blogger visitor

Thursday, June 30, 2011


In 2008, proposed and temporary Treasury Regulations reduced the six-month automatic extension of time to file income tax returns for most partnerships, estates, and certain trusts to five months. The IRS has now finalized the Regulations, retaining the shortened five month period. Such extension period will include extensions for the filing of Forms 1065, 8804 and 1041.

The purpose of the shortened period is to allow persons reporting income from such pass-through entities, which persons may be on a six month extension, a month to prepare their own returns. That is, the pass-through entity will have to get them the reporting information a month before their own extended return is due.

The final Regulations also provide rules as to some specific filing situations, such as:

--Even though individual bankruptcy estates file a Form 1041, they still will use the six month period (unless it is a pass-through entity that is in bankruptcy).

--Electing large partnerships also use the six month period.

T.D. 9531, 06/23/2011 ; Reg. §1.6081-2 , Reg. §1.6081-6 , Reg. §54.6081-1 

Saturday, June 25, 2011


For those readers that have issues involving trusts and foreign accounts, I suggest they review my latest article entitled Final Regulations Expand on FBAR Reporting which is being published in the July 2011 edition of Estate Planning Journal (WG&L). To my knowledge, it is the only summary out there that brings together in one analysis the various disparate factual circumstances that may trigger an FBAR filing requirement for a trust or persons connected with trusts (including grantors, beneficiaries, and trustees). I hope to have a copy of the article up at my firm’s website in a few days (

A special thanks to my co-author, a sharp, up-and-coming estates and trusts lawyer in Miami, Jenna Rubin…and yes, she is my daughter.


Section 72 of the Internal Revenue Code generally provides favorable deferral of income tax for qualified annuities. However, Code Section 72(u) disallows such favorable treatment when the annuity is owned by someone other than a natural person, such as a trust. An exception to the exception allows a trust to hold the annuity as an agent for a natural person.

A recent private letter ruling has employed the "agent for a natural person” exception to allow use of the trusts. The subject ruling allowed the trust to purchase annuities with the remaindermen as the annuitants. Another individual was the current beneficiary of the trust. To the extent that distributions were made from the annuity prior to the death of the current beneficiary, those proceeds would be payable to the trust. After the death of the current beneficiary, the annuity policies will be distributed to the remaindermen (each receiving his or her annuity for which he or she is the annuitant).

The IRS examined the history of the Code Section 72(u) limit on non-individual ownership. It found that provision was largely intended to restrict an employer's use of annuity contracts to fund significant amounts of deferred compensation for employees. In the context of the subject trust, no such employment aspects were involved. Since all of the beneficiaries of the trust were natural persons, the IRS ruled that the Code Section 72(u) limits did not apply.

The IRS also ruled favorably in regard to Code Section 72(e)(4)(C). That provision holds that an assignment of an annuity contract without full and adequate consideration will be taxable as a sale of the contract based on the cash surrender value of the contract at that time. The IRS ruled that the later distribution of the annuity contracts to the individual remaindermen would not be subject to this deemed sale provision. Again, the IRS ruled favorably based on its reading of the legislative history. According to the ruling, the purpose of the restriction on gratuitous transfers of annuity contracts related to inhibiting taxpayers from continuing tax deferral beyond a life of an individual taxpayer. Since such deferrals were not involved in the subject transfers, the IRS ruled that Code Section 72(e)(4)(C) will not apply.

Clearly, these rulings are very favorable for the requesting taxpayers, and are not directly supported by language of the Internal Revenue Code. However, it is doubtful if anyone is going to be upset by this. Note that this is not the first time that the IRS has provided ruling similar to this.

Private Letter Ruling 201124008

Thursday, June 23, 2011


Federal transfer tax laws provide for various fixed exemptions and credits, such as the unified credit amount, the annual exclusion gift maximum amount, and the generation-skipping tax exemption. Taxpayers seeking to make inter vivos transfers of difficult-to-value assets that are at or under an exemption amount have a practical problem. To make the transfer they need to transfer property (such as shares of a closely-held business), but unless and until the IRS audits the transfer, there can be a large swing in potential transfer tax value between the estimate provided by the taxpayer’s appraiser, and what the IRS may assert or believe. Attempts to make transfers based on a formula such as “so many XYZ Corp. shares that are equal in value to $x” are vigorously opposed by the IRS. They can also be impractical because some number of shares would need to be transferred based on the initial valuation, with a later adjustment and transfer of shares one way or the other if the value is adjusted by the IRS. The IRS generally challenges such formula gifts as being invalid “savings clauses” under Procter, 142 F2d 824 (4th Cir. 1944). The precise scope of Procter has never been fully delineated by the courts, with King in the 1970’s, and Harwood and Ward in the 1980’s, helping somewhat to define its parameters.

In 2003, the 5th Circuit in McCord, 461 F2d 614, rev’g. 120 T.C. 358 (2003), reversed the Tax Court and gave tax effect to a defined value clause. Now, the Tax Court itself has ruled in a case that also gave effect to such a clause. The planning in the instant case was excellent – it included two elements presumably intended to defuse anticipated IRS arguments, and they appear to have functioned as designed.

The first such planning element was a the inclusion of small gift to a charitable recipient (here, a donor advised community fund), based on the donors’ valuation. The gift was structured that a fixed dollar amount of stock was to be transferred to family trusts, with any excess value passing to the charitable fund.  This achieved two benefits, and since the charitable gift was relatively small as compared to the transfer to the trusts, it did not have a substantial economic cost to the donors.

First, it allowed the donors to defend against the IRS’ argument that a defined value clause was against public policy. That argument is that the IRS is discouraged from challenging valuations in these circumstances since it has no transfer tax “upside” to disputing value  - any increase in value would only create a deductible charitable gift. The donors instead could, and did, argue that the clause furthered a public policy of encouraging charitable gifts. This charitable benefit was noted by the Tax Court.

Second, it avoided the problem of the possibility of shares being returned to the donors, or additional shares being transferred from the donor, based on changes in value. Instead, the donors were taken out of the picture in regard to transfers that were needed by such subject revaluations. Any adjustments in value resulted in the adjustment in shares occurring between the trusts and the charitable fund – the donors were not a participant. This distinguishes these transfers from facts similar to Procter.

The other interesting element was that the transfers to the trusts were a part sale/part gift transaction. Only the excess of the total defined transfer to the trusts over the consideration paid by the trusts constituted a gift. The IRS argued that the formula clauses were invalid because they were not reached at arm’s length. An important aspect of the court’s decision to nonetheless find an arm’s length transaction was the sale element. Pursuant to the sale, the trusts incurred economic and business risk – if the value of the stock used in the initial computation turned out to be too low, more shares would pass out of the trusts and go to the charitable fund.

It is important to note that the subject case is appealable to the 5th Circuit Court of Appeals – the same circuit as McCord. Thus, issues as to applicability of this case to cases arising in other circuits still remain. However, the case is still important because it was not a mere repeat of McCord. The Tax Court considered, and was not persuaded by, two arguments of the IRS that were not considered in McCord. Those two arguments were the public policy and lack of arms-length dealings discussed above. Further, the court also noted with approval the application of a similar clause in regard to a disclaimer in Estate of Christiansen, 586 F3d 1061 (8th Cir 2009), which should help bolster support for the use of such clauses outside of the 5th Circuit.

Hendrix, TC Memo 2011-133

Saturday, June 11, 2011


2011 BACK TO SCHOOL SALES TAX HOLIDAY. Continuing the annual tradition, Florida has enacted legislation that there will be no sales tax collected during the period from August 12, 2011, through August 14, 2011, on the sale of clothing, footwear, and certain accessories selling for $75 or less per item; or school supplies having a sales price of $15 or less per item. These tax exemptions do not apply to sales within a theme park or entertainment complex, a public lodging establishment, or an airport.

ABILITY TO APPORTION FLORIDA INCOME TAX TO FLORIDA BASED SOLELY ON SALES FACTOR INSTEAD OF NORMAL THREE-FACTOR APPORTIONMENT FORMULA. A taxpayer doing business within and without Florida, who demonstrates to the Office of Tourism, Trade, and Economic Development that, within a 2-year period beginning on or after July 1, 2011, it has made qualified capital expenditures of at least $250 million, may apportion its adjusted federal income solely by the sales factor beginning in the taxable year that the Office approves the application, but not before a taxable year that begins on or after January 1, 2013. Once approved, a taxpayer may elect to apportion its adjusted federal income for any taxable year using the sales factor method or the three-factor apportionment formula. This provision does not apply to taxpayers that are financial organizations, banks, savings associations, international banking facilities, or banking organizations


Golfer Retief Goosen, a nondomiciliary UK resident, entered into endorsement agreements with various corporate sponsors, and other agreements to provide services for those sponsors. The IRS challenged Goosen’s characterization of payments under those agreements, raising issues of personal services income, royalty income, source of income, and taxation under the U.S. – U.K. income tax treaty.

These issues arise often for athletes and international artists. Many of the characterization issues are factual and difficult to apply. The Tax Court ultimately disagreed with several of Goosen’s positions and increased his U.S. income taxes.

Given the variety of arrangements that Goosen entered into, the Tax Court’s discussion and conclusions should be helpful in assisting other athletes and artists in both structuring their arrangements and determining the proper U.S. income tax consequences. The following provides a brief summary of the what and why of the various arrangements. Taxpayers and advisors with these issues would be well served to review the opinion and conclusions.

Item: Prize money from U.S. golf tournaments and appearance fees in the U.S.

    Character: Effectively connected income from a U.S. trade or business.

Item: Off-course endorsement agreement payments (that is, the ability of the sponsor to use Retief’s name and likeness in advertising and product promotions).

    Character: Royalty income, per Retief’s ownership interests in his name and likeliness. As to royalty income relating to golf card and video game sales, these were sourced in the U.S. based on the percentage portion of U.S. sales of those items to worldwide sales. Allocating by the relative amount of advertising conducted for such items inside and outside the U.S. by the sponsors was rejected by the court. Royalty payments attributable to on-course and other endorsement agreements were treated as 50% U.S. source based only on a general analysis of various markets of the sponsors.

Item: On-course endorsement fees and bonuses, relating in large part to wear or use sponsor products while playing golf.

    Character: Personal services income, which are sourced by where the services are performed. However, some of the contracts combined such on-course use of products with the ability of the sponsor to use Retief’s name and likeness. Such contract payments were thus considered to be partly personal services income and party income from royalties, with the court being forced to make some type of guestimate allocation between the two.

Item: U.S. source royalty income from endorsements – effectively connected with a U.S trade or business?

    Character: As to on-course endorsements, which were tied to and required Retief to play in golf tournaments, Retief’s participation was material to his receiving such income and is treated as income effectively connected with a U.S. trade or business. As to off-course endorsements, these were not dependent on tournament play or Retief’s presence in the U.S. These were thus determined to be non-effectively connected income, subject to 30% tax as FDAP income.

Item: Applicability of U.S.-U.K. tax treaty.

    Character: The opinion noted that the treaty will apply to income for a U.K. nondomiciliary resident only to the extent the income is remitted to or received in the U.K. Retief’s endorsement income was initially paid into Liechtenstein bank accounts of entities controlled by Retief’s manager. Amounts were ultimately transferred to a U.K. bank account, but often in the form of salary and other payments. While the Tax Court acknowledged funds being paid to the U.K. bank account, Retief could not provide enough proof  that such payments were endorsement income. Thus, Retief was denied the use of the treaty, which might otherwise have provided reduced U.S. income taxation on Retief’s U.S. source income.

Because the various contracts often mixed on-course use of sponsor products, with ability to use name and likeness for advertising and promotion, the court had a difficult time allocating such combined items. Taxpayers seeking more certainty in this area should consider allocating a fixed portion of the compensation to the various items being paid for.

Retief Goosen v. Commissioner, 136 T.C. No. 27 (June 9, 2011)

Wednesday, June 08, 2011


I am pleased to announce that this blog has been included in a listing of the top 50 tax policy blogs at I didn't know there were 50 tax policy blogs out there! Thank you to that site for our inclusion.

Tuesday, June 07, 2011


A recent Florida case addresses an interesting question not previously decided in Florida. The facts are straightforward. A decedent’s son and daughter-in-law owed the decedent money under a promissory note. In the decedent’s last Will, he forgave the repayment of the note. However, if the decedent’s estate does not collect on the note, it will not have enough money to pay its administrative costs, debts and expenses. Thus, the question raised is whether the loan forgiveness is effective if the estate is rendered insolvent by it.

The probate court held the loan forgiveness was effective. On appeal, the probate court was reversed and the loan forgiveness was not given effect.

This makes sense. Florida law, as does the probate law of most states, gives a priority in payment to administrative costs, debts of the decedent, and expenses. Heirs of the probate estate are entitled to receive gifts and bequests only to the extent there are assets remaining after the payment of such items. One policy of such a system is to encourage the probate of insolvent estates to wind-up the affairs of the decedent, even though there may not be assets for the heirs. If costs and expenses of administration could not be paid from available assets first, it would be difficult to find persons willing to undertake such administration. Another policy served is that a decedent’s creditors should be paid before his heirs.

Thus, if a probate estate has $100,000 in cash which is left to the decedent’s son, but has $100,000 of administrative costs, debts and expenses, the son would get nothing. What if the estate did not have $100,000 in cash, but instead has $100,000 due to it from the son under a promissory note which is forgiven in the Will? If the forgiveness is effective, the son is effectively $100,000 richer as if he received $100,000 from his father’s estate, and the estate has no money to pay its costs, debts and expenses. That is, if the promissory note forgiveness is given effect, the son receives the benefit of the write off and thus gets more than if he was entitled only to a $100,000 cash gift, and essentially jumps ahead of the creditors in receiving payment. This was rejected by the appellate court – it noted:

“[t]he ruling by the lower court elevates the gift of forgiveness of an obligation to a superior status over the rights of legitimate creditors of the decedent, contrary to the priorities established in the Probate Code.”

The appeals court distinguished these facts from those in Estate of Whitley, 508 So.2d 455 (Fla. 4th DCA 1987). In that case, loan forgiveness was effectuated by the provisions of the promissory note itself, thus keeping the note out of the probate estate and giving effect to the write-off. This is important in context of the judicial recognition of the effectiveness of the cancellation provisions of self-cancelling installment notes, and provides an avenue for a decedent to be able to assure loan forgiveness at death in all events.

The appeals court rejected arguments that the forgiveness mechanism was the equivalent of forms of ownership that allow for the transfer of assets at death outside of the probate estate. Again, this appears to be a correct analysis since it is the Will that effectuates the loan forgiveness.

The appellate court also noted that while this was a case of first impression in Florida, its decision is in accord with all other jurisdictions that have addressed the issue.

Bernadette Lauritsen, as Personal Representative v. Brian Wallace, 5th DCA, April 1, 2011


The last time there was a threat to return to pre-2001 transfer tax rules and levels, Congress sat on its hands for over 9 years. It waited until the last minute at the end of 2010 to avoid such a return, but the new legislation that was passed expires after 2012. If Congress does not act, in 2013 the unified credit will return to $1 million and the maximum transfer tax rates will rebound to 55% (from a $5 million unified credit and a 35% maximum rate, for 2011 and 2012).

According to a recent New York Post article, there is interest in Congress to act now to deal with 2013 and beyond. While there is still Republican interest for total repeal, there does some to be a fair amount of cross-party agreement to extend the $5 million unified credit amount, but perhaps bump up the maximum rates to 45%. The hope is that Congress will take up the matter if and when it gets past the current debt-ceiling matters.

Early action to deal with the post-2012 situation would be welcome by planners and taxpayers alike. I don’t think there are too many out there that would like a replay of the last-minute planning and forecasting that arose from Congress’ last minute activities in 2010. As to whether Congress could actually get something done this year? Your guess is as good as mine.

Senate Eyes Compromise on Estate Tax, June 5, 2011

Saturday, June 04, 2011


The IRS recently issued new rules that tinker with the ethical standards for tax return preparers, and persons advising taxpayers in regard to positions taken on a return.

These provisions reside in §10.34 of the Circular 230 regulations that govern ethical standards and discipline for tax practitioners before the IRS. The provisions are separate and apart from similar (and overlapping) rules under Code §6694 which relate to penalties that may be imposed on return preparers under the Internal Revenue Code.

Essentially, there are 3 courses of conduct that may get a preparer in trouble under the new Circular 230 rules. The same items apply to persons signing a return or claim for refund and persons advising taxpayers on adopting a return position:

   a. If the position lacks a reasonable basis;

   b. If it is an unreasonable position under Code §6694(a)(2) (relating to the Code penalties on tax preparers); or

   c. If the position is a willful attempt to understate liability or is a reckless or intentional disregard of rules and regulations.

Note that it is possible that the position have a reasonable basis, with a violation still occurring. This is because under Code §6694(a)(2), a reasonable basis will not protect a practitioner against penalties for certain tax shelter and listed transaction standards, nor for positions that lack “substantial authority” if required disclosure rules are not complied with.

However, the preamble to the new rules does provide that a violation of Code §6694(a)(2) is not a per se or automatic violation of Circular 230. An independent determination as to whether the practitioner engaged in willful, reckless or grossly incompetent conduct will be made before such a violation is found.

T.D. 9527, IRS Final Regs. Governing Practice Before the Internal Revenue Service ( May 31, 2011)

Wednesday, June 01, 2011


Trust and estate litigation often involves issues regarding a QTIP marital trust for which a deduction was taken under Code §2057(b)(7) for estate tax purposes. This comes up often, since such litigation often arises between a surviving spouse who is beneficiary of the QTIP trust, and children of the decedent who are remaindermen and may not be children of the surviving spouse.

Care must be undertaken in dealing with such trusts and their assets in crafting settlements of such disputes. Transfers of interests in such trusts, terminations of such trusts, and other transactions can trigger gift tax consequences, including under Code §2519 (creating a gift tax upon disposition by a surviving spouse of all or part of such spouse’s mandatory income interest in the QTIP).

Not all settlement transactions give rise to adverse transfer tax consequences. In a recent private letter ruling, a QTIP trust purchased ownership interests in entities owned by the children/remaindermen and trusts for their benefit. The children/remaindermen also purchased interests in other entities that were owned by the QTIP trust. The taxpayers sought confirmation that such transfers did not trigger Code §2519 or other gift tax consequences.

Since there was no effective or deemed disposition of the spouse’s income interest in the QTIP trust, the IRS confirmed that Code §2519 was not triggered. Further, no other taxable gift was deemed to occur.

Central to the ruling was that the prices for the various purchases were determined by independent third party appraisals – thus, there were no underpayments or overpayments for the assets. If the remaindermen had been able to purchase QTIP trust assets at a discounted value, or if the QTIP trust overpayed for the assets it bought, this might otherwise have been construed as a disposition of the spouse’s income interest under Code §2519. Underpayments or overpayments for the assets may have also given rise to other gift tax consequences, although if undertaken in context of litigation settlement it probably could still be argued that other consideration was exchanged for the assets (such as releases of rights under the purported claims) as to avoid a gift element.

Private Letter Ruling 201119003, 05/13/2011