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Thursday, August 30, 2012


In my March 31 posting, I discussed the Wandry decision of the Tax Court. The decision was a very favorable determination that approved of a formula clause to limit the amount of a gift (and thus limit exposure to gift tax) upon an IRS redetermination of value of the gifted property. While formula gifts have withheld scrutiny in other decisions, those cases involved more complex planning involving charitable lids or disclaimers – Wandry greatly simplifies the methodology involved to have an effective clause.

Notice of appeal was filed in the Tax Court on August 28, with the appeal going to the 10th Circuit Court of Appeal. Look for more here as soon as a decision is out.


Sunday, August 26, 2012


By Sean Lebowitz

Mandatory service of court pleadings by e-mail begins on September 1, 2012. The Florida Supreme Court, in opinion SC10-2101, issued a holding requiring e-mail service of pleadings for all attorneys practicing in the civil, probate, small claims and family law divisions of the trial courts as well as in all district court of appeals. Mandatory service by e-mail is Florida’s initial step to a state-wide internet portal, similar to PACER in federal courts, which is currently scheduled to commence on April 1, 2013.

Florida Rule of Judicial Administration 2.516 (Service of Pleadings and Papers) is the principal newly adopted rule. The Rule replaces Florida Rule of Civil Procedure 1.080, which currently governs service of pleadings. The key provisions of Florida Rule of Judicial Administration 2.516 are as follows: 1) Attorneys are required to state their e-mail address on every pleading filed with the Court; 2) All documents required or permitted to be served on another party must be served via e-mail and need not be served via US Mail; 3) Service of a document via e-mail is made by attaching the document in PDF format to the e-mail; 4) The e-mail subject line must begin with the words “SERVICE OF COURT DOCUMENT” followed by the relevant case number; 5) The body of the e-mail must contain the name of the court, case number, name of the initial party on each side, the title of the document being served via e-mail and the sender’s contact information; and 6) The original documents must still be filed with the Court.

In addition, although service by e-mail is instantaneous, the rule still provides an additional five (5) days for transmittal pursuant to Florida Rule of Civil Procedure 1.090(e), unless another means of service is utilized with differing time limits (for instance, facsimile).

The e-mail and attachment may not exceed five (5) megabytes in size, and if the enclosures are larger, the e-mail may be sent in multiple e-mails. The document being served may be electronically signed by the “/s/” format, but the document filed with the Court must be appropriately signed. Permitting a document to be signed by the “/s/” format should alleviate the strict size requirements since the pleading does not need to be scanned (and can be saved as a PDF using Word or Word Perfect).

The mandatory service by e-mail rules have exceptions and contain other nuisances. The author encourages all attorneys to read the new rule and opinion (which can be found here:

Wednesday, August 22, 2012


The question often comes up whether a distribution to a shareholder is a taxable distribution (e.g., a dividend), or a nontaxable loan. A recent 5th Circuit Court of Appeals decision listed the general considerations courts will consider, and applied those considerations to the facts of the case.

Generally, the test of whether a distribution is a loan is whether there was an intent that the advanced monies be repaid. The following seven objective factors are what courts will focus on:

(1) Whether the promise to repay was evidenced by a note or other instrument. In the case, the note was not signed until six months after the distribution, so even though there was a promissory note its late preparation was an unfavorable fact for finding a loan.

(2) Whether interest was charged. In the case, interest was charged, which was a good thing, but the rate was below the market, which was not a favorable factor for a loan.

(3) Whether a fixed schedule for repayment was established. A schedule was provided, but not until 3 months after the first payment was due.

(4) Whether collateral was given to secure payment. In the case, the note was secured.

(5) Whether repayments were made. In the case, no payments had been made – obviously, not a good fact for finding a valid loan. While there were insurance mechanisms to allow for eventual payment if necessary from a plan death benefit, there were too many contingencies attached to such payment to treat it as an actual payment.

(6) Whether the borrower had a reasonable prospect of repaying the loan and whether the lender had sufficient funds to advance the loan. The borrower was a neurosurgeon who made a good living, so there was a reasonable prospect of repayment.

(7) Whether the parties conducted themselves as if the transaction was a loan. Not here – they did not make payments in accordance with the note, and no collection was attempted.

So how do you think the court ruled? Both the Tax Court and the appellate court found that there was no bona fide loan.

Clearly, taxpayers seeking loan treatment in similar circumstances should attempt to meet as many of the above factors as possible.

Todd, II v. Comm., 110 AFTR 2d ¶ 2012-5205 (CA 5 8/16/2012)

Saturday, August 18, 2012




COMMENT: With interest rates on the uptick again, will this be the lowest rates will be for awhile?

Tuesday, August 14, 2012


What happens if a litigant obtains a judgment in a lawsuit, and then assigns that judgment to a third party before it is paid? The assignment of income doctrine generally provides that an assignor of a right to income will generally be taxable on the income when it is received by the transferee, even if the transferor no longer has any rights to the income. Does this mean the litigant under the above facts will be taxable when the transferee of his or her judgment gets paid by the defendant (assuming that the damages received are otherwise taxable)?

A recent private letter ruling reviewed existing case law on the subject. It summarized the law to be that a transferor who makes an effective transfer of a claim in litigation to a third person before the time of the expiration of appeals in the case is not required to include the proceeds of the judgment in income under the assignment of income doctrine because such claims are contingent and doubtful in nature. If the transfer is made after the appeals are done, then the assignment is no longer contingent and the assignment of income doctrine will apply.

Interestingly, in the ruling request, the assignment of the judgment was contingent on the issuance by the IRS that the assignment of income doctrine did not apply, so long as the ruling was issued  before a final settlement of the lawsuit or the expiration of the appeals period. Thus, the ruling had to be issued while recovery was still contingent, and thus the IRS ruled that assignment of income did not apply. If the ruling could be issued after the expiration of the appeals period, then the assignment could be effective after it ceased to be contingent, and thus presumably in that circumstance the assignment of interest doctrine could apply. The result also did not change even though a portion of the judgment would be applied to the payment of attorneys fees.

PLR 201232024

Friday, August 10, 2012


In June, I wrote about how a married same-sex couple was able to persuade a U.S. District Court in New York to strike down the definition of marriage as being only the legal union between a man and a woman. This definition is in Section 3 of the Defense of Marriage Act (DOMA). In the case of Windsor v. U.S., 109 AFTR 2d ¶ 2012-870 (DC N.Y. 6/6/2012), the court struck down the definition and allowed the estate tax marital deduction to apply to a same-sex married couple. You can read my initial analysis here.

A District Court in Connecticut has now also ruled against the federal definition. This case involved several same-sex married couples, and the issues involved included income tax savings by being able to file as a married couple, eligibility of a surviving spouse for Social Security Lump Sum Death benefits, eligibility under the Family Medical Leave Act, and Medicare Part B supplemental insurance availability.

Like Windsor, the DOMA provision was struck down based on failing the rational basis test under the Equal Protection Clause of the U.S. Constitution. Unlike Windsor, the Connecticut Court undertook a lengthy analysis as to whether homosexuality is a “suspect class” under that Clause – however, it ultimately ruled that such a finding was unnecessary to strike down the marriage definition given its failure to pass the lower scrutiny rational basis test.

The Windsor case is under appeal to the Second Circuit, so more authoritative precedent (one way or the other) will likely come out of that case. Interestingly, the Connecticut case noted that there are at least 1,138 federal laws and regulations that are impacted by the federal definition of marriage.

 Pedersen, et al, v. Office of Personnel Management, et al, (DC CT 07/31/12) Civil Action No. 3:10-cv-1750.

Wednesday, August 08, 2012


There are only four months left to implement gift giving before year end to take advantage of the $5.12 million unified credit, before it reverts to $1 million in 2013. Given the increasing interest in planning for such gifts, and a few requests, I am putting on a one-hour in-house presentation on basic and advanced planning techniques. Included topics will include the pros and cons of gift planning, basic gifting techniques, SLATs and other gift trusts, formula fundings, and discounting, with a special focus on planning to allow continued economic interests to a donor after gifting.

The free presentation will be of interest to accountants, attorneys, financial planners, clients, bank, brokerage & trust officers,  and other interested persons. CPE credit is available, and CLE credit is applied for.

The presentations will be held on successive Fridays, on September 7 and 14, at 8 a.m. in our offices.

Since we have run out of room at past presentations, I am making this seminar available for a few days first to the readers of this blog, before a more general announcement goes out – so if you are interested, I suggest you sign up as soon as reasonably convenient. Please call or email Susana at 561-998-7847 or with your preferred date.

For a copy of our Full Announcement, go here.

Friday, August 03, 2012


In 1997, the IRS issued final regulations providing that a domestic LLC wholly owned by single owner could be disregarded as a entity separate from its owner and its operations treated as a branch of its owner.  Consistent with those rules, in Announcement 99-102, the IRS provided that an owner that is exempt from taxation under Code §501(a) must include, as its own, information pertaining to the finances and operations of a disregarded entity in its annual information return (Forms 990, 990-EZ, 990-T, and 990-PF).
Well, it has only taken 15 years, but the IRS is now acknowledging in Notice 2012-52 that it will treat as a charitable contribution to a U.S. charity a contribution to a disregarded entity wholly owned by the U.S. charity.
Notice 2012-52

Thursday, August 02, 2012


Individuals who are stockholders or employees of a corporation often lend it funds. When the loan turns sour and does not get repaid, a "business" bad debt deduction, if allowed, allows for an ordinary loss. However, if the loan is a "nonbusiness" bad debt, the lender only receives short-term capital loss treatment. Further, for nonbusiness bad debts, a deduction is allowed only if the debt is wholly worthless - business bad debts are allowed for partial worthlessness.

If the lender is an employee of the corporation and that employment is the lender's primary employment, the taxpayer can often make a reasonable showing that he or she made the loan to protect his trade or business as an employee (and not just as an investment). In that situation, business bad debt treatment should be available. That is, if the lender believed the corporation needed the loan to keep the lender's job going, that should be enough.

Problems arise when the lender's motivation relates more to the investment side of things, and not protection of his or her employment. This tends to come up more when the lender is both an employee and a stockholder. As such a lender in a recent Tax Court case learned, this opens the door to a strong argument that the loan was made more to protect the lender's investment in the company than his or her employment. There, the taxpayer lost his bid for business bad debt treatment. In finding that the loan was a nonbusiness bad debt instead, it noted:

[T]he dominant motivation for making the loans was not petitioner's trade or business as an employee of the companies. ... Petitioner designed the software used by the companies and invested a significant amount of time and money to ensure the success of the companies. Protection of petitioner's investment interests in the companies, rather than protection of his salary, was the dominant motivation for the loans.

What was especially problematic for the taxpayer was that in the year after the loan was made, the lender did not receive any pay from the two companies involved. While not explicitly discussed, the Court's mentioning of this fact presumably helped it reach the conclusion that the loan was not made principally for employment purposes. Whether it would have ruled for the taxpayer if the lender continued to receive compensation is unknown.

Harry R. Haury, TC Memo 2012-215