helpful, this method can only be used where reasonable cause for the failure to timely file exists. A key benefit of this method is that no private letter ruling filing fee applies.

If an entity cannot use this method, it can explore the availability of the other relief methods under Rev.Proc. 97-48 and Rev.Proc. 2003-48.

Tuesday, October 09, 2007


A decedent died owning a 50% joint ownership interest in art. On his estate tax return, a very substantial discount in the value of the joint interest was taken to account for the joint ownership nature of ownership. After several procedural gyrations, the discount for joint ownership issue came before the federal District Court. The IRS argued for a 0% discount due to joint ownership - the estate argued for a 44% discount.

The Court ruling allowed only for a 5% discount. This does seem to be a little on the low side, since if a joint owner wanted to cash out his or her joint interest, the probable method would be to have the entire item sold at auction. An auction is always open to the lack of a reasonable amount of bidding risk and the possible "steal" of the artwork for a low price. Would someone purchasing a joint ownership interest (that is, in trying to apply the willing buyer/willing seller standard for estate tax valuation) discount the purchase price only 5% for this risk of loss?

Stone v. U.S., 100 AFTR 2d 2007-5512 (DC N.D Cal. 2007)

Saturday, October 06, 2007


The U.S. and Canada recently signed a 5th Protocol (amendment) to their income tax treaty. Highlights of the Protocol include:

  1. Zero Withholding on Interest Payments. The current Treaty provides for a 10% withholding rate on cross-border interest payments. This is reduced to 0% under the new Protocol.
  2. Arbitration. The Protocol provides for mandatory arbitration procedures for disputes with regard to certain Treaty provisions.
  3. Transparent Entities. The Protocol has provisions allowing for reduced Treaty rates when transparent entities (such as LLC's) are involved.

The Protocol needs to be ratified by the U.S. Senate and and the Canada Parliament before it enters into force.

Wednesday, October 03, 2007


The IRS has summons authority to gain access to taxpayer and third party documents. However, if the documentation is protected by the work product privilege, such access is difficult to obtain.

The work product privilege privilege protects written statements, private memoranda and personal recollections, prepared or formed by an adverse party's counsel in the course of his legal duties. It is intended to prevent a litigant from taking a free ride on the reasoning and thinking of his opponent's lawyer and thus avoid deterring a lawyer's committing his thoughts to paper.

A document is eligible for protection under the work product rule where it was created “because of” anticipated litigation and wouldn't have been prepared in substantially similar form but for the prospect of that litigation.  In addressing whether a tax opinion issued prior to audit is covered by the work product privilege, the IRS recently proclaimed that a "document prepared in anticipation of an audit, even if it focuses on a particular transaction or item, is not prepared in anticipation of litigation. If a document is prepared before even an audit has been initiated, the specter of litigation is, absent [special facts], too insubstantial and attenuated to support a conclusion that the possibility of litigation is concrete or significant" enough to bring such a document under the privilege.

Note, however, that this pronouncement was made in an Action on Decision whereby the IRS was disagreeing with an appellate court ruling that was opposite to what it is asserting. Therefore, the IRS' position on this issue, as announced in the AOD, should not be taken as a correct interpretation of law, but merely a strong indication of the IRS' intent to fight the work product privilege in similar circumstances.

AOD 2007-004 (10/1/07)