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Saturday, January 30, 2010


I had the pleasure of attending and speaking at the 2010 University Of Miami Heckerling Institute on Estate Planning in Orlando this past week. A lot of the focus was on the inapplicability of federal estate taxes in 2010, and the return of those taxes in 2011 at the rates and credits applicable in 2001.

Two interesting questions were raised relating to the return of the 2001 tax rates and credits - questions for which no one had a good answer. These questions arise from a curious provision of the 2001 tax act. This tax act provided for increased unified credit and generation skipping tax exemptions through 2009, and the nonapplicability of the estate tax and limited basis step ups at death in 2010. What the act provided is that starting on January 1, 2011, the changes made by the 2001 tax act shall be applied as if they "have never been enacted."

Let's take a look at the increased generation skipping tax exemption that occurred under the 2001 tax act. Assume we have a trust that was funded in 2009 by a grantor with $3.5 million. The grantor used his $3.5 million generation skipping tax exemption for the transfer, so that the trust now has a zero inclusion ratio and is fully exempt from generation skipping taxes in the future. On January 1, 2011, the generation skipping tax exemption shall be reduced to $1 million (plus inflation adjustments) per the revocation of the increases in the exemption that occurred under the 2001 tax act. Since the increases in the exemption are to be treated as if they "had never been enacted" does the trust we are talking about still having zero inclusion ratio since the $3.5 million transfer exceeded the $1 million exemption available in 2001 and again in 2011? If the increases in the exemption were "never enacted" then how can they have been used to create trusts that are wholly exempt?

A similar question arises in regard to the carryover basis regime that is applicable to persons that die in 2010. For such persons, the usual rule for adjusting the basis of all assets of the decedent to their fair market values on the date of death (or the alternate valuation date) do not apply. So let us assume we have a decedent that died in 2010, owned an asset worth $10 million, had a tax basis of $1 million, and the decedent's estate allocated the limited basis step up available in 2010 to other assets. If the decedent's estate or heirs sell that asset for $10 million there will be $9 million of gain. However, in 2011 we treat the 2010 carryover basis regime as having "never been enacted." Does this mean that if the asset is sold in 2011 the sellers can use the fair market value at death basis adjustments to bring the basis to $10 million (since those would be the basis adjustment rules applicable if the 2001 tax act amendments and "never been enacted?"

The answers to these questions will have to await Congressional action, court decisions, or possibly IRS attention. Of course, any conclusions drawn solely by the IRS in a manner adverse to taxpayers are open to challenge in court based on the language of the statute.

By the way, if anyone would like a copy of my materials for my Heckerling presentation (on the subject of tax consequences of settling litigation involving QTIP trusts), click the link below or go to

Charles Rubin’s Heckerling Institute Materials

Thursday, January 28, 2010


As an incentive to encourage charitable gifts to Haiti earthquake relief efforts, a new law was enacted this week. The new law allows taxpayers making charitable contributions to Haiti relief after January 11, 2010 and before March 1, 2010 to deduct the contributions on their 2009 income tax return (instead of waiting to take the deduction on their 2010 income tax returns).

Here are some of the particulars:

A. The contribution must be in cash, not property, and may be made by text message, credit card, check, or debit card;

B. The contribution must be for the relief of victims in the areas affected by the January 12th earthquake; and

C. The regular charitable deduction requirements must be met, including to requirements of a qualified charitable recipient organization and proper substantiation. For this purpose, text message contributions will be deemed to have met the substantiation requirements through use of a telephone bill that shows the name of the donee organization, the date of the contribution, and the amount of the contribution.

Taxpayers do not have to take the deduction in 2009 – they can take it on their 2010 return if they think that will produce greater tax savings.

To take advantage of the new law, the taxpayers must itemize their deduction.

I’m not usually in favor of social engineering through the tax code, but its hard to find fault with this type of incentive. A similar law was enacted in 2005 for contributions in aid of the Indian Ocean tsunami.

News Release 2010-12, 01/25/2010

Monday, January 18, 2010


Nina Olson, in her annual report to Congress, provides an interesting list of the 10 most litigated federal tax issues from June 1, 2008 to May 31, 2009 for which the court issued an opinion. The top 10 are (listed in order of most to least cases):

  1. Collection due process hearings;
  2. Summons enforcement;
  3. Trade or business expenses;
  4. Gross income;
  5. Accuracy-related penalties;
  6. Frivolous issue penalties;
  7. Actions to enforce federal tax liens or to subject property to payment of tax;
  8. Failure to file penalty and estimated tax penalty;
  9. Family status issues; and
  10. Relief from joint and several liability for spouses.

As one can see, most of these heavily litigated issues are not "sexy" but typically relate only to procedural matters. Some other interesting highlights of the report include:

  1. The list is substantially similar to the list from the prior year, except for a marked decrease in gross income cases.
  2. The top 10 list is made up of 923 cases.
  3. Bad news for tax litigators - 71% of these cases involved pro se taxpayers who represented themselves.
  4. Generally, taxpayers have a higher chance of prevailing in litigation if they were represented by counsel. However, pro se taxpayers experienced a substantially higher rate of success than represented taxpayers in litigation over frivolous issue penalties and family status issues.
  5. Taxpayers prevailed in whole or in part in 14.3% of the cases.

The report also highlights what the IRS considered to be the "significant cases" for the covered period. The following is a list of those cases and the IRS’ description of them:

  1. In In re Bilski, the Court of Appeals for the Federal Circuit held that a process is not a patentable subject matter unless it is either (1) tied to a particular machine or apparatus, or (2) transforms an article into a different state or thing.
  2. In RadioShack Corp. v. United States, the Court of Appeals for the Federal Circuit held that the taxpayer’s statute of limitations period for filing a telephone excise tax refund claim began to run when the taxpayer’s telephone service provider filed a return.
  3. In Keller v. Commissioner, the Court of Appeals for the Ninth Circuit held that a taxpayer was not liable for the 40 percent gross valuation misstatement penalty because his understatement of tax was attributable to improperly claiming a deduction rather than overvaluing a deductible item.
  4. In the Estate of Rosen, the Tax Court held that the IRS could not reverse its erroneous application of the decedent’s income tax payment to his estate tax liability after the three-year statute of limitations on assessment had expired with respect to the income tax return, and thus, the income tax overpayment offset the decedent’s estate tax liability.
  5. In Countryside L.P. v. Commissioner, the Tax Court held that the exception to the tax practitioner privilege applicable to written communications promoting a corporate tax shelter did not apply to handwritten notes or meeting minutes because (1) they were not a “written communication” and (2) the routine advice provided by the practitioner did not “promote” a shelter.
  6. In Mayo Foundation for Medical Education and Research v. United States, the Court of Appeals for the Eighth Circuit reversed the District Court by holding that (1)a hospital’s medical residents were not eligible for the student exemption from Federal Insurance Contributions Act (FICA) taxes because they were full-time employees, and (2) the applicable Treasury Regulations were valid.
  7. In Williams v. Commissioner, the Tax Court held that it lacked jurisdiction to redetermine the taxpayer’s liability for the foreign bank account report penalties(FBAR).
    In Morrison v. Commissioner, the Court of Appeals for the Ninth Circuit held that a taxpayer can recover fees from the government under IRC § 7430 even if a third party pays the fees, provided the taxpayer agrees to repay to the third party any fees reimbursed by the government.
  8. In United States v. McFerrin, the Court of Appeals for the Fifth Circuit extended the “Cohan rule” to hold that a taxpayer who establishes the existence of qualified expenses for purposes of the IRC § 41 research credit, is entitled to rely on rough estimates, rather than contemporaneous documentation, to determine the amount of those expenditures.
  9. In Bakersfield Energy, the Court of Appeals for the Ninth Circuit held that an overstatement of basis was not an omission of gross income for purposes of extending the statute of limitations on assessment under IRC § 6501(e).

Annual Report to Congress

Friday, January 15, 2010


Code Section 2503(b) allows taxpayers to make annual gifts to recipients of $13,000 per year (adjusted for inflation) without paying gift tax or using up any of their unified credit. To use Section 2503(b), the recipient of the gift must have a “present interest” in the property received and not a “future interest.” In Hackl v. Commissioner,   118 T.C. 279, 294 (2002), affd.   335 F.3d 664 [92 AFTR 2d 2003-5254] (7th Cir. 2003), the Tax Court previously held that there were so many restrictions on a transferred interest in an LLC that the recipient had no present benefit in the interest and thus transfers of the LLC interests could not qualify as annual exclusion gifts under Section 2503(b).

The Tax Court has now extended its reasoning to transfers of limited partnership interests, finding that transferred interests did not qualify as annual exclusion gifts. The case is notable for two reasons. First, for its extension of Hackl to limited partnership interests. Second, the case provided an exhaustive list of the economic restrictions that led the court to its conclusion. Presumably, in situations that have facts opposite to one or more of those on the list, a different result may apply.

The economic restrictions on the limited partnership interests that the court found determinative were:

a. Under the partnership agreement the donees have no unilateral right to withdraw their capital accounts;

b. The partnership agreement expressly prohibits partners from selling, assigning, or transferring their partnership interests to third parties or from otherwise encumbering or disposing of their partnership interests without the written consent of all partners;

c. Donees of interests are not full limited partners, but only receive an assignee interest (although the court did say that even if donees could become full substituted limited partners, this would not have changed their conclusion, so this factor alone is not determinative);

d. The partnership’s income does not flow steadily to the partners, with some years when no distributions of income were made;

e. Partnership profits are distributable only in the discretion of the general partner; and

f. Distributions of profits to assist partners in paying their taxes was only discretionary.

Since the foregoing factors are usually needed to suppress value for purposes of transfer taxes that are expected at death or for larger lifetime gifts, planners will often have to trade the loss of annual exclusion gifts for LLC or limited partnership interests for the greater savings on the anticipated larger lifetime or testamentary transfers. Nonetheless, some suggested planning nonetheless may still allow the best of both worlds. Such planning may involve the use of put rights, temporary rights to withdraw capital, and rights of first refusal on transfers in lieu of outright prohibitions.

Walter M. Price, et ux., TC Memo 2010-2

Tuesday, January 12, 2010


Florida imposes documentary stamp taxes on promissory notes and other written obligations to pay money. The tax is imposed at the rate of 35 cents per $100 of face value, although obligations that are not secured by real property are now [thankfully] subject to a $2,450 cap in the tax.

Most practitioners will tell you that a promissory note cannot be enforced in court unless the documentary stamp taxes are paid, and there is case law supporting this. However, in a recent 4th DCA case, the appellate court found that this is only the case  in regard to enforcing mortgages, evidences of indebtedness, and security agreements that are filed in the public records. Unsecured promissory notes can be enforced without the payment of tax – the enforcement of payment of such taxes is instead backstopped solely by applicable criminal laws and civil penalties.

The court premised its interpretation on the differing language between Fla.Stats. §201.08(1)(a) and (b). Subsection (a) imposes the tax on unrecorded promises to pay – Subsection (b) relates to recorded instruments. Only Subsection (b) has language eliminating enforceability until the taxes are paid, and thus there is no “unenforceable” language applicable to the unrecorded promises to pay. The court went on to restrict its prior decisions on the subject to the extent there were inconsistent with this interpretation. The court also noted that at least one of prior decision that is contrary to this conclusion dealt with the statute before it had this delineation between Subsections (a) and (b).

GLENN WRIGHT HOMES (DLRAY) LLC et al v. LOWY, 4th DCA, September 30, 2009

Saturday, January 09, 2010


IRA participants and defined contribution plan participants over age 70 1/2 have annual required minimum distribution requirements (RMDs) that require a minimum distribution each year. In 2009, economic relief legislation allowed taxpayers to skip the 2009 distribution.

This was only a one year exception, so participants must restart their RMDs in 2010. Some taxpayers are wondering whether the 2009 legislation affects their 2010 obligations.

Generally, the answer is no  - other than the incidental effect that there are more assets in such IRAs if the 2009 distribution was skipped than there would have been if distributions were made, which will result in slightly higher distributions by reason of the larger size of the IRA. However, there are a few rules that are still affected.

A. Where the participant died before his required beginning date, beneficiaries subject to the five year distribution rule must distribute out the entire account no later than December 31 of the calendar year containing the fifth anniversary of the owner's death. Such beneficiaries who waived the 2009 distribution have an extra year to complete the distributions.

B. A retirement account may allow the owner or beneficiary to choose between a 5-year or lifetime payout, and may specify one or the other payout method if the choice isn't timely made. The deadline for making the 5-year or lifetime payout election is extended to Dec. 31, 2010, if the deadline would have occurred in 2009.

Tuesday, January 05, 2010


In the regulatory state that is the United States of America, more and more occupations are subject to regulation by some government body. The time has come to add paid tax return preparers to the list.

The IRS has issued the results of a study that proposes registration, testing, and continuing education requirements for paid tax preparers. Elements of this initiative that are likely to be rolled out in future filing seasons include:

1. Paid tax return preparers who signed a federal tax return will be required to register with the IRS and obtain a "preparer tax identification number." This will assist the IRS in tracking the bad eggs.

2. Paid tax return preparers will have to pass competency tests.

3. Paid tax return preparers will have ongoing continuing professional education requirements.

4. The ethical rules in Circular 230 will be extended to preparers.

Luckily, for those of us that are attorneys, CPAs, and enrolled agents, the competency testing and ongoing professional education requirements will not apply to us, since we are already subject to competency and continuing education requirements.

The IRS is also advising that approximately 10,000 paid tax return preparers can expect to receive letters from the IRS, noting that they have prepared a large volume of tax returns with errors on them, and encouraging them to be vigilant in areas where the errors are frequently found. Several thousand of these preparers can also expect to receive a visit by IRS Revenue Agents for a sitdown discussion about these issues.

News Release 2010-1, 01/04/2010

Friday, January 01, 2010

HAPPY 2010!

I would like to wish all of my readers a happy and health New Year! 2010 looks to be an interesting year, with all kinds of questions and issues about gift and estate tax repeal and reform  to be addressed (and hopefully resolved).

I would also like to thank all of my clients for the opportunity to be of service to them, for those who have directed clients my way for their most welcome referrals, to those who have provided interesting comments to blog entires, and to all of those clients and friends who favorably comment to me about this blog and our firm’s newsletter and thus give me the energy to hold to my self-imposed, twice-a-week blogging schedule.


One of the benefits of probate administration is the accelerated procedure for dealing with creditor claims. Creditors have only a 90 day period from the estate’s publication of a Notice to Creditors to submit a claim. Otherwise, the claim will be forever barred, regardless of its validity.

In Tulsa Professional Collection Services, Inc. v. Pope, 485 U.S. 478, 108 S.Ct. 1340, 99 L.Ed.2d 565 (1988), the U.S. Supreme Court held that due process requires that actual notice of the claims period be provided to reasonably ascertainable creditors (not just a published notice). Thus, the door is open to creditors who do not receive actual notice within the 90 day period to file an enforceable claim after the 90 day period.

To step through his open door, claimants still must follow certain procedural steps, as the creditor in a recent Florida case learned to his dismay. In the case, a purportedly reasonably ascertainable creditor did not receive a Notice to Creditors within the 90 day period. The creditor filed a claim against the estate, thirteen months after publication of the Notice to Creditors, alleging that he was a reasonably ascertainable creditor.

The claim was determined by the probate court to be unenforceable per its tardiness, and the 1st District Court of Appeals upheld the determination. This is because Fla.Stats. §733.702 requires that before a late claim can be considered as timely filed, the creditor must seek an extension from the court to file the claim (on the grounds of fraud, estoppel, or insufficient notice of the claims period). In the case, the creditor skipped that step – thus its claim was unenforceable.

The creditor argued that Burgis v. Burgis, 611 So. 2d 594 (Fla. 2d DCA 1993) allows an untimely petition to require payment of a claim to effectively serve as the required request for an extension to file the claim, if the petition alleges the claimant was a readily ascertainable creditor of the estate that was not given actual notice of the claim (as did the creditor’s petition in the current case). That was the case law at one time, but that case was based on a Florida Probate Rule that allowed for such a petition to challenge lack of notice. However, that Rule has since been modified to remove that route, and thus the appellate court found that Burgis is not longer good law for this issue.

Thus, an unfortunate case for a creditor serves as clear guidance to others that late claims will be entertained only upon the claimant first seeking (and obtaining) an extension from the probate court to file the claim.

 Morgenthau v. Estate of Andzel, 35 Fla. L. Weekly D86a (1st DCA 2009)