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Monday, September 21, 2009


The IRS has extended until October 15, 2009 the deadline for entering the voluntary disclosure program for unreported offshore accounts from the current September 23 date. The IRS also announced that there will be no more extensions.

Sunday, September 20, 2009



Wednesday, September 16, 2009


Noordin Charania owned substantial holdings in the stock of a U.S. corporation when he died. Even though he was a nonresident of the U.S., his estate was taxable on that stock for U.S. estate tax purposes based on the U.S. situs of stock of a U.S. corporation.

Mr. Charania's estate argued that only half of the stock was includible in his estate for estate tax purposes because the property was owned as community property with his surviving wife. Mr. Charania married his spouse in Uganda, which was at the time governed by British common law principles and was not a community property jurisdiction. Mr. Charania and his spouse eventually fled Uganda with little in the way of assets, and settled in Belgium, a community property jurisdiction, where the couple was living when he died. Mr. Charania acquired the subject assets while living in Belgium.

Mr. Charania's estate argued that the marital domicile was changed to Belgium, and community property principles applied to the stock. That is, it sought to apply the concept of a "mutable" marital domicile - one that moves with the couple (here, to Belgium). The IRS argued for an "immutable" marital domicile - one that does not move with the couple but that remains where the couple lived when they married.

The Tax Court undertook an extensive analysis on whether marital domiciles were mutable or immutable under British common law. That analysis, along with a finding that the Charanias did nothing under Belgium law to submit themselves to the local community property regime and did not otherwise evidence any intent to be part of that regime, led the Tax Court to conclude that the Charanias were not governed by Belgium community property law and the decedent's entire interest in the U.S. stock was subject to U.S. estate tax.

The case is of limited precedential value, per its reliance on British common law issues. Nonetheless, it demonstrates the difficulties that often arise in determining appropriate estate tax consequences when dealing with international taxpayers and/or international assets. This case was resolved only after integrating British common law rules, the obscure concepts of mutable and immutable marital domiciles, Belgium marital property rules, and international conflict of law provisions. For good measure and interesting reading, it included a dose of 20th century international politics, since the decedent was expelled from Uganda by its infamous dictator, Idi Amin.

Estate of Noordin M. Charania, et al. v. Commissioner, 133 T.C. No. 7

Saturday, September 12, 2009


If a gift is reported on a gift tax return, the IRS may challenge the value of the transferred property. If the IRS increases the value, but the taxpayer has adequate unified credit to cover any increase in tax, there is no increase in actual tax that results at the time. Previously, taxpayers had no way to obtain relief from such a change in value in Tax Court due to the absence of the imposition of current tax, even though the use of the taxpayer's unified credit may result in additional gift taxes or estate taxes due to later transfers.

In 1997, Code Section 7477 was enacted to provide a route to the Tax Court in circumstances such as these. The IRS has now issued Regulations providing when taxpayers can go this route to obtain a declaratory judgment from the Tax Court on the value of a reported gift.

There are a number of prerequisites/requirements before such relief is available:

a. The transfer must be shown or disclosed on a gift tax return, including a statement attached to a return;

b. The IRS must make a determination regarding the gift tax treatment of the transfer that results in an actual controversy in a situation where the adjustments do not result in a gift tax deficiency or refund. Thus, a taxpayer cannot initiate Tax Court review absent a dispute with the IRS. The IRS determination is deemed made by the mailing of a Letter 3569 to notify the taxpayer of the adjustments proposed by IRS;

c. The donor has to file a pleading seeking a declaratory judgment with the Tax Court before the 91st day after the mailing of the Letter 3569 by IRS (similar to 90 day letter procedures);

d. The taxpayer must have exhausted all administrative remedies. The Regulations list the various remedies and at what stage it agrees that they have been exhausted.

The new Regulations, which adopted fairly closely previously issued proposed regulations, are effective for Tax Court petitions filed after September 8, 2009.

Tuesday, September 08, 2009


In today's economic hard times, many employees are seeking early distribution from their qualified retirement plans at work to help cover expenses. If the plan allows for it, a "hardship" distribution can be made if due to an immediate and heavy financial need of the employee and is in an amount necessary to meet the financial need.
Such distributions are not subject to the 20% withholding tax applicable to early plan distributions. They are still subject to income tax in the hands of the beneficiary.
A taxpayer who received a hardship distribution claimed that the distribution was not subject to the 10% penalty of Section 72(t)(1), which imposes a penalty on distributions from qualified retirement plans before age 59 1/2, due to the financial hardship involved. The Tax Court, noting that while some exceptions exist for imposing the 10% penalty tax, determined that there is no exception for mere financial hardship in the law.
There is an exception from the 10% penalty for "disability" distributions. However, the definition of "disability" is fairly strict. A taxpayer is considered disabled for this purpose only if he is unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued or indefinite duration. The Treasury Regulations provide that only medical conditions of a nature so severe as to prevent substantial gainful activity result in a taxpayer's being considered disabled for this purpose.
The taxpayer failed this definition of "disability" on numerous levels. His doctor indicated that he would fully recover from his mental illness (relating to post-traumatic stress disorder from his job). He also continued to work at the same job after his "disability" and also engaged in a business activity throughout the year that required him to travel a significant distance numerous times. Further, he later got another job full-time job with another employer.
Thus, avoiding the 10% penalty is not possible simply due to financial hardship. Taxpayers seeking to avoid the penalty based on "disability" will also have to overcome a high threshold to avoid the penalty.
Dollander, TC Memo 2009-187

Sunday, September 06, 2009


In an effort to boost savings by employees, President Obama is seeking to make several changes that will make it easier for employees to save for retirement. Some of the changes can be implemented immediately by the President - others will require Congressional law changes. The key changes are:
a. Taxpayers will be able to buy U.S. savings bonds with their tax refunds just by checking a box on their tax forms.
b. Employees will be allowed to contribute their pay attributable to unused vacation time to their 401(k) plans.
c. Workers would be automatically enrolled in workplace retirement plans, and would have to opt out if they do not want to participate. This is the opposite of current rules, where workers now have to opt in.
d. Legislation will be sought to allow workers without workplace retirement plans to have contributions made to IRAs through payroll deposit contributions at their places of work.
The voluntary nature of such measures is to be applauded. Methods of enhancing savings opportunities without unduly burdening employers is also good policy - so hopefully when formalized these rules will be implemented in a way that do not increase employer costs.