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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


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.

Sunday, August 02, 2015

No Four Year Statute of Limitations for Fraudulent Conveyance

Florida Statutes Section 726.110 generally provides for a four year statute of limitations in regard to fraudulent conveyances (or if longer, 1 year after the transfer was or could have reasonably been discovered by the claimant). Fraudulent conveyance law generally allows a creditor to pursue a third party that received assets from a debtor if the transfer was a fraudulent conveyance.

In a recent Florida case, a judgment holder sought to collect a judgment against a transferee on assets transferred by the debtor. This was done under proceedings supplementary under Florida Statutes Section 56.29, which is a procedural mechanism for collecting on a money judgement. The property of the transferee was at risk since Florida Statutes Section 56.29 provides “[w]hen any gift, transfer, assignment or other conveyance of personal property has been made or contrived by the judgment debtor to delay, hinder, or defraud creditors, the court shall order the gift, transfer, assignment or other conveyance to be void and direct the sheriff to take the property to satisfy the execution.”

The language of this statute is similar in language and concept to the general fraudulent conveyance statutes. Based on such similarity, the transferee argued that the statute of limitations under those statutes should apply to protect the transferee – since that period had run it was too late to collect against the transferee.

No such luck, said the first District Court of Appeal. The statute for collections under proceedings supplementary on a judgment are not tied to the fraudulent conveyance statutes of limitations. Instead, the judgment holder instead can proceed against the transferee (if the transfer was made to delay, hinder or defraud creditors) for the 20 year entire term of the judgment. Transferees thinking they are protected under a 4 year fraudulent conveyance statute in all events may have to adjust their assumptions.

While not applicable in the subject case, however, if a bankruptcy is involved then this extended period may not be applicable. In re: C.D. Jones & Company, Inc., 2015 WL 2260707 at footnote 18 (United States Bankruptcy Court, N.D. Florida 2015).

Biel Reo, LLC v. Barefoot Cottages Development Co., LLC, 156 So.3d 506 (1st DCA 2014)