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Sunday, September 24, 2017

New Useful Florida Homestead Concepts Diagram

Several years ago I prepared a table to assist practitioners in determining what restrictions apply on a transfer of homestead property at death or during lifetime. You can access it here.

Homestead status has other implications, including protections from creditors, inclusion or exclusion from the probate estate, and ad valorem tax implications. The Florida Statutes also employ the term “protected homestead” in defining some of these aspects. The whole area makes for a set of interrelated and unrelated concepts and implications that is difficult to both comprehend and apply.

To help with understanding these concepts, and how the statutory term “protected homestead” fits in, I have created a new diagram. You can download a copy here.

If you see the need for any corrections or clarifications, please email me at Note that the chart does not address ad valorem tax considerations of homestead.


Saturday, September 16, 2017

Audit of Predeceased Spouse Permitted for Purposes of DSUE Adjustment for Surviving Spouse’s Estate

A husband died in 2012, and his estate filed a gift tax return to report a deceased spousal unused exclusion (DSUE) and elected portability. The IRS sent a letter to husband’s estate accepting the estate tax return as filed. Portability allows a surviving spouse or the estate of that surviving spouse to use the unused unified credit of the predeceased spouse for estate and gift tax purposes.

His wife died in 2013. Her estate filed an estate tax return that applied the husband’s DSUE amount to reduce her estate taxes. Notwithstanding any period of limitation in section 6501, after the time has expired under section 6501 within which a tax may be assessed under chapter 11 or 12 with respect to a deceased spousal unused exclusion amount, the Secretary may examine a return of the deceased spouse to make determinations with respect to such amount for purposes of carrying out this subsection.

Under the authority of Code §2010(c)(5)(B) , the IRS examined the return of the husband’s estate. Finding unreported lifetime gifts made by the husband before 2010, the IRS reduced the DSUE amount and thus increased the estate taxes due by the wife’s estate.

The Wife’s estate contested the adjustment and raised numerous arguments why the DSUE reduction by the IRS was not permitted. Finding for the IRS, the Tax Court rejected all of the arguments of the taxpayer and upheld the IRS’ reduction of the DSUE amount.

Code Section 2010(c)(5)(B) authorizes a review of the estate of a predeceased spouse to determine the DSUE amount available to the surviving spouse. It reads:

Notwithstanding any period of limitation in section 6501, after the time has expired under section 6501 within which a tax may be assessed under chapter 11 or 12 with respect to a deceased spousal unused exclusion amount, the Secretary may examine a return of the deceased spouse to make determinations with respect to such amount for purposes of carrying out this subsection.

Argument – The Estate Tax Closing Document Is a Closing Agreement Under Code §7121, and the IRS is Estopped from a Further Review of the Husband’s Estate

Under Code §7121(a) the IRS may enter into written agreements with any person relating to the liability of such person. Agreements under Code §7121 are final. The IRS cannot reopen a matter for which a closing agreement has been executed unless there is a showing of fraud or malfeasance or misrepresentation of a material fact. Under Treas. Regs. §601.202(b) & 301.7212-1(d)(1), only the prescribed forms, Form 866, Agreement as to Final Determination of Tax Liability, and Form 906, Closing Agreement on Final Determination Covering Specific Matters, qualify as closing agreements. No such forms were used here.

In extraordinarily rare cases, courts have bound the Commissioner to an agreement in the absence of a properly executed Form 866 or Form 906. In such cases, there has been a period of negotiation between the parties and a clear exchange of offer and acceptance. Here, no such negotiation took place and thus the court held there was no closing agreement.

As to estoppel, cases where courts have held that a taxpayer was adversely affected and the Commissioner was estopped, the adversely affected parties would have been forced to bear the cost of taxes that they would not otherwise have borne. Estoppel may also apply when a party with a withholding responsibility that acted in reliance on a previous Government position and received no benefit from a failure to pay a tax is now required to pay a tax that would normally be borne by another. Here, there was no risk of double taxation, and there were no facts showing that either estate acted in reliance on the Estate Tax Closing Document. Therefore, estoppel could not be applied.

Argument – The Examination of Husband’s Estate was an Improper Second Examination

Code §7605(b) protects taxpayers from an impermissible second examination. The Commissioner does not conduct a second examination when he does not obtain any new information. The Commissioner did not request additional information from the husband’s estate, and consequently, there was no second examination. Even if the Commissioner had conducted a second examination of the return for Franks estate, he would not have violated Code §7605(b) as to Minnies estate. The Tax Court and others have found that only the examined party is protected from second examinations. Here,  the party that is claiming protection against the effects of a purported second examination (i.e., the wife’s estate) was not the party that underwent the examination (i.e., the husband’s estate).

Argument – Code §2010(c)(5)(B) Effective Date Precludes DSUE Adjustment for Gifts Made Before 2010

The estate argued that because the gifts at the center of this case were given before the effective date of Code §2010(c)(5)(B), the Commissioner cannot make adjustments to the DSUE as a result of those gifts. The Tax Court noted it is clear that the effective date of Code §2010(c)(5)(B), the estate tax amendment, is for decedents dying after December 31, 2010. Because both husband and wife died after December 31, 2010, Code §2010(c)(5)(B) applies to both their estates and that is the end of the story – there is no exclusion for gifts made before the effective date of the statute.

Argument – Code §2010(c)(5)(B) As Applied is Contrary to Congressional Intent and is a Due Process Violation since It Overrides the Statute of Limitations

The Supreme Court has held that the statutory text is the most persuasive evidence of congressional intent. Congress adopted a statute that explicitly gave the Commissioner the power to examine the returns of the predeceased spouse and adjust the amount of the DSUE outside of the period of limitations under Code §6501. This is a clear indication that the Commissioners exercise of this power is not in violation of congressional intent.

The wife’s estate also argued that Code §2010(c)(5)(B) is unconstitutional for want of due process of law in that there is no statute of limitations. However, while the IRS may adjust or eliminate the DSUE amount reported on such a return, the IRS may assess additional tax on that return only if that tax is assessed within the period of limitations on assessment under Code §6501 applicable to the tax shown on that return. Thus, the statute is not unconstitutional.

Estate of Minnie Lynn Sower et al. v. Commissioner, No. 32361-15, 149 T.C. No. 11

Thursday, September 14, 2017

Extended Due Dates for Hurricane Irma Victims

Hurricane Irma blazed a path of destruction through the Caribbean, the Florida Keys, and up through Florida. As a result, the IRS is postponing various tax filing and payment deadlines that occurred starting on September 4, 2017 in Florida and September 5, 2017 in Puerto Rico and the Virgin Islands. Persons with valid filing extensions in place will have their due dates extended until January 31, 2018. Extended deadlines include due dates for income tax returns for individuals and entities due on September 15 and October 16, and the September 15 and January 16 quarterly estimated income tax payments.

These extended deadlines apply to areas designated by FEMA as qualifying for individual assistance. The IRS indicates the following areas are so designated (check for updates here):

In U.S. Virgin Islands: The islands of St. John and St. Thomas.

In Puerto Rico: The municipalities of Culebra, Vieques, Canóvanas and Loíza.

In Florida: The counties of Brevard, Broward, Charlotte, Citrus, Clay, Collier, DeSoto, Duval, Flagler, Glades, Hardee, Hendry, Hernando, Highlands, Hillsborough, Indian River, Lake, Lee, Manatee, Marion, Martin,  Miami-Dade, Monroe, Okeechobee, Orange, Osceola, Palm Beach, Pasco, Pinellas, Polk, Putnam, Sarasota, Seminole, St. Johns, St. Lucie, Sumter and Volusia.

IRS News Release 2017-150, September 12, 2017

Saturday, September 09, 2017

Time to Revise Your Partnership and LLC Agreements?

In June, the IRS reissued proposed regulations that adopt new centralized partnership audit procedures. These will replace the current TEFRA audit rules.

The short story is that by default, the PARTNERSHIP is responsible for paying any additions to tax, although the partnership can elect to push this out to the partners. The new rules also replace the “tax matters partner” with a “partnership representative” – this representative has greater authority to act without the involvement of the partners than in the past. There is also an opt-out election that smaller qualified partnerships can take.

Partnerships and LLCs should amend their partnership and operating agreements to provide for the changes in the law, although perhaps they may want to wait for final regulations to be issued. For more detail on the changes and items that should be addressed in the agreements, click HERE.

Saturday, September 02, 2017

Reading the Tea Leaves on Trump Tax Reform

In a recent speech, President Trump did not provide much detail in regard to the tax reform proposals that are expected soon, or his particular desires. Nonetheless, he did drop hints as to some aspects of reform:

a. He has continued his call for a 15% business tax rate, so as to improve U.S. tax competitiveness;

b. He also is looking for ways to bring back non-U.S. profits on a more favorable basis; and

c. He is looking for some measure of relief for middle-income americans, including helping parents afford childcare and the cost of raising a family.