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Monday, March 29, 2010


For those who are interested, an article of mine was published this month in the March 2010 edition of the Journal of Taxation entitled "Regulations Shift Burden of Uncertain and Contested 2053 Claims and Expenses to Taxpayers." The article analyzes new Treasury Regulations that provide new and extensive rules for addressing when deductions can be taken for federal estate tax purposes for uncertain and contested claims and expenses. A copy of the Article can be accessed from the "Resources" section of our firm's website at

Also available in the Resources section is an article I published late last year in the Tax Management International Journal that analyzes and comments upon the 2009 guidance issued by the IRS in Notice 2009-85 relating to expatriation of U.S. persons which I don’t believe I previously mentioned here.

Sunday, March 28, 2010


Surviving spouses of a decedents who are participants in a qualified ERISA retirement plan have significant statutory protections. These protections include mandatory survivor benefits for the surviving spouse that cannot be changed without the consent of the spouse. Thus, a plan participant cannot provide for the passage of assets at death to third parties without consent of his or her spouse.

Different from ERISA retirement plans are individual retirement accounts (IRA). The statutory spousal protections applicable to ERISA plans do not apply. In a recent case, the issue was raised whether the ERISA spousal protections applied to an IRA anyway, because the IRA at issue was funded by a rollover of funds out of an ERISA plan.

In the case, a decedent had previously had his ERISA retirement plan assets rolled over into an IRA. The decedent subsequently remarried. The beneficiaries of the IRA were the children of the decedent. The participant died, and the fight was on – the children claimed they were entitled to the IRA by reason of the beneficiary designation. The surviving spouse claimed she should get the proceeds by reason of her surviving spouse status, and that the funds came from an ERISA plan where spousal protections applied.

The appellate court’s holding was that the surviving spouse benefits of ERISA did not apply, so that the IRA belonged to the children. The analysis was detailed and technical, but the bottom line was that the surviving spouse protections of ERISA do not apply to IRAs, even if the funds in the IRA came from an ERISA plan.

One “benefit” of the ruling is that it provides certainty as to IRA beneficiary designations – a contrary ruling would effectively require IRA custodians to conduct historical research to determine if the IRA was previously funded from an ERISA plan when spouses are not the beneficiaries. Information on this history may not be readily available to the custodian, if it all.  If Congress finds the lack of protection in this situation objectionable, then it can change the law to provide extended protection to spouses in this circumstance.

Charles Schwab & Co., Inc. v. Debickero, 105 AFTR 2d 2010-692 (9th Cir. 2010)

Tuesday, March 23, 2010


On January 21, 2009, we discussed how a manufacturer of kitchen items was required by the Tax Court to capitalize royalties paid to put Pyrex and Oneida trademarks on their kitchen tools. The Tax Court found that the trademarks were part of the production process, and thus could not be immediately expensed.

The Second Circuit Court of Appeals has now reversed the Tax Court, and allowed the taxpayer to immediately deduct the royalty payments. The Court held that the royalty payments were not “properly allocable to the property produced” so as to require capitalization under the Code Section 263A uniform capitalization rules.

The Court focused on the royalty payments being calculated on items SOLD and not PRODUCED, and thus were more in the character of expenses for marketing instead of production. Presumably, if the royalty payments were instead based on units produced, capitalization would have been required.

Robinson Knife Manufacturing Co., Inc., 105 AFTR 2d ¶2010-634 (CA-2 3/19/2010) 

Monday, March 22, 2010


I have prepared a summary of the tax provisions of the recent Health Care Acts. This summary assumes that both the Senate bill which was approved by the House on 3/22/2010, and the House reconciliation bill which will need to go back to the Senate for approval, will both be enacted and enter into law. If the House reconciliation bill is subsequently modified or not enacted by the Senate, then the tax provisions of the Senate bill that were approved by the House on 3/22/2010 shall enter into law – the provisions of that Senate bill are not the same as those on the summary. Click here to review the summary, which can be viewed in outline or mindmap format by clicking on the various page links.

Thursday, March 18, 2010


William West, an attorney licensed to practice in North Carolina, entered into a contingency fee agreement with a beneficiary of a trust to handle a trust dispute in Florida. West handled the matter through mediation, and received a favorable result for his client. When West sought to collect a $1 million fee, his client balked, and claimed West was not entitled to any fee because he earned the fee while practicing law in Florida without a license.

At several points in the litigation, West advised his client that he would need to affiliate with a Florida law firm since he was not authorized to practice in Florida. He even made arrangements with a Florida law firm and sent them a motion to appear pro hac vice. However, he never finalized these arrangements and the Florida firm was not engaged.

The trial court found that West’s contract with his client was void ab initio because he was not authorized to practice law in Florida.

West then sought to be paid, either under the theory of unjust enrichment (his client being unjustly enriched by not having to pay his fee) or quantum meruit (his being paid for his service based on their value, even though there was no existing valid fee agreement). The trial court then awarded fees based on quantum meruit.

The appeals court reversed the trial court and held Mr. West was not entitled to any fee, stating that to “award fees for illegal activities is contrary to public policy.”

The case is interesting for the total rejection of compensation to the attorney, and doubly so for the amount of fees at issue - $1 million lost, yikes!

Morrison v. West, 4th DCA, Case No. 4D08-1693 (2/17/10)

Saturday, March 13, 2010


A Bankruptcy Court in Texas has ruled that unlike a traditional individual retirement account (IRA), an inherited IRA is not an exempt asset in bankruptcy under federal bankruptcy exemptions. The basis of the ruling is two-fold.

First, to be exempt, the funds in the IRA must be “retirement funds.” While the funds would be retirement funds as to the original IRA participant, they are not for someone who inherits the account.

Second, the Bankruptcy Code requires that the funds be exempt from taxation under Internal Revenue Code Section 408. Since inherited IRAs are created and treated under Code Section 402(c)(11), the Code Section 408 requirement was found not to be met.

It is likely that inherited qualified plan assets would be similarly treated as inherited IRA’s.

States are allowed to allow debtors to use state law exemptions in bankruptcy instead of federal exemptions. However, some states have similar issues as to inherited IRAs. For example, as you may recall, a recent Florida case held that Florida’s state law IRA exemption also does not apply to inherited IRAs. Robertson v. Deeb and RBC Wealth Management, 2nd DCA, Case No. 2D08-6428 (August 14, 2009), as discussed in the October 21, 2009 entry to this blog.

In re Chilton, (Bktcy Ct TX 3/5/2010) 105  AFTR 2d ¶ 2010-575

Sunday, March 07, 2010


Last week, we discussed the Matthies case, which tagged a taxpayer with a substantial deficiency in a “pension rescue”/springing life insurance situation involving the use of valuation mechanisms and life insurance to attempt to remove assets from a qualified retirement plan through the purchase and sale of a life insurance contract whose value was depressed through the existence of substantial surrender charges. The transaction that took place in Matthies preceded the “safe harbor” life insurance valuation rules that were issued by the IRS in Rev.Proc. 2005-25 and a 2005 revision to the Regulations.

The Revenue Procedure did allow for safe-harbor reductions in value due to surrender charges, but caps the aggregate reduction at 30% of the value. Further, the Procedure did not bless pension rescue-type transactions, per several restrictions included in the Procedure, including:

a. Allowing a reduction for surrender charges, "but only if those charges are actually charged on or before the valuation date and those charges are not expected to be refunded, rebated, or otherwise reversed at a later date;"

b. Not allowing a reduction for charges, "if a mortality charge or other amount charged under a contract can be expected to be directly or indirectly returned to the contract holder (whether through the contract, a supplemental agreement, or under a verbal understanding and regardless of whether there is a guarantee);"

c. Allowing for a challenge in other potentially abusive situations, including situations where the contract is sold if not in force "for some time" (whatever that means). In particular, the Procedure reads: "In addition, a surrender charge cannot be taken into account in determining an average surrender factor if it may be waived or otherwise avoided or was created for purposes of the transfer or distribution. Furthermore, at no time are these rules to be interpreted in a manner that allows the use of these formulas to understate the fair market value of the life insurance contracts and associated distributions or transfers. For example, if the insurance contract has not been in force for some time, the value of the contract is best established through the sale of the particular insurance contract by the insurance company (i.e., as the premiums paid for that contract)."

The IRS also issued new Regulations in 2005 that provide valuation methodologies that the IRS can attempt to use to challenge springing value arrangements.

The foregoing limitations and the Matthies case, taken together,  appear to provide plenty of maneuvering room for the IRS to successfully challenge pension rescue transaction, at least those of the plain vanilla variety.

Saturday, March 06, 2010


Treasury Form TD F 90-22.1 (commonly known as the “FBAR”) is used by taxpayers to report financial interests in, or signature authority over, foreign accounts. Several official announcements have come out recently that address some of the filing requirements. The form for 2009 filings is due by June 30, 2010.

A. DEFINITION OF U.S. FILERS. The definitions of U.S. person in the 2008 form instructions will not apply for 2009 filings. Instead, the 2000 form instructions will apply. Under the prior version of the form, a U.S. person is defined as a (1) citizen or resident of the U.S., (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust.

B. FILINGS BY NON-U.S. PERSONS. The filing obligations for non-U.S. persons are suspended for 2009.

C. SIGNATURE AUTHORITY ONLY. Persons with signature authority over, but no financial interest in, a foreign financial account for which a FBAR would otherwise have been due on June 30, 2010, will now have until June 30, 2011, to report those foreign financial accounts.

D. COMMINGLED FUNDS. the IRS will not apply its enforcement authority adversely to persons with a financial interest in, or signature authority over, any foreign commingled fund other than mutual funds with respect to that account for calendar year 2009 and earlier calendar years.

E. COORDINATION WITH INCOME TAX RETURN DISCLOSURES. Taxpayers who are exempt from filing an FBAR pursuant to the above rule modifications are likewise permitted to not disclose those accounts on the foreign account disclosures on their individual income tax return forms.

In addition to the above, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) has issued proposed regulations that will revise the reporting rules. If finalized, the new rules will be reflected in revised FBAR instructions. The new rules will revise the definition of  U.S. person, provide for various filing exemptions, and provide expanded definitions of other statutory terms.

Announcement 2010-16; Notice 2010-23; DEPARTMENT OF THE TREASURY, 31 CFR Part 103, RIN 1506–AB08, Financial Crimes Enforcement Network; Amendment to the Bank Secrecy Act Regulations—Reports of Foreign Financial Accounts


Wednesday, March 03, 2010


The IRS has announced the interest rates for tax overpayments and underpayments for the calendar quarter beginning April 1, 2010.

For noncorporate taxpayers, the rate for both underpayments and overpayments will be 4% (unchanged).

For corporations, the overpayment rate will be 3% (unchanged). Corporations will receive 1.5% (unchanged) for overpayments exceeding $10,000. The underpayment rate for corporations will be 4% (unchanged), but will be 6% (unchanged) for large corporate underpayments.

Rev. Rul. 2010-9