Joint Obligors–Who Gets the Interest Deduction

In a recent Chief Council Advice, the IRS summarizes and reaffirms various principles that can be applied to determine who gets an interest deduction for payments made on a home mortgage when there is more than obligor under the mortgage. The principles applied should similarly apply to other types of interest deductions.

The affirmed and announced principles are:

1. Funds paid from a joint account with two equal owners are presumed to be paid equally by each owner, in the absence of evidence showing that is not the case. [PLR 5707309730A; Mark B. Higgins v. Commisioner, 16 T.C. 140 (1951); Finney v. Commissioner, T.C. Memo. 1976-329]
2. A deduction in respect of the payment of interest on a joint obligation is allowable to whichever of the parties liable thereon makes the payment out of his own funds. [Castenada-Benitez v. Commissioner, T.C. Memo. 1981-157; Rev.Rul. 71-179; Rev.Rul. 71-268]
3. To claim an interest deduction it is necessary to be liable on the note. However, Treas.Regs. section 1.163-1(b) states that “Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness.”
4. Deductions need not be allocated in accordance with whom the Form 1098 reports as the payor.

The CCA applied these principles to three factual situations. Since the conclusions simply apply the foregoing principles without adding to them, I am not going to summarize them. Interested readers can read them directly.

CCA 201451027, December 19, 2014

Applicable Federal Rates – January 2015

Unofficial only – check IRS sources before using in planning and implementation!

Highlights of Final Regulations for Reporting of Specified Foreign Financial Assets

The Treasury Department has issued final regulations relating to reporting of specified foreign financial assets on Form 8938. The highlights include:

1. Dual Resident Taxpayers. Dual resident taxpayers reporting as a nonresident alien under a treaty do not need to file.
2. Nonfilers. Persons who do not have to otherwise file an income tax return do not have to file a Form 8938.
3. Nonvested Property. Property received in connection with the performance of personal services is not treated as having an interest until it is vested under Section 83.
4. Disregarded Entities. Taxpayers need to look through them to calculate filing thresholds and reporting of assets owned.
5. Jointly Owned Assets. Unmarried joint owners must include the full value of each jointly owned asset in determining filing thresholds and in reporting the assets themselves. Married persons filing separately must do the same.
6. Foreign Current Exchange Rates. Now issued by the Bureau of the Fiscal Service (and not the Financial Management Service).

T.D. 9706, December 12, 2014

PROTECTOR POWER TO AMEND TRUST UPHELD, BUT LITIGANTS ALSO RAISE AN INTERESTING ACCOUNTING ISSUE [FLORIDA]–PART II

Earlier this week I wrote about a recent Florida case that upheld the ability of a trust “protector” to amend the provisions of a trust. You can read that posting here.

In that posting, I alluded to an interesting trust accounting issue. In the case, the purpose of the amendment made by the protector was to cut off the rights of the remaindermen (the decedent’s children) under the trust to receive accountings and object to the operation of the trust. The amendment was made to clarify that under the terms of the Family Trust which was being held for the decedent’s spouse, that when the spouse died the trust assets would not continue in trust for the children, but instead would pass to a new and separate trust for the children. It is the position of the spouse that since the children are not beneficiaries of the Family Trust being held for her, the trustee need not account to them under Florida law and they have no ability to object to the administration of the Family Trust. Their interests are only in a new trust to be created later.

According to an affidavit of the protector, who was also the decedent’s attorney, he intentionally set up the trust documents in this manner so that the decedent’s children could not challenge how the assets of the Family Trust were applied for his spouse.

Under Florida law, accountings must be distributed to “qualified beneficiaries.” Florida Statutes Section 736.0103(14) defines a “qualified beneficiary.” An element of the definition is that the subject person is a “beneficiary.” Section 736.0103(4) provides that to be a “beneficiary”, a person must have “a present or a future beneficial interest in a trust, vested or contingent, or holds a power of appointment over trust property in a capacity other than that of trustee.” (emphasis added). It is the position of the spouse that the language “in a trust” means that the interested person must have a beneficial interest in the subject Family Trust – an interest in a trust that receives the assets of the Family Trust does not make one a beneficiary of the Family Trust. Now that the appellate court has upheld the protector’s amendment to the Family Trust to clarify that it terminates at the death of the spouse, presumably the trial court will now rule on this question.

If the spouse is correct, this would create a major loophole in the statutory obligation to account. All that would be necessary to defeat the interests of remaindermen would be to draft in a manner that they receive their remainder interests in a new trust instead of the trust that held the assets before their remainder interest is funded. This would disturb a key policy of accountings which is that the remaindermen are the policemen of the trust since it is in their interest to make sure that the trustee lives up to its obligations – if they are blocked from receiving accountings or objecting to trust administration, then there will be no checks on the trustee other than the current beneficiary (who may in fact be the trustee).

I would expect that the spouse will not prevail in her argument. However, there is language in the statute to support a contrary ruling, so we will see what develops!

Minassian v. Rachins and Minassian, 4th DCA, Case No. 4D13-2241, December 3, 2014

PROTECTOR POWER TO AMEND TRUST UPHELD, BUT LITIGANTS ALSO RAISE AN INTERESTING ACCOUNTING ISSUE [FLORIDA]–PART I

A recent Florida appellate court decision upholds the ability of a trust “protector” to amend the provisions of a trust.

Florida Statutes Section 736.0808(e) provides that “[t]he terms of a trust may confer on a trustee or other person a power to direct the modification or termination of the trust.” In the trust at issue, the trust instrument authorized a third party to modify or amend the trust provisions to correct ambiguities in the trust or correct a drafting error that defeats the settlor’s intent. During litigation involving the rights of children to challenge the administration of a trust held for the settlor’s spouse, the protector modified the trust language in an attempt to restrict the children’s right to challenge. The trial court disallowed the amendment. The appellate court found ambiguity in the trust document that was eligible for modification by the protector, and reversed the trial court and allowed the amendment to stand.

The children argued that the amendment power violated common law as an unauthorized delegation by the trustee of discretionary powers to another. The appellate court rejected this because it was not the trustee that delegated a duty here – it was the settlor. Further, Fla.Stats. 736.0106 allows common law to be overridden by the statutory provisions of the trust code.

The children also argued that Sections 736,0410-.0415 and 736.0412 are the sole means of modifying a trust under the Florida Trust Code, and that the terms of the trust are not permitted to override this limit, pursuant to Section 736.0105(2)(k). The appellate court did not agree to this restrictive reading, since otherwise Section 736.0808(3) would have no effect.

I have updated our Irrevocable Trust Amendment Mechanisms diagram for this case. You can download the new version here. The first page is a shortened version – the second page has the detail which you will need to zoom in on to read.

The more interesting question to me is what the wife and the protector were trying to accomplish by the amendment vis-à-vis the obligation to account to the children. This is addressed in Part II of this posting, to follow.

Minassian v. Rachins and Minassian, 4th DCA, Case No. 4D13-2241, December 3, 2014

EMPLOYER CASH PAYMENTS TO REIMBURSE EMPLOYEES FOR HEALTH INSURANCE COSTS–NO!

Many employers offer or provide cash to employees to reimburse them for the cost of purchasing an individual health insurance policy. Others offer employees with high claims risk a choice between enrolling in the company’s standard group health plan or choice. Some companies purchase a product that allow employers to cancel their group policies, setup a reimbursement plan that works with brokers or agents to help employees select individual policies, and allow eligible employees to access premium tax credits.

The Department of Labor has announced that any of the above will be a violation of the Affordable Care Act – violating companies can be subject to penalties as high as $100 per employee per day. The bureaucratization and regulation of health care marches on.

If you think this may apply to you or your clients, see the FAQ below for more details.

FAQs about Affordable Care Act Implementation (Part XXII), November 6, 2014

Overpayment and Underpayment Rates-1st Quarter 2015

2014 Extenders Clear the House

For many years now, Congress has contributed to tax uncertainty by extending certain favorable tax provisions on a year by year basis. Thus, for example, in 2014 these extenders have expired. Neither the IRS, who has to prepare 2014 forms and computer programs, nor taxpayers, who may want to take advantage of these provisions, know what to do until Congress gets around to passing a law that extends them and makes them applicable in 2014.

An extenders bill has now passed the House of Representatives. At first, Harry Reid in the Senate indicated the Senate might not get to the bill, but it now looks like the Senate will have a straight up-or-down vote on the bill (so that it will not be changed in the Senate). There were prior moves afoot to make at least some of the extenders permanent, but the political environment in Washington has made that a non-starter.

So it looks like we will have extension law (for 2014 only), assuming the Senate approves the House bill and the President does not veto it. Here is a list of some of the key provisions that I thought worthwhile to mention (not exhaustive):

Individual Provisions

• exclusion of up to $2 million ($1 million if married filing separately) of discharged principal residence indebtedness from gross income
• deduction for mortgage insurance premiums treated as qualified interest
• deduction for state and local sales taxes
• above-the-line deduction for qualified tuition and related expenses

Business Provisions

• research and experimentation credit
• new markets tax credit
• work opportunity tax credit
• 15-year straight line cost recovery for qualified leasehold property, qualified restaurant property, and qualified retail improvements
• increase in expensing limit and in investment based phaseout amount and expanded definition of Section 179 property for certain real property
• RIC qualified investment entity treatment under FIRPTA
• exceptions under Subpart F for active financing income
• look-through treatment of payments between controlled foreign corporations
• special 100% gain exclusion for qualified small business stock
• reduction in S corporation recognition period for built-in gains tax

Charitable Provisions

• basis adjustment to stock of S corporations making charitable contributions of property
• special rules for contributions of capital gain real property for conservation purposes
• tax-free distributions for charitable purposes from individual retirement account (IRA) accounts of taxpayers age 70 1/2 or older