PROJECTED 2014 INFLATION-ADJUSTED FIGURES

The IRS will issue inflation-adjusted transfer tax and foreign reporting items for 2014 based on fiscal year 2013 inflation, but it hasn’t done so yet. Thomason Reuters does its own computations of what it estimates will be the adjustments for 2014, and these tend to be very accurate. So, for a peek at what the 2014 adjustments will likely be:

a. UNIFIED ESTATE AND GIFT TAX EXCLUSION AMOUNT AND GST EXEMPTION – $5,340,000 (up $90,000 from 2013);

b. GIFT TAX ANNUAL EXCLUSION AMOUNT  - $14,000 per recipient (unchanged);

c. GIFT TAX ANNUAL EXCLUSION FOR GIFTS TO NONCITIZEN SPOUSES – $145,000 (up $2,000 from 2013);

d. FOREIGN GIFT REPORTING THRESHOLDS – $100,000 aggregate gifts from a nonresident alien individual or foreign estate; $15,358 for gifts from foreign corporations and foreign partnership;

e. COVERED EXPATRIATE INCOME THRESHOLD – $157,000 average annual net income tax for preceding five years;

f. FOREIGN EARNED INCOME EXCLUSION – $99,200 ($1600 increase from 2013).

FLORIDA LAND TRUST REVISIONS–THE HIGHLIGHTS [FLORIDA]

Earlier this summer, Florida’s land trust statute underwent a substantial revision. Below are the major highlights:

1. Florida has separated out the title aspects of land trusts from the other provisions. This is because the title aspects apply both to land trusts under the land trust statute, and trusts that are not land trusts (i.e., Chapter 736 trusts). The title rules are now in Fla.Stats. §689.073(1). The land trust provisions remain in Fla.Stats. §689.071.

2. The title aspects (relating generally to a trustee having full authority to sell, mortgage, and similarly deal with the subject real property) are pretty much the same as they used to be, and are triggered by the designation of the titleholder in a recorded  transfer instrument as “trustee” or using “as trustee” language, and specifically conferring on the trustee the power and authority to protect, to conserve, to sell, to lease, to encumber, or otherwise to manage and dispose of the real property described in the recorded instrument. As noted above, these provisions apply both to land trusts and Chapter 736 trusts. The purpose of these title rules is to allow persons dealing with the trustee in a sale or conveyance or similar title transactions to deal only with the trustee and to not be concerned about rights of beneficiaries or other provisions of an unrecorded trust instrument.

3. The law is now clear that a land trust is generally not subject to Chapter 736 (the provisions of Florida law governing trusts). This is in accord with the general difference between a land trust and other trusts subject to 736. Land trusts are principally only title holding devices, with the trustee subject to substantial beneficiary control. Because of the limited authority and discretion of a land trustee, the more extensive provisions of Chapter 736 do not apply.

4. So what is a “land trust” that is subject to Fla.Stats. §689.071? For trusts formed after June 28, 2013, there are two elements: (a) A recorded instrument confers on the trustee the title powers and authorities  described in Fla.Stats. §689.073(1) (as discussed under 2. above), AND (b) the trustee’s duties under the trust agreement, including any amendment made on or after such date, are no greater than those limited duties described in paragraph (2)(c) of Fla.Stats. §689.071. Whether earlier trusts are land trusts will turn on an express designation as such in a recorded instrument or intent of the parties to have a land trust can be discerned, and whether an express or implied intent to be governed by Chapter 736 exists.

5. The beneficiary’s interest in a land trust will now be treated as personal property (and not real property) ONLY IF such a declaration is made in a recorded instrument or in the trust agreement.

6. The UCC is coordinated with the statute in regard to granting security interests in a beneficiary’s interest. If the interest is treated as personalty, the personalty provisions of the UCC secured interest rules apply – if it is real property, a mortgage will be needed.

YOU CAN NOW PAY FLORIDA DOCUMENTARY STAMP TAXES ONLINE [FLORIDA]

In a welcome modernization, the Florida Department of Revenue now allows for online payment of documentary stamp taxes, such as those imposed on issuers of promissory notes and other written indebtedness.

Higher volume taxpayers must register and use Form DR-225. Others can use Form DR-228 without having to formally register. You can access the system here (click on Documentary Stamp Taxes) once opened.

SAME SEX COUPLES SHOULD CHECK ON THEIR WAGE WITHHOLDING AND ESTIMATED TAX PAYMENTS NOW

A downside to the IRS’ recognition of same sex marriages is that such couples must file in 2013 as married – they can file jointly or or as married filing separately. This means they may now suffer higher income taxes due to the marriage penalties that exist in the Internal Revenue Code.

To avoid future headaches, such couples should check on their current wage withholding and estimated taxes, and adjust them upward if needed, if their taxes will be going up based on their new marital status.

NEW FBAR CASE SUPPORTS LINGERING CRIMINAL EXPOSURE FOR LATE FILINGS UNDER FAQ

In a recent appellate case, the taxpayer filed required FBAR’s late, using the filing procedure allowed for late filings under the 2009 OVDI FAQ. Nonetheless, the court found that the FAQ relief from civil penalties was not a bar to the government asserting criminal penalties.

Thus, those doing late filings under the OVDI FAQs should not consider them necessarily safe from criminal prosecution.

In the case, the taxpayer did not qualify for using the late filing FAQ anyway, since not all offshore income had been reported timely. Nonetheless, it appears the court would still have allowed criminal liability even if the FAQ applied.

There were some bad facts that surely contributed to the government’s attitude, and possibly that of the court. For example, there was an offshore trust, and lots of money being spent. Nonetheless, the taxpayer hardly reported any income and sought financial aid for his children’s education. The taxpayer was also a CPA. Whether a different result would have arisen absent these facts cannot be gauged.

US v. Simon, 7th Circuit Court of Appeals, August 15, 2013

CHARITABLE LEAD TRUSTS WITH PRIVATE FOUNDATION LEAD BENEFICIARY

Transfers to charitable lead trusts during lifetime can provide tax benefits to the donor, and can avoid inclusion of the transferred property in the gross estate of the donor for federal estate tax purposes at death. However, donors often try to keep things “all in the family” by having the required distributions from the lead interest being made to a family private foundation of which the donor is a founder and/or manager. In those situations, the donor must deal appropriately with both the trust and the foundation to obtain completed gift treatment and to avoid gross estate inclusion. Retained powers and authority via the foundation can jeopardize these items.

A 2013 private letter ruling provides a useful roadmap for obtaining both completed gift treatment and avoiding gross estate inclusion, when a private foundation is involved. The donor must act to separate himself from managing either the trust, or funds of the trust that are received by the foundation. The particular things that were done to obtain the desired tax treatment included:

a. the donor cannot serve as trustee of the charitable lead trust;

b. while the donor can serve as a director of the foundation, the donor is not permitted to vote on matters relating to disbursements or grants of funds received from the trust;

c. a quorum of the Board of Directors of the foundation, excepting the donor, established a committee, with the sole authority to receive, separately invest and make all investment decisions and administrative, grant and distribution decisions on behalf of the foundation with respect to and regarding all funds received by the foundation from the trust. The committee consists of at least three members, at least one of whom is not a director of the foundation and at least one of whom is not related or subordinate to any director of the foundation as defined by § 672(c). All actions by the committee shall require unanimous consent.

c. any funds received by the foundation from the trust will be segregated into a separate account. The committee will administer and distribute the separate account. The donor will have no power over the account or the committee.

PLR 201323007

IRS TAX OVERPAYMENT AND UNDERPAYMENT INTEREST RATES–4th QUARTER 2013

LOCKED OUT S CORPORATION SHAREHOLDER STILL TAXABLE

In a recent Tax Court case, a 40% shareholder of an S corporation medical practice was locked out of the office and the practice by the 60% shareholder. Nonetheless, at the end of the tax year, the S corporation issued a Form K-1 to the 40% shareholder allocating to him $215,920 of business income and $2,344 of interest income.

The 40% shareholder sought to disallow the allocation of income to him, since he could not participate in the business. His theory was that by reason of the lockout, he ceased to be the beneficial owner of the shares. Points should be given for the creative theory, even though it was not successful.

A taxpayer is the beneficial owner of property if the taxpayer controls the property or has the economic benefit of the property. The Tax Court found that the 40% shareholder still retained beneficial ownership since there was no agreement transferring any rights to the stock, and the 40% shareholder still retained his economic rights as a shareholder.

What could the 40% shareholder have done here? One thought is that he could have transferred his shares to a nonqualified shareholder (such as a nongrantor trust), thus terminating the S election of the company. Some shareholder agreements restrict such transfers, but in the scope of the wider controversy or in the absence of such a restriction, this may have solved his problem. However, in this case under applicable state law, perhaps the shares could not be transferred to someone other than a licensed professional.

Kumar v. Commissioner, TC Memo 2013-184