blogger visitor

Saturday, June 30, 2012


No, I don’t think so.

Back in my March 11, 2012 posting, I discussed the general issue of clawback for large gifts made in 2011 and 2012, and the likelihood of the IRS asserting its application in later years when the donor died (if unified credit amounts are then lower). While I didn’t discuss it in the blog, I had been struggling with the assertion by Professor Pennell at the Heckerling Institute that clawback was a nonissue. imageAs best I could, I looked at the statute and could not make the risk of clawback disappear from the perspective of a pure statutory analysis and applying IRS prior guidance and direction how to compute estate taxes when prior gifts had been made. Without getting too technical here, the issue is whether, in computing deemed gift taxes on prior gifts under Code §2001(b)(2), one should use the unified credit amount that existed at the  time of the gift or at the time of later death. Prior IRS interpretations are to use the unified credit applicable in the year of the gift – this reduces the credit for prior gift taxes available against estate taxes, and makes clawback a real threat. In my March 11, 2012 posting, I did note a number of reasons why clawback should not be applied and why the IRS may choose not to apply it. The bottom line for me at the time was that there was a good chance clawback would not ever be asserted by the IRS, but that there was room to do so in the statute if they desired.

Fast forward to a conference I attended last week. At the conference, Professor Pennell indicated that he thought the newly issued unified credit regulations (which pertain primarily to portability) support that clawback was a nonissue. I was happy to hear that, and sat down today to review the regulations and write a posting to that effect.

However, I am still scratching my head. Near as I can tell, the new regulations do not address the issue. Indeed, Treas. Regs. §20.2010-2T(c)(2) and –2T(c)(5), Ex. 2. reinforce in my mind the IRS’ focus in the gift tax computations on the unified credit amounts applicable in the year of the gift and not death. This provisions do not directly apply to Code §2001(b)(2) but in a way are similar since they relate to computations of how much of a prior gift was subject to gift tax in a prior year (for purposes of portability).

I am in no way near as smart, well-read or well-versed in these areas as Professor Pennell, so my disagreement with him makes me nervous (as it did back in March).  Perhaps when I review the new Regulations in more detail, I’ll find something that changes my mind. In the meanwhile, if anyone has read the Regulations and can point me in the direction of a provision that validates that clawback will not be applied, please send me an email at I would love to be wrong on this for the sake of certainty and resolution of the issue in favor of taxpayers, so help me out!

In the meanwhile, I had also thought to do a summary of the new portability rules. However, since portability is set to expire on December 31, 2012, let’s hold off on that until we know that it will be extended.

T.D. 9593; REG-141832-11

Wednesday, June 27, 2012

IRS Releases Additional Guidance for U.S. Taxpayers Disclosing Unreported Foreign Accounts

[This post was prepared by Mitchell Goldberg of our office]

On June 26, 2012, the IRS released an updated Frequently Asked Questions (“FAQ”) for the Offshore Voluntary Disclosure Initiative (“OVDI”) announced by the IRS on January 9, 2012.  imageThe FAQ also applies, in part, to taxpayers who entered the 2009 and 2011 voluntary disclosure programs.  In general, the FAQ restates substantially all of the information contained in prior versions and incorporates the information contained in IR 2012-5 such as there is no set deadline to apply, the terms of the OVDI could change at any time, and a 27.5% miscellaneous offshore penalty will be imposed on the highest aggregate balance of all offshore assets attributable to noncompliance.  Such offshore penalty is in lieu of all other offshore civil penalties that may apply outside the OVDI.  In addition, the FAQ addresses some additional items in response to issues that arose in the 2009 and 2011 programs:

    •    FAQ #9 specifically states that the eight (8) year period covered by the OVDI does not include current years for which there has not been noncompliance.  Thus, if a taxpayer’s 2011 return is on extension through October 15, 2012 and such taxpayer makes a submission to the OVDI, the submission would cover 2003-2010.

    •    FAQ #54 addresses Canadian registered retirement savings plans (“RRSPs”) and registered retirement income funds (“RRIFs”) when a taxpayer did not make a timely election to defer income on such accounts.  The answer depends on whether the taxpayer entered the 2009, 2011, or 2012 voluntary disclosure program. In general, FAQ #54 appears to indicate that a late election will be granted if requested by the taxpayer and all necessary information is provided. 

Also, FAQ #17 is again included from previous versions of the FAQ to allow taxpayers who reported all income from foreign accounts but failed to file a Form TD F 90-22.1 (“FBAR”) to file delinquent FBARs outside the OVDI and avoid penalties.

Some minor procedural changes are made as well.

Lastly, in News Release 2012-65, the IRS announced that it will start a new procedure for U.S. citizens residing overseas who are “low compliance risk.”  The imagenew procedure will go into effect on September 1, 2012.  In general, the procedure applies to those U.S. citizens residing abroad who are not in compliance and who will have simple returns and will owe $1,500 or less in tax for any of the covered years.  Taxpayers who wish to take advantage of the new procedure will be required to file delinquent tax returns along with appropriate related information returns for the past three (3) years and to file delinquent FBARs for the past six (6) years. 

Monday, June 25, 2012


Most individuals use their Social Security number as their taxpayer identification number in the U.S. However, the Social Security Administration limits itsimage assignment of SSNs to individuals who are U.S. citizens and alien individuals legally admitted to the U.S. for permanent residence or under other immigration categories that authorize U.S. employment. For nonresidents to acquire a taxpayer identification number, a nonresident must apply for an international taxpayer identification number, or ITIN.

The ITIN application (Form W-7) requires copies of various identity papers. In a new development, the IRS is now requiring that ORIGINAL documentation accompany the application, such as birth certificates and passports. Notarized copies of documents will not be enough, although certified copies of the required identity documents issued by the issuing agency can also be used.

Some applicants aren't impacted by these interim changes, such as spouses and dependents of U.S. military personnel who need ITINs, and nonresident aliens applying for ITINs for the purpose of claiming tax treaty benefits.

IR 2012-62

Wednesday, June 20, 2012


More often than not, spouses name each other as beneficiaries on various testamentary documents. Through inadvertence,  oversight, or just bad timing (i.e., dying too fast) they often do not get around to removing a former spouse from such designations after divorce but before they die. This raises issues whether such designations will still be given legal effect after divorce. That is, will the surviving former spouse receive a windfall inheritance or benefit that the deceased spouse may not have wanted him or her to receive?

Florida law has provisions that will automatically remove a former spouse as a beneficiary under a Last Will or a revocable trust upon divorce. Effective for decedent’s dying after July 1, 2012, similar removal provisions will now apply to former spouses who are beneficiaries of a decedent’s life insurance, IRA, employee benefit plan, payable-on-death account, transfer-on-death security, or annuity. Effectively, Florida is saying that it believes persons most likely want to remove their former spouse from such items at the termination of the marriage, and it will do it for them unless they take affirmative action under the statute to continue such designations. This new provision arises under new Fla.Stats. §732.703. The foregoing is only a brief summary of the new statute – please read it to see how it applies in any particular situation.

Still not covered by statute are beneficial interests in favor of a former spouse that arise under a nonrevocable trust entered into during marriage.




Saturday, June 16, 2012


Code Section 6324(b) reads:

[U]nless the gift tax imposed by chapter 12 is sooner paid in full or becomes unenforceable by reason of lapse of time, such tax shall be a lien upon all gifts made during the period for which the return was filed, for 10 years from the date the gifts are made. If the tax is not paid when due, the donee of any gift shall be personally liable for such tax to the extent of the value of such gift. (emphasis added)

The underlined provision has three accepted implications:

     a. If gift tax is not paid by the donor, the IRS can collect it from the donee;

     b. Such “tax” includes interest charged against the donor on the tax; and

     c. The total of the gift tax and such interest on the donor obligation that becomes the liability of a donee is capped at the value of the gift received by the donee.

A recent case addressed the separate question whether Code Section 6324(b) prohibits the IRS from separately charging interest on the donee for failure to pay the above amounts due, and whether the total cap on the value of the gift precludes such interest from being charged to the extent all of these transferee liabilities exceed the value of the gift.

The court determined that there was adequate statutory authority to conclude that (a) interest on the transferee for its unpaid liability can be assessed, and (b) such interest liability is outside the cap on total liability that is tied to the value of the gift received. Thus, a donee of a gift can be put into the egregious situation of owing more in taxes and interest than the value of the gift received.

Of course, for interest and tax to exceed the value of the gift, interest will need to be running at a high rate and/or for a long time. Nonetheless, a failure to pay required gift taxes often is not uncovered until many years after the fact – for example, oftentimes not until the death of the donor when the estate tax return is being prepared. Thus, situations when gift tax liability may have run for 10 or 20 years are not as rare as you may think.

While this decision is bad for donees, all hope is not lost. There is a split in the Circuit Courts of Appeal on this general issue, so a different result can occur in different Circuits, and perhaps the Supreme Court may ultimately resolve the issue in favor of donees.

U.S. v. MacIntyre, 109 AFTR 2d 2012-XXXX, (DC TX), 06/07/201

Thursday, June 14, 2012


EXECUTIVE SUMMARY: The U.S. District Court for the Southern District of New York has ruled that same-sex couples can take advantage of the estate tax marital deduction provisions of the Internal Revenue Code. This ruling has far-reaching federal tax implications beyond federal estate taxes.

FACTS: Edie Windsor and Thea Spyer registered as domestic partners in New York City in 1993. In 2007, they married in Canada, as permitted under Canada law. Spyer died in 2009, and her assets were left to Windsor. After paying applicable federal estate taxes, Spyer’s estate sought a refund of $363,053, asserting the use of the federal estate tax marital deduction for amounts passing to Windsor.

Spyer’s claim was that the provisions of Section 3 of the Defense of Marriage Act (DOMA) violated the equal protection clause of the U.S. Constitution. That DOMA provision defines “marriage” under federal law as a legal union between one man and one woman as husband and wife. Thus, such definition would apply under the Internal Revenue Code and its marital deduction provisions. Equal protection clause jurisprudence imports higher judicial scrutiny to laws that disadvantage a suspect class or impinge a fundamental right. Spyer’s estate sought the application of such higher scrutiny, charactrizing homosexuals as a suspect class. The court declined to classify homosexuals as a suspect class. Nonetheless, it still found the DOMA provisions unconstitutional under the lower “rational basis” standard which requires only that a law have a rational basis for its classifications to withstand an equal protection clause challenge. The court determined that the purposed bases of protection of the institution of marriage, protection of childrearing and procreation, consistentcy and uniformity of federal benefits, and conserving the public fisc were not rationally served by the DOMA provisions. The court thus ordered that the refund be paid.


Broad Implications. An appeal of the case is likely. If upheld (and absent contrary rulings in other Circuits or ultimate reversal by the U.S. Supreme Court), then the estate tax marital deduction will be allowed to same-sex persons who are married under applicable law. Of course, not all jurisdictions allow for such marriages, but determined couples can jurisdiction shop to become married if they desire.

There are numerous other federal tax provisions that provide benefits to married persons. Presumably, most, if not all of them, will likewise become available to same-sex married couples if the DOMA provision is invalid. These include (a) the federal gift tax marital deduction, (b) joint tax return filing rates and permissions, (c) favorable “stretch” and rollover provisions for IRA’s and other qualified retirement plan distributions to a surviving spouse, and (d) portability of unified credit amounts between spouses. Other federal law provisions outside of the Internal Revenue Code that turn on marital status may also apply, including those relating to employment benefits and other social service benefits.

Interesting Procedural Aspects. Generally, the Justice Department defends the U.S. in refund cases, and further defends challenges to U.S. laws such as DOMA. However, earlier this year, the Attorney General indicated that the Justice Department would not defend Section 3 of DOMA based on his belief, and the belief of President Obama, that the provision is subject to strict constitutional scrutiny and under such scrutiny the law is violative of the equal protection clause of the Constitution. This left the case in the unusual situation of having no one to defend the U.S.’ case. However, the District Court allowed the Bipartisan Legal Advisory Group of the U.S. House of Representatives (BLAG) to intervene in this case to defend the constitutionality of the statute.

Presumably, BLAG will have or receive standing to prosecute an appeal of the Court’s ruling, although the constitutional questions of whether a group of U.S. Representatives has automatic or permissive standing to do so is beyond the expertise of this author.

What to Do In the Meanwhile. Same-sex married couples that have overpaid taxes by reason of not being treated as “married” under the Internal Revenue Code should contemplate filing refund claims before any applicable statute of limitations expire. This applies both in the income tax and transfer tax arenas.

In regard to new filing and tax payment positions, taxpayers will need to explore whether it is better to file as unmarried, pay tax, and then seek a refund, or not pay the extra taxes in the first instance. The refund route is more conservative since it avoids the running of interest and potential penalties if Section 3 of DOMA is ultimately upheld. However, avoiding penalties in that eventuality will probably be easier to accomplish now in the case of an original filing asserting marriage per the holding in this case than it was beforehand. This is because there is now judicial support for treatment as married  - except perhaps in other jurisdictions with case law that has rejected the rejection of Section 3 of DOMA, if any.

CITES: Windsor v. U.S., 109 AFTR 2d ¶ 2012-870 (DC N.Y. 6/6/2012)

Saturday, June 09, 2012


Code §2503(b) allows donors to make gifts free of gift tax and without using up any of their unified credit – presently, $13,000 per year per recipient can be gifted. However, to use Code §2503(b), the gift must be a gift of a “present interest” in property. Treas. Regs. §25.2503-3 defines a “present interest” as “[a]n unrestricted right to the immediate use, possession, or enjoyment of property or the income from property (such as a life estate or term certain).”  A nonqualified “future interest” is one that is “limited to commence in use, possession, or enjoyment at some future date or time.”

In Hackl, 118 T.C. 279, 289 (2002), aff'd, 335 F.3d 664 [92 AFTR 2d 2003-5254] (7th Cir. 2003), the Tax Court held that a gift of an LLC interest that was subject to substantial restrictions on transfer was not a gift of a present interest for this purpose. The Tax Court and the Seventh Circuit Court of Appeals found that such a restricted interest did not have the requisite “right to substantial present economic benefit.”

In a memorandum decision, the Tax Court has now provided for a possible methodology to get around the Hackl restrictions for interests in partnerships and LLC’s. This case involved the transfer of limited partnership interests that also were restricted on transferability and the admittance of transferees as substitute limited partners.

The assets of the partnership were publicly traded stock and dividends received on the stock. The subject transfers were made in 1996, 1997, 1998, 1999, and 2000.  In 1996, 1997, and 1998, the partnership made distributions to all of its partners in amounts sufficient for them to pay their Federal income tax attributable to partnership income passed through to them from the partnership. Beginning in February 1999, the partnership continuously distributed all dividends, net of partnership expenses, to the partners. The partners also had access to capital account withdrawals and used them at times.

The IRS determined the partnership interests were not present interests for purposes of §2503(b) based on Hackl principles. The Tax Court disagreed and ruled that the interests were present interests.

True, the partnership interests were restricted as to transfer, similar to the facts in Hackl. However, the Tax Court noted that use, possession or enjoyment can create a present interest if it relates EITHER to the partnership interest itself, or income from those interests. While a present interest in the partnership interest itself appears foreclosed due to the transfer restrictions, the Tax Court found that a present interest did exist in the income from the partnership interest.

In determining whether rights to income qualify as a present interest, the Tax Court noted that the following three elements must be present: (1) the partnership would generate income, (2) some portion of that income would flow steadily to the donees, and (3) that portion of income could be readily ascertained.

Elements (1) and (3) were deemed met by reason of the partnership owning publicly traded dividend-paying stock that would generate income (element 1) and that due to its publicly traded nature could be reasonably estimated and ascertained (element 3).

Element (2) was deemed satisfied because one of the partners was a trust and that the general partner was deemed to have a fiduciary duty to distribute enough assets to allow that trust to pay its taxes since it owned no other assets.

Some Comments and Observations

A. The case did not appear to turn on a requirement that the partnership distribute ALL of its income each year, even though such a pattern commenced in 1999 which does muddy the facts a little. The obligation to distribute enough to pay taxes was enough to meet element (2) above for present interest in an income interest.

B. The fiduciary obligation to distribute enough income to pay taxes was based on state law. Rather than rely on the vagaries of state law in each state (which may not directly address the question of an obligation to distribute cash to pay taxes of owners), a direct obligation in the partnership or operating agreement for minimum distributions to pay owner taxes on their share of entity income should bring the same result.

C. The court was heavily influenced by the presence of publicly traded income paying stock to meet the requirements of elements (1) and (3). A partnership that holds nonincome producing property (e.g., investment property held for appreciation), or perhaps even income-producing property that produces income on an irregular or non-ascertainable manner, may not be able to meet these elements.

Thus, the case does provide another method of working around the limitations of Hackl, if minimum distributions to cover taxes are acceptable. However, the case may have limited value for entities with assets that do not regularly produce cash flow or income for distribution to the partners/members.

Estate of George H. Wimmer, TC Memo 2012-157 (6/4/12)

Saturday, June 02, 2012


In a recent U.S. District Court case, transferee liability statutes were favorably interpreted to avoid transferee liability to trust beneficiaries. However, the fiduciaries were unable to rely on a contribution agreement from the beneficiaries to avoid personal liability for unpaid estate taxes under the federal claims statute.

FACTS: Before Anna Smith died, she created a family trust (the “Trust”). Anna died in 1991, and her last will provided for a pourover of probate assets to the Trust. The Trust provided for a residual distribution to certain named beneficiaries after all expenses and taxes of the Trust were paid (the “Beneficiaries”). A significant asset of the estate was shares of stock in a corporation. Anna’s fiduciaries elected to defer a portion of her estate taxes under Code §6166.

In 1992, the trustees of the Trust distributed assets of the Trust to the Beneficiaries. Because the estate taxes were not yet paid in full due to the deferral under §6166, the Beneficiaries agreed to bear responsibility for the unpaid estate taxes.

In 2002, the corporation went bankrupt. The Beneficiaries received nothing on their shares beyond some amounts received for covenants not to compete from the buyer of the corporation assets out of bankruptcy. In 2003, the estate defaulted on its unpaid estate taxes, after having paid only $5 million of the $6.871 million in taxes due. The IRS then sought to collect the unpaid taxes from the personal representatives of Anna’s estate (who were also trustees of the Trust), and from the Beneficiaries.

The District Court determined that the Beneficiaries were not subject to transferee liability for the residual assets distributed to them from the Trust. The personal representatives/trustees were found liable under the federal claims statute, however.


Liability as Transferees. The IRS argued that Code §6324(a)(2) imputes personal liability to the Beneficiaries as “transferees.” That provision reads:

(2) Liability of transferees and others. If the estate tax imposed by chapter 11 is not paid when due, then the spouse, transferee, trustee ..., surviving tenant, person in possession of the property by reason of the exercise, nonexercise, or release of a power of appointment, or beneficiary, who receives, or has on the date of the decedent's death, property included in the gross estate ... to the extent of the value, at the time of the decedent's death, of such property, shall be personally liable for such tax.

Based on the language of “who receives, or has on the date of the decedent’s death,” the court narrowly interpreted who is a “transferee” under this provision to exclude the Beneficiaries since they did not receive the subject property immediately upon death. They were entitled to the property only after other Trust beneficiaries were paid and all taxes and expenses were paid.

Technically, the trustees of the Trust did not immediately receive the Trust property either, because estate administration first had to occur. Nonetheless, the court still found them as described transferees under the statute. While not discussed in the case, a fair reading might be that a named beneficiary of an asset from its owner at the time of death (whether that owner is the decedent’s estate or a trust that already owns the asset) meets the immediacy requirement, but not a beneficiary of a trust when the trust itself must first receive the asset from the decedent’s estate.

§6624(a)(2) also imposes transferee liability on a “beneficiary.” The IRS also sought to impose liability on the Beneficiaries using that term. Interestingly, however, case law generally limits that term to beneficiaries of life insurance, and does not apply a broad definition such as any recipient of property from an estate or trust. Once again, the Beneficiaries escaped transferee liability, due to this narrow use of the term. Presumably, however, even if the “beneficiary” term was broad enough to include the Beneficiaries, the above immediacy requirement may have also insulated the Beneficiaries from liability in this circumstance, too, for the same reasons it insulated them from being “transferees.” Note that the Beneficiaries did not entirely escape transferee liability since they were beneficiaries of life insurance on the decedent’s life and thus were covered by §6624(a)(2) to the extent of those assets.

The limited scope of the terms “transferee” and “beneficiary” will likely be of use to other potential indirect recipients of property who receive property under similar circumstances.

Statute of Limitations. The Beneficiaries argued that the statute of limitations for collection expired against them. However, since the Estate had extended the statute of limitations in conjunction with its §6166 election, this extension was deemed applicable to collections against estate distributees such as the trustees and the Beneficiaries as to the life insurance received.

Claims Statute Liability.

31 U.S.C. §3713(b) provides that a “representative of a person or an estate ... paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.” It is this statute that should give pause to any fiduciary distributing any estate or trust assets if it has knowledge of any unpaid taxes of the estate or trust, since it can result in personal liability to the fiduciary if it retains insufficient assets to fully pay the federal liability.

In this case, the fiduciaries distributed assets to the Beneficiaries before the federal estate tax liability was fully paid. While the fiduciaries obtained a contribution agreement to obligate the Beneficiaries to pay any remaining taxes, this put the fiduciaries at personal risk for the taxes if the Beneficiaries defaulted on that obligation. While not clear from the opinion, the bankruptcy of the corporation may mean that the Beneficiaries no longer have the financial wherewithal to pay the taxes such that the fiduciaries are not going to be able to collect under the contribution agreement and thus will bear the taxes personally.

The fiduciaries argued that with the contribution agreement, the distribution to the Beneficiaries did not render the estate or Trust insolvent such that there were sufficient assets to pay the taxes at the time of the distribution. If there were sufficient assets, this could avoid claims statute liability. However, the court found that the agreement could not be used to bootstrap the estate and Trust into a solvency situation for purposes of this analysis. More particularly, the court provided:

Were courts to excuse personal representatives from liability when they secure contribution agreements, the Government would have to bring an action in contract, prove it is a third-party beneficiary of the agreement, and then establish its right of contribution. Section 3713(b) is designed to avoid such complications. It provides a straightforward way to collect unpaid taxes from the very individuals who dispersed the estate's assets without having satisfied the tax liability. In this case, the individuals who distributed the Estate's assets accepted the risk that the Heirs may fail to pay the tax. The Personal Representative, rather than the Government, is in the best position to seek reimbursement from the individuals who accepted the assets with a deferred obligation to pay the tax.

There is a lesson here for fiduciaries undertaking a Code §6166 election to defer payment of taxes. The lesson is that with the extension, the estate or trust with the subject assets should retain those assets until after full and eventual payment of the tax liability. Distributing early, unless there are other assets in the estate or trust to fully cover the tax liability, will expose the fiduciaries to personal liability such as that imposed in the subject case. Perhaps if the fiduciaries can adequately secure the beneficiary obligations under the contribution agreement with a pledge and/or mortgage of assets that are unlikely to lose material value, the risk can be minimized.

U.S. v. Johnson, 109 AFTR 2d 2012-XXXX (05/23/12)

Friday, June 01, 2012

"Too Good to Be True" Rule Applied in Penalty Situation

Taxpayers subject to accuracy-related penalties can get out of them if they can show reasonable cause for their erroneous return positions. Thus, taxpayers will often argue that they reasonably relied on the advice of counsel to avoid penalties.

Simply relying on counsel of another is not a free pass. To show reasonable cause, the taxpayer must show that that their counsel was a competent professional with sufficient expertise, that they provided adequate information to the counsel so that the counsel could properly do their job, and the taxpayer actually relied on the counsel in good faith.

In a recent Tax Court case, the taxpayer argued that he relied on a tax preparer, and an expert, in adopting an erroneous return position. The Tax Court rejected his reliance on both of them.

In rejecting reliance on the expert, the Tax Court had problems with the expert being a promoter of the economic arrangement (relating to borrowing from a pension plan) that was the subject of the erroneous reporting. The promoter had a conflict of interest since he was getting paid for setting up the arrangement. The Tax Court further noted that a reasonable person would believe the promoter's advice to be "too good to be true" such that reliance on him would be unreasonable.

Reliance on the tax preparer was also rejected, since the preparer had no expertise in the area at issue, and indeed told the taxpayer that. Further, the taxpayer was found not to have given all relevant information to the tax preparer.

Reliance on counsel to avoid penalties is still viable, but not under facts like these. Who knew that when your mother told you "if it is too good to be true, it probably isn't true" that she was educating you in Tax Court doctrine!

Hristov, Tax Court Memo 2012-147