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Thursday, April 30, 2015

Florida Recognizes Same-Sex Marriages, At Least When the Time Comes for Divorce

A same-sex couple were married in Massachusetts in October 2012. They later moved to Florida, and one of the spouses filed a petition for dissolution of marriage in Florida, even though Florida does not recognize same-sex marriages.

The Full Faith and Credit clause of the U.S. Constitution does require one state to recognize the acts, records, and proceeds of other states, unless it is against the public policy of that state. Florida does not recognize same-sex marriages under its Defense of Marriage Act. Because of that Act, and its public policy, the trial court would not allow the dissolution of marriage to proceed.

The 2nd District Court of Appeals reversed the trial court and directed that the dissolution proceedings can continue in Florida. The Court found that since sexual orientation is not a protected class, Florida need only prove that it has a rational basis for its classification in this instance. Nonetheless, the Court could not find a rational basis for sexual orientation in dissolution of marriage proceedings. The Court reasoned that if Florida’s policy “is to prevent, eliminate, discourage, or otherwise preclude same-sex marriage in Florida, permitting the courts to dissolve same-sex marriages that have been previously entered into in other states would arguably further that policy by reducing the number of same-sex married couples in Florida.”

So, we are left with the odd situation that same-sex persons cannot marry in Florida, but can get divorced here. Florida’s limitations on same-sex person marriages may be voided, depending on what happens in the U.S. Supreme Court dealing with same-sex marriage restrictions this term.

DANIELLE BRANDON-THOMAS, v. KRISTA BRANDON-THOMAS, 40 Fla.L.Weekly D971a (2nd DCA 2015)

Friday, April 24, 2015

FBAR Case Rules on Unknown Issues

A recent FBAR decision weighs in on some unknown and uncertain penalty issues relating to failure to file FBARs. These issues include:

a. Definition of Reasonable Cause. The penalty for failure to file an FBAR will not apply if the taxpayer has reasonable cause for the nonfiling. Unfortunately, there is no definition of reasonable cause under the Bank Secrecy Act or its regulations for FBAR penalty purposes. The court determined that the best meaning would be to borrow from the Internal Revenue Code provisions (such as Sections 6664(c)(1) and 6677(d)), and held that a person would have reasonable cause for an FBAR violation if he exercised of ordinary business care and prudence.

b. No Reasonable Cause Facts. Applying the above definition, the court found the taxpayer did not have reasonable cause for his failure to file. The same facts will have a different impact on different courts, both as to having different judges and different overall circumstances. Nonetheless, it is useful to see what facts are relevant to deciding in courts. In this case, some of the bad facts were that the court determined that the taxpayer knew of his filing requirements (in part because in prior years he had filled out his own tax returns and knew of the question on the income tax return about foreign accounts even though he did not answer that question), that he incorrectly denied having foreign accounts in filling out tax organizers/questionnaires of the return preparer, and there was no evidence that he otherwise advised the preparer of the account.

c. Assessment Procedures Met Due Process. By interviewing the taxpayer, giving him a notice proposing to assess the penalties, affording the taxpayer an appeal process, and issuing a notice of assessment, the IRS was found by the court to have met the requirements of procedural due process.

d. No 8th Amendment Violation. The IRS imposed $10,000 per year penalties on the accounts. The court found that the imposition of such maximum penalties were not an 8th Amendment “excessive fine” violation. The court found the penalties were not disproportionate to the offence, since Congress authorized them without regard to the size of the unreported accounts, and the actual size of the account not reported here (account with balances between $300,000 and $550,000).

Moore v. U.S., (DC WA 04/01/2015) 115 AFTR 2d ¶2015-591

FBAR Case Rules on Unknown Issues

A recent FBAR decision weighs in on some unknown and uncertain penalty issues relating to failure to file FBARs. These issues include:

a. Definition of Reasonable Cause. The penalty for failure to file an FBAR will not apply if the taxpayer has reasonable cause for the nonfiling. Unfortunately, there is no definition of reasonable cause under the Bank Secrecy Act or its regulations for FBAR penalty purposes. The court determined that the best meaning would be to borrow from the Internal Revenue Code provisions (such as Sections 6664(c)(1) and 6677(d)), and held that a person would have reasonable cause for an FBAR violation if he exercised of ordinary business care and prudence.

b. No Reasonable Cause Facts. Applying the above definition, the court found the taxpayer did not have reasonable cause for his failure to file. The same facts will have a different impact on different courts, both as to having different judges and different overall circumstances. Nonetheless, it is useful to see what facts are relevant to deciding in courts. In this case, some of the bad facts were that the court determined that the taxpayer knew of his filing requirements (in part because in prior years he had filled out his own tax returns and knew of the question on the income tax return about foreign accounts even though he did not answer that question), that he incorrectly denied having foreign accounts in filling out tax organizers/questionnaires of the return preparer, and there was no evidence that he otherwise advised the preparer of the account.

c. Assessment Procedures Met Due Process. By interviewing the taxpayer, giving him a notice proposing to assess the penalties, affording the taxpayer an appeal process, and issuing a notice of assessment, the IRS was found by the court to have met the requirements of procedural due process.

d. No 8th Amendment Violation. The IRS imposed $10,000 per year penalties on the accounts. The court found that the imposition of such maximum penalties were not an 8th Amendment “excessive fine” violation. The court found the penalties were not disproportionate to the offence, since Congress authorized them without regard to the size of the unreported accounts, and the actual size of the account not reported here (account with balances between $300,000 and $550,000).

Moore v. U.S., (DC WA 04/01/2015) 115 AFTR 2d ¶2015-591

Tuesday, April 14, 2015

60 Crummey Withdrawal Beneficiaries Allowed

For many years, courts have recognized that gifts to a trust can qualify for the gift tax annual exclusion as “present interest” gifts if withdrawal powers are granted to beneficiaries.The IRS is hostile to persons being treated as a beneficiary for this purpose if they have no rights to income or principal nor vested rights as remaindermen. Nonetheless, the courts have recognized beneficiaries that are merely contingent remaindermen as having a substantial enough interest such that annual exclusion can be applied to gifts subject to withdrawal by them. For example, see Estate of Cristofani v. Commissioner, 97 T.C. 74 (1991)

In a recent Tax Court case, a trust had as its beneficiaries 60 persons – all of the lineal descendants of the settlors and the spouses of those descendants.Property was funded into the trust in 2007, and all beneficiaries were granted withdrawal rights and notified of their withdrawal rights. Aside from satisfying the withdrawal rights that might be exercised, the trustees were given power to distribute in their discretion amounts of income and principal among one or more of the beneficiaries for health, education, maintenance, support and other purposes.

The Court granted a motion to treat the amounts subject to the withdrawal powers as present interest gifts for annual exclusion purposes.

This is the highest number of withdrawal power beneficiaries I have ever seen. Interestingly, the principal issue before the court did not relate to the number of beneficiaries nor the discretionary or contingent nature of their interests in the trust aside from their withdrawal rights. Instead, it focused on whether they had an enforceable right to withdraw the withdrawal amounts.

This was an issue because the initial resolution of disputes has to be submitted to arbitration before a panel consisting of three persons of the Orthodox Jewish faith. Such a panel in Hebrew is called a beth din. If a disputant does not like the results of the beth din, they could still go to court, but the trust has an in terrorem clause that would cut off the rights of the disputing beneficiary if he or she did that. So the IRS argued that the in terrorem clause effectively voided the withdrawal beneficiaries power to legally enforce his or her withdrawal powers – thus they were illusory and not a qualified present interest.

The flaw in this argument is that the beth din was still obligated to apply the provisions of the trust instrument and New York law. So since the beneficiaries had withdrawal rights under the trust and New York law the beth din could not willy-nilly disregard them – the rights were thus enforceable. The fact that they were enforceable by the beth din and not a court of law was not important to the Tax Court.

Mikel v. CIR, T.C. Memo 2015-64

Friday, April 03, 2015

Can A Form 1040 Income Tax Return Omission Lead to an Extended Statute of Limitations for an Estate Tax Return (Form 706) or Estate Income Tax Return (Form 1041)?

Surprisingly, yes! At least according to the IRS. How so? Here’s at least one scenario where it is possible:

   1. An executor for a decedent’s estate files a final Form 1040 for the decedent. The executor does not report a foreign financial asset of the decedent, which Code Section 6038D requires should be reported on Form 8938 to be filed with the Form 1040.

   2. The executor also did not report income from such foreign financial asset on the estate’s Form 1041, and did not report it on the estate Form 706 which the estate was obligated to file. The three year statute of limitations for both the Form 1041 and Form 706 have expired.

   3. Code Section 6501(c)(8) provides “[i]n the case of any information which is required to be reported to the Secretary … under section … 6038D …, the time for assessment of any tax imposed by this title with respect to any tax return, event, or period to which such information relates shall not expire before the date which is 3 years after the date on which the Secretary is furnished the information required to be reported under such section.”

   4. One would rightly expect that the statute of limitations for the Form 1040 remains open under the above provision due to the omission. In this situation, however, since the omitted foreign items “relate” to other tax returns such as the Form 1041 and Form 706, IRS Program Technical Advice asserts that the statute of limitations on those returns stays open until 3 years after the subject foreign financial asset items are reported. This is allowable since Code Section 6501(c)(8) refers to Title 26, which includes taxes other than individual income taxes.

Note that Section 6501(c)(8) does not leave the statute open only as to the missing foreign financial asset items, but keeps the statute open for all items under the subject return. However, if the failure to report was due to reasonable cause and not willful neglect, under Section 6501(c)(8)(B) the statute stays open only as to items relating to the missing foreign financial asset.

Does the Form 8938 omission really “relate” to the Form 1041 and Form 706? The Technical Advice says “yes” because if the missing items had been on the Form 8938 then the IRS would have known to look for them on the Form 1041 and Form 706. I don’t know if I accept that – reasonable minds may differ. The counter-argument is that the Form 8938 reporting is required so that the IRS is alerted to tax consequences relating to income taxes for the tax year of reporting – not reporting in later years. However, the use of the word “title” in Code Section 6501(c)(8) does lend support to the IRS’ position.

Program Manager Technical Advice 2014-018