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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)