blogger visitor

Sunday, February 26, 2012


Most Americans are generally aware that the Bush tax cuts will expire in 2013, and that the new healthcare law will also impose some new taxes. As we get closer to 2013, the scope of the increases will come into clearer focus for taxpayers. For those taxpayers who will be subject to them (generally, married couples with income over $250,000 and singles over $200,000), the new amounts of their income that will be sucked into the abyss of what is the federal budget deficit is eye-popping:

Ordinary income, in general 35% 39.6% 13.14%
Earned income hospital insurance (HI) 1.45% 2.35% 62.06%
Capital gains 15% 23.8% 58.66%
Dividends 15% 43.4% 289.33%
Interest, rents, royalties 35% 43.4% 24%
Estate, Gift & Generation Skipping Transfers 35% 55% 57.14%
Estate, Gift & GST Exemptions $5.12 million exemption $1 million exemption 80.46% reduction in exemption

The income tax increases arise from two principal components. First, the maximum rates are being rolled back to the pre-Bush tax cut maximums (i.e., 39.6%). Second, investment income for those over the thresholds are subject to an additional 3.8% tax under Obamacare (e.g., on interest, dividends, capital gains, net rental income, and royalties – but excluding tax-exempt municipal bond interest and withdrawals from qualified plans and IRAs). Lastly, the HI tax on earned income is increased by 0.9% on persons over the thresholds.

Note that further increases in taxes will arise in 2013 that are not reflected in the above table. These relate to the return of limits on itemized deductions for higher income taxpayers.

Note that the threshold for the additional 3.8% investment tax and the new 39.6% maximum tax rate is extremely low for estates and noncharitable trusts that do not distribute their investment income (i.e., it is at the same income level that the highest income tax bracket begins to apply). Thus, many of such entities are in for some unpleasant increased check writing to the U.S. Treasury Department come 2013.

Of course, the Bush tax cuts rollback was deferred in 2010 for 2 years, so perhaps this could happen again. Obamacare is also up for review by the U.S. Supreme Court, and there may be a new President or party alignment in Congress after the 2012 elections. So, while all of the above changes will come into law if no new laws are passed, the uncertainty of what will happen in the law that has existed for the last few years will likely persist for the foreseeable future.

Thursday, February 23, 2012


Filing a false income tax return can result in civil penalties, and also criminal fines and jail time. Now you can adddeportation from the U.S. (if you are not a U.S. citizen) to the list of penalties.

Mr. Kawashima and his wife are citizens of Japan, but are admitted in the U.S. as permanent residents (i.e., they have green cards).  Mr. Kawashima pleaded guilty to willfully making and subscribing a false tax return, and his wife pleaded guilty to aiding and assisting in the preparation of a false tax return.

The government sought to deport the Kawashimas under subparagraph (M) of 8 U.S.C. §1101(a)(43). That subparagraph classifies as a deportable aggravated felony an offense that involves fraud or deceit in which the loss to the victim or victims exceeds $10,000.

The offense of filing a false return does not require a showing of fraud or deceit. Thus, the Kawashimas argued that the above provision did not apply to them. The U.S. Supreme Court took on the case, and ruled that the Kawashimas could be deported. The court found that deceit is present when filing a false return, even though it is not an explicit element in the statute.

Note that this is not the situation of deportation of someone present in the U.S. only on a temporary visa. As green card holders, the Kawashimas would have been entitled to remain in the U.S. for the rest of their lives.

Kawashima v. Holder, (S Ct 2/21/2012) No. 10-577

Saturday, February 18, 2012


Earlier this week, the Obama Administration released its 2013 revenue proposals. In the area of transfer taxes, the Administration’s wish list includes many items previously proposed, but also has at least one relatively new item. Given the current political situation in Washington D.C., the ability of the Administration to get all or most of these enacted is questionable. However, it is still useful to know what is in the scope of the Treasury Department’s rifle, even though they may not be able to take the shot this year. The proposed modifications are:

1. Restore the 2009 Credit and Exemption Levels. The 2009 unified credit and GST exemption levels will be reinstated and made permanent. These include a 45% maximum estate, gift and GST rate, an exclusion amount of $3.5 million for estate and GST taxes, and a $1 million exemption for gift taxes. However, portability of unused estate and gift tax exemption between spouses, which entered into the law after 2009, will be retained.

COMMENTS: No surprises here, although some would have expected the Administration to retain the 2001 levels which will be reinstated in 2013 if no new legislation is enacted, since they are substantially lower than the 2009 levels. The decoupling of estate and gift tax rates creates unneeded complexity, and the $1 million gift tax exemption is disappointingly low. That proposed gift tax exemption adds further urgency to taxpayers to make larger gifts in 2012 before the exemption shrinks up.

2. Consistency in Value for Transfer and Income Tax Purposes.  Taxpayers who receive property by reason of an individual’s death or by gift receive a basis step-up or carryover basis for future gain/loss computations, based on various rules. The proposal mandates that the recipient is bound by and must file returns with a basis consistent with information reported by the transferor, including values when relevant.

COMMENTS: Conceptually, there is nothing wrong with this idea. However, similar to the ability of a taxpayer in the income tax arena to report a tax item in a manner that differs from a Form K-1 entry so long as that different reporting is disclosed to the IRS, hopefully the same opportunity will be open to taxpayers in this area.

Also, the proposal indicates there will be enhanced (i.e., new)  reporting on decedents and donors  as to value and basis information. Hopefully, this will not be as extensive as that required under the Form 8939 reporting that was required for many 2010 decedents. This raises a number of questions. Will estates that do not have to file a Form 706 still have to obtain values (including appraisals to determine value) for their assets? Will those estates have to report information to the IRS, thus creating a mandatory federal filing for ALL estates that does not currently exist? How will annual exclusion gifts be reported? Is there really such a large problem with inconsistent reporting that a new and burdensome (and costly) reporting obligation needs to be imposed on all decedents and donors? The proposal does note that special provisions may be applicable to nontaxable estates and annual exclusion gifts, but what that means is not discussed.

3. Reduction of Discounting Involving Family-Controlled Entities. In an attempt to reduce discounting of interests in family partnerships and other closely-held entities, valuation rules will be enacted under Section 2704 to disregard limits on an owner’s right to liquidate interests and limits on the ability to be admitted as a full partner or hold an equity interest.

4. Minimum Term for Grantor Retained Annuity Trusts. The proposal would require that a GRAT have a minimum of a ten year term. It would also require that the remainder interest be above zero in value, and that no decrease in the annuity would be allowed during the GRAT term.

COMMENTS: GRATs will still remain as a planning tool if this enacted, but the ten year term will make it more unlikely that a donor will survive the term - if the donor does not survive the term, the value shifting benefits will not arise. It will also eliminate quick-hit transfers through the use of short-term rolling GRATs that allow for transfers under a shorter term spike in values before that increase can be offset by later reductions in value. Also, it will make GRATs  less attractive in higher interest rate years, since it will increase the payouts back to the grantor for no less than 10 years.

5. Limit GST Exemption Benefits to 90 Years. After a trust has been in existence for 90 years, its generation-skipping tax exemption would be effectively eliminated.

COMMENTS: Yes, the idea of trusts that are exempted from further transfer taxes forever is a wonderful thing (or for 360  years in Florida). But considering that our country was founded only 236 years ago, is a longer time period really going to be missed by many? There are some families where trusts may actually continue beyond 90 years, but I’d venture to say there aren’t that many.

6. Create Estate Tax Inclusion for All Grantor Trusts. In a major rewrite of the estate tax provisions, any individual who is taxed as the owner of a trust for grantor trust purposes will have to include the trust assets in his or her gross estate for federal estate tax purposes (at least as I read the proposal). Also, any non-grantor who is deemed the owner of the trust and engages in a sales transaction with the trust will be subject to estate tax on the portion of the trust attributable to the transferred property. The Treasury Department has sales to defective grantor trusts in its sights on this one.

COMMENTS: Many grantor trusts are already subject to gross estate tax inclusion. However, piggybacking the grantor trust rules into the estate tax area jumbles the various tax policies involved, and will result in many trusts being subject to estate tax when it is wholly inappropriate. For example, in the grantor trust area one spouse is generally attributed the rights and powers of another spouse, which can create a grantor trust in a donor spouse even though he or she retains no rights, powers, or interests over an inter vivos irrevocable trust that is created for the other spouse and/or children. Is the donor now going to be subject to estate tax on that trust?

This provision is using an elephant gun to shoot a squirrel. If Treasury is concerned about sales to defective trusts, then it should limit inclusion only to the extent of sale transactions. Indeed, the proposal already addresses sale transactions for non-grantors, so that can simply be expanded to cover all grantors engaged in sale transactions, without an unneeded overexpansion of the gross estate inclusion rules.

7. Extension of Estate Tax Lien Period for Section 6166 Deferrals. Under this provision, the ten-year estate tax lien period will be extended to cover the extended estate tax deferral period of 15 years, 3 months, when a deferral of estate tax is involved.

COMMENT: This proposal avoids the need for estate beneficiaries to come up with security interests to secure the deferred estate tax beyond the ten-year period. As  such, this extension is a useful mechanism for both the government and taxpayers.

General Explanations of the Administration’s Fiscal year 2013 Revenue Proposals

Monday, February 13, 2012


A newly published opinion arising out of the Probate Division of the Broward Courts illustrates, yet again, how important it is to strictly adhere to the terms of estate planning documents.  In Jervis v. Tucker  the settlor of a trust was adjudicated incompetent and her brother was appointed to be her limited guardian.  After she was declared incompetent the settlor executed an amendment to her trust which adjusted the dispositive scheme.  By its terms, the trust was revocable and amendable, but it contained a provision which suspended the settlor's right to amend or revoke the trust if she was adjudicated to be incapacitated.  However, the trust provided that the right to amend or revoke could be reinstated if the settlor was restored by the court, or if the trustee received written opinions from two "licensed physicians" indicating that the settlor was competent.  In this case two letters were obtained, but only one letter came from a "licensed" physician.  The second letter came from "Dr. Strang, a nursing home administrator with expert experience and medical schooling - but without a physician's license."  After the settlor died there was a trust contest concerning the validity of the amendment.  The court ruled that the amendment was invalid because the letter from Dr. Strang failed to comply with the strict wording of the trust instrument.  The appellate court affirmed the lower court's decision.  The lessons are obvious but worth repeating: be careful about the manner in which rights and procedures are created and described in estate planning documents, and be sure that clients strictly follow the terms of the instruments.

Jervis v. Tucker, 4th DCA (2012)

*Norman is one of our trust and estate litigation partners at Gutter Chaves Josepher Rubin Forman Fleisher P.A.


For those with an interest, an article of mine was published in the Miami Herald today entitled “New Offshore Asset Reporting Not as Taxing as Feared.” It can be read online here.

Friday, February 10, 2012


Washington state is now the latest state to allow for same sex marriages. Importantly, for federal tax purposes the Defense of Marriage Act (DOMA) will not respect these marriages. Thus, the various provisions of the Internal Revenue Code that apply to married individuals (e.g., the ability to file joint income tax returns, the estate and gift tax marital deduction, etc.) cannot be used by a same sex couple married under state law.

However, it is often overlooked that this is not a blanket rule. Since federal tax consequences are applied to property ownership as determined  by state law, a state law marriage between two same sex individuals may still affect their income tax liabilities. Thus, for example, if a same sex couple owns community property under state law, each partner must report on his or her own income tax return 1/2 of the income from the community property. See CCA 201021050.

This treatment leaves open the currently unanswered question whether other community property rules will also apply. For example, will a double step-in basis in community property at the death of the first partner be allowed to occur as it would in non-same sex marriage?

Further adding to the tax difficulties in planning for same sex couples is that state laws may provide state tax benefits to same sex marriages even though they are not available at the federal level.

It is these subtleties and uncoordinated treatment that make planning in this area a challenge. For more on this subject, see Effect of Same-Sex Marriage Laws on Estate Planning, by Nicole Pearl and Carlyn McCaffrey in the January 2012 edition of Estate Planning Journal.

Wednesday, February 08, 2012


In the past, a common estate planning technique to shift future appreciation on a sale of property would be to sell the property for a private annuity. This provided an income stream to the seller, and also allowed the seller to defer taxes on any gain until payments were received.

In 2006, the IRS  issued proposed regulations that disallow any deferral of tax on gains – instead, all gain on sale is taxed in the year of sale. For many, this is perceived as a death blow to the planning technique.

However, even with a current income tax bite, there are still advantages to the technique and justify its use in appropriate circumstances:

a. The benefit of shifting future appreciation out of the seller’s gross estate for estate tax purpose still fully applies (although this can backfire if a seller substantially outlives his or her life expectancy, since the total annuity payments may then exceed the value of the property plus appreciation).

b. Income taxes may not be a major issue. For example, there may not be much current appreciation (i.e., little or no gain) in the property. Or perhaps the seller has other losses they can use to offset the gain.

c. For 2012, recognizing long-term capital gain may be a good thing since maximum rates are only 15%, and are scheduled to increase next year.

d. In the past, a seller of property for an annuity could not secure the annuity obligation with a pledge or mortgage on property, because that would prevent income tax deferral. Thus, sellers had to take on increased risk of loss as to a default by the buyer. Now that deferral of tax is off the table, sellers can secure the payment obligation without giving up anything.

Saturday, February 04, 2012


Favio came to the U.S. in 2005 after a kidnapping attempt against his son in Venezuela. He rented an apartment, and lived there with his son (a U.S. citizen), and his wife. He then purchased an apartment in 2006 and lived there with his family until his death in 2009.

Favio had borrowed $500,000 from Eric and Carla. When Favio died, they filed a claim against Favio’s estate to be repaid. Favio’s estate claimed the apartment was homestead property, and thus could not be reached by Eric and Carla to repay the debt. Presumably, Favio did not have other assets to fully satisfy the debt.

The probate court reviewed numerous cases that provided that an individual in Florida on a temporary visa could not form the requisite intent to make a residence a “permanent residence” so as to qualify for homestead protection against creditors. The court found that since Favio did not have the right to stay here on a permanent basis (he did not have a green card admitting him as a lawful permanent residence nor was he a U.S. citizen), the property was not homestead property.

The 3rd DCA reversed, and held the property was protected homestead. In doing so, they made a number of interesting observations and statements:

     a. That the son was a U.S. citizen was an important fact. The court noted that the Florida Constitution does not require the owner to reside on the property – it is enough that the owner’s family reside on the property. Thus, the father could in effect piggyback on the son’s permanent status.

     b. The intent question is to be answered based on the intent of the homesteader and not that of the U.S. Citizenship and Immigration Services. Thus, while Favio did not have the right to remain in the U.S. permanently, that was not controlling.

     c. Precedent and rules in the ad valorem tax homestead exemption area do not control in regard to the exemption from forced sale. There is strong precedent in the tax area that temporary immigration status is not sufficient to obtain the ad valorem homestead exemption. That precedent is not controlling because for tax exemption purposes, the statute is to be strictly construed against the taxpayers. However, in the forced sale arena, the rules are to be liberally construed for the benefit of those that the rules are designed to protect.

     d. That Favio and has wife had applied for permanent residence status before Favio’s death was an important fact that supported homestead status.

In the end, the court noted that based on (a) continued residence at the property since its purchase, (b) possession of a visa that permitted residence here (albeit not on a permanent basis), and (c) the application that had been made for permanent resident status, homestead protection against forced sale was appropriate.

WHERE’S THE VALUE HERE? The court opens the door to homestead protection against forced sale, even when the owner does not have the right to permanently reside in Florida. However, the special facts discussed above in (a)-(c) were key – absent similar compelling facts in other situations, the lack of the ability to permanently reside is still likely to be a significant bar to forced sale homestead protection based on the other cases in this area.

Estate of Favio Jose Grisolia Sanchez v. Pfeffer, 36 Fla.L.Weekly D2554 (3rd DCA (November 23, 2011))

Wednesday, February 01, 2012


Purchasers and sellers of businesses will often allocate the purchase price among the assets sold. Under Code §1060, the buyer and seller must make an allocation with their tax returns.

When the allocation is made in a written agreement, the parties are bound by it for tax purposes, except under the Danielson rule. Code §1060(a).  That rule allows a party to contradict an unambiguous contractual term by offering proof that would alter that construction or to show its unenforceability because of mistake, undue influence, fraud, or duress.

Peco Foods purchased two processing plants. Portions of the purchase price were allocated to “Processing Plant Building” and “Real Property: Improvements.” Instead of capitalizing the purchase price into real property only (Code §1250 property), Peco conducted a post-closing study that broke these allocations into component parts, including allocations to specialized mechanical systems and other personal property assets (Code §1245 property). By doing this, Peco was able to increase its depreciation deductions through the use of faster write-off methods that are allowable under Code §1245.

The IRS objected, and the matter ended up in the Tax Court. The Tax Court sided with the government, and determined that a subdivision of the allocations to real property assets between real property and nonreal tangible personal property rule was an impermissible modification of the allocation in the purchase agreement.

WHERE’S THE VALUE HERE? Buyers of businesses should conduct their cost segregation analysis before the closing and conduct any refinements in the allocation in the purchase agreement, instead of doing these things after the agreement is finalized.

Peco Foods Inc. et al., TC Memo 2012-18