SELF-MADE WILL ENDS UP COSTING MUCH MORE THAN THE DRAFTING EXPENSES SAVED

The drafting half of our law firm knows that drafting dispositive documents that are clear, effective, tax-efficient, and not subject to dispute, is no easy task. Except in the simplest of circumstances, we view pre-printed forms and self-help drafting websites as something to be avoided. They don’t usually bring a smile to our faces.

The probate and trust litigation half of our firm does smile about these forms and websites – they often bring litigation and thus additional work for that part of the firm.

For an example of the pitfalls of self-drafting and the litigation it breeds, read about the Aldrich case here at Rubin on Probate Litigation.

Aldrich v. Basile, --- So.3d --- (Fla. 2014), 2014 WL 1250073

WHEN KEEPING SILENT CAN BE USED AGAINST YOU

Prior constitutional law, as well as popular culture via crime shows on TV, inform us that a suspect can keep silent and that silence cannot be used against him in a criminal proceeding. This has been generally true, but a Supreme Court case from 2013 warns of an important exception.

Let’s say you are a taxpayer, and an IRS Criminal Investigation agent comes to your house or place or work and wants to ask you questions. Since you have not been arrested or otherwise are not in custody, the agent does not read you your Miranda rights. Applying what you know of your rights, you remain silent in response to the agent’s questions. You are later indicted and on trial for criminal tax evasion. To your surprise, the judge allows the agent to testify that you did not answer his questions and thus infer your guilt by failing to respond.

This is the law now since Salinas v. Texas, 133 S. Ct. 2174 (2013). If you are arrested and you do not speak, this cannot be used against you. If you are not arrested, but you were read your Miranda rights and you do not speak, this cannot be used against you. But if you are not in custody and you are not read your Miranda rights, your silence CAN be used against you.

Commentators now expect that law enforcement will conduct more pre-arrest, pre-custodial interviews to benefit from this new interpretation of the 5th Amendment right against self-incrimination. They also posit a new method of dealing with such questioning. In the past, the stock advice was always “don’t say anything.” Now, in a noncustodial, non-Mirandized situation, the advice is to not to answer questions, but to expressly say that one is invoking their right against self-incrimination and right to counsel. By saying so, the interpretation will then place silence in that situation off-limits in a later criminal proceeding.

TRUSTS AND “MATERIAL PARTICIPATION”

There is uncertainty in the law as to whether, and how, trusts can meet the “material participation” requirements of Code Section 469 to escape passive loss treatment. These uncertainties include whether a trust can materially participate, whether material participation must be measured solely by trustee activities or whether activities of beneficiaries and agents/employees of the trust can be considered, and whether the special rental real estate exceptions of Code Section 469(c)(7) can be used by trusts. Recently, these questions have taken on further relevancy, per the cross-reference to the passive loss rules in determining when trusts are subject to Obamacare’s new tax on net investment income.

A recent Tax Court case resolves one of these issues, and sheds light on some of the others. In this case, a trust had 5 income beneficiaries. The trustees were those beneficiaries, plus one additional person. The trust owned an interest in a disregarded LLC that conducted management activities in the rental real estate field. The trust was also involved via other holdings in rental real estate, investment real estate, and real estate development. The trust incurred losses, and the IRS sought to characterize them as passive losses. The trust argued for material participation and the application of Code Section 469(c)(7).

Here is what the court held:

a. trusts can use the Code Section 469(c)(7) exception from rental activities being automatically passive activities;

b. a trust can "materially participate" under Code Section 469(h) (and Section 469(c)(7));

   1. there is no statutory nor regulatory guidance on material participation for a trust, and how a trust meets the regular, continuous, and substantial activity requirement for material participation;

   2.  the activities of the individual trustees can be used to measure material participation;

        (i) this is true even if the trustees' activities come from serving as an employee of an affiliated entity;

        (ii) this measurement does not require each individual trustee to materially participate. Here, 3 of 6 trustees were not actively involved; and

         (iii) the court was unclear, and does not appear to have ruled, on whether non-trustee employees of the trust can be used to satisfy the material participation standard.

Other precedent on these issue include Mattie K. Carter Trust v. U.S., 256 F.Supp. 2d 536 (N.D. Tex. 2003) (favorable case extending material participation examination to agents of the trustee), TAM 200733023 (unfavorable case disagreeing with Mattie K. Carter Trust, and TAM 201317010 (also unfavorable).

Frank Aragona Trust v. Comm., 142 TC No. 9 (2014)

IRS TO ADOPT ONE ROLLOVER PER YEAR RULE OF BOBROW

I wrote about the Bobrow case here. In Bobrow, the Tax Court adopted a more limited rollover rule than IRS Publications allowed, The Tax Court found that the one rollover per year limitation applied to all of a taxpayer’s Individual Retirement Accounts and Individual Retirement Annuities together, and not separately to each account.

The IRS has now announced that it will follow Bobrow and issue a new proposed regulation and revise Publication 590 to adopt the Tax Court's interpretation of the limitation, but that the new rule won't apply to any rollover that involves a distribution occurring by year-end.

Ann. 2014-15, 2014-16 IRB

TENANCY BY THE ENTIRETIES PRESUMPTION REJECTED IN GUARDIANSHIP PROCEEDING [FLORIDA]

Beal Bank, SSB v. Almand & Associates, 780 So.2d 45 (Fla. 2001) is well-known for its presumption that bank accounts held by spouses are held as tenants by the entireties. however, a recent Florida case holds that Beal Bank is inapplicable in regard to claims for fees by a guardian and his attorney against such a joint account. It also held that such account can be reached by those persons even after the ward’s death when the account passed by survivorship to the surviving spouse.

No need to reinvent the wheel here – read about it in more detail at my daughter’s blog, Rubin on Probate Litigation.

Romano v. Olshen, --- So.3d --- (2014), 2014 WL 940700

AUTOMATIC CONSOLIDATED RETURN ELECTIONS

Corporations that are directly or through intervening chains of corporations owned 80% or more by a common parent corporation can file a consolidated income tax return. There are many benefits to such returns, including offsets of income and losses from the various subsidiaries, the elimination of immediate tax consequences for transactions between members, and the ability to make distributions without adverse tax consequences within the group.

For a corporation to make a consolidated return, it usually must either join on a timely filed return itself or file a Form 1122. Oftentimes, a subsidiary corporation will be left off a consolidated return. Sometimes this is an oversight. Other times an entity may be thought to be a partnership or a disregarded entity, but turns out to be a corporation for income tax purposes.

Until now, the IRS could determine to allow such corporations to join the consolidated return lately, based on a fact and circumstances analysis, using factors delineated in Treas. Regs. §1.1502-75(b)(2).

So as to provide more certainty and to make it easier to address excluded subsidiaries, the IRS has now issued a Revenue Procedure that provides a safe harbor when the IRS will allow an excluded subsidiary to join a previously filed consolidated return. The conditions are designed to cover many of the typical circumstances when a subsidiary is left off due to mere error or omission.

To use the Revenue procedures, all of the following 3 conditions must be met:

A. The group timely filed what purported to be a consolidated return, either (a) including Form 851 with the return, or (b) providing some other clear and unequivocal indication on the return that it was intended as a consolidated return, such as checking the appropriate box at the top of the tax return;

B. The non-filing subsidiary was not prevented from joining in the filing of the consolidated return by any applicable rule of law, other than the failure to file Form 1122; and

C. A separate return was not filed by the non-filing subsidiary for any period of time included in the consolidated return, or any subsequent tax year, other than (a) a separate return for a period in which the non-filing subsidiary's income and deductions were not properly includible in the affiliated group's consolidated return, or (b) a partnership return, all the income and deductions of which were included on the consolidated return as part of the income and deductions of the partners, all of which were members of the affiliated group.

Also, one of the following 3 conditions must be met:

1. The nonjoinder was due to a mistake of law or fact, or to inadvertence, provided that the affiliated group believed that the non-filing subsidiary was a member of the affiliated group for the tax year and included the non-filing subsidiary's income and deductions in the consolidated return as if the non-filing subsidiary was a member of the affiliated group;

2 The nonjoinder was due to a mistake of law or fact, or to inadvertence, provided that all of the non-filing subsidiary's income and deductions were included on the consolidated return as part of the income and deductions of another member of the group (such a the group believed the subsidiary was a disregarded entity or had formally ceased to exist pursuant to a merger or liquidation into another member of the group); or

3. The nonjoinder was because the affiliated group believed that the subsidiary was taxable as a partnership and all of the non-filing subsidiary's income and deductions were included on the consolidated return as part of the income and deductions of its partners.

The procedure applies even if the error was not detected until an audit occurs. If the above criteria are not met, the group can seek inclusion via a determination letter from a Director if no audit is pending on the issue.

Rev Proc 2014-24, 2014-13 IRB

DEBTORS DID NOT HAVE TO BRING STOCK CERTIFICATES BACK INTO FLORIDA

A Florida court ordered defendants to turn over stock certificates located outside of Florida evincing their ownership interest in several foreign entities to satisfy a judgment. On appeal, the appellate court ordered that that Florida court lacked jurisdiction for such a turnover order. Presumably, the plaintiffs will need to pursue their claims in the foreign jurisdictions where the certificates are held.

Some observations:

a. That the defendants were subject to in personam jurisdiction did not change the result.

b. The result might have been different if the plaintiffs had a perfected lien on the stock certificates.

c. One of the concerns of the appellate court was that there may be competing claims to ownership of the asset, and that those should be resolved in the jurisdiction where the property is situated.

d. Allowing such a broad reach would conflict with the policy behind domestication of foreign judgment statutes.

e. Wow – quite an easy way to move assets beyond the reach of a Florida court!

HARRY SARGEANT, III, MUSTAFA ABU-NABA'A, and INTERNATIONAL OIL TRADING COMPANY, LLC, a Florida corporation, Appellants, v. MOHAMMAD ANWAR FARID AL-SALEH, Appellee, 39 Fla.L.Weekly D488a, 4th District. Case No. 4D13-1447. March 5, 2014.

EXEMPT ORGANIZATION MUST BE PRIMARILY ENGAGED IN SCHOOL ACTIVITIES TO REAP SCHOOL BENEFITS

The Internal Revenue Code provides a number of benefits to schools that qualify as an exempt organization under Code Section170(b)(1)(A)(ii). These include avoiding private foundation status, having contributions qualify for the 50% contribution limits instead of lower limits, avoidance of Form 990 requirements if affiliated with a church, and avoidance of the debt-financed rules as to debt-financed real property.

The Code defines a §170(b)(1)(A)(ii) organization as “an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.” So does this mean that a otherwise qualified exempt organization (e.g., a hospital) can engage in school activities alongside its other exempt functions and qualify for these benefits?

That was the question in PLR 201407024, where an exempt integrated health group that operated hospitals and clinics also operated schools with a regular faculty and curriculum and an enrolled body of students. It sought to qualify under § 170(b)(1)(A)(ii) and § 514(c)(9)(c) to get out from under the debt-financed property rules. Those rules result in a percentage of income and deductions from debt-financed property being treated as taxable unrelated business income.

Perhaps someone had not done their research. While §170(b)(1)(A)(ii) doesn’t address it, Treas. Regs. §1.170A-9(c)(1) requires that to qualify under §170(b)(1)(A)(ii), the PRIMARY function of the organization must be the school activities. Or perhaps the organization thought that the overall “flavor” of educational activities met the “primary” function requirement.

For this organization, only 13% of its expenditures are for formal instruction, with the rest attributable to fundraising, system-wide management activity, development program, medical journal, and “management and general.” Only 20% of the employees are involved with the schooling, and only 6% of the revenues come from schooling activities. Thus, even though the organization engages generally in educational activities, its

“primary function is not the presentation of formal education in the instructive sense, but is, instead, serving as the parent of an integrated enterprise that is educational in the broad sense of ‘advanc[ing] the study and investigation of human ailments and injuries and the cause, prevention, and cure thereof’ (see Articles of Incorporation). The formal educational activities of the Schools are incidental to that primary function.”

Thus, it did not come within the definition of §170(b)(1)(A).

PLR 201407024