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Thursday, April 30, 2009


Florida’s Constitution provisions in regard to homestead can at times override a disposition of real property that is otherwise provided for in a decedent’s estate planning documents. A recent Florida case illustrates a point that many not be aware of.

In the case, the decedent never resided in a residence he purchased. However, his wife and daughter lived in the home before he died. When the decedent died, the wife claimed the residence was decedent’s homestead, and thus she was entitled to a life estate in it (an interest that she would not have received under the decedent’s dispositive documents if the property was not “homestead” property).

The court confirmed that the subject property was homestead property, even though the decedent never lived in it. This was based on language in the Florida Constitution that limited a homestead to “the residence of the owner or the owner's family.

BAYVIEW LOAN SERVICING, LLC, Appellant, v. NIVIA GIBLIN, Appellee. 4th District. Case No. 4D08-1117. April 29, 2009

Sunday, April 26, 2009


Code Section 162(m) limits the deduction for compensation paid to certain highly paid employees of publicly held corporations to $1 million per year. A recent Private Letter Ruling addressed the applciation of this limitation to a foreign corporation whose American Depository Shares are publicly traded.

The Code Section 162(m) limitations only apply to corporations issuing a class of common equity shares required to be registered under section 12 of the Securities Exchange Act of 1934. In the Private Letter Ruling, the corporation paying the excess compensation was a foreign corporation that was qualified as a "foreign private issuer" under 17 CFR Section 240.3b-4(c) and as such was not required to be registered under section 12 of the Exchange Act (because such issuers are not subject to the executive compensation disclosure rules of the Exchange Act). It qualified as a foreign private issuer because it was incorporated under the laws of a foreign country and did not meet the following definition:

(1) More than 50% of the issuer's outstanding voting securities are directly or indirectly held of record by U.S. residents; and (2) One or more of the following apply: (a) the majority of the executive officers or directors are U.S. citizens or residents; (b) more than 50% of the assets of the issuer are located in the U.S.; or (c) the business of the issuer is administered principally in the U.S.
Therefore, foreign corporations with limited U.S. shareholders or that appropriately limit certain U.S. connections have some confirmation from the IRS that they are outside the $1 million compensation limits.

PLR 200916012

Thursday, April 23, 2009


The U.S. looks very unfavorably on employee withholding taxes that are not paid over to the IRS. Code Section 6672 is an important tool in the IRS' compliance arsenal. Under Section 6672, an individual who is responsible for the collection of the taxes can be held liable for a 100% penalty if collected taxes are not paid over.

Employers often use employee leasing companies to assist them with their staffing needs and payroll responsibilities. These employers effectively lease their employees from the leasing company. The leasing company typically pays the employees (after collecting payroll amounts from the company where the leased employees actually do their work), and collects and pays over the withholding taxes to the IRS. As a matter of common law, the employees are usually not "employees" of the leasing company since the company does not direct and control the employees in their work.

If the employee leasing company does not pay over the withholding taxes to the IRS, can an officer or responsible person of the leasing company be held liable for the 100% penalty? Yes, according to a recent IRS Office of Chief Counsel Memorandum.

In the Memorandum, the employee leasing company was reporting the employees as their own on their employment tax returns, and not as employees of the company where they physically worked. Due to this reporting, the Memorandum concludes that they will be treated as employees of the leasing company, and thus responsible officers of the leasing company can be personally liable for the 100% penalty if the leasing company withholds but does not remit withholding taxes.

CCA 200916024

Thursday, April 16, 2009


For a Last Will to be valid in Florida, two witnesses must sign. Further, the two witnesses must sign in the testator’s and each other’s presence.

A recent Florida court indicates that if a witness is merely close by when the the other witness and the testator signs the Last Will, that alone is not enough to meet the “presence” requirement. In the subject case, one of the witnesses was in the same area, and perhaps even in the same room, but did not actually see the other witness or the testator sign the Last Will. Thus, while physically present, the witness’ mental absence from the signing process invalidated the Last Will.

Therefore, at a minimum, witnesses to a Last Will should be advised what is being signed, and instructed to observe the testator and the other witness when they sign.

Price v. Abate, et al., Fifth DCA, Case No. 5D08-2109 (March 6, 2009)

Sunday, April 12, 2009


Subject to other Code limitations, a stockholder of a Subchapter S corporation can deduct his or her pro rata share of losses of the corporation to the extent of basis in his or her shares or in any indebtedness of the S corporation to the shareholder. This allowance of losses for shareholder loans often gives rise to taxpayer planning and structuring. However, planners need to note that not all such loans give rise to usable basis.

In a recent Tax Court case, the taxpayers’ controlled partnership loaned them money each year. This money was then relent by them to their controlled S corporation, creating basis for deduction of S corporation losses. The S corporation in turn leased property from the partnership, so the funds that went in to the S corporation were then paid to the partnership as rental payments.

The Tax Court held that the taxpayers did not make a sufficient enough economic outlay to gain basis for the loans to the S corporation, due to the complete circle that was made of the cash payments each year. The Court concluded that the transactions had no economic substance since the money wound up right where it started.

What about the loans that were accumulating from the corporation to the taxpayers, and from the taxpayers to the partnership? Wouldn’t those lend economic substance to the transaction? While cash was flowing in a circle, real world obligations were being created.

The Court did not believe in the substance of the loans, for several reasons. No interest amounts were deducted or included in income by the parties. Only one loan repayment had been made. The loans came from a related party.

Does this mean that if the bona fides of the loan were respected, the basis would have been allowed? The answer can only be maybe, since the opinion addresses other cases when back-to-back loans in this context were not respected – but those cases had their own problems as to viability of the loans and whether as a practical matter the shareholder suffered any actual liability exposure.

If you read the Internal Revenue Code and the Treasury Regulations, you will find no exception to Subchapter S corporation basis for circular loans. Nonetheless, this exception is alive and well as a court created exception, at least in some circumstances involving back-to-back or circular loans.

Marvin S. Kerzner, et ux., TC Memo 2009-76, 04/6/2009

Thursday, April 09, 2009


Federal income tax returns are due for most individuals this April 15th. Taxpayers who cannot complete their return by then can file for an automatic 6 month extension for filing.

Historically, taxpayers (or their return preparers) prepared a Form 4868 to obtain the extension. The IRS is reminding taxpayers that they can also file the extension request electronically using the IRS’ FreeFile online system.

Remember, that an extension to file is not the same as an extension to pay. A payment adequate to meet the tax that is ultimately determined to be due must be paid by April 15 to avoid penalties, or a separate extension to be pay must be applied for and granted by the IRS. Those who owe taxes can make a payment when they file the extension either by mailing a check or by several electronic payment methods, such as electronic funds withdrawals from bank accounts and credit card payments

Sunday, April 05, 2009


Many states apportion estate taxes among beneficiaries of an estate and revocable trusts in proportion to the assets received by them that are subject to estate taxes, absent contrary language in the dispositive instruments. This is known as “equitable apportionment.”  Thus, when assets pass to a surviving spouse in a manner that qualify for the marital deduction, equitable apportionment avoids such marital assets being reduced for estate taxes relating to the passage of other assets. This is usually a good thing since it reduces the overall estate tax bill – if the marital deduction property bears estate taxes, an interrelated computation of the tax arises that reduces the marital deduction (since not all the marital deduction property ends up with the surviving spouse).

Oftentimes, surviving spouses receive a residuary interest in estate and trust assets. In such cases, draftsmen must be careful to specifically provide that the marital assets so received do not bear estate taxes – either by allowing a state’s default equitable apportionment statute to apply or via drafting. Oftentimes, standard language (or statutory language) will allocate estate taxes to the residuary assets (and thus the marital deduction assets) by default – so this default language has to be overridden.

For example, if you were reading a revocable trust that left the residuary assets to the surviving spouse, and the trust also contained this language:

The Trustee shall pay from the residue of the trust estate prior to any distributions provided for herein, all of the Settlor's debts, expenses of last illness, expenses of disposal of remains, all expenses of administration and trust termination, including attorneys' fees, and shall pay all estate taxes, if any, attributable to Settlor's entire taxable estate,

you would assume there is a problem here – estate taxes are being allocated to the residuary (and thus the assets passing to the spouse), and that equitable apportionment would not apply. In a recent Tax Court case, the IRS thought the same. However, for some unknown reason, the Tax Court went through a numerous contortions to find that the clause did NOT require that the residuary marital gift bear estate taxes, and that Utah’s equitable apportionment statute applied to allocate the taxes to other gifts. This was done, even though it appears from the case that the other gifts were not other residuary gifts, but were specific gifts to other beneficiaries.

It is true that there were some slight ambiguities and inconsistencies in the trust that could be used to challenge the above express language, but I would not have expected the taxpayer to prevail. For example, the court read the above reference to the “residue of the trust estate” to refer to the residue of the probate estate – quite  a stretch. Further, the Court drew a distinction between allocation and apportionment. That is, the Court believed that even if the testator/settlor intended that the taxes be allocated to and paid out of the residuary, the testator/settlor did not intend to also apportion the taxes among the residuary beneficiaries – that is, the taxes should still nonetheless be apportioned among the beneficiaries in proportion to the TAXABLE assets they received.

What lessons can be learned (other than sometimes, against all odds, the Tax Court will pull the draftsman’s fat out of the fire for him or her)? Depending on which result is desired, be very specific with allocation and apportionment language. For example, if apportionment among taxable assets only is desired, use language such as “with apportionment.” Or if apportionment is not desired so that the entire residuary should bear taxes, use language such as “without apportionment.” When no apportionment is desired, one can go the further step of expressly providing that no right of reimbursement exists – that is, to use language such as “without apportionment and with no right of reimbursement from any recipient of any such property.”

John D. McCoy, et ux. v. Commissioner, TC Memo 2009-61

Thursday, April 02, 2009


The Internal Revenue Service ("IRS") recently announced a framework for resolving cases involving previously undisclosed foreign entities and offshore accounts held by or for the benefit of U.S. persons. The protocol set forth by the IRS will remain available to taxpayers up until September 23, 2009, unless sooner extended.

The announced framework requires that a request be submitted to the IRS asking for permission to make a voluntary disclosure. The request will contain a summary of the relevant facts and will initially be considered by the IRS Criminal Investigation Division (CI) which will make a preliminary determination as to whether the taxpayer is eligible to make a voluntary disclosure. That determination will be based in large part on whether the IRS has already commenced an investigation of the taxpayer seeking relief. If not, and if there are no extraordinary aspects whereby the IRS feels compelled to otherwise prosecute (for example, if there is some underlying criminal activity which gave rise to the money on deposit in the offshore account or foreign entity), then the request to proceed with a voluntary disclosure will likely be granted.

Once CI approves the making of a voluntary disclosure , the request will be forwarded to a special IRS unit in Philadelphia for civil processing where it will be worked by examiners who specialize in offshore issues.

If permission is granted to proceed, the IRS will resolve the case based upon the following guidelines:

1.  All taxes and interest going back for a period of six (6) years will be assessed (unless the account or foreign entity is in existence for less than six (6) years, in which case the assessments will go back tot he first year the account or entity was opened). The taxpayer will be required to file or amend all returns for that period, including information returns and Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (commonly known as as "FBAR").

2.  The IRS will assess either an accuracy or delinquency penalty on all years and there will be no consideration given to any "reasonable cause" exception.

3.  The IRS will also assess a penalty equal to twenty (20%) percent of the amount in foreign bank accounts or entities in the year with the highest aggregate account or asset value.

4.  If (i) the taxpayer did not open or cause any foreign account to be opened or entity formed (for example, if an account or entity is inherited); (ii) there has been no activity during the period the account or entity has been controlled by the taxpayer (that is, there were no deposits or withdrawals, etc.); and (iii) all applicable U.S, taxes have been paid on the original funds deposited into the accounts or entities (that is, other than earnings on the funds while in the account or entity), then the twenty (20%) percent penalty described in the previous paragraph will be reduced to five (5%) percent.

The taxpayer will be required to cooperate both civilly and criminally in order to benefit from the terms outlined above.

Thanks to my partner, Marvin Gutter, for the above summary.