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Wednesday, December 30, 2015

Improper Decanting [Florida]

In a case of first impression, Florida’s 5th District Court of Appeals interpreted Fla.Stats. §736.04117 relating to the ability of a trustee to decant a trust into a new trust arrangement. A trustee transferred the funds of a trust held for the current beneficiary (the settlor’s son) into a special needs trust also held for the current beneficiary of that same beneficiary. The trustee could do this since the trustee had the right under the first trust agreement to distribute all or part of the principal to the son in his absolute discretion.

The appellate court found two deficiencies with the decanting. First, Fla.Stats. §736.04117(1)(a)1. requires that the “beneficiaries of the second trust may include only beneficiaries of the first trust.” Under the special needs trust the remaindermen after the death of the son were other beneficiaries of the pooled trust. Such other beneficiaries were not beneficiaries of the first trust – instead, the remaindermen under the first trust were other relatives of the settlor. So the new trust arrangement included beneficiaries that were not beneficiaries of the first trust. While not explicitly addressed, this finding implies that the focus on same beneficiaries includes both current beneficiaries, and future beneficiaries such as remaindermen.

The second deficiency was that the trustee did not provide the 60 days adanced notice of the intent to decant to the qualified beneficiaries, as required by Fla.Stats. §736.04117(4).

Pursuant to these violations, the appellate court ordered the funds of the special trust returned to the original trust.

An interesting question is whether failing to give the requisite 60 days notice is enough to void the new trust funding in all events – the statute does not explicitly provide what the penalty is for a violation of that notice provision. This case will not answer that question, since there was also the other violation of including new beneficiaries so we don’t know if the 60 day notice violation would have been enough by itself to void the new trust funding.

Harrell and Dake v. Badger, 5th DCA, Case Nos. 5D14-1145 and 5D14-3469 (2015)

Friday, December 25, 2015

2013 Gift Tax Assessment for 1972 Gift Upheld by Tax Court - 41 Years of Separation

The IRS has 3 years to assess gift taxes for gifts disclosed in a gift tax return. If a gift tax return is not filed, the statute of limitations never begins to run. Nonetheless, it is rare for the IRS to assess gift taxes relating to gifts that occurred many years in the past.

A recent Tax Court case confirms that the IRS is not legally barred from assessing gift taxes many, many years after the gift when no gift tax return is filed, if it so desires. Here, Sumner Redstone gifted shares of stock in a closely held entity to two trusts for his children in 1972. Due to litigation commencing in 2006, the IRS became knowledgeable of the gifts, and ultimately assessed gift taxes in 2013 for the 1972 tax year.

The Tax Court found that such assessment was valid, despite the 41 year spread between the taxable gift and the tax assessment.

Mr. Redstone argued that the doctrine of laches should bar the assessment. Laches is an equitable concept that will bar actions after an extended period of time, even if a legal statute of limitations is still open. The Tax Court noted that the U.S. is not subject to the defense of laches in enforcing its rights. Further, it found the facts supporting the application of laches are not present here - it would have required that the IRS had been aware of the 1972 gifts but sat on its rights and that the taxpayer suffered undue prejudice as a result. Here, the IRS did not become aware of the gift transfers until 2010.

Interestingly, back in the 1970's the IRS made inquiries of Mr. Redstone relating to gifts made in 1972 in context of political contributions that Congress was investingating. Mr. Redstone argued that this review was an examination, so that a second examination in 2011-2013 violated the one examination rule of Section 7605(b). The Tax Court rejected this, finding that the review in the 1970's did not give rise to an examination. Further, a violation's effect is limited to giving rise to procedural obstacles to the conduct of the second examination, such as blocking the exam or the enforcement of summons. Such a violation does not invalidate a deficiency coming from that second examination.

Note that we first discussed these issues in a posting here back in 2013.

Sumner Redstone v. Commissioner, TC Memo 2015-237

Thursday, December 24, 2015


The Protecting Americans from Tax Hikes Act of 2015 was recently signed into law. Section 324 of the Act modifies Code Section 1445 to increase the required withholding amount on dispositions by nonresident aliens and foreign entities of U.S. real property interests from 10% to 15%.

Nonetheless, the prior 10% rate will continue to apply dispositions of a residence if (a) the amount realized is $1 million or less, (b) the transferee will use the property as a residence, and  (c) the $300,000 or less exemption from withholding does not apply.

I guess since the withholding tax is imposed on non-U.S. persons, this provision does not contradict the title of the Act which reads "protecting Americans from tax hikes" (emphasis added), at least if one reads the term "American" as only including tax residents of the USA and excluding tax residents of other countries in the Americas. Technically, this is not a tax hike anyway - just a withholding tax that is subject to refund if the seller's U.S. income taxes are less than the 15% withholding.

Sunday, December 20, 2015

Deeds to Trustees [Florida]

One statute that most Florida real estate and trust lawyers have to deal with at some time is Fla.Stats. Section 689.07(1). Let’s read it together:
(1) Every deed or conveyance of real estate heretofore or hereafter made or executed in which the words “trustee” or “as trustee” are added to the name of the grantee, and in which no beneficiaries are named, the nature and purposes of the trust, if any, are not set forth, and the trust is not identified by title or date, shall grant and is hereby declared to have granted a fee simple estate with full power and authority in and to the grantee in such deed to sell, convey, and grant and encumber both the legal and beneficial interest in the real estate conveyed, unless a contrary intention shall appear in the deed or conveyance; provided, that there shall not appear of record among the public records of the county in which the real property is situate at the time of recording of such deed or conveyance, a declaration of trust by the grantee so described declaring the purposes of such trust, if any, declaring that the real estate is held other than for the benefit of the grantee.
Thus, the statute appears to grant fee simple title to the grantees in a deed, even though they are designated takers “as trustee” if no other information regarding the trust is included and the trust was not previously recorded in the public records. And so concluded a Florida Circuit Court judge, in ruling that two co-trustees owned real property conveyed to them “as trustee” in fee simple without further description and without a recorded trust instrument. In so ruling, the court was providing that the two trustees could partition the property, sell it, and keep the proceeds for themselves.
This was the case, even though the two trustees were siblings holding the trust property for over 30 years for 6 siblings under an unrecorded trust agreement. During those 30 years, the trust property was operated as a trust asset for the benefit of all the beneficiaries. Further, the trust agreement was recorded in June 2013. Thus, the Circuit Court ruling, if upheld, would provide a windfall to the trustees to the detriment of the beneficiaries.

Fortunately for the beneficiaries, the 1st District Court of Appeals reversed the Circuit Court, on two theories.

First, the DCA noted that Section 689.07(1) (and its predecessors going back 100 years) was enacted to protect innocent third parties from “secret” trusts, and not to provide a windfall to trustees. More particularly, the statute allows third parties to deal with the trustees as fee simple owners in regard to title, conveyancing and mortgages, and need not be concerned about contrary provisions in trust agreements that may restrict the trustee or vest beneficial ownership in others – that is, the third parties are entitled to rely on the public record as to ownership rights even though there is a suggestion of a trust by the trustee language in the deed. Clearly, in this case the trustees do not fall within the class of “uninformed outsiders” that are protected by this statute.
Second, the legislature attempted to put this issue to bed fifty years ago when it enacted Section 689.07(4), which reads:
(4) Nothing herein contained shall prevent any person from causing any declaration of trust to be recorded before or after the recordation of the instrument evidencing title or ownership of property in a trustee; nor shall this section be construed as preventing any beneficiary under an unrecorded declaration of trust from enforcing the terms thereof against the trustee; provided, however, that any grantee, transferee, assignee, or mortgagee, or person obtaining a release or satisfaction of mortgage from such trustee for value prior to the placing of record of such declaration of trust among the public records of the county in which such real property is situate, shall take such interest or hold such previously mortgaged property free and clear of the claims of the beneficiaries of such declaration of trust and of anyone claiming by, through or under such beneficiaries, and such person need not see to the application of funds furnished to obtain such transfer of interest in property or assignment or release or satisfaction of mortgage thereon.
This statute was intended to prevent trustees from using 689.07(1) as a sword against beneficiaries to cut off their beneficial interests – the trustees are still bound by their fiduciary obligations under the trust agreement. Further, this statute expressly allows for recording of the trust instrument AFTER the recording of the deed.

The case provides an interesting history lesson regarding this statute, and how it is intended to operate. It does not appear that the 2013 breakout of these provisions out of Section 689.071 to their new home in Section 689.07 changes the analysis.

Heiskell and Morris v. Morris, 1st DCA, Case Nos. 1D15-364 & 1D15-365. Opinion filed December 18, 2015

Friday, December 11, 2015

Are Income Tax Refunds Due to a Decedent Subject to Estate Taxes?

I've always thought so, but apparently at least one estate thought not, and took the issue to the Tax Court.

A decedent died before filing his income tax return for the prior calendar tax year. Once the return was prepared after death, it showed the decedent was due a refund of $429,315. A smaller refund was also later determined to be due for the short year of the decedent's death.

The decedent's estate did not include the refund amounts on the estate tax return. The estate argued that the overpayment as of the date of death was not a property interest of the decedent – it was only a mere possibility or expectancy which would not be a property interest under applicable state law. It argued that there is no property interest until the refund has been declared by the Government.
The Tax Court determined that there were other cases acknowledging that tax refunds are part of the gross estate. Further, it noted that the IRS by law "shall" refund any balance due to the taxpayer – this mandatory obligation was clearly relevant. Thus, it included the refunds in the gross estate.
The Tax Court did note that if the refund could be subject to offset by the IRS for other tax liabilities of the decedent, then case law would permit excluding the refund. That was not the case here, however.
Estate of Russell Badgett, Jr. v. Comm., T.C. Memo 2015-226 (November 24, 2015)

Wednesday, December 09, 2015

IRS Suggests Using Transcripts in Lieu of Estate Tax Closing Letter

A federal estate tax closing letter shows that the IRS has either accepted an estate tax return as filed, or after audit final adjustments have been agreed to. They do not close the statute of limitations, but provide comfort to executors that they can make distributions or pay creditors with little likelihood of IRS review of the estate tax computations.

In the past, closing letters were automatically issued. Earlier this year the IRS indicated that would no longer happen – taxpayers now need to specifically request a closing letter, and must wait at least 4 months from filing of the estate tax return before making the request.

The IRS has now indicated on its website that an estate tax transcript can be used as an alternative method for taxpayers to determine that the IRS has accepted an estate tax return or closed an audit. More particularly, the IRS provides:

“Transaction Code 421 [on a transcript] indicates an Estate Tax Return (Form 706) has been accepted as filed or that the examination is complete. Please note that the Transaction Code 421 explanation will display "Closed examination of tax return" in all instances. If Transaction Code 421 is not present, the tax return remains under review.”

The IRS goes on to provide how taxpayers or their representatives can request a tax transcript from the IRS (either online or via the mail). It also notes that “[t]he decision to audit a Form 706 is typically made four to six months after the filing date. Please wait four to six months after filing Form 706 before submitting a request for an account transcript.”

Since many probate courts require an estate tax closing letter before closing an estate when an estate tax return is filed, it remains to be seen whether an IRS estate tax transcript will be accepted as a valid substitute for those returns.

Transcripts in Lieu of Estate Tax Closing Letters. See also Frequently Asked Questions on Estate Taxes

Sunday, December 06, 2015

Gulag America

A few years back, Congress passed FATCA. While purportedly aimed at reaching money of tax evaders hidden offshore, a practical effect has been it is nearly impossible for U.S. persons to hold or open bank or brokerage accounts outside of the U.S. That is, for a tax policy objective, the freedom enjoyed by U.S. persons to hold their liquid assets wherever they want in the world has been substantially curtailed.

The construction of Gulag America under the guise of tax policy continues apace with the passage and signing of the Fixing America’s Surface Transportation (FAST) Act in the last few days. The Act adds new Section 7345 to the Internal Revenue Code. This provision provides that if the IRS Commissioner certifies that a taxpayer is delinquent in his her federal taxes to the tune of $50,000 or more, the Secretary of State can take action to deny, revoke or limit the taxpayer’s passport. That is, persons with delinquent taxes may now be barred from leaving the U.S.

The U.S. has enforced its taxes for over one hundred years with civil and criminal enforcement mechanisms. Apparently, that enforcement arsenal is no longer sufficient, and U.S. citizens in financial straits will now lose their travel “privileges.” I wonder how many federal government employees, including members of Congress, will feel the heat of this provision (Federal employees owe $3.3B in back taxes).

An Illustration of How NOT to Do an Related Party Loan

While the Internal Revenue Code does have provisions that may impact the tax consequences of related party loans, conceptually there is nothing wrong with a related party loan. Loans can have favorable tax aspects, including deductibility of interest payments, principal repayments by entities being treated as such instead of taxable distributions, and bad debt deductions if the obligations cannot be repaid. Since the IRS will often seek to recast related party loans as gifts, capital contributions, or something other than a loan, taxpayers must observe all proper formalities and meet the criteria for both a “loan,” and when a bad debt deduction is sought that the loan became “worthless.”

On the “loan” side, the lender generally must show at the time of the funds advance, there was a real expectation of repayment and an intent to enforce collection. On the “worthless” side, the lender must be able to show that the debt was truly worthless in the year a deduction for worthlessness is sought.

A recent appellate decision shows the IRS will use bad facts to void loan treatment when a shareholder loans funds to a related corporation. The shareholder sought to write off $800,000 that she loaned to the corporation and that was not repaid.

Here is a list of the bad facts in the case. They are an education on what to AVOID in these situations:

  • Generally speaking, the loan was not made on terms that an outsider would have undertaken.
  • The loan was unsecured.
  • The loan was funded over a period of time as a line of credit. During that period of time, the finances of the borrowing corporation declined – nonetheless, the lender continued to fund the loan.
  • No payments of interest or principal ever were made.
  • The borrowing corporation did not enter bankruptcy, and continued to operate two years after the year a worthless debt deduction was sought.
  • The borrowing corporation did not recognize any cancellation of indebtedness income.
  • The lender’s only effort to enforce the debt was to make a demand for repayment of $5,000 in the year of the write off. No legal action was ever commenced.
  • There were no opinions of accountants or financial consultants that the note was worthless.
  • There was no evidence of borrower creditworthiness at the time of the loan was advanced (a loan to an insolvent entity will often not be characterized as a loan).
  • The loan was a line of credit loan, but it had no covenants that advances could be suspended if certain income or other benchmarks were not attained or maintained.
  • No event of default occurred in the year that worthlessness was claimed.

SHAW v. COMM., 116 AFTR 2d 2015-XXXX, (CA9), 11/18/2015

Wednesday, December 02, 2015

Private Foundation Can Limit Grant Scholarships to Students Attending Specific Schools

A private foundation that makes a grant to an individual for travel, study, or other similar purposes makes a “taxable expenditure” that is subject to a penalty excise tax under Code Section 4945. However, if the grant is made on an objective and nondiscriminatory basis for a scholarship or fellowship to be used to study at qualified educational organizations, and the IRS approves the grant process and criteria, then that grant will not be a taxable expenditure.

What if scholarships are funded, but only for students meeting qualification criteria at a few named schools? Is this “nondiscriminatory” for this purpose?

In Private Letter Ruling 201548023 the IRS approved the taxpayer’s grant making procedures, even though the scholarships were limited to students attending three named schools. And in Private Letter Ruling 201548022, the IRS also approved procedures limiting scholarships to students attending one named school.

Sunday, November 29, 2015

Identity Theft Victims Can Now Get a Copy of Fraudulently Filed Returns

Many taxpayers, upon filing (or trying to file electronically) their income tax return, hear back that the IRS has already received a filed return for them. Typically, this is due to a fraudulent return filed using the taxpayer identification number and name of the taxpayer that seeks a fraudulent refund of taxes already paid to the IRS – the IRS version of identity theft.

In the past, the defrauded taxpayer was unable to see what had been filed with the IRS. In a change of policy, the IRS now will allow the defrauded taxpayer to see the fraudulently filed tax return, subject to some redactions.Taxpayers that previously could not get a look at the fraudulent return can do so now for prior years – requests can be made for up to six preceding tax years.

If you would like to receive such a copy, go to and follow the directions for preparing and submitting a request letter.

Saturday, November 28, 2015

2016 Updated Rates, Exemptions, and Other Amounts

The IRS has released updated rates, exemptions, and other adjusted figures for the 2016 tax year.

I keep summaries of these up-to-date on our firm’s website, and the site has now been updated for 2016. The updates include new income tax rate tables and revised unified credit exclusion amounts for federal transfer taxes, among others. The 25 summaries also include relevant Florida tax rates and tables, none of which require adjustment for the new tax year. There are probably hundred’s of rates and other items that change each year – our website summaries only track the principals rates, exemptions, and other related amounts. You can access these summaries here – scroll down to see the tables once you get there.

Sunday, November 22, 2015

Is the Charitable Deduction for Trusts Limited to Adjusted Basis?

No, says a U.S District Court.

An irrevocable trust received distributions from a partnership in one year and purchased property. In a later year it contributed the property to a qualified charity, after the property had appreciated in value. It took an income tax charitable deduction for the fair market value of the property.

Code Section 642(c)(1) allows for an income tax charitable for trusts. It reads:

[T]here  shall  be  allowed  as  a  deduction  in  computing  its  taxable
income  (in  lieu  of  the  deduction  allowed  by  section  170(a),  relating  to
deduction for charitable, etc., contributions and gifts) any amount of the gross
,  without  limitation,  which  pursuant  to  the  terms  of  the  governing
instrument is, during the taxable year, paid for a purpose specified in section
170(c)  (determined  without  regard  to  section  170(c)(2)(A))… (emphasis added)

The IRS argued that the “gross income” language (1) limits a trust’s deduction to the amount of gross income it contributed to charity; (2) gross income does not include unrealized appreciation; and (3) a liberal construction of the  statute  allowing  fair  market  valuation  would  negate  the  gross  income  derivative requirement. Thus, it sought to limit the deduction to the trust’s adjusted basis in the contributed property.

The District Court began its analysis by noting that the policy behind the charitable contribution is to encourage charitable deductions. This was not a good start for the IRS.

Another policy issue was that the IRS sought to apply the rule that an income tax deduction is a
matter of legislative grace and that the burden of clearly showing the right to the claimed deduction is on the taxpayer. While there is such a rule, the court noted statutes regarding charitable deductions are not matters of legislative grace, but rather “expression[s] of public policy.” As such, provisions regarding charitable deductions should be liberally construed in favor of the taxpayer.

The Court also noted a distinction between Section 642, and Section 170 (relating to charitable deductions for individuals). Unlike Section 170, Section 642 has no limiting language on the amount of the deduction, including limits relating to appreciation in contributed property. The Court perceived the IRS as seeking to impose limitations where Congress clearly declined to do so.

One of the IRS’ arguments was that the contribution had to be traced to gross income. While this is true, there is no requirement that the payment had to be traced to income from the same tax year as the contribution. So the fact that the property was purchased in a prior tax year with income from that year was not a problem. That the contribution was paid out of trust principal and not income was also not an issue – the Court found that such an argument conflated fiduciary accounting principles with the federal tax concept of gross income.

Since the case is not an appellate court case but only an interpretation of a District Court, the precedential value of the decision is limited. Given the substantial amounts at issue, the IRS may appeal.

Green v. U.S., U.S. District Court for the Western District of Oklahoma, Case No. CIV-13-1237-D (11-4-2015)

Thursday, November 19, 2015

Can Correction of a Scrivener’s Error Retroactively Fix a Tax Problem with a Trust?

Yes, in a recently released Private Letter Ruling in regard to an irrevocable trust.

There were actually two problems with the trust. First, the settlors retained powers to change the beneficial interests of the trust, creating an incomplete gift. Second, those retained powers also created a problem under Code Section 2036.

The trust was reformed in state court to create both a completed gift and to take away the retained powers that were problematic under Code Section 2036. The IRS allowed the reformation to implement the revised tax consequences, retroactive to the creation of the trust.

Does this mean that such corrections will always be respected retroactively by the IRS? A key requirement here was that the changes were made to effectuate the settlors’ original intent. This was evidenced by the other provisions of the trust agreement, and an affidavit by the attorney who drafted the trust. Absent those facts, it is unlikely that the IRS would have allowed such retroactive treatment – scrivener’s error or otherwise.

PLR 201544005

Sunday, November 15, 2015

Article Abstract - The New Estate Planning Lexicon: SUGRITs and Other Grantor-Retained Interest Step-Up Trusts


The New Estate Planning Lexicon: SUGRITs and Other Grantor-Retained Interest Step-Up Trusts




Journal of Taxation, November 2015



ABSTRACT (Key Points & Discussions)

    • Discusses alternative lifetime trusts for married couples that seek to allow for a basis-step up in trust property at death of first spouse, regardless of order of death, so as to achieve basis step-up parity at death of first spouse to spouses in community property jurisdictions. Referred to as GRISUTs - grantor retained interest step up trusts.
    • SUPRT - step up QPRT. A standard QPRT, but with one spouse (or his or her estate) as remainderman, and funding settlor spouse retaining an interest that continues until death of first spouse to die. Nonsettlor spouse provides for return of trust property to settlor in his or her own estate planning documents if nonsettlor spouse dies first. Allows for gift tax marital deduction to match remainder gift on formation, basis step-up regardless of order of death, and the marital deduction for estate tax purposes. It does not achieve any estate tax savings, unlike a regular QPRT.
    • SUGRIT - step up grantor retained income. This is a retained income trust set up by one spouse with the other spouse as remainderman, that does not meet the requirements for avoiding Section 2702(a) 100% gift treatment (i.e., unlike a QPRT). This leads to a partial taxable gift on formation and use of unified credit of settlor spouse, while again achieving full basis step up regardless of order of death. For couples who will likely not use up their full unified credit. But may also be of use to wealthier couples due to reasonable likelihood that use of unified credit on formation of the trust will be undone at death of the spouses.
    • Tangible personal property SUGRIT. This is similar to a QPRT such that unlike the SUGRIT discussed above there is no taxable gift or use of unified credit on formation per qualification as a remainder only gift under Section 2702. Only nondepreciable personal property can be used.
    • SUGRUT and SUGRAT. Uses qualified GRATs and GRATs to avoid an upfront gift by also qualifying as a remainder only gift under Section 2702. Useful for properties other than residences and qualified tangible personal property. One negative is that there may not be 100% estate inclusion and basis step-up if settlor spouse dies first.
    • The death of the remainderman spouse within one year of formation may not allow for a basis step-up under Section 1014(e).
    • The benefits and risks of each spouse creating a GRISUT for the other are discussed, including the application (and possible nonapplication) of the reciprocal trust doctrine.



Basis step up


An excellent overview of the key tax issues in using these trusts to achieve a favorable income tax benefit (in lieu of an estate tax benefit). Such trusts provide an alternative to similar "estate trusts" whereunder one spouse creates an inter vivos trust for the other spouse so as to achieve a basis step-up in trust property regardless of order of death - such estate trusts are different than those discussed in the article because the settlor spouse does not retain a direct interest in the trust. Note that both such trust arrangements need to go beyond tax issues and address divorce aspects, including who ends up with trust property upon divorce or subsequent death of a spouse, and how estate taxes will be paid if there is no marital deduction at the death of the first spouse.


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.

Be Cautious of Late In the Year Mutual Fund Purchases

This is the time of year to be cautious about buying a mutual fund. Many funds pay dividends near the end of the calendar year in December. If you buy one now, and it pays a dividend, you will be paying taxes for 2015 on the dividend. However, you are not any “richer” for the dividend, since the mutual fund value will usually decline by the amount of the dividend you receive.

All you are doing is prepaying future taxes, in effect. If you sold the fund after the dividend, your gain will be reduced per the value reduction that occurs from the dividend. Thus, your tax payment buys you lower gain later (or possibly a capital loss).

You will still be taxed even if you reinvest the dividend in buying new shares of the fund.

The solution is to check the anticipated ex-dividend date of the dividend and buy after that date.

Another solution for that “have to buy now” fund is to buy it in a tax-deferred account, such as an IRA or 401(k) plan – since the owner of that account does not pay current income taxes on the earnings of the account.

Sunday, November 08, 2015

Congress Tinkers with Family Partnership Rules

The recently enacted Bipartisan Budget Act of 2015 moves around the family partnership rules so as to clarify their application.


Section 704(e)(1) provided that a person is recognized as a partner of a partnership if capital is a material income-producing factor, whether the partnership was obtained by purchase or gift. This was commonly referred to as the “family partnership rule.”


A transfer of a partnership interest by gift (or even by sale) opens the door to an impermissible assignment of income. That is, income from property or a business can be transferred in a manner that would be a disrespected assignment of income if such a transfer was conducted outside of the partnership form. The family partnership rule is a safe harbor from IRS attack based on assignment of income principles when capital is a material income-producing factor in the partnership. Per the focus on capital, the safe harbor will not provide protection for service businesses or other businesses where capital is not a major requirement.


To be considered partners for federal income tax purposes, the legal partners must have joined together with an intent to conduct an active trade or business. Some taxpayers have argued that this rule does not apply if the family partnership rule applies. That is, they claim that the family partnership rule is an alternative way of being considered a partner, without the requirement of an active trade or business.


It moved the family partnership rule out of Section 704(e)(1) and into Section 761(b). As it now reads, Section 761(b) makes clear that one still has to meet the general requirements of being a member of a partnership. The family partnership rule is now only a qualification to the above general rule such that in testing whether one is a partner a gift transfer cannot be used as a challenge if capital is a material income-producing factor. Section 761(b) now reads:

(b) Partner. For purposes of this subtitle, the term “partner” means a member of a partnership. In the case of a capital interest in a partnership in which capital is a material income-producing factor, whether a person is a partner with respect to such interest shall be determined without regard to whether such interest was derived by gift from any other person.


Code Sections 704(e)(2) (relating to special rules on allocation of income on gifted interests) and 704(e)(3) (relating to purchases of interests by family members being treated as a gift transaction) are left behind in Section 704(e), and are renumbered as (e)(1) and (e)(2) respectively.


For partnership tax years beginning after 12/31/2015.

Thursday, November 05, 2015

Power of Attorney Holder Cannot Sign for Another

Tax practitioners are familiar with Form 2848. With that form, a taxpayer authorizes an attorney, accountant, or other authorized representative to act as attorney-in-fact for the taxpayer as to the specified tax matter in dealing with the IRS.

When the form is prepared, the representative has to sign it. In a recent Chief Counsel Advice, the question was raised whether one duly authorized representative can sign for another representative on the Form 2848. Unsurprisingly, the advice provides that this is not permissible. The nature of the written declaration of the representative is for the signer to declare, under penalties of perjury, his status and that he is subject to the provisions of Circular 230. Allowing someone else to make that declaration is inconsistent with the purpose of the declaration.

Note that this is a different question from whether one named representative, as representative of the taxpayer, can appoint another representative for the taxpayer (i.e., to sign the Form 2848 on behalf of the taxpayer). But I hope I didn’t get your hopes up on that scenario – that is not permitted either, by the express terms of the Form 2848 - unless the taxpayer had specifically authorized it in Section 5a of the Form 2848 that named the original representative that is seeking to name an additional representative.

Chief Counsel Advice 201544024

Sunday, November 01, 2015

Some 2015 Florida Law Changes

Below are some statutory changes enacted in Florida in 2015 that you may not have noticed:

GRANDPARENT VISITATION RIGHTS. In a major rewrite of Chapter 752, statutory rights of a grandparent to obtain visitation rights with a grandchild were substantially narrowed. Under new Fla.Stats. §752.011, these rights can be legally enforced only if (a) both parents of a minor grandchild are deceased, missing or in a persistent vegetative state, or (b) one parent is in such condition, and the other has been convicted of a felony or an offense of violence evincing behavior that poses a substantial threat of harm to the grandchild’s health or welfare.

The opportunities for visitation were broader under prior law, but most of them had been stricken down as unconstitutional under Florida law as violating the parents’ right of privacy, part of which is treated as including the parents’ freedom as to child-rearing.

A report on the problems with the older statutes is available here.

HEALTH CARE SURROGATE PROVISIONS. Chapter 765 has been revised to now allow an individual to name a surrogate to make health care decisions for them and/or to access their health information without the need for a determination of incapacity.

LIMITED LIABILITY COMPANIES. A provision in the articles of organization of an LLC that limits the authority of a person to transfer LLC real property is not effective to non-members and non-managers unless recorded in the public records in the county of the applicable real property.

CUSTODIAL GIFTS TO MINORS. Custodial gifts in the past had to terminate either by age 18 or 21, depending on the method of creation of the account. Some accounts now may be extended by the transferor to age 25.

Thursday, October 29, 2015

Another Advantage of Proceedings Supplementary

Debtors oftentimes attempt to shield their assets from creditors by transferring them away to others. If this is done, a creditor can bring an action under Florida’s Uniform Fraudulent Transfer Act (UFTA) to attempt to undue the transfer and execute on the transferred property as a fraudulent transfer.

Alternatively a holder of a Florida judgment can seek to reach transferred documents under “proceedings supplementary.” Such action has the benefit of not requiring the commencement of a new and independent action. Another benefit of proceedings supplementary over an action under the UFTA is that the 4 year statute of limitations under the UFTA will not apply – instead the creditor can proceed at any time during the term of the judgment so long as the action giving rise to the judgment was filed within 4 years of a fraudulent transfer. Biel Reo LLC, 156 So3d 506 (1st DCA 2014).

A recent Florida case illustrates another advantage of proceedings supplementary. In the case, a judgment holder proceeded against a debtor to reach assets that the debtor had transferred to his spouse. The trial court ruled against the creditor, finding that the creditor had not proved the debtor made the transfer to “delay, hinder, or defraud creditors” (which is a requirement of the proceedings supplementary statute). The creditor had the burden of proof on this issue and did not meet it.

The trial court decision was overturned on appeal, because in proceedings supplementary if certain stated time period requirements are met, the burden of proof is on the debtor to show that the transfer at issue was not made to delay, hinder or defraud creditors. That is, the burden of proof was on the debtor, not the creditor. A useful reminder of another advantage of proceedings supplementary.

RREF SNV-FL SSL, LLC., Appellant, v. Shamrock Storage, LLC et al, 1st District. Case No. 1D14-4257, 40 Fla.L.Weekly D2407a

Sunday, October 25, 2015

Substantial Compliance Doctrine Will Not Override Return Signing Requirement

In a recent Tax Court case, a joint return was timely filed by a husband and wife. However, the return was filed without the wife signing the return. The IRS rejected the initially filed return and imposed late filing penalties. Note that the late taxes here came to over $5 million (over two tax years), so the penalties involved were very significant.

The taxpayers argued that the substantial compliance doctrine should have protected them from penalty. Under this doctrine, if a return purports to be a return, is sworn to as such…and evinces an honest and genuine endeavor to satisfy the law, it will constitute a return even though it may not have complied with all rules. The problem here was that without the wife’s signature, one of the taxpayers was not signing under penalties of perjury. The Tax Court thus found that the requirement to sign under penalties of perjury was a separate requirement of the law (apart from other return preparation requirements) that was not complied with and was a requirement that must be met for taxpayers seeking to use the substantial compliance doctrine based on U.S. Supreme Court precedent.

The taxpayers noted some cases where a married spouse did not sign the return but the IRS did not challenge timely filing. The Tax Court rejected being bound by this precedent, providing that the IRS concession of an issue in a case does not bind them to deal as generously,  leniently, or erroneously in another case.

The taxpayers also argued the tacit consent doctrine – i.e., that the wife tacitly consented to the joint return filing and that should be enough to have filed timely. The Tax Court noted that this doctrine does allow one spouse to sign a joint return for both spouses if it is shown that the nonsigning spouse tactily consented to the joint filing. Here, however, the husband did not sign for both of them – he only signed for himself. Also, in other tacit consent cases, the Service Center accepted the original return for processing and filing – here, the return was rejected.

There was an odd fact here that the IRS returned the unsigned return to the taxpayers. The taxpayers claimed that no notice came with the return, so they did not know why it was returned. However, there are facts that show that the husband knew at some point soon after receiving the return back from the IRS that his wife did not sign the return, but he never had her sign and resubmit the original return – instead they later signed and submitted another copy after they received a deficiency notice. This knowledge of the failure  and failure to correct it when they received the return back from the IRS may have had a role in the court’s decision against the taxpayers.

Reifler, TC Memo 2015-199

Saturday, October 24, 2015

Updated Wheel of Pain

I have updated my “wheel of pain” summary chart of Federal employment taxes. You can access it here.

Sunday, October 18, 2015

The Benefit of Establishing an Offshore Asset Protection Trust While the Coast is Clear

Offshore asset protection trusts avoid or diminish a number of creditor exposures that apply to such trusts organized in the U.S. High net worth individuals and persons involved in high liability exposure businesses and professions should consider establishing a “nest egg” offshore trust to provide a protected fund that is exempt from creditor claims but which can still be expended for the benefit of the grantor/settlor and his or her family.

Offshore trusts, in the right jurisdiction, have a benefit of a short statute of limitations for creditors to bring an action to reach the trust assets on a fraudulent conveyance theory (the usual mechanism under which trust assets are reached). However, if the trust is established before there is a creditor on the horizon, there are even more advantages in certain jurisdictions.

First, by establishing the trust while the grantor is solvent, this will usually insulate the trust from a fraudulent conveyance trust completely in the favored jurisdictions. That is, if a later creditor claim arises, since the trust was funded while the grantor was solvent and the funding did not render the grantor insolvent, the later creditor is out of luck.

Second, even if there is an existing creditor at the time the trust is established, and if that existing creditor perhaps can get into the trust on a fraudulent conveyance theory, in the proper jurisdiction creditors that arise after the funding of the trust cannot piggy-back on the claim of the first creditor to reach trust assets. Again, these later-acquired creditors are out of luck. In many U.S. jurisdictions, this protection is not available.

Human nature being what it is, calls to our office for creditor protection planning usually arise AFTER a potential claim arises. This is problematic both for domestic and offshore planning, and we usually decline to participate in post-claim planning..

The ideal planning should occur before there is a claim. This is helpful for both domestic and offshore planning, but debtor-friendly asset protection trust provisions in some foreign jurisdictions provide even greater benefits for such early planning than if the trust is established in the U.S.

Saturday, October 17, 2015

Loan Transaction Costs IRA its Bankruptcy Exemption

A recent case illustrates a common problem with IRAs when their participants declare bankruptcy.

Generally, IRAs are exempt assets in bankruptcy proceedings, and are thus beyond the reach of the bankrupt individual’s creditors. This exemption in the Bankruptcy Code is tied to the tax-exempt status of the IRA. 11 USC §522(d)(12) provides an exemption to “[r]etirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section ... 408 ... of the Internal Revenue Code of 1986.”

Code §497(c)(1) prohibits loan transactions between an IRA and a disqualified person. If an IRA engages in a prohibited transaction with the beneficiary or creator of the account, the IRA will lose its exempt status pursuant to Code §408(e)(2).

While the IRS has an interest in policing the prohibited transaction rules, in my experience I have seen these issues come up more in bankruptcy proceedings than in tax audits and controversies. This is because the bankruptcy trustee is always on the lookout to void the exempt status of IRA accounts. If the trustee can convince the bankruptcy court that a prohibited transaction occurred in regard to the IRA like a loan transaction, they then argue that the IRA is no longer exempt under Code §408(e)(2) and thus there is no bankruptcy exemption. I have seen this in regard to straight loan transactions, and even in circumstances when the participant receives a distribution from an IRA and rolls it back into the same IRA within the tax-free 60 day rollover period – the trustee argues that this is in fact a loan, even though such a rollover transaction back to the same IRA is expressly authorized in the Code.

In the case at issue, the IRA was an investor in a partnership. As what typically happens in these cases, the parties fight it out in bankruptcy court as to whether a transaction was a “loan.” In the instant case, the partnership itself went through bankruptcy, in addition to the IRA participant. In the filings of the partnership, it submitted schedules showing the IRA as an unsecured creditor – the bankruptcy court relied on those schedules to find that the IRA had made a loan to the partnership and thus the IRA lost its exempt status.

Kellerman v. Rice,116 AFTR 2d 2015-6133 (DC AR)

Sunday, October 11, 2015

Prenuptial and Postnuptial Agreements

I gave a presentation yesterday at the Florida Bar Tax Section CLE How to Be an Estate Planning Wizard. The subject was the tax and other aspects of prenuptial and postnuptial agreements. The presentation covered both federal and Florida issues.

For those with an interest in the subject, you can watch slides of my presentation here. I have added audio to the slides, so it is almost like being at the presentation. The presentation plays off the website of, so you do not need to download anything to your computer.

Any one who was at the seminar or was viewing it online and would like to see the part of my presentation that I did not get to because time ran out, can also see what they missed.

While I have posted presentation materials before, this is the first time I have gone and added audio – feel free to email me at with any comments or critiques so as to guage reader interest for the future.

Monday, October 05, 2015

Florida Supreme Court Holds for Extended Claims Period for Known or Ascertainable Creditor Claims [Florida]

In 2013 I wrote about the Golden case which ruled that a known or reasonably ascertainable creditor who did not receive a Notice to Creditors in a probate proceeding could file a claim against the estate up to 2 years after death. That the estate published notice generally would not invoke the 3 months claims period  - such a notice only applies to creditors who are not known or reasonably ascertainable. This case was contrary to two other appellate circuits, who had applied the 3 month limitations period. You can read my write-up here.

The Florida Supreme Court has now sided with the Golden court, such that the extended claims period of 2 years was determined to be the correct statutory interpretation.

Jones v. Golden, Florida Supreme Court, Case No. SC13-2536 (October 1, 2015)

Wednesday, September 30, 2015

Florida Court Provides a Lesson in Nuncupative and Notarial Wills

Many lawyers have not heard the terms “nuncupative wills” and “notarial wills” since they took their bar exams (and some perhaps not even then). A recent Florida case provides us with a real world application of these terms.

In the case, a testator executed a will in New York before 3 witnesses and signed it at the end. The will expressly was limited to the U.S. property of the testator. Later, as an Argentinian resident, testator entered into a will in Argentina. This will had different beneficiaries than the New York will, and it also revoked all prior wills. A dispute arose whether the New York will could be probated in Florida, or whether the Argentina will could be (which would act to revoke the New York will).

The Argentina will was not signed by the testator, and the witnesses also did not sign. Here is the procedure that was followed:

The Testator orally pronounced her testamentary wishes to a notary who transcribed them. The Argentine will sets forth that the Testator made her attestations before the notary in the presence of three witnesses who were identified by name, address, and national identity card number. The Argentine will explains that the notary typed up the testamentary wishes and presented the typed document to the Testator, who declined to read it. The document was then read back to the Testator, who orally approved it in the presence of the witnesses. The notary signed and stamped the will, but the Testator and the witnesses did not sign it.

Florida law requires the testator to sign a will at the end and also requires two signing attesting witnesses. Fla.Stats. Sec. 732.502(1). So at first blush, the Argentina will cannot be probated in Florida. Fla.Stats. Sec. 732.502(1).

Florida does relax its execution requirements for wills signed by a nonresident of Florida. Fla.Stats. Sec. 732.502(2) provides in part “[a]ny will, other than a holographic or nuncupative will, executed by a nonresident of Florida, either before or after this law takes effect, is valid as a will in this state if valid under the laws of the state or country where the will was executed.” Since the will was admitted to probate in Argentina, it purportedly was valid in Argentina and thus this statute would allow its probate so long as it was not a holographic or nuncupative will.

So was the will “nuncupative?” Florida’s Probate Code does not provide a definition, and there is little Florida case law on the issue. Black’s Law Dictionary defines a nuncupative will as a “will made by the verbal declaration of the testator, and usually dependent merely on oral testament for proof.” The classic example is a testator who makes a declaration on his deathbed. Since the will at issue was orally dictated and not signed, it sure looks like a “nuncupative will.”

The proponents of the Argentina will attempted to get around the Florida restrictions by characterizing it as a “notarial will.” Fla.Stats. Sec 733.205 provides “[w]hen a copy of a notarial will in the possession of a notary entitled to its custody in a foreign state or country, the laws of which state or country require that the will remain in the custody of the notary, duly authenticated by the notary, whose official position, signature, and seal of office are further authenticated by an American consul, vice consul, or other American consular officer within whose jurisdiction the notary is a resident, or whose official position, signature, and seal of office have been authenticated according to the requirements of the Hague Convention of 1961, is presented to the court, it may be admitted to probate if the original could have been admitted to probate in this state.”

So was the will a “notarial will?” Again, Florida’s Probate Code does not define the term. The appellate court quoted a treatise that indicates a notarial will general involved four stages of creation:

First, the testator makes an oral declaration of the will to the notary and two witnesses. Second, the notary (or an assistant) reduces the will to written form. Third, after being read aloud by the notary, the will is signed by testator, notary, and witnesses, with the notary adding information about the execution, including, usually, its date and place and the names of witnesses. Finally, the will is retained by the notary and, in some countries, registered in a central register.

The third element was missing here – the testator and witnesses did not sign the will. But even if the will was a notarial will, there is the last requirement of Fla.Stats. Sec. 733.205 that still must be met – that the original will could have been admitted to probate in Florida. So if the will was nuncupative, then the fact that it was a notarial will would not help its admission.

The appellate court noted that it is possible to have a notarial will that is not nuncupative (i.e. it was signed by the testator). In that case, Florida would admit it. But unsigned notarial wills are nuncupative and thus cannot be admitted – thus the appellate court denied the admission of the will.

The appellate court closes its opinion with a call to the Florida legislature to make their job easier by enacting some statutory definitions for these these terms.

Malliero v. Mori, Mori & Corallo, 3rd DCA (September 30, 2015)

Friday, September 25, 2015

No Charitable Set Aside Deduction for Estate Due to Litigation

Under Code Section 642(c)(2) an estate may claim a current charitable contribution deduction for income tax purposes, notwithstanding that the income earned will not be paid or used for a charitable purpose until sometime in the future. That is, the estate need not actually pay income over to the charity in the year it is earned to obtain a charitable deduction – it is enough if the funds are set aside for later payment to the charity.

In a recent Tax Court case, the remainderman of the estate was a church. However, at the time the income tax return for the year at issue was filed (albeit filed late), there was ongoing litigation regarding who was entitled to what from the estate. Income earned during the year that appeared to be otherwise due to the church was now at risk of being diverted to pay other claimant beneficiaries and litigation costs.

Under Regulations, no charitable set-aside deduction deduction will be available if there is a risk that the set aside income may not find its way to charity. They require the estate to prove that the possibility that the amount set aside for the charitable beneficiaries would go to noncharitable beneficiaries be so remote as to be negligible. Treas. Regs. Sec. 1.642(c)- 2(d). In the case at issue, the IRS sought to disallow the deduction due to the risk that the set aside income could be diverted to noncharitable beneficiaries and expenses.

The Tax Court sided with the IRS and disallowed the deduction. The estate argued that due to the advanced state of settlement negotiations, there was little risk that the income would not go to two churches (at some point, another church was added as a beneficiary) at the time the return was filed. The court noted that at the time of the return filing, even if the pending settlement was finalized, the shares of the churches were still uncertain since the issues of legal fees and coexecutors’ commissions remained unsettled. Also, until that issue was resolved, the will was not validated. Based on these facts, the risk of loss of funds was not “so remote as to be negligible.”

This is the second case in 2015 with similar facts and a similar result. The first case was Estate of Eileen S. Belmont, et al.v. Commissioner, 144 T.C. No. 6, which I wrote about here. Estates and trusts seeking a set-aside deduction that are engaged in litigation should consider themselves warned that the IRS will scrutinize such deductions and contest them when appropriate, and that the Tax Court is apt to side with the IRS on these issues.

Estate of John D. DiMarco, TC Memo 2015-184.

Friday, September 11, 2015

Florida Supreme Court Gives Expansive Protection to Husband’s Separate Property under a Prenuptial Agreement

A divorcing wife asserted that because a 20 year old prenuptial agreement made no specific reference to enhancement in value of nonmarital property attributable to marital labor or funds, the enhancement in value to the husband’s assets during the marriage is subject to equitable distribution. Similarly, the agreement did not specifically provide that the husband’s earnings will be his separate property, so the wife sought a finding that these were not protected under the prenuptial agreement.

The agreement did provide that the property “owned or hereby acquired by each of them respectively” would be free of claims of the other spouse. It also provided that “each party agrees that neither will ever claim any interest in the other’s property,” and if one party “purchases, [a]cquires, or otherwise obtains, property in [his/her] own name, then [that party] shall be the sole owner of same.”

Both the District Court of Appeals and the Supreme Court found that the above general waiver language was broad enough to protect enhancement in value of property and the husband’s separate earnings as separate property of the husband, thus denying the wife an interest in those assets upon divorce. While the ruling is fact specific based on the specific language of the agreement, it does call into question other lower court decisions that found earnings and appreciation to be marital property subject to division when they were not specifically described as separate property in the agreement.

Of course, these issues can be entirely avoided by providing specific waivers as to these items in the prenuptial agreement.

As an aside, the fairness of a marital agreement can be an issue in the enforceability of that agreement in Florida. In Casto v. Casto,  508 So.2d 330 (Fla. 1987), the Florida Supreme Court found that unfairness or unreasonableness can negate enforceability, although full and complete financial disclosures will still allow for enforceability even if the agreement is unfair or unreasonable. Casto continues to apply to postnuptial agreements in Florida. Prenuptial agreements are now governed by Fla.Stats. Section 61.079 – that statute similarly voids prenuptial agreements if unconscionable, with a savings if there is full and complete financial disclosure (measured at the time of the agreement and not at divorce) even though there were disproportionate wealth between the spouses, due to the $1.9 million the spouse would obtain under the agreement.

Hahamovitch v. Hahamvitch, Florida Supreme Court Case No. Sc14-277 (September 10, 2015)

Monday, September 07, 2015

Taxpayers Must Correctly Write-Off Balances for Partial Bad Debt Deduction

Code Section 166(a)(2) allows for a deduction for partially worthless debts for business debts. One of the requirements to be able to deduct is that the amount deducted “was charged off” on the books during the tax year.

In a recent Legal Advice issued by Field Service Attorneys, the taxpayer put a contra-asset account on its balance sheet to reflect a partial loss. The issue was whether that was sufficient to be a charge off on the books for this purpose.

The government attorneys noted  the case of International Proprietaries, Inc. v. Comm., 18 TC 133 (1952) that the creation of a reserve account, without an actual reduction in the accounts receivable account, was not enough to constitute a charge off – even though it did reduce net income. In the current analysis, the attorneys equated the creation of a contra-asset account as nothing more than a reserve.

The taxpayer sought to rely on Brandtjen & Kluge, Inc., 34 T.C. 416 (1960). In that case, the taxpayer increased its account entitled “Reserve for Doubtful Notes and Accounts” and debited bad debts, reducing its income. So far, pretty similar facts to our taxpayer. However, there, the taxpayer also made an adjusting journal entry in a new ledger account entitled “Reserve for Loss” with an explanation being “To charge bad debts with loss fro Canadian operation.” The court found that such account and explanation indicated a “sustained loss and not an anticipated future loss” and allowed the deduction.

The Legal Advice concludes that the current facts were closer to International Proprietaries than to Brandtjen, and thus disallowed the current loss.  

Thus, what the IRS and courts are trying to determine is whether the book entry shows a provision for losses anticipated in the future, or whether it shows a current loss and write-off. To avoid the issue entirely, taxpayers would be best served by actually reducing the balance of the receivable account to obtain partial worthlessness loss treatment.

As an aside, a taxpayer can defer the charge-off and deduction to a later year when partial worthlessness is greater, or wait to deduct the entire debt amount in the year of total worthlessness. For the taxpayer at issue here, the loss of the deduction for partial worthless should not result in a total loss – it should be able to deduct it in a later year (not beyond the year of total worthlessness) by doing the correct charge off on its books.

Legal Advice Issued by Field Attorneys 20153501F

Saturday, September 05, 2015

No Section 121 Gain Exclusion When Seller of Residence Obtains it Back in Foreclosure

Marvin sold his principal residence for $1.4 million on an installment basis. He reported current gain of $657,796, and excluded $500,000 of that gain from income under Code Section 121 as a sale of a principal residence. The remaining $157,796 of gain was reported on the installment basis. After the sale, Marvin reported $56,920 of gain from cash installment payments received.

The buyer defaulted on his debt and Marvin foreclosed and took the property back. He recognized the remaining $97,153 in long-term capital gains, per the reacquisition of real property rules of Section 1038. Marvin did not resell the residence within a year of his reacquisition.

The IRS asserted that the original $500,000 Section 121 exclusion could not be used to offset gain on the sale and reaquisition, and thus applying the rules of Section 1038 Marvin had gain of $448,080 at the time of the foreclosure and reacquisition. Marvin argued that just because he foreclosed on the property does not mean that the initial $500,000 gain exclusion should not be available to him for purposes of the Section 1038 gain computation.

The Tax Court agreed with the IRS. It noted that Congress did put a special rule in Section 1038(e) that provides if a principal residence is reaquired, and then is resold within 1 year thereafter, the original Section 121 exclusion will continue to apply. Since Marvin did not resell within a year, he could not use this provision. The Tax Court reasoned that if the original Section 121 exclusion applied in a Section 1038 computation of gain for persons that did not resell within 1 year, then there would be no need for Section 1038(e) and it would be a meaningless Code provision. Thus, to give effect to Congress putting Section 1038(e) in the Code, Congress must have recognized that for situations when there is no resale within a year, that Section 121 would not apply.

DeBough, 106 AFTR 2d ¶2015-5192 (CA8 8/28/2015)

Saturday, August 29, 2015

Table of Revised Income Tax Return Filing Due Dates

Rather than have to look these up constantly, I have created for myself (and my readers) a cheat sheet summary of the new filing dates enacted in the recently enacted Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. Note that most of these will start applying only to filings for the 2016 tax year.

Download a PDF of the entire chart here, which will be easier to read and print than the screenshot below. I will also add it to the list of resources in the right-hand column of this blog.

If you think there are any errors, email me at


Monday, August 24, 2015

Ashes of a Cremated Decedent are not Property Subject to Division among Heirs [Florida]

The parents of a deceased child were the sole heirs of the child’s estate. The child’s remains were cremated, and the parents could not agree on the final disposition of his assets. The father petitioned the probate court to divide the ashes equally among the mother and father as the heirs of the child.

Florida’s probate code defines “property” as “both real and personal property or any interest in it and anything that may be the subject of ownership.” The probate court found that the ashes were not “property” subject to division in accordance with the division of other property of the decedent, and the appellate court agreed. The appellate court noted that while there is a legitimate claim of entitlement by the next of kin to possession of the remains of a decedent for burial or other lawful disposition, this does not give rise to a property right and does not convert those remains to “property” for disposition purposes.

Wilson v. Wilson, 4th DCA, May 21, 2014

Sunday, August 23, 2015

IRS Announces Delay in Consistent Basis Notice to Beneficiaries Rules

I recently wrote about the provisions of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 that require estates to give statements to beneficiaries regarding the basis of property if an estate tax return is required to be filed, generally within 30 days of the due date of the return.

The IRS has now issued guidance delaying taxpayer obligations to follow the new rules. The Notice provides:

For statements required under sections 6035(a)(1) and (a)(2) to be filed with the IRS or furnished to a beneficiary before February 29, 2016, the due date under section 6035(a)(3) is delayed to February 29, 2016.  This delay is to allow the Treasury Department and IRS to issue guidance implementing the reporting requirements of section 6035.  Executors and other persons required to file or furnish a statement under section 6035(a)(1) or (a)(2) should not do so until the issuance of forms or further guidance by the Treasury Department and the IRS addressing the requirement s of section 6035. (emphasis added)

Notice 2015-57

Friday, August 14, 2015

Congress Sneaks in Some Important Procedural Tax Changes

On July 31, 2015, President Obama signed HR 3236, the "Surface Transportation and Veterans Health Care Choice Improvement Act of 2015." While you wouldn’t know it from the title, Congress included some important procedural tax changes that are of special interest to tax return preparers and estate administrators.

Due Date for FBAR/FinCEN Form 114. Starting next year, this has been moved up from June 30 to April 15. For the first time, taxpayers can obtain a six month extension to October 15. This will put the filing schedule in line with the federal income tax return filing deadlines for most individuals. At this point, it is unknown if a separate filing will be needed to obtain the extension or whether a federal income tax return extension request will be sufficient – hopefully only one extension request will be needed.

Filers residing abroad are automatically extended until June 15, and can get an extension until October 15 (which is shorter than the current extension period available to December 15). First time filers who file late may be eligible to receive late filing penalty relief if they file by October 15.

Due Date for Partnership Income Tax Returns/Form 1065 and S Corporation Income Tax Returns/Form 1120S. This has been moved up by a month, to March 15 for calendar year returns and the 15th day of the third month following the close of the fiscal year for fiscal year entities. A maximum six month extension is available.

Due Date for C Corporation Income Tax Returns/Form 1120. This has been moved back a month to April 15 for calendar year returns and the 15th day of the fourth month following the close of the fiscal year for fiscal year partnerships.

Maximum Extension Due Dates for Trusts/Form 1041. The maximum extension for calendar year taxpayers will be 5 1/2 months to September 30.

Maximum Extension Due Dates for Exempt Organization Forms 990. This is 6 months to November 15 if not otherwise required to file an income tax return, for calendar year filers.

Due Date for Form 3520-A, Annual Information Return of a Foreign Trust with a U.S. Owner. This will be the 15th day of the 3rd month after the close of the trust’s taxable year, with up to a six month extension.

Due Date for Form 3520, Annual Information Return of a Foreign Trust with a U.S. Owner. This will be April 15 for calendar year filers, with up to a six month extension.

Six Year Statute of Limitations for Basis Overstatement. The extended six year statute of limitations for 25% or more omissions from gross income on an income tax return now expressly provides than an overstatement of basis is an omission from gross income for this purpose. This overrules Home Concrete & Supply, LLC, 132 S.Ct. 1836 (2012) which held that an overstatement of basis was NOT an omission from gross income.

Consistent Basis Reporting. Code Section 1014 is modified to require that the basis of property reported on an income tax return must be consistent with the values determined for such property for estate tax purposes. Thus, taxpayers cannot claim a higher basis than the estate tax value. Based on the provision only applying to property whose inclusion in the decedent’s estate increased the liability for estate tax, it would appear that this provision would not apply if due to deductions taken on the estate tax return there was no estate tax due (but this exception should not apply to the new reporting discussed below). Accuracy-related penalties applicable to underpayments under Code Section 6662 will apply to violations of this provision.

New Code Section 6035 now requires an estate required to file an estate tax return to furnish to the IRS and to each person acquiring an interest in gross estate property a statement identifying the value of each interest in such property. This statement must be delivered within 30 days of the earlier of the date the return is filed or the date the estate tax return was due (with extensions). If the value is subsequently adjusted (e.g., by audit or amendment), a supplemental statement must be provided within 30 days. Presumably, the IRS will provide a form for use in this reporting. The penalty for each failure is $250, to a maximum of $3 million. If the failure to report was intentional, the penalty is increased to $500, with exceptions for reasonable cause.

These new provisions apply to estate tax returns filed after July 31, 2015. They should not apply to returns filed only to claim portability of the DSUE amount if a return was not otherwise required.

What happens if the estate does not know within the 30 day deadline who will receive what assets? It would appear that the estate would need to provide a list of all possible assets to each particular potential recipient to avoid a violation of this provision. Perhaps a rule that would extend this to within 30 days of receipt of the subject asset would have been better or can be included by the IRS in its instructions or regulations. Executors may also want to give notice to themselves if they are beneficiaries, to assure compliance, unless final rules provide otherwise.

Sunday, August 09, 2015

IRS to Provide New Exception to Partnership Formation Nonrecognition When There Are Foreign Partners

In Notice 2015-54, the IRS indicates it will be issuing regulations under Code Section 721(c) which will provide that transfers of appreciated property to controlled partnerships that have a related foreign partner will not qualify for nonrecognition treatment unless a specific “gain deferral method” is followed.

FACTS: Code Section 721(a) provides that no gain or loss is recognized on the contribution of property to a partnership by a partner. Since 1997, Code Section 721(c) has given authority to the IRS to issue regulations that nonrecognition would be unavailable if any gain on appreciated contributed property would be included in the gross income of a foreign person when recognized. Until now, the IRS has not exercised that authority. In Notice 2015-54, the IRS has advised that regulations will be issued that will allow for gain recognition when there are foreign partners of the partnership, absent compliance with a gain deferral method safe harbor. The Notice provides significant detail on what the regulations will provide.

Many practitioners believed that no regulations would ever be issued under Section 721(c), at least as to U.S. contributors, since it requires that it operates only if any built-in gain will be eventually included in the gross income of a non-U.S. person. This would be difficult to accomplish since Section 704(c) allocates built-in gain back to the contributing partner when recognized, and thus does not allow for a shift of that gain from a U.S. contributing partner to a different foreign partner.

The IRS indicated that it thought these rules are being manipulated via misvaluations of contributed property, and they also imply that some of the allocation of gain methods under Section 704(c) may not operate to avoid all gain allocable to foreign persons (which gain allocations may result in no U.S. taxation of such gains). While such movement abroad is circumscribed as to transfers to foreign corporations under Section 367(a), ever since the repeal of Sections 1491-1494 there is no corollary limitation in regard to transfers to partnerships. Thus, the IRS felt it necessary to breathe life into Section 721(c) to protect the fisc.

The new regulations will provide that Section 721(a) nonrecognition will not apply when a U.S. Transferor contributes an item of Section 721(c) Property (or portion thereof) to a Section 721(c) Partnership, unless the Gain Deferral Method is applied with respect to the Section 721(c) Property. That’s the new rule in a nutshell, with the details being in the definitions of the capitalized terms.

A “U.S. Transferor” is any U.S. person other than a domestic partnership – thus, the regulations will apply to all U.S contributors (other than domestic partnerships). “Section 721(c) Property” is appreciated property other than cash, securities, and tangible property with appreciation not exceeding $20,000. A Section 721(c) Partnership is a domestic or foreign partnership (a) with a (direct or indirect) foreign partner that is related to a U.S. Transferor, and (b) the U.S. Transferor and related persons own 50% or more of the partnership.

If Section 721(c) applies to void nonrecognition of gain, nonrecognition is still available if the “gain recognition method” is applied. This requires (1) the partnership uses the “remedial” allocation method of Treas. Regs. Section 1.704-3(d) for built-in gain as to currently contributed property (which acts to allocate income and loss items among partners to work down the disparity between book and tax basis differences arising from contributions of appreciated property), and also as to subsequently contributed property until all built-in gains are recognized or 60 months, whichever is earlier, (2) while there is remaining built-in gain all Section 704(b) income, gain, loss and deduction with regard to that property will be allocated in the same proportions among the partners, (3) new reporting requirements are met, (4) the U.S. Transferor recognizes built-in gain upon an Acceleration Event. An “acceleration event” is any transaction that either would reduce the amount of remaining built-in gain that a U.S. Transferor would recognize under the Gain Deferral Method if the transaction had not occurred or could defer the recognition of the built-in gain (other than transfers of partnership interests to domestic corporations under Section 351 or 381), and (5) the U.S. Transferor agrees to an extended 8 year statute of limitations on these tax items.

Helpfully, a general exception to the new rules will apply if the aggregate built-in gain of Section 721(c) Property in a year is $1 million or less, if there is no Gain Deferral Method then in operation. How nice it would be for taxpayers if all new complex regulations enacted to address the few taxpayers engaged in aggressive tax planning would have reasonably generous de minimis exceptions from applicability, like these.

While the regulations are not yet out, when they do come out they will have an August 6, 2015 effective date (or earlier deemed contributions from check-the-box elections made on or after this date) for most of their provisions. This should not be a problem for taxpayers given the reasonably detailed provisions in the Notice.

The IRS indicated it will also adopt additional rules under Section 482 to address controlled transactions involving partnerships in cases where they believe that taxpayers are inappropriately shifting income to related foreign partners.

COMMENTS: There is good news and bad news for taxpayers here.

The bad news is that ANYTIME a contribution of appreciated property is made to a partnership, a review of the application of Section 721(c) will now be needed if there is a non-U.S. partner. Importantly, Section 721(c) applies whether the contribution is to a domestic or a foreign partnership. Thus all practitioners that deal with partnerships or LLCs, including those focused principally on estate planning, will need to apply these rules whenever appreciated property is contributed to the entity (although the requirement of a foreign direct or indirect partner will likely quickly eliminate most closely-held partnerships and LLCs from the rules). Since Section 721(c) is not presently on the radar of most practitioners, this is a trap for the unwary. The addition of more complexity to Subchapter K is also not a welcome event - the ballooning complexity of that Subchapter over the years is a trend that these new rules continue.

The good news is multifaceted. First, Section 721(c) will only apply in limited circumstances. There needs to be a foreign partner (but be wary of the “indirect” rule). There will need to be appreciation over $1 million. Also, the applicable U.S. Transferor and persons related to the U.S. Transferor must own more than 50% of the partnership. Second, even if Section 721(c) does apply, there is not significant downside to adopting the Gain Recognition Method as a method of avoiding gain recognition beyond administrative inconvenience.

Notice 2015-54

Friday, August 07, 2015

Article Abstract: Estate Planning with Carried Interests & Code §2701


Estate Planning with Carried Interests: Navigating I.R.C. §2701


Nathan R. Brown


The Florida Bar Journal, July/August 2015


Florida Bar

ABSTRACT (Key Points & Discussions)

    • Issue: Fund managers of private equity funds typically obtain a percentage of total profits via general partner interests - a "carried interest." Because the GP is not entitled to its carried interest unless the fund’s investments generate sufficient profit to return all invested capital plus a specified preferred return, at the time the fund is created (and throughout the fund’s early stages) the carried interest has little or no value. The carried interest’s significant appreciation potential makes it an ideal asset to transfer during life using various estate planning techniques. However, Code §2701 typically applies to increase the value of the transferred asset for gift tax purposes if the managers own any other equity interests in the fund, such as limited partners. The article addresses various planning mechanisms to avoid Code §2701 limitations.
    • VERTICAL SLICE EXCEPTION: Utilizing Treas.Regs. § 25.2701-1(c), the vertical slice exception to §2701 requires the fund manager to transfer not only the carried interest, but also a proportionate amount of all other equity interests in the fund (e.g., the fund manager’s capital interest in the fund either through the GP or in the fund directly as an LP). This is commonly done via a transfer of all interests to an LLC and then a gift of member interests in that LLC.
    • CODE §2701 COMPLIANT ENTITIES: The manager transfers all of his interests to an LLC, which is structured to have common and preferred interests. Transfers of common interests are able to use the "same class" exception, and the retained preferred interests are structured to qualify as "qualified payment rights" under 2701. A deemed gift of 10% of the total equity interest values will still occur, and care must be exercised as to the coupon rate on the qualified payment right.
    • TRUST FOR APPLICABLE FAMILY MEMBERS:  The manager transfers the carried interests to a trust under which applicable family members and other friendly persons are only discretionary beneficiaries without triggering §2701. Transfers to family members later occur through exercise(s) of limited powers of appointment to and among them. Step transaction exposure may exist.
    • PARALLEL TRUSTS. Two irrevocable trusts  are created for the benefit of family members. One would be a completed gift grantor trust which receives the carried interest. One would be an incomplete gift nongrantor trust which received a proportionate amount of other capital interests. §2701 is avoided by the fund manager being treated as not owning the capital interest in the second trust.
    • DERIVATIVE CONTRACT:  A  derivative contract tied to the performance of the carried interest is transferred to an irrevocable grantor trust in exchange for a payment. Since an actual interest of the carried interest does not occur, then §2701 should not apply.


Carried Interests, Code §2701


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