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Sunday, April 27, 2014


Most organizations seeking Code §501(c)(3) tax-exempt status must file a 25+ page Form 1023 application. In a major change to this time-consuming procedure, the IRS will soon be issuing a short form three page Form 1023-EZ for smaller applicants to use.

The short form can be used by organizations that do not expect to have annual gross receipts of more than $200,000 in the next 3 years or in the prior 2 years, and do not have total assets in excess of $500,000. Some organizations that meet this criteria will still not be allowed to use the form, including foreign organizations, limited liability companies, successors to for-profit entities, churches, schools seeking public charity status, and hospital and medical research organizations seeking public charity status.

The apparent idea is to relieve smaller organizations from submitting an application that is based mostly on future projections anyway.Rather than using IRS resources to examine these applications, the IRS will instead employ a robust compliance process later, either through compliance checks or full examinations.

The IRS draft of April 23, 2014 of the Form 1023-EZ can be viewed here.

Tuesday, April 22, 2014

ARTICLE ABSTRACT - The Baucus International Business Tax Reform Discussion Draft: Key Design Issues


The Baucus International Business Tax Reform Discussion Draft: Key Design Issues


David G. Noren, Esq.


43 TM International Journal 199 (April 2014)



ABSTRACT (Key Points & Discussions)

    • General discussion of terms and relevance of Max Baucus November 19, 2013 staff discussion draft of reform of U.S. international tax rules.
    • Option Y proposal - minimum tax of 80% of U.S. statutory rate on CFC income on low taxed income.
    • Option Z proposal - all CFC income subject to minimum tax regardless of foreign rates, with differences between active and passive income.
    • The proposals impose high levels of minimum tax on a broad base, trying to avoid income-shifting at the risk of burdening U.S.-based multinationals.
    • Author discussion of suggested modifications to these options.
    • Proposal singles out CFC income from serving U.S. markets for adverse treatment.
    • Proposal to override check-the-box regulations for entities owned by CFCs.
    • Proposal for a current-year item-by-item foreign tax credit for taxes attributable to taxable Subpart F income, and creates new separate baskets and complexity.
    • 20% transition tax on mandatory deemed repatriation of pre-effective-date earnings accumulated by CFC's.
    • Proposal to expand disallowance of deductions for related-party base erosion payments for inbound structures, including hybrid instruments/transactions, hybrid entities, conduit financing arrangements, or preferential taxation in hands of the recipient.
    • Overall, the Baucus proposal is too harsh, but does advance the debate on these issues.


Baucus proposed reforms; territorial taxation; anti-base erosion proposals; CFC proposed modifications


These abstracts are provided as a service to the readers of Rubin on Tax to advise them of articles that may be of interest to them, both as they are published and as a research tool using the blog's Search function. Note that many of these articles are available by subscription only.

Saturday, April 19, 2014


Written and oral communications between a client and his or her attorney are generally privileged. This includes communications regarding taxes.

In a recent Tax Court case, an example of “the exception swallowing up the rule” arose. The case threatens to void the attorney-client privilege in a great swath of tax cases that are litigated where the taxpayer asserts a reasonable cause defense to a penalty.

In the subject case, the taxpayer was threatened with a substantial underpayment of income tax penalty. In defense of that threat, the taxpayer claimed the reasonable cause exception for the penalty under Code §6664(c). That Section applies to the portion of an underpayment “if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion (emphasis added).”

By asserting that defense, the government claimed that that taxpayer had waived the attorney-client privilege. The government could thus access communications between the taxpayer and his attorney that related to the tax issue, because that is relevant to whether the taxpayer acted in ‘good faith.’ More specifically, the government was seeking access to written tax opinions that would otherwise have been privileged.

The Tax Court agreed with the government, finding that the required inquiry into ‘good faith’ makes the reasonable cause exception a ‘state-of-mind’ exception. Thus, a review of the knowledge and thinking of the taxpayer as to the law is relevant. Further, knowledge and statements communicated by the attorneys to the taxpayer relating to the reporting of the tax item are directly relevant to such an inquiry. Thus, by asserting the penalty exception, the taxpayer waived the attorney-client privilege.

The reach of this exception is broad, since it presumably will apply to all accuracy related penalties, including fraud penalties, when the reasonable cause exception is asserted by the taxpayer. Thus, taxpayers and their tax attorneys do have the benefit of the attorney-client privilege, but a taxpayer that wants to assert the privilege may have to sacrifice any claim to any state-of-mind penalty exception, including the reasonable cause exception, if it wants to maintain the privilege. Since reasonable cause is a common and important penalty defense, the impact of this case will be very significant (forcing a choice between an exception to penalty argument vs. protecting privileged communications).

The exception should not result in a waiver of all attorney-client communications – only those relevant to the taxpayer’s state of mind and knowledge of the applicable law when filing its tax return.

A similar case and result occurred in a District Court bankruptcy proceeding relating to tax issues, in In Re: G-I Holdings, et al., 92 AFTR2d 2003-6451 (DC NJ), 07/17/2003. See also New Phoenix Sunrise Corp. v. Comm., 106 AFTR 2d 2010-7116 (CA6 2010) for another similar result.

I leave it to the litigators whether there is any method to bifurcate the tax determination phase of a proceeding from the penalty phase, so that the privileged items need not be disclosed unless the taxpayer lost the tax determination phase. This was attempted in the In Re: G-I Holdings case cited above. It was not rejected out-of-hand, but was ultimately denied because the court determined that the taxpayer had already waived the privilege by asserting the reasonable cause defense to penalties in discovery responses and thus it was too late to salvage it.

AD Investment 2000 Fund LLC, Community Media, Inc., 142 TC No. 13 (2014)

Wednesday, April 16, 2014

ARTICLE ABSTRACT: Proposed Regulations on Debt Allocations: Controversial, and Deservedly So


Proposed Regulations on Debt Allocations: Controversial, and Deservedly So




Journal of Taxation, April 2014




Addresses proposed modifications to Section 707 and 752 Regulations relating to partnership indebtedness. The author is very critical of the changes to the Section 752 rules.


Proposed regulations discussed include Example 12 in Prop.Reg. 1.707-5(g) relating to Code §707 disguised sale rule when debt proceeds of multiple liabilities are distributed, modifications to Code §707 disguised sale rules relating to reimbursements of preformation capital expenditures, the definition of "qualified liabilities" under Code §707, consideration of reductions in a partner's share of liabilities under Code §707, tiered partnership issues under Code §707,  netting of increases and decreases in liabilities in partnership mergers and consolidations.


In regard to disguised sales by a partnership to a partner by reason of a partner receiving property subject to a liability under Treas. Regs. §1.707-6, the Service is considering whether it may be inappropriate to take into account the transferee partner's share of a partnership liability immediately prior to a distribution if the transferee partner did not have economic exposure with respect to the partnership liability for a meaningful period before the associated property is distributed to that partner subject to the liability.


Author notes that the new proposed regulations relating to the allocation of partnership liabilities reflect a complete reversal of the thinking that underlay the existing Regulations, which look at whether any partner could bear the risk of loss rather than whether any partner would bear the risk of loss.


  • Under current  Treas. Regs. §1.752-2, a partner's share recourse liabilities depends on the extent it bears the risk of loss. This is based on who would have to pay if the partnership's assets became worthless - i.e., an ultimate liability test under a worst-case scenario. Proposed Regulations now add 7 new requirements before a partner receives a share of the liability under these rules instead of the nonrecourse liability rules (ProposedTreas. Regs. §1.752-2(b)(3)(ii) and (iii)). Further such partner must have adequate "net value" to pay the obligation.  This will require the partnership to make annual valuation determinations in regard to its partners. The author notes that the new rules can lead to absurd results, and in many circumstances will allocate debt to partners who do not really bear the economic risk of loss.
  • Under current Regulations, a partner's share of nonrecourse liabilities can be allocated based on profits. The "significant item method" variation and the "alternative method" variation are done away with in the proposed Regulations. The share of profits will now be determined based on the partner's liquidation value percentage on a deemed liquidation of the partnership as of the most recent occurrence of formation or an event described in Treas. Regs. §1.704-1(b)(2)(iv)(f), regardless of whether capital accounts were adjusted for that event.



Code §707 & 752; Regulations and Proposed Regulations under those Sections


These abstracts are provided as a service to the readers of Rubin on Tax to advise them of articles that may be of interest to them, both as they are published and as a research tool using the blog's Search function. Note that many of these articles are available by subscription only.

Sunday, April 13, 2014

ARTICLE ABSTRACT: Minimize Capital Gains Tax of Estates, Trusts, and Beneficiaries

Minimize Capital Gains Tax of Estates, Trusts, and Beneficiaries
Nicholas E. Christin, William A. Snyder
Estate Planning Journal, April 2014
    • Trusts are taxed at the highest rate on capital gains at a very low income threshold ($12,150 in2014), as well as being subject to the 3.8% Medicare tax on capital gains at the same low threshold.
    • Lower overall taxes will often be available if capital gains are included in DNI and distributed to beneficiaries.
    • General review of Treas. Regs. §1.643(a)-3 rules on inclusion of capital gains in DNI.
    • Regular practice of trustee characterizing discretionary principal distributions as capital gain distributions (should commence from first tax year) as a method of including capital gains in DNI.
    • Use of power to adjust to include capital gains in DNI.
    • Total return unitrusts as a method to include capital gains in DNI- providing an ordering rule in the trust itself, using a state ordering statute.
    • Need to address these issues in the first tax year of the trust, and to consistently apply allocation rules thereafter.
Capital gains; DNI; income taxation of trusts; Code §§643, 661, 662; Treas. Regs. §1.643(a)-3

These abstracts are provided as a service to the readers of Rubin on Tax to advise them of articles that may be of interest to them, both as they are published and as a research tool using the blog's Search function. Note that many of these articles are available by subscription only.

Sunday, April 06, 2014


In a recent private letter ruling, the question was raised whether an LLC interest that received a preferred return with additional LLC cash flow going to other common interests could qualify for the marital deduction if funded into a QTIP trust.

The IRS ruled that the property did qualify for the marital deduction. However, this was based on certain elements being present – absent their presence the ruling may not have been issued. These key elements were:

1. The QTIP trust itself had all the Section 2056(b)(7) requisite elements, including required income distributions and limits on distributions to persons other than the surviving spouse.

2. The preferred units provided for an eight percent return on the aggregate face value, payable no less often than annually.

3. The preferred units cannot be redeemed for less than the greater of their face value or fair market value.

4. The rights of the preferred units cannot be altered by the holders of the common units.

5. The sale of preferred units is not unreasonably restricted.

PLR 201410011 (3/7/2014)

Friday, April 04, 2014


Two individuals were appointed as co-executors of an estate. The decedent had not filed income taxes for a number of years. The attorneys prepared tax returns for the missing years, and the IRS assessed taxes against the estate. Without knowledge of the tax liabilities (at least according to the executors), the executors distributed funds out of the estate (coincidentally to the executors). The estate was left with insufficient assets to pay the income tax liabilities of the estate.

Under 31 USC 3713, a fiduciary of an estate is liable for the tax obligations of the estate to the extent it distributes estate funds to lower priority creditors and beneficiaries. In the above case, one of the co-executors sought summary judgment that he was not responsible for the taxes since he did not have knowledge of the tax obligations when the distributions were made out of the estate.

Motion denied, said the District Court – the law firm’s knowledge is imputed to their clients, the co-executors. Further, the court rejected the defense of reliance on erroneous advice of counsel, citing Renda, 709 F.3d 472,484 (5th Cir. 2013) – “We follow the majority of other courts in holding that a representative's actual knowledge of a federal claim is sufficient, notwithstanding that representative's reliance on the erroneous advice of counsel as to how to address the claim.”

U.S. v. SHRINER, ET AL., 113 AFTR 2d 2014-1360, (DC MD), 03/12/2014