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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.


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using the blog's Search function. Note that many of these articles are available by

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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.