blogger visitor

Saturday, July 30, 2011


Section 4942 requires a private foundation to make minimum distributions to charitable recipients each year (generally, no less than 5% of its assets). If not made in a timely manner, a first tier penalty tax of 30% is imposed.

A private foundation filed its Forms 990-PF for several years, but neglected to make the required minimum distributions. When this was discovered by a new accountant, the foundation eventually made the missing distributions and filed a Form 4720 (Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code) requesting abatement of the penalty tax.

Under Code Section. 4962(a) , the IRS can abate the penalty  if the private foundation establishes to the IRS's satisfaction that the violation (1) was due to reasonable cause; (2) wasn't due to willful neglect, and (3) has been corrected within the appropriate correction period. The foundation alleged reasonable cause due its accountant advising it that it qualified as a private operating foundation that did not have the minimum distribution requirement.

Since the foundation submitted returns that provided it was not a private operating foundation, the IRS did not accept that reasonable cause existed for missing the required distributions. The IRS also felt that changes by the foundations Board to increase returns and reduce expenditures evidenced knowledge that the foundation should have known that distribution shortfalls were occurring.

While not discussed in the ruling, apparently the foundation did not earn enough brownie points by reason of its voluntary disclosure of the issue so as persuade the IRS to abate the penalty.

PLR 201129050

Wednesday, July 27, 2011


In my December 1, 2010 posting, I included links to my summary of various routes available to innocent spouses relief from income tax liabilities. One of those routes is Code Section 6015(f) which allows a claim for equitable relief if certain requirements are met.

Regulations under that section limited this relief to spouses who apply for relief within two years after the date of the IRS' first collection activity. Various courts have disagreed whether that limited time period is authorized by law.

The IRS has now issued a Notice that it will do away with the two-year limitation. Instead, individuals may request equitable relief without regard to when the first collection activity was undertaken. However, requests must still be filed within the Code Section 6502 period of limitations on collection (generally, 10 years), or for any credit or refund of tax within the Code Section 6511 period of limitation (three years of filing or two years after payment of tax).

The notice also goes on to provide guidance as to pending request for relief, previously denied requests, and requests that are in court.

Notice 2011 – 70

Thursday, July 21, 2011


Below is a summary of the new law from Mitch Goldberg of our office:

Introduction.  On May 4, 2011, the Florida legislature passed Senate Bill 670 which substantially revises the Florida power of attorney ("POA") statute, § 709.  The new law is effective for POAs executed on or after October 1, 2011 albeit, for matters other than execution formalities (such as statutory interpretation and fiduciary duties), the new law applies to all POAs, regardless of when it was executed.  § 709.2402.  While this article discusses relevant changes to the statute in brief, the author urges practitioners who deal with the subject matter discussed herein to read the new statue in its entirety to better understand the scope of the substantive changes. 

Creation and Termination. The formalities to execute a POA have not changed from prior Florida law, to wit: (1) signed by the principal; (2) with two subscribing witnesses; and (3) before a notary public.  § 709.2105.  Also consistent with prior law, a POA is not durable unless the instrument explicitly designates it as such. § 709.2104.  However, a significant change is the elimination of springing POAs (unless executed prior to October 1, 2011 and contingent on the principal's incapacity), provided, however, that military deployment-contingent POAs are still valid. § 709.2108.  To revoke a POA, the principal must do so by expressly stating the revocation in a subsequently executed POA or other writing signed by the principal; mere execution of a subsequent POA, without indicating revocation of prior instruments, is insufficient to revoke prior executed POAs.  § 709.2110.

Agents, Co-Agents and Successor Agents. The new statute imposes certain mandatory fiduciary duties on agents that cannot be eliminated by contract as well as default duties that can be waived by written agreement.  § 709.2114.  If more than one agent is designated to act on behalf of the principal, unless the instrument provides otherwise, a co-agent may act independently of the other co-agent(s), departing from the prior requirement that two co-agents must act in concert, or if more than two, by a majority.  Notwithstanding the fact an instrument requires co-agents to act together, a co-agent may delegate to another co-agent authority to conduct banking transactions. In addition, if a co-agent has actual knowledge of a fiduciary breach by another co-agent or predecessor agent, such co-agent has an affirmative duty to take reasonably appropriate action to safeguard the principal's best interests.  Failure to take such action renders the agent liable to the principal for the principal's reasonably foreseeable damages that could have been avoided had the agent taken such action.  § 709.2111. 

Agent's Authority to Act. The new law imposes additional drafting and execution requirements when enumerating an agent's authority to act on behalf of the principal.  Generally, an agent may only exercise authority specifically granted to the agent in the instrument and the new law explicitly states that global provisions, such as those attempting to grant the agent authority to do all acts the principal can do, are ineffective.  § 709.2201.  Even more specifically, the following powers require they be specifically granted in the instrument and the principal sign or initial next to each specific grant of authority:

-Create an intervivos trust;
-With respect to a trust created by or on behalf of the principal, amend, modify, revoke, or terminate the trust, but only if the trust instrument explicitly provides for amendment, modification, revocation, or termination by the settlor's agent;
-Make a gift (as further discussed below);
-Create or change rights of survivorship;
-Create or change a beneficiary designation;
-Waive the principal's right to be a beneficiary of a joint and survivor annuity, including a survivor benefit under a retirement plan; or
-Disclaim property and powers of appointment. § 709.2202.

Agents are specifically precluding from the following acts:

-Perform duties under contract that requires the exercise of personal services of the principal;
-Vote in any public election on behalf of the principal;
-Execute or revoke any will or codicil for the principal; or
-Exercise powers or authority granted to the principal as trustee or as court-appointed fiduciary. § 709.2201.

In addition, to the above limits, if an agent is not an ancestor, spouse, or descendant of the principal, such agent cannot exercise any authority to grant an interest in the principal's property to the agent or to an individual to whom the agent owes a legal obligation of support, unless the instrument states otherwise.  Also an agent's authority to make gifts, described above, is limited in amount to the annual gift tax exclusion provided for in 26 U.S.C. § 2503(b), per donee, regardless of whether the annual exclusion applies, unless the instrument provides otherwise.  § 709.2202.

Non-Exclusive. The new law is not the exclusive method of interpretation and enforcement.  The new law is supplemented by the common law of agency and principles of equity.  § 709.2301.  The remedies provided in the new law are not exclusive and do not abrogate any other right or remedy under any other law.  § 709.2303.

Saturday, July 16, 2011


The implementation of FATCA is approaching. FATCA imposed a substantial withholding tax, due diligence, and reporting regime on non-U.S. entities to enlist their assistance in rooting out U.S. taxpayers who are using offshore entities and accounts to hide their assets and income. Unfortunately, the rules are lengthy, difficult to comprehend, expensive to implement, and will likely have the unfortunate result of keeping much needed capital from being invested in the U.S. at a time when that capital is needed for job creation.

The IRS has issued Notice 2011-53 which provides guidance and information on the phase-in of implementation. Covered in the Notice are the dates that participating foreign financial institutions must register with the U.S., the phase-in of such institutions’ due diligence requirements, the phase-in of reporting of foreign accounts, and the implementation in two stages of the new withholding rules.

For those that have an interest in these rules, and other masochists, I have prepared a map outline of the principal Notice provisions, available at You will need a recent version of Adobe Reader or Adobe Acrobat to be able to view the file.

Notice 2011-53

Wednesday, July 13, 2011


Successful stock market day-traders like to be characterized as mere investors for federal income tax purposes - this allows them to pay taxes on their trading gains at preferential capital gains rates. Unsuccessful stock market day traders want to avoid the "investor" label, and instead they want to be characterized as engaged in the trade or business of trading. This is because they don't want capital loss treatment for their trading losses - capital losses can only be used to offset capital gains (except as to $3,000 per year which can be used to offset ordinary income).

Traders that are engaged in the trade or business of trading securities may elect to have the Code Sec. 475(f) mark-to-market rules apply. Under these rules gain or loss is recognized on their securities held at the close of a tax year as if they were sold for their fair market value on the last business day of the tax year. Further, gain or loss is taken into account for the tax year as ordinary income or loss. Being engaged in a trade or business also avoids the expense limits on investors – investor trading expenses can only be deducted to the extent they and any other miscellaneous itemized expenses exceed 2% of adjusted gross income.

A recent Tax Court case involved a trader who engaged in substantial trading activities. The trader lost over $2 million in 2000, $400,000.oo in 2001, and $278,000.00 in 2002. With all those losses, the trader sought trade or business treatment so as to obtain ordinary loss treatment for the losses.

In 2000, the trader traded on 73 days with a total of 313 trades. In 2001, he traded on 18 days and had 72 trades, and in 2002 he traded on 21 days for 84 days.

A taxpayer's activities constitute a trade or business if (1) the taxpayer's trading is substantial, and (2) the taxpayer seeks to catch the swings in the daily market movements and to profit from these short-term changes rather than to profit from the long-term holding.

In regard to the first test of “substantiality,” the courts will examine the number of trades, the amount involved in the trades, the number of days on which trading occurs, and whether trading is the taxpayer’s sole or primary source of income.  Since the taxpayer only traded on 29%, 7% and 8% of the trading days in 2000-02, this was not substantial enough for the court (even though they acknowledged that the dollar volume of the trades was significant).

In regard to the second test, the courts will examine whether stocks were held for more than 30 days, and how often stocks were both purchased and sold on the same day. In the instant case, a majority of the stocks purchased were held for over 30 day, and very few stocks were sold on the same day they were purchased. Thus, the court ruled against the taxpayer on this element, too. The taxpayer was denied ordinary loss/trade or business treatment.

This case is factually similar to Holsinger v. Comm., which I wrote about here, and with a similar holding. Per these two cases, taxpayers with stock trades that number in the hundreds should not automatically assume they will achieve trade or business status. Of course, those traders at that level who are successful will not want trade or business status anyway so they can get preferential capital gains rates (for their long-term gains).

Richard Kay, Jr., TC Memo 2011-159

Saturday, July 09, 2011


Triangular B reorganizations are often conducted whereby a subsidiary corporation will acquire a target corporation in exchange for stock of the subsidiary’s parent corporation. Throw a foreign corporation into the mix and the opportunity exists for tax avoidance, especially as to the acquisition of the subsidiary of stock of its parent for valuable consideration to use in the acquisition. For example, a foreign subsidiary may be able to repatriate earnings to a U.S. parent without a taxable dividend, or if the parent corporation is foreign then funds may be transferred to the parent without a U.S. withholding tax.

So-called ‘Killer B’ transactions were first addressed in Notices 2006-85 and 2007-48, and then further addressed in 2008 Temporary Regulations under Code Section 367(b). In May of this year, final Regulations were issued.

The final Regulations, when applicable, generally result in deemed distributions that are subject to tax under other Code sections, such as Section 301. They may also result in deemed contributions from the parent to its subsidiary. The deemed distributions may be characterized as ‘notional’ only, so as to avoid the potential application of Code Section 311(b) gains and losses.

Jeffrey Rubinger has published a recent article in the June 2011 Journal of Taxation that provides the history of the ‘Killer B’ transactions and an analysis of the new Regulations (“Final ‘Killer B’ Regulations Further Expand Likelihood of Gain Recognition by Taxpayers”). He points out that the deemed distributions can occur even if the target corporation is unrelated to the acquiring parent/sub group. He also notes that in circumstances when Code Section 367(b) does not apply due to a lack of earnings and profits, Code Section 367(a) may still be triggered.

Treasury Decision 9526, 5/19/11

Wednesday, July 06, 2011


In a recent Private Letter Ruling, a current trust beneficiary was entitled to income only in the discretion of the trustee, and was entitled to principal in the discretion of the trustee as needed for the beneficiary’s health, support or maintenance. The trust beneficiaries and trustee are seeking State court approval for an early distribution of a portion of principal to the remaindermen, since it appears they would not otherwise be entitled to any distributions until the death of the current trust beneficiary.

The current trust beneficiary has advised the IRS that her income and resources are sufficient to maintain her current standard of living for her lifetime and any forseeable emergencies, that she has received no trust distributions, and based on her financial condition she will not qualify for distributions from the trust. The trustee has represented that distributions would be made to the current trust beneficiary only in case of emergency.

Thus, the IRS was advised that the chances of a distribution being made to the current trust beneficiary during her lifetime are between slim and none. Based on that, the current beneficiary sought a ruling that her cooperation in allowing the early distribution of a portion of the principal to the remaindermen would not be a taxable gift.

The IRS ruled that a gift would occur with such a distribution. The gift arises by reason of the current beneficiary giving up the ability to receive income or principal from the principal amount that will be distributed, and that such transfer is a gratuitous and taxable transfer to the remaindermen. Regardless of the lack of likelihood of a distribution ever being made to the current beneficiary, the possibility remains.

This is a fair and appropriate legal analysis. The practical issue is how to value the gift? This is a fact question and not something the IRS wouldl rule on, although the ruling does concede that the value may be nominal. When dealing with gifts involving discretionary interests, and even ascertainable standards, this is a common valuation question, but one that begs a practical solution.

I would be interested to hear via the comment section from any readers how they deal with these valuation issues.

Private Letter Ruling 201122007

Tuesday, July 05, 2011


For tax years beginning after March 18, 2010, the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act) provides that individuals with an interest in a “specified foreign financial asset” during the tax year must attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets is greater than $50,000. This reporting is in addition to similar reporting required on the annual FBAR form.

The IRS has now released a revised draft Form 8938, “Statement of Specified Foreign Financial Assets,” for public comment and review. This is the form that will be used for the HIRE Act reporting. Interestingly, the draft requires the taxpayer to list out the various income items from reported foreign financial assets and indicate where they are reported on the taxpayer’s income tax return (see excerpt below):


The actual reporting is not yet required. In Notice 2011-55the IRS suspended the reporting requirements until it releases a final Form 8938. Once the final form is released, taxpayers will still need to report for the period required by the new law, but not until they file their next income return that is due. The Notice also advises that the Code Section 6501(c)(8) limitations period for tax assessments for periods for which reporting is required will not expire before three years after the date on which the IRS receives Form 8938.

Link to Draft Form 8938