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Thursday, November 29, 2007


The IRS has announced the interest rates for tax overpayments and underpayments for the calendar quarter beginning January 1, 2008.

For noncorporate taxpayers, the rate for both underpayments and overpayments will be 7%. This is a 1% reduction from the prior quarter.

For corporations, the overpayment rate will be 6% (a 1% reduction). Corporations will receive 4.5% for overpayments exceeding $10,000 (a 1% reduction). The underpayment rate for corporations will be 7%, but will be 9% for large corporate underpayments (1% reductions).

Rev. Rul. 2007-68

Tuesday, November 27, 2007


Assets of a decedent that is a participant in a retirement plan can be left to a surviving spouse to obtain the benefits of the estate tax marital deduction, and thus avoid current estate taxes at the death of the decedent. While there are reasons for leaving such plan assets outside of trust, decedents at times want to tie up the assets in trust, and thus a transfer to a QTIP trust may be advisable.

Natalie Choate, a leading authority on the tax aspects of retirement plans, recently reviewed four basic requirements needed to avoid tax problems with funding retirement assets into a QTIP. The four basic requirements are:

1. The QTIP trust should be named as the beneficiary. An alternative is to name a funding trust as a beneficiary, which allows the use of funding formulas to assure that only an amount of plan assets needed to minimize estate taxes end up in the QTIP trust. However, use of such a funding trust involves other tax issues and complexities that can be avoided by naming the QTIP trust as the beneficiary. In the event that this results in "overfunding" the QTIP trust, this overfunding can be ameliorated by a partial QTIP election for the overfunded QTIP trust.

2. Provisions must be added to require that the surviving spouse receives all of the income of BOTH the QTIP trust and the plan interest that is funded into it.

3. Properly specify how the income that must be distributed is to be computed. Such method must produce income in a manner acceptable to the IRS. Note that one acceptable method is to require a unitrust payout of from 3% to 5% of the trust's value each year.

4. A proper QTIP election needs to be made on the estate tax return.

SOURCE: Leaving Retirement Benefits to a QTIP Trust by Natalie Choate, Estate Planning Journal (WG&L)

Saturday, November 24, 2007


December 2007 Applicable Federal Rates Summary:

-Short Term AFR - Semi-annual Compounding - 3.84% (4.07%/November -- 4.15%/October -- 4.76%/September)

-Mid Term AFR - Semi-annual Compounding - 4.09% (4.34%/November -- 4.3%/October -- 4.73%/September)

-Long Term AFR - Semi-annual Compounding - 4.67% (4.83%/November -- 4.82%/October -- 5.03%/September)


Tuesday, November 20, 2007


The built-in gains value reduction for transfer tax purposes provides that the value of stock of a 'C' corporation is reduced by any untaxed gains inside the corporation. The theory is that a willing buyer would reduce the purchase price for such shares by the latent income tax liability inside the entity.

In a recent Tax Court case, the Tax Court recognized the value reduction. However, it did not allow a full reduction for the taxes that would arise on the sale or disposition of the corporate assets - instead, it discounted that reduction on the theory that the buyer would not sell all the assets at once but would only realize those gains (and resulting taxes) over time.

The Eleventh Circuit Court of Appeals has overturned that decision, and held that a 100% reduction in value for the income taxes on the built-in gains is appropriate. The Court ruled that the valuation should be conducted as if the corporation was liquidated, thus realizing its gains at the time of valuation. It did this based on its belief that a buyer would require a 100% reduction even if it did not intend to sell the corporate assets immediately.

Estate of Frazier Jelke III, 100 AFTR2d 2007-5475 (CA 11 11/15/2007)

Sunday, November 18, 2007


Unbeknownst to many charities, they have been recruited as policemen in the war on terror. Anti-terrorist measures impose penalties on grant-making nonprofit organizations that make grants to individuals or organizations that engage in or support terrorism - nonprofits who fail to police their grantmaking and properly investigate their grant recipients could find themselves in trouble. Therefore, nonprofit organizations making grants abroad need to be knowledgeable of these counterterrorism measures and comply with them. Unfortunately, the exact scope of protective measures that needs to be undertaken to avoid penalties is not clear.

The key provisions that nonprofits need to be wary of are:

a. Executive Order 13224 (Sept. 14, 2001) entitled "Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism." The Executive Order prohibits transactions with individuals and entities deemed to be associated with terrorism. It blocks any assets controlled by the terrorist persons and those that have supported them. What is most troublesome about the Executive Order is that there is no knowledge or intent requirement. A nonprofit that has no intent to support terrorism and has no knowledge that it is doing so can still have its assets frozen if in fact a grant recipient is associated with terrorism; and

b. The USA PATRIOT ACT (10/26/01) imposes civil fines and imprisonment for persons providing material support or resources to terrorists.

So what should nonprofits do to minimize their exposure under these provisions? At a minimum, before making grants to foreign organizations or individuals (or even domestic organizations), they need to consult the government lists that identify organizations and individuals suspected of having connections to terrorism. The principal list is the Specially Designated Nationals list (the "SDN list") maintained by the Treasury Department's Office of Foreign Assets Control ("OFAC") and accessible at Other lists include the U.S. Government Terrorist Exclusion List ("TEL") maintained by the Department of Justice and lists maintained by the United Nations and the European Union. As a practical matter, nonprofits should consider subscribing to a commercial service that scans the databases. One of these is the OFAC Analyzer, accessible at

Various agencies and organizations have issued guidance on additional actions that nonprofits should undertake, beyond checking the lists. However, meeting all suggested actions would be cumbersome, expensive, if not near impossible for many nonprofits. Therefore, nonprofits will need to develop their own internal guidelines based on these recommendations - understanding that the further they stray from the recommendations the greater their exposure if in fact they unknowingly make a prohibited grant but balancing their budget, staff availability and other constraints on full compliance. The guidelines that should be reviewed in developing internal guidelines are:

a. The 2006 Treasury Department "Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S. Based Charities." These can be viewed online at:

b. The Principles of International Charity, available online at:

Tuesday, November 13, 2007


Estate planning is not a "set it and forget it" process, or at least it shouldn't be. Even with the best of planning, circumstances change and a review of an individual's situation and estate planning is advisable. The following is a (non-exclusive) list of life and business events that should trigger a review of an estate plan and applicable estate planning documents, or at least a consultation with one's estate planner:

  • Birth of a child or grandchild;
  • Marriage of self or heir;
  • Divorce;
  • Death of a spouse or child;
  • Major change in the tax laws;
  • Major change in financial circumstances, such as a substantial inheritance;
  • Change of domicile to a new state or country;
  • Acquisition of out-of-state or out-of-country property;
  • Major illness;
  • Acquisition or sale of a business or real estate, including major liquidity events;
  • Major charitable gifting;
  • Acquisition of life insurance or significant annuity policies;
  • Significant gifting to friends or family members;
  • Or in the absence of any of the above, the passage of 4-5 years since the last review.

Ideally, clients should consult with their professionals BEFORE some of these events occur so as to allow for effective tax planning when income or transfer taxes are involved.

A suggestion for estate planners is to provide a listing of these events to their clients at the completion of the planning process to help educate them about when to have their estate planning reviewed. A memo to be kept with the client's set of estate planning documents is an easy way to accomplish this.

Sunday, November 11, 2007


Most Florida attorneys will tell you that the homestead laws of Florida are a challenge to understand and apply. One important aspect of homestead law are the limits on who homestead property can be transferred to, both during lifetime and at death - when spouses and lineal descendants exist, these limits can apply. An invalid transfer can result in unexpected consequences, including the eventual passage of the property to persons that may not have been intended to receive it.

To make matters slightly easier for those with issues in this area, I am posting a summary table that details the restrictions on transfers on Florida homestead property, both during lifetime and at death. These restrictions arise both under the Florida Constitution and statutory law. A permanent link to the table is also being placed in the links in the right column of this blog.

There are other aspects of homestead not addressed in the table, including the definition of homestead property, creditor protection aspects, and ad valorem tax aspects.

Friday, November 09, 2007


Currently, individuals over age 70 1/2 can make direct distributions to most public charities from their IRA of up to $100,000 per year. Such a direct distribution avoids the need to include such distributions in income and then seek an offsetting charitable deduction, which complete offset may often not be available.

This direct gift provision is set to expire at the end of 2007. There is a chance that this provision will be extended through 2008. However, President Bush has threatened a veto of the "extender" legislation due to some tax increases that are included in the proposed law (such as taxation of carry interests of hedge fund managers as ordinary income and not capital gain). Therefore, at this point in time, it is hard to say whether the direct to charity rules will survive into next year. Taxpayers who are on the fence about whether to make such transfers in 2007 or 2008 may want to make the transfers in 2007 in case the provision is not extended.

Tuesday, November 06, 2007


The IRS, in finalizing proposed Regulations in the tax-free reorganization area, has continued the process of liberalizing "continuity" requirements. In the latest Regulations, the IRS has given its blessing to certain post-reorganization transfers that can be made without jeopardizing required continuity of interest rules.

More particularly, the Regulations allow transfers of stock or assets to shareholders, so long as not all of the stock acquired is so transferred, and the transfer is of such a magnitude as to constitute a liquidation of the distributing corporation. Other transfers of assets or stock are also permitted so long as none of the affected corporations are terminated by such transfers. To use these rules, the continuity of business enterprise rules must also be followed.

Treas. Reg. §1.368-2(k)(1)(i)

Sunday, November 04, 2007


In August 2007, the IRS issued a Notice [Notice 2007-72] that it was designating a form of charitable contribution as an item "of interest." As such, persons entering into those types of transactions, and their advisors making tax statements with respect to them, are subject to disclosure and list maintenance requirements.

The IRS is now beginning to examine exempt organizations and government entities suspected of participating in successive member interest contribution arrangements. As part of the examination, the organizations receive an extensive questionnaire, which the IRS indicates it is using to determine if these types of transactions should be treated as a tax avoidance type of transaction, and whether the transaction should be designated as a listed transaction.

So what is a successive member interest contribution? According to the IRS:

In a typical transaction, Advisor owns all of the membership interests in a limited liability company (LLC) that directly or indirectly owns real property... that may be subject to a long-term lease. Advisor and Taxpayer enter into an agreement under the terms of which Advisor continues to own the membership interests in LLC for a term of years (the Initial Member Interest), and Taxpayer purchases the successor member interest in LLC (the Successor Member Interest), which entitles Taxpayer to own all of the membership interests in LLC upon the expiration of the term of years. In some variations of this transaction, Taxpayer may hold the Successor Member Interest through another entity, such as a single member limited liability company...After holding the Successor Member Interest for more than one year (in order to treat the interest as long-term capital gain property), Taxpayer transfers the Successor Member Interest to an organization described in § 170(c) (Charity). Taxpayer claims the value of the Successor Member Interest to be an amount that is significantly higher than Taxpayer's purchase price [and] a charitable contribution deduction...based on this higher amount.

The IRS is concerned with the large discrepancy between (1) the amount Taxpayer paid for the Successor Member Interest, and (2) the amount claimed by Taxpayer as a charitable contribution.  It also has the following concerns which may be present in some variations of this transaction: (1) any mischaracterization of the ownership interests in LLC; (2) a Charity's agreement not to transfer the Successor Member Interest for a period of time (which may coincide with the expiration of the applicable period in § 6050L(a)(1)) [relating to the obligation of a charity to report the details of a sale of contributed property that it received within 3 years of the sale]; and (3) any sale by Charity of the Successor Member Interest to a party selected by or related to Advisor or Taxpayer.

It goes without saying that any exempt organization that is approached to participate in one of these contribution arrangements should probably decline, at least until more guidance is issued by the IRS as to when, if , and under what circumstances, such transactions will be respected as legitimate.