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Wednesday, July 31, 2013


Estate planners often have clients that want to include directions in their wills and trusts that don’t directly relate to dispositions of assets. Such “dead hand” attempts to control events from the grave can at times be challenged on public policy grounds.

In a recent 4th DCA case, a decedent included a provision in a codicil to his last will, requiring employment of his son after the decedent dies by a corporation controlled by him (he owned 100% of the stock). Besides ruling against the son that the language relating to lifetime employment was only precatory, the court found that even if it was not precatory it was unenforceable since it conflicts with the fiduciary duties of the officers and directors of the corporation.

A testamentary direction to guarantee Thomas employment within the company, regardless of circumstances or detriment to the corporation, could compel the violation of fiduciary duties of the officers and directors to the corporation. This would be a violation of statutory duties and the public policy behind them.

Interestingly, in support of its conclusion the DCA noted two Florida cases that voided directions in a will to a personal representative to hire a specific lawyer and to hire a specific real estate agent to assist in estate administration - In re Estate of Marks, 83 So. 2d 853 (Fla. 1955) and In re Estate of Fresia, 390 So. 2d 176 (Fla. 5th DCA 1980). These cases provide that a will provision cannot compel a personal representative to hire a specific person who would be acting in a fiduciary capacity because of the confidential relationship between the personal representative and a fiduciary. How many last wills have you seen that direct appointment of an attorney for the estate? I know I’ve seen more than one!

THOMAS GRANT, Appellant, v. BESSEMER TRUST COMPANY OF FLORIDA, INC., as personal representative of the Estate of Milton Grant, Appellee. 4th District. Case No. 4D11-3614. July 3, 2013

Monday, July 29, 2013


Notwithstanding failing to assess estate tax against an IRA beneficiary wihin the Code §6901 four year transferee statute of limitations, in U.S. v. Maureen G. Mangiardi et al, the IRS was permitted to collect estate taxes under its estate tax lien more than 12 years after estate taxes were assessed.

FACTS: Joseph Mangiardi died on April 5, 2000. He died owning assets through a revocable trust of about $4.57 million and an IRA worth $3.85 million. Estate taxes were determined to be approxmately $2.47 million.

The estate received four years of payment extensions under Code §6161, claiming inability to pay due to reductions in the value of publicly traded securities from a declining market. Only $200,000 in estate taxes have been paid, and there are inadequate assets in the revocable trust to pay the estate taxes. The IRS now seeks to collect against Maureen Mangiardi as a transferee owner of IRA assets of the decedent under the 10 year estate tax lien of Code §6324, in an amount equal to the value of the IRA assets she received.

Maureen asserts two defenses. First, Code §6901 provides for the assessment and collection of taxes from a transferee with the same three year statute of limitations on assessment applicable to the estate under Code §6501, plus one extra year. Code §6901(c). The IRS did not assess taxes against Maureen within this period and never assessed under Code §6901. Instead, the IRS sought to collect the tax directly under the Code §6324 10 year estate tax lien against all gross estate assets. Maureen claimed that an assessment against her within the Code §6901 four year period was required. Unfortunately for her, other courts have previously held that the IRS can proceed to collect under Code §6324 without having to assess the transferee under Code §6901 (including one involving the same estate as the instant case, but which the court did not cite). These cases included Mangiardi , Joseph Est v. Com., 108 AFTR 2d 2011-6776 (2011, CA11), aff’g (2011) TC Memo 2011-24; United States v. Geniviva, 16 F.3d 522, 525 (3d Cir. 1994); Culligan Water Conditioning of Tri-Cities, Inc. v. U.S., 567 F.2d 867, 870-71 (9th Cir. 1978); United States v. Russell, 461 F.2d 605, 606 (10th Cir. 1972); U.S. v. Motosko, No. 8:12-cv-338-T-35-TGW, 2012 WL 2088739; United States v. Matzner, No. 96-8722-CIV, 1997 WL 382126.

Maureen also argued that the 10 year lien had expired by the time the IRS sought to collect from her. While more than 10 years had expired since assessment of the estate tax, the IRS countered that the 10 year lien period was extended by the four year extension of time to pay granted to the estate which extended the statute against the estate. The court nonetheless ruled that since Maureen’s liability, as a transferee, was derivative of the estate’s liability as transferor, the four year extension granted to the estate also extended the statute for collections against her, citing United States v. Kulhanek, 755 F. Supp. 2d 659 (W.D. Pa. 2010).

COMMENTS. The above result is bad for IRA and other beneficiaries for many reasons. First, it allows beneficiaries to be hit with estate taxes many years after death, and without knowledge that taxes were never paid and thus that the potential liability existed.

Second, this extended time period can be more than 10 years, since extensions granted to the estate extend this 10 year period. Presumably, if estate taxes are extended for 10 or 15 years under Code §6166, this extension can be tacked on to the 10 year estate tax lien period.

Lastly, it would appear that an IRA beneficiary is liable as a transferee for the full amount of IRA assets that are inherited. However, the IRA beneficiary really does not benefit by the full amount, since income taxes will have to paid by him or her on amounts withdrawn from the IRA. This is unfair – the beneficiary will be liable for more in estate taxes than the net amounts received from the IRA. While Code §691(c) may provide an income tax deduction for the estate taxes attributable to the IRA, mismatched tax years between deduction and income may void or limit the benefit of this deduction to the IRA beneficiary.

United States v. Maureen G. Mangiardi et al., No. 9:13-cv-80256 (USDC So.D.Fla.)

Friday, July 26, 2013


Section 529 plans offer many advantages in regard to funding education. Key among these are tax-free growth, tax-free distributions for educational purposes, and the ability to use up five years of annual exclusion gifts in one year. Nonetheless, the use of such a plan is not always a no-brainer, especially when compared to other vehicles, such as irrevocable gift trusts.

A recent article highlights some of the negative aspects of Section 529 plans. The following summarizes many of these, both from the article and from my own analysis and research notes:

  • The plans have limited investment choices, especially as compared to trusts. These choices are dictated by the rules of the state in which the plan is located;
  • The plans will typically be used to pay tuition costs. However, since individuals can make tax-free gifts of tuition costs directly, this reduces the ability of donors to deplete their estates by make such tuition gifts – instead, they use up some of their annual exclusion amounts to fund the plan and thus payments that could have been made free of estate tax anyway;
  • Earnings withdrawn for non-qualified (i.e., noneducational) expenses are subject to income tax and a 10% penalty tax;
  • The unused portion of the annual exclusion will be included in the donor’s taxable estate for estate tax purposes if the donor dies within 5 years of the funding, if more than one year’s funding is undertaken at one time;
  • It is difficult to get any tax benefits from losses;
  • “Educational” uses are limited to college and post-secondary school expenses;
  • Once a maximum account size is reached, no additional contributions are permitted; and
  • Spouses cannot be beneficiaries.

Therefore, planners should always compare the use of a Section 529 plan to other available alternatives, including irrevocable gift trusts.

Liss, Stephen, Rethink the Use of 529 Accounts for Funding College Costs, WG&L Estate Planning Journal, August 2013

Tuesday, July 23, 2013


Many thanks to Juan Antunez for his kind words and mention of the Florida Irrevocable Trust Amendment Mechanisms in his recent blog posting, which you can read here. For those that are unaware, Juan always posts very interesting articles on case law and developments in his Florida Probate & Trust Litigation Blog.

Saturday, July 20, 2013


For many years, nongrantor trusts have suffered an income tax disadvantage as compared to individuals. These trusts move much quicker to the highest marginal income tax rate on undistributed income then individuals. Compare this table with this table. In 2013, a trust or estate will be subject to the maximum 39.6% rate after $11,950 of taxable income.  A single person doesn’t hit the maximum rates until over $400,000 in income.

This problem has been exacerbated in 2013 by the overall increase in rates, including increases in the maximum capital gains rate and qualified dividend income rate from 15% to 20%. Trusts and estates are subject to the 20% rate again after about $12,000 in income, while individuals don’t suffer it until after $400,000 in income.

Further, the new Obamacare 3.8% tax on investment income applies to trusts after MAGI of about $12,000, while single individuals do not suffer it until MAGI of $200,000.

Lastly, these rate differentials may be further exacerbated by applicable state income taxes.

Putting aside trust taxation of capital gains which are not included in DNI, these rate differentials are not an issue for nongrantor trusts that require all income be distributed to the beneficiary, since that distribution will result in the beneficiary being taxed on the trust income instead of the trust (aside from the above capital gains). Nor is this an issue for grantor trusts when the income is already taxable to an individual other than the trust. Thus, this tax issue is principally an issue for trusts that have discretionary income standards, including those that distribute income only on an ascertainable standard, since that will open the door to years when all income may not be distributed to beneficiaries and will be taxable to the trust.

One approach to this problem is to draft the trust to give the beneficiary a power to withdraw trust income beyond the above $12,000 (as adjusted each year) thresholds. If exercised, this will shift the income over to the beneficiary to be taxed at the beneficiary’s tax rates, which should be at worst the same as the trust maximum rate, but hopefully lower based on the other income of the beneficiary. The maximum withdrawal amount will be limited by the 5 by 5 power limitations of Section 2514, so that the maximum withdrawal each year can be no more than the greater of $5,000 or 5% of the value of the trust. This will avoid a taxable gift if the power is not exercised – i.e., the lapse of the power will not be a taxable gift by the beneficiary to the other trust beneficiaries.

Interestingly, if the power of withdrawal is not exercised, the problem diminishes somewhat as the portion of the trust that is not withdrawn will be treated as a grantor trust and taxed to the non-withdrawing beneficiary in future years (and thus not to the trust). As an aside, trusts funded with Crummey withdrawal power gifts that are not exercised will also see this benefit as to the portion of the trust not so withdrawn each year that a contribution is made.

Putting aside the foregoing income tax benefits of this power of withdrawal, such a power of withdrawal in a discretionary trust or an ascertainable income standard trust may be problematic, for many reasons. First, the settlor may not want all of that income to be automatically distributed to the beneficiary – otherwise, the grantor would not have used a discretionary or ascertainable standard for income distributions. Second, the beneficiary may not be in a good position to receive that income – either due to age, disability, drug and other personal issues, marital and creditor issues, or other of the many reasons for not distributing assets to a beneficiary. Third, such distributions may defeat desired accumulations of income in the trust – especially when the trust is GST or estate tax exempt at the death of the beneficiary or future beneficiaries. Fourth, the failure to withdraw may constitute a contribution to the trust for local creditor protection laws and divorce laws – thus potentially exposing the nonwithdrawn assets and other trust assets to increased creditor and divorce risk.

Assuming the foregoing objections are not enough to overcome the desires to implement this type of income tax planning, note that when distributions are made to the beneficiary they will draw out a prorata portion of all classes of income of the trust. Since capital gains and qualified dividend income are subject to  much lower maximum rate than ordinary income, it would be nice if the trustee could cherry pick or maximize which items of income are distributed (the ordinary income items) and leave behind in the trust those items that are taxed at relatively lower rates (the capital gains and the qualified dividend income). Unfortunately, Subchapter J does not work that way.

However, James G. Blase in the June 2013 issue of Estate Planning Journal discusses a formula power of withdrawal approach that he believes would allow for the distribution of only the highly-taxed ordinary income items. His proposed distribution language is quite lengthy, and whether the IRS would respect his interpretation is unknown at this point. For those with an interest, I highly recommend his article, entitled Drafting Tips That Minimize the Income Tax on Trusts – Part 1 since it has an extended discussion about these issues.

Sunday, July 14, 2013


Taxpayers are required to disclose their ownership interests in foreign bank and financial accounts by filing a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”). 31 U.S.C. §5321 allows the U.S. to impose a penalty for willful failure to report of 50% of the maximum balance of the account (or $100,000, if greater).

If a taxpayer does not report in multiple years, this 50% per year penalty can equal or exceed the amount that is in the account. It is this threat of multi-year penalties that often motivates nonreporting taxpayers to enter the Offshore Voluntary Disclosure Initiative (OVDI) programs, since the programs offer only one penalty, at a much lower rate.

As a practical matter, assertions of a multi-year 50% penalty are few and far between. However, in June 2013 the U.S. filed suit in the Southern District of Florida asserting 4 years of a 50% penalty against Carl Zwerner. Thus, Mr. Zwerner is at risk of having to pay over $3.48 million in penalties for an account that appears not to have had more then $1.5 million in it during the years of nonreporting. While Mr. Zwerner did not initially pay income taxes on the income of the subject accounts, he later did so via the filing of amended returns.

The Treasury Department may be setting itself up to lose the persuasive threat of the 50% penalty by litigating this case. The Eighth Amendment prohibits “excessive fines.” If a court determines that the penalty is excessive, the penalty will be unconstitutional and unenforceable. Further, other significant penalties relating only to “information reporting” may likewise be at risk of challenge if the FBAR penalty is successfully challenged. In U.S. v. Bajakajian, 524 U.S. 321 (1998), the U.S. Supreme Court struck down a $357,144 penalty against Mr. Bajakajian who failed to report the currency he had in his luggage that he was transporting outside of the U.S. The statute authorized the U.S. to seek the forfeiture of all of the unreported property.  The Court determined the penalty was excessive under the Eighth Amendment for a reporting violation, and affirmed the District Court which had imposed a total penalty of $20,000.

United States v. Carl R. Zwerner, Case # 1:13-cv-22082-CMA (SD Florida, June 11, 2013)


Nonresident alien gamblers that gamble recreationally in the U.S. have a substantial disadvantage vis-à-vis residents – they cannot offset their losses against their gains in determining gains subject to tax. The Tax Court made matters worse when it previously ruled that Sang J. Park, a nonresident alien, would be taxed on all of the winning pulls from his slot machine play, and could not offset the losing pulls.

The D.C. Circuit Court of Appeals described the unfortunate situation of Mr. Park:

Consider two people. The first, a U.S. citizen, walks into a casino and sits down to play slots. The player first wins $100 but then loses the $100 before leaving the casino for the night. In that hypothetical, the U.S. citizen would have $0 in income to report because the IRS interprets the applicable provision of the Tax Code to cover only gains measured over a session of gambling.

The second person, a non-resident alien, also wins $100 and then loses $100. The non-resident alien is in the same financial situation as our U.S. friend. But according to the IRS, the non-resident alien has $100 in income to report (the $100 he won in the initial bet) because the IRS interprets the applicable provision to require non-resident aliens to pay taxes on gains from each bet.

U.S. taxpayers are not so burdened – U.S. taxpayers are treated as having gains based on the result of their entire gambling session, not based on the results of each bet. To use the IRS’ own words in Memorandum AM2008-11, Office of Chief Counsel, Internal Revenue Service 4 (2008):

“We think that the fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate” her net gain. Because gain or loss may be calculated over a series of wagers, a “taxpayer who plays the slot machines recognizes a wagering gain or loss at the time she redeems her tokens.”

U.S. recreational taxpayers still retain an advantage over nonresidents, in that they can still net their overall gambling losses against their gambling gains, although they cannot deduct any net losses.  Code §165(d). Since this Code Section does not apply to recreational gambling nonresident aliens, gamblers like Mr. Park still cannot use losses from gambling “sessions” against winning “sessions” in determining taxable gains.

Park, (CA-DC 7/9/2013) 112 AFTR 2d ¶ 2013-5060

Wednesday, July 10, 2013


Capital is the gasoline of an economy. A plentiful supply propels growth, jobs, investment, and prosperity. A lack results in malaise, unemployment, and poverty.

A truism involving capital is that capital flows to where it is best treated. A key component of the treatment of capital is how highly it is taxed.

In a recent economic paper, two academics measured the tax attractiveness of 100 countries, applying 16 components of real-world taxation. In an astounding result, only 5 countries were more unattractive than the United States.

Even more disturbing is that the analysis was conducted for the period 2005 to 2009. With the recent increases in U.S. taxes that were enacted after 2009, the ranking of the U.S. on a current basis could very well be even lower.

If you would like to lose some sleep, take a look at Table 3 on page 45 of the paper to see how the U.S. stacks up against other countries.

Measuring Tax Attractiveness Across Countries, by Sara Keller of the Otto Beisheim School of management and Deborah Schanz of the Ludwig-Maimilians-University Munich

Tuesday, July 09, 2013


Back in 2011, we reviewed a Tax Court case that determined that income inclusion under the controlled foreign corporation (CFC) rules, while taxed like a dividend at ordinary income rates, could not qualify for the lower 15% (now 20%) preferred rate for qualified dividends. You can read our analysis here.

The Fifth Circuit Court of Appeals has now affirmed the Tax Court, confirming the unavailability of the preferential rate. 

Interestingly, the appellate court notes that if the CFC had made an actual dividend distribution, the lower tax rate would be available:
It is also worth noting that, in the context of this case, Appellants—as Editora's sole shareholders—could have caused a dividend to issue. Had they done so, the income at issue would have unquestionably qualified as dividend income subject to a lower tax rate, a point the IRS concedes.
Rodriguez, 112 Aftr 2d Para 2013-5050


A recent article indicates that residents of Princeton, New Jersey have filed suit against the university, claiming that the university’s commercial ventures have disqualified it from its tax exempt status, and thus it should pay its fair share of local taxes. It is not clear what local taxes are sought (i.e., income, ad valorem property taxes, or others).

The commercial activities of the university include theatre performances, retail food outlets, health services, and patent licensing profits.

Depending on the particular provisions of local law, if this suit is successful it may spawn similar lawsuits against other schools that conduct similar commercial activities.

The article can be read here.

Sunday, July 07, 2013


Under the phase-in of Obamacare, employers with 50 or more full-time employees are obligated to provide medical insurance to employees or face a fine (or as the Supreme Court determined, a “tax”), commencing January 1, 2014. The Treasury Department has now delayed this until January 1, 2015.
However, the deadline for individuals to have coverage or face a fine/tax has NOT been deferred beyond the scheduled January 1, 2014 date.

Friday, July 05, 2013


A particular mixture of a federal tax lien, a transfer of tenancy by entireties property during lifetime, and the federal claims statute resulted in personal liability to the executors of the estate of a surviving spouse for the income tax liability of the predeceased spouse. Interesting in its own right, it also provides useful guidance and reminders to fiduciaries in dealing with tax liens and tenancy by entireties property.

FACTS: Father owed the IRS $436,849 in income tax. Father and mother owned real property in Pennsylvania, held as tenants by the entireties (TBE). While subject to the IRS liabilities, father transferred the real property to mother for one dollar. After the transfer, the IRS filed a notice of federal tax lien on the real property. Father then died, with no distributable assets, and presumably with no other assets to satisfy the IRS liability. Within a year, mother then passed away, leaving her property to her son as sole heir. The son, David Tyler, and a Louis Ruch, were named as executors for mother’s estate.

The IRS sent letters to the executors, asserting that a federal tax lien had attached to the real property before legal title had been transferred to mother. The letters provided that the executors were obligated to satisfy the lien out of the assets of mother’s estate. Despite these letters and the lien, the executors conveyed the property to David Tyler for one dollar a little over a year later. The son sold the property, and lost the proceeds in the stock market.

The government sought collection of one-half of the proceeds of the sale of the property from the executors under the federal claims statute, 31 USC §3713 (also referred to as the federal insolvency statute). The trial court granted the government’s summary judgment request. The Third Circuit Court of Appeals has now affirmed the trial court, thus imposing liability on the executors for the lien.

COMMENTS. The federal claims statute is not in the Internal Revenue Code, but is referenced in Code §6901(a)(1)(B). This provision is an exception to the normal rule that executors will not have personal liability for the debts and obligations of a decedent. Under the statute, a fiduciary that disposes of assets of an estate before paying a claim of the government is liable to the extent of the payment for unpaid claims of the government if three elements are met:

(1) the fiduciary distributed assets of the estate;

(2) the distribution rendered the estate insolvent; and

(3) the distribution took place after the fiduciary had actual or constructive knowledge of the liability for unpaid taxes.

In determining that the executors of mother’s estate are responsible for the tax lien of the predeceased father, the appellate decision produces a number of interesting conclusions and pronouncements for fiduciaries and their counsel. These include:

     (a) Generally, tax liabilities of a predeceased spouse can at times produce liabilities for the estate of a surviving spouse, and its fiduciaries. Normally, the fiduciaries would focus only on the liabilities of the estate of the surviving spouse. While it is fine to limit one’s focus to those liabilities, it is necessary to determine if the surviving spouse or the property of that surviving spouse was encumbered by or legally responsible for the taxes of the predeceased spouse.

     (b) The recipient of a gift of property encumbered by an unfiled tax lien takes the property subject to that lien. Here, the mother received the father’s interest in the TBE property while both of them were living and before a notice of Federal tax lien was filed. Thus, her interest in the property was nonetheless encumbered by the tax lien even though a notice of the lien was not filed at the time of the gift. There are exceptions to such transferee liability. One of these is under Code §6323(a) and applies to a purchaser who buys the subject property for adequate and full consideration. While the mother’s estate attempted to use that exception arguing that the mother acquired the property subject to obligations to pay all expenses relating to the property including mortgage debt, the court did not find a transfer for adequate and full consideration and thus the exception did not apply.

     (c) A federal tax lien imposed on the interest of one spouse in TBE property will be discharged at the death of that spouse, if the spouse predeceases the other spouse. However, if the TBE property is transferred from one spouse to the other during their joint lifetimes, that extinguishment of the lien does not occur. Thus, if father had retained ownership of the TBE real property until his death, mother (and eventually her estate) would have acquired the real property free of the IRS lien and all of the problems that arose relating to that lien.

     (d) The federal claims statute can apply to persons in possession of property of a deceased delinquent taxpayer even though they are not appointed executors of the estate of a delinquent taxpayer. Thus, mother’s executors were found liable under the claims statute even though they were not executors for the father’s estate.

     (e) Fiduciaries ignore the existence of tax liens and tax liabilities of the estate of the decedent they represent at their own peril, since the claims statute will impose personal liability on them if they distribute property that should have gone to satisfy tax liabilities. Thus, at a minimum, fiduciaries and their counsel should conduct a lien search against any properties that are to be distributed to beneficiaries to determine if a lien has been filed against them.

     (f) The federal claims statute will impose liability on a fiduciary, even if the fiduciary receive no personal benefit from the distribution of the property of the estate. This is an unfortunate lesson that Louis Ruch learned in this case.

     (g) Where there is more than one executor, liability under the federal claims statute is joint and several. This is another unfortunate lesson that Louis Ruch learned. Mr. Ruch’s co-executor received the subject real property and enjoyed the benefits of the proceeds of itself. If that co-executor does not have assets that are reachable by Mr. Ruch or the IRS, which seems to be the case, Mr. Ruch will have to bear the full liability.

US v. Tyler, 2013-1 USTC Para. 50,373