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Thursday, July 12, 2018

A Safe Harbor for Waiver-by-Deed of Spousal Homestead Interests [Florida]

Under the Florida Constitution, a decedent owner of Florida homestead property with a surviving spouse can only devise that property to the surviving spouse (although if there are surviving minor children then no devise can be made at all). Fla.Stats. §732.702 allows for written waivers of homestead rights by spouses. That statute requires “fair disclosure” of assets be made if the waiver occurs after marriage.

Recent case law, most notably Stone v. Stone, 157 So.3d 295 (4th DCA 2014) allowed a deed from a spouse to constitute a waiver for this purpose. The correctness and scope of this decision have been debated by practitioners.

By reason of Stone and other decisions, Florida has enacted Fla.Stats. §732.7025 (effective on July 1 of this year) that provides a safe harbor method of having a spousal waiver-by-deed. If a spouse enters into a deed that has specific statutory language, then the deed will constitute a valid waiver of spousal homestead rights for descent and distribution purposes (but not for creditor protection purposes or for purposes of avoiding spousal joinder on inter vivos transfers of homestead).

For those with an interest, I have a more extended commentary in the Waiver section of my treatise, Rubin on Florida Homestead (www.rubinonfloridahomestead.com). This commentary addresses whether fair disclosure is still needed, the “safe harbor” nature of the new provision, the effect of such a waiver, and the question whether the new statute applies if the deeding spouse has no legal or equitable interest in the homestead. If of interest, you can download a copy of that Section from Microsoft OneDrive at this link: https://1drv.ms/b/s!AvIWUWY7Se4ogaUrVjPseSkvCL9yvQ

Sunday, July 08, 2018

Supreme Court Upholds Changes to Beneficiaries Upon Divorce

Married persons often name the other spouse as beneficiaries of their estate, life insurance, pensions, IRA’s, annuities and other contractual arrangements upon the death of the first spouse. Upon divorce, they often do not get around to changing these beneficiary designations, either intentionally or unintentionally. Many state legislatures have reached the conclusion that the spouse that died would likely have wanted to change the beneficiary from the former spouse, but just never got around to it (whether intentionally via procrastination or unintentionally). They have enacted revocation-on-divorce statutes that treat a divorce as voiding one or more of testamentary bequests and beneficiary designations. In 2002, Minnesota adopted such a statute that applied to will and various will substitutes, including life insurance and annuity contracts.

The Contracts Clause of the U.S. Constitution restricts the power of States to disrupt contractual arrangements. It provides that “[n]o state shall . . . pass any . . . Law impairing the Obligation of Contracts.”  U. S. Const., Art. I, §10, cl. 1. In a recent case, the U.S. Supreme Court addressed the issue whether Minnesota’s revocation-on-divorce statute was unconstitutional as violative of the Contract Clause. The dispute arose between the claims of a divorced spouse, and alternative beneficiaries, as to entitlement to life insurance proceeds when a former spouse died and did not remove the surviving spouse as beneficiary of the insurance policy.

The Supreme Court ruled against the surviving spouse and held these types of laws do not violate the Contracts Clause. That Clause restricts the power of States to disrupt contractual arrangements, but it does not prohibit all laws affecting pre-existing contracts. The two-step test for determining when such a law crosses the constitutional line first asks whether the state law has “operated as a substantial impairment of a contractual relationship.” In analyzing that question, the Court has considered the extent to which the law undermines the contractual bargain, interferes with a party’s reasonable expectations, and prevents the party from safeguarding or reinstating his rights. If such factors show a substantial impairment, the inquiry turns to whether the state law is drawn in an “appropriate” and “reasonable” way to advance “a significant and legitimate public purpose.”

The Supreme Court ruled based on the first step, and never had to address the second step. The Court noted that the law is designed to reflect a policyholder’s intent—and so to support, rather than impair, the contractual scheme. It applies a prevalent legislative presumption that a divorcee would not want his or her former partner to benefit from a life insurance policy and other will substitutes. Thus the law often honors, not undermines, the intent of the only contracting party to care about the beneficiary designation. Also, the Court reasoned that the law is unlikely to disturb any policyholder’s expectations at the time of contracting, because an insured cannot reasonably rely on a beneficiary designation staying in place after a divorce.This is because divorce courts have wide discretion to divide property upon dissolution of a marriage, including by revoking spousal beneficiary designations in life insurance policies or by mandating that such designations remain. Because a life insurance purchaser cannot know what will happen to that policy in the event of a divorce, his reliance interests are next to nil. Further, the law supplies a mere default rule, which the policyholder can undo in a moment by redesignating the divorced spouse as beneficiary through a change-in-beneficiary form.The Court noted it has long held that laws imposing such minimal paper-work burdens (like recording statutes) do not violate the Contracts Clause.

The decision threatened to have a substantial impact if the Court had ruled these laws to be a violation of the Contracts Law, but that has dissipated with the conclusion that such laws are not a Contracts Clause violation.

Sveen v. Melin, 584 U.S. ____ (2018)


GOT HOMESTEAD? www.rubinonfloridahomestead.com

Sunday, July 01, 2018

Taxpayers Could Not Rely on IRS Correspondence Waiving Penalties

In a recent U.S. District Court decision, the taxpayers were audited, and ultimately received a letter from the auditing agent that “the penalties had been waived.” The taxpayers signed a Form 4549 document which did not assess penalties.

Subsequently, the IRS sent a Form 4549-A assessing a civil penalty under §6707A for failure to disclose a listed transaction. The taxpayers argued that the IRS had waived penalties and could not assess this new penalty, or alternatively the IRS was equitably estopped from asserting the penalty. The court ruled in favor of the IRS and allowed the penalty.

Code §7121(a) authorizes the IRS to enter into agreements in writing as to tax liabilities of a taxpayer. Treas. Regs. § 301.7121-1(d)(1) provides that closing agreements must be executed on forms prescribed by the IRS. Rev.Proc. 68-16, Section 6 provides that the appropriate forms are Form 866 or Form 906. Since neither of those Forms were issued by the IRS, the court held that there was no binding closing agreement as to penalties, and thus allowed the new penalties. The court noted that a Form 4549 is not an authorized closing agreement.

The court also noted that since the IRS had not asserted a §6707A penalty at the time of its waiver offer, that penalty was not waived.

While there is case law allowing valid closing agreements to arise outside of a Form 866 or Form 906, the court noted that the precedent in this area applies only to settlement of pending litigation in docketed cases, which was not the case for the taxpayers.

The court also disposed of the equitable estoppel claim by finding a lack of “affirmative misconduct” on behalf of the IRS.

Hinkle, 121 AFTR2d Para. 2018-861( DC New Mexico)

GOT HOMESTEAD? - www.rubinonfloridahomestead.com

Sunday, June 24, 2018

Likely That Not All Internet/Web Sales Into a State will be Subject to State and Local Sales Taxes

In South Dakota v Wayfair, Inc., the U.S. Supreme Court overruled its prior precedent regarding sales tax on interstate sales and imposed state sales tax on sellers of merchandise who had no physical location or presence in South Dakota into South Dakota via the Internet .

OLD LAW. National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992) had previously held that an out-of-state seller’s liability to collect and remit the tax to the consumer’s State depended on whether the seller had a physical presence in that State, and that mere shipment of goods into the consumer’s State, following an order from a cata­log, did not satisfy the physical presence requirement.

GENERAL COMMERCE CLAUSE LIMITATIONS ON TAXATION OF INTERSTATE SALES. State regulations may not discriminate against interstate commerce, and may not impose undue burdens on interstate commerce. State laws that “regulat[e] even-handedly to effectuate a legitimate local public interest . . . will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefit". In Complete Auto Transit, Inc. v. Brady, 430 U. S. 274 (1977), the Court held it would sustain a tax so long as it (1) applies to an activity with a substantial nexus with the taxing State, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services the State provides. The Quill requirement for physical presence was based on "substantial nexus" requirement.

COURT DETERMINATIONS. The Supreme Court found that the physical presence test is flawed and abrogated it, and thus overruled Quill and National Bellas Hess. So now, the mere selling into a state via the Internet can subject the seller to sales taxes in the location of the purchaser.

SCOPE OF THE RULING. The substantial nexus test remains, as do the other Brady requirements and the requirement not to unduly burden interstate commerce. These requirements were found to be met in this case, in part based on several aspects of South Dakota law and the taxpayers: (a) the tax applies only to sellers that, on an annual basis, deliver more than $100,000 of goods or services into the State or engage in 200 or more separate transactions for the delivery of goods or services into the State, (b) there was no retroactive application of the tax, (c)  South Dakota is a party to the Streamlined Sales and Use Tax Agreement which reduces administrative and compliance costs per a single, state level tax administration, uniform definitions of products and services, simplified rate structures, and other uniform rules, (d)  the sellers were large, national companies with an extensive virtual presence, and (e) the State provided sales tax administration software.

Unduly complex collection mechanisms, lack of exceptions for small businesses or those with minimal sales in the locality, and other fact-specific questions may make the collection of sales taxes illegitimate in other jurisdictions based on the facts applicable to the applicable sales and taxing jurisdiction. While regimes with similar rules to South Dakota will likely pass constitutional muster, other broader or more burdensome regimes may not.

South Dakota v Wayfair, Inc., 585 U. S. ____ (2018).

Sunday, June 17, 2018

The Good and Bad News on Charitable Deductions under the 2017 Act

The good news first:

a. The 50% of adjusted AGI limitation maximum deduction amounts in any one year is increased to 60% as to cash contributions.

b. The Section 68 3% “Pease limitation” phase-out of itemized deductions is out of the law (through 2015).

These changes can significantly increase available deductions, but mostly for higher income persons and/or persons making significant gifts. Thus, one has to wonder whether the loss of deductions under the “bad news” below for many taxpayers will be offset by these increases.

The bad news:

a. The standard deduction is significantly increased to $12,000 for single people and $24,000 for married taxpayers.

b. Many formerly deductible expenses are no longer deductible,or deductions are limited (e.g., $10,000 limit for state and local taxes).

This means that for taxpayers making smaller gifts, it will be harder for them to have aggregate deductions above the standard deduction threshold. If deductions are not above that threshold, it will make more sense for those taxpayers to not itemize and take the standard deduction. This means that their charitable gifts may not be significant enough to garner a tax deduction. The prediction is that for lower and middle income taxpayers without a lot of deductions, their charitable giving will be reduced without the incentive of an income tax deduction.

There is an obvious planning mechanism for these taxpayers - to aggregate and save up their their charitable gifts and make them in fewer tax years (but to have a higher gifting amount in those years they do gift). The plan would be to take them above the standard deduction limits in their gift years and thus obtain a tax benefit for their gifting. Still, for many taxpayers, even with aggregation (also referred to as “stacking”), their gifts may not be high enough to materially get past the standard deduction thresholds.

Taxpayers who do not want to put large lump sums into the hands of charities but desire a charitable deduction in a current year can avail themselves of existing planning mechanisms that allows a deduction now and money going out to the charity later. These include gifts to private foundations, donor advised funds, and charitable trusts. Note that there are various limitations on deductions and rules on how to operate such vehicles, and some of them are not cost-effective absent large gifts. Before using them, taxpayers should consult with their tax advisors.

GOT HOMESTEAD? - www.rubinonfloridahomestead.com

Tuesday, June 12, 2018

Updated Florida Irrevocable Trust Amendment Mechanisms [Florida]

By Charles (Chuck) Rubin & Jenna Rubin

Florida practitioners will tell you that it is difficult to aggregate and analyze all the potential legal avenues to amending or terminating an irrevocable trust. We have previously created a map/chart that summarizes the principal methods available.

We have recently updated that map/chart, and added another delivery method. The two methods to view the map/chart are now:

a. An HTML file that after you download to your computer should open in a browser to view the information in an expandable/collapsible mindmap format. Click HERE to download the file. You must download it first and save it, and then you can open it. Some computer systems block the file or will not run it, presumably based on security settings. If that is the case for you, see alternative b. below.

b. This is a PDF file that contains all the information from the map/diagram, but in a text document layout, including copies of the relevant statutes. Click HERE to download it.

We have received a lot of favorable feedback from prior versions, so we are keeping this project going and will continue to update these items as the law evolves.

Saturday, June 09, 2018

IRS Warns on State Charitable Deduction Schemes to Allow Property Taxes Deduction

The Tax Cuts and Jobs Act of 2017 limits the Code §164 deduction of individuals for state and local taxes to $10,000 per year ($5,000 for married individuals filing a separate return). Thus, many taxpayers in states with high state taxes have lost a federal income tax subsidy of their state and local taxes.

Several states have adopted or are proposing arrangements to convert tax payments to deductible charitable deductions. These work by allowing taxpayers to make their tax payments to state-established or sanctioned charitable organizationS and then receive a credit against their state taxes for these payments. Voila - a state tax payment (subject to the $10,000 limit) is converted to a deductible charitable payment (not subject to the $10,000 limit).

The IRS has issued Notice 2018-54 warning taxpayers of proposed regulations that will be coming out that will address these payments. The Notice does not explicitly provide that the above charitable deduction arrangement will be ineffective - no such level of detail is provided. It does, however, specifically describe those arrangements and also references the “substance-over-form” doctrine, so it is highly likely that the regulations will disallow the charitable deduction under these arrangements.

Note that in the past, the IRS has provided that such charitable contribution/state tax credit arrangements allowed for a charitable deduction. Such was the conclusion in Office of Chief Counsel Internal Revenue Service Memorandum 201105010. However, that memorandum implies that the taxpayers did not receive a disqualifying quid pro quo in receiving the state tax credit for the charitable deduction, at least in part because a federal income tax deduction was allowable both for charitable deductions and state and local tax payments. Now that the state and local tax deduction is limited, I would expect the IRS to hold that by receiving the state tax credit the taxpayers are receiving a valuable quid pro quo - a federal tax deduction that would not otherwise be available for a direct tax payment. Thus, the charitable deduction would not be available. Alternatively, or also, the IRS may rely on the substance-over-form doctrine it mentions in its Notice to challenge the charitable deduction.

Notice 2018-54, Guidance on Certain Payments Made in Exchange for State and Local Tax Credits

GOT HOMESTEAD? - www.rubinonfloridahomestead.com

Thursday, May 31, 2018

Court Stops Beneficiaries From Commuting Trust [Florida]

By Chuck Rubin & Jenna Rubin
EXECUTIVE SUMMARY: An income beneficiary of a trust and the trust remaindermen were unable to successfully commute and terminate a trust.
FACTS: A revocable trust became irrevocable at the death of the settlor. The settlor provided for an income interest for her son for his life, with the remainder to pass to three educational institutions at the son’s later death.
The son and the remaindermen entered into an agreement to terminate the trust, and divide the $3 million of trust assets between them based on their actuarial interests. The trustee of the trust was not a party to the agreement, and did not agree to the early termination.
The son filed a complaint against the trustee to terminate the trust in accordance with the agreement, citing Fla.Stats. §§736.04113 and 736.04115. Fla.Stats. §736.04113 allows for judicial modification of an irrevocable trust on petition of a trustee or a qualified beneficiary if: (a) the purposes of the trust have been fulfilled or have become illegal, impossible, wasteful, or impracticable to fulfill; (b) because of circumstances not anticipated by the settlor, compliance with the terms of the trust would defeat or substantially impair the accomplishment of a material purpose of the trust; or (c) a material purpose of the trust no longer exists. Fla.Stats. §736.04115 similarly allows judicial modification if compliance with the terms of a trust is in the best interests of the beneficiaries, taking into account the intent of the settlor and the current circumstances and best interests of the beneficiaries.
Both parties moved for summary judgment, and the trial court ruled in favor of the son, allowing termination of the trust. The trial court held that the termination was in the best interests of the beneficiaries since it would preserve trust assets by eliminating unnecessary expenses relating to trust administration. On appeal, the appellate court reversed the trial court and directed that summary judgment be entered in favor of the trustee barring the termination of the trust.
COMMENTS: There are few income beneficiaries and remaindermen who would not want to commute their trusts and receive direct and immediate access and ownership over trust assets if given the opportunity. And in fact, this can be accomplished in Florida if the beneficiaries can satisfy a court that it would be in their best interests (for post-2000 trusts) or that trust purposes no longer exis,. have been fulfilled, or have become illegal, impossible, wasteful, or impracticable to fulfill. Fla.Stats. §§736.04113 and 736.04115. Before this decision, the desires of settlors to retain assets in trust for beneficiaries to avoid vesting of significant assets in their hands, to protect them from creditor claims, to have third party or professional asset management, and to achieve the other benefits of trust ownership could be easily thwarted if courts are lenient in applying those statutory provisions... Here though, the appellate court recognized that the settlor’s intent is the polestar of trust interpretation and that early termination of the trust based on common circumstances applicable to many trust administrations would thwart that intent.
The appellate court noted that the trustees’ fees were customary, there were no unusual administrative expenses, and there had been no invasion of principal. It also indicated that market fluctuations did not create a real risk that the settlor’s intent would be thwarted. The court noted “[i]f we were to affirm the trial court's ruling, beneficiaries could have trusts terminated simply by stating that they did not want to pay trustees' fees, administrative expenses, or be concerned with market fluctuations.”
The case is instructive since there is little case law that interprets the specific requirements for judicial modification in the subject statutes. It makes terminating a trust more difficult by holding that barring other circumstances, mere savings on future administrative expenses, and the risk of market fluctuations will not be not enough to meet the requirements for judicial modification or termination.
The case also illustrates the benefits of having the trustee on board when petitioning to terminate a trust. If the trustee and all the beneficiaries reach an agreement, it is more likely than not that a trial court will approve termination when presented with a petition invoking the modification statutes and an agreed order to sign. However, the case also suggests that even with the trustee’s participation, an activist trial court may decline to sign off on the termination based merely on the grounds put forth by the beneficiaries in this case.
If the trustee agrees with the beneficiaries, and the Florida statutory requirements relating to date of the trust and the applicable rule against perpetuities allow it, another route to terminate a trust might be through nonjudicial modification under Fla.Stats. §736.0412. Alternatively, if the settlor is still living, common law modification or termination (judicial or nonjudicial) may be allowable by agreement between the settlor and beneficiaries, without regard to the trustee’s consent.
There are other avenues in Florida that can allow, under proper circumstances, for the modification or termination of a trust. A chart previously prepared by the authors of this posting that summarizes the various approaches (and updated for this case) is available for download here [follow the download instructions to save the file on your computer and then click the file to open it in a browser - it will not open unless you first download it].
Horgan v. Cosden, 2018 WL 2374443 (Fla. 2nd DCA 2018)











Sunday, May 27, 2018

I Forgot to Mention . . .

That to help get the word out, the publisher of Rubin on Florida Homestead is offering a 15% discount for purchases through this opening weekend. When checking out at www.rubinonfloridahomestead.com, use the coupon code “Introduction”. For those of you that already ordered, a credit back for the 15% is being applied to your orders.

Saturday, May 26, 2018

Soft Opening – Rubin on Florida Homestead

As I teased a few days ago, I’ve been working on a challenging writing project these past 2-3  years. Today is the day of its release!

As you can tell by the title, it is a book/treatise on Florida homestead law. I took on the project because there are no comprehensive one-stop reference sources out there that cover all aspects of homestead law. There are many excellent sources of information and analysis, but they are scattered among various articles, chapters in books on larger subjects, and other miscellaneous places. Most of them are limited to one aspect of Florida homestead law – but Florida homestead law generally covers three large areas: creditor protection, limitations on gifting and testamentary transfers, and ad valorem taxes (and its corollary Save Our Homes cap on valuation limitations). As anyone who has had to deal with these areas, they involve concepts and planning that is quite challenging to both understand and practically apply. So I have sought to make the book a one-stop resource for all things related to Florida homestead law.

I’ve endeavored to make the book accessible to those who need an introduction to an area, to answer quick questions, or to assist with a detailed analysis. While of interest to those in Florida, it should also be of interest to those outside of Florida who have occasional need to deal with Florida homestead issues for themselves or their clients.

If this is something that interests you, and I sure hope it does, feel free to visit www.rubinonfloridahomestead.com for more information on the book (and of course, how to buy it!).

The book is in PDF format, for viewing on computers and other devices. Perhaps a paper edition may come in the future, but the ability to search contents, access links to cited sources, and my ability to update the book as the law evolves,  makes an electronic version the better way to go in my mind.

This is the first public announcement – I am going to wait a little while until all the kinks are worked out before going wide. If you have any problems with the website or ordering, please email me at crubin@floridatax.com. Comments on the book itself, whether general, suggestions for future coverage areas, or otherwise, are also welcome.

Sunday, May 20, 2018

Teaser - New Publication Coming

A heads-up to readers that I will shortly be publishing a treatise that should be of interest to many of you. I have been hard at work on this project for the last 2-3 years, and hope to have it out in the next few weeks. Frankly, if I had known it would take me so long to write I probably would never have started, but I believe it is unique in what it covers and fills a need.

Some of you have asked me about the reduced volume of posting by me in Rubin on Tax (especially in recent weeks), and this is the reason why - there are only so many non-working hours in the day so something had to give. I intend to get the volume back up again, once this project is behind me.

More details to follow soon!

Possible Fix Coming to Charitable Gifting Problem

For many taxpayers, the 2017 tax law changes removed an incentive to many taxpayers to make charitable contributions. As an itemized deduction, charitable contributions provide a deduction only to taxpayers who itemize their deductions. With a much larger standard deduction, and reductions in available deductions for state and local taxes and mortgage interest, many taxpayers who used to itemize will no longer do so. This is especially true for lower and middle income taxpayers. Thus, many charities expect reductions in gifting to them do to the loss of income tax benefits to donors.

A bipartisan bill, the Charitable Giving Tax Deduction Act, has been introduced into the House of Representatives that would address this issue. The Act would make charitable deductions an “above-the-line” deduction. This means that taxpayers can deduct contributions against their income, whether or not they itemize their deductions. The income tax incentive to make charitable gifts would thus be restored, and even enhanced from the pre-2017 tax law changes.

Whether the bill will pass is anyone’s guess at this time. Its bipartisan support and its charitable nature probably gives it more of a shot to pass than most bills.

Sunday, April 22, 2018

Takeaway from Recent Decision on Florida Attorney Extraordinary Attorney Fees For Ordinary Administrative Work in an Estate [Florida]

In this case, the Personal Representative sought fees for serving as both PR and attorney for the estate - while not totally clear from the opinion, it appears the PR sought those fees using the presumptively correct fee Florida statutory fee schedule schedule.

The PR also engaged outside counsel to assist with some matters. It is the fees for that outside counsel that the court was principally concerned with. The court ended up substantially reducing the fees sought by the outside counsel either outright, or deferring the consideration of some of those fees until later since some of them were too premature for the court to rule on. Some of the conclusions of the court were:

a. Work by the office of the outside attorney to determine addresses of 53 interested persons for purposes of receiving formal notice regarding a determination of beneficiaries and pertaining to the sale of property and determination of homestead did not constitute “extraordinary” services entitling an attorney for compensation. Instead, such work was of the “ordinary” services character. The court did note that proceedings for determination of beneficiaries can be considered extraordinary in appropriate circumstances.

b. Work by outside attorneys to strike a late claim upon failure of a claimant to file an independent action were similarly not “extraordinary” services of the attorneys.

c. Review by outside attorneys of prepared estate income tax return was determined to be duplicative of the Personal Representative’s and CPA’s efforts.

d. Paralegal time of outside attorney’s office relating to preparing addresses and Fed Ex mailers, processing paperwork to the computer, scheduling hearings, coordinating phone conferences, and similar services were found to be administrative and secretarial in nature and not legal services.

e. In regard to the employment by the estate of multiple attorneys, the court noted: “While parties have the right to employ as many lawyers as they choose, the Court will not assess lawyer fees for or against any party for more than one lawyer for a matter in which no more than one lawyer is required. . .As such, duplicative time charges by multiple attorneys working on the case are generally non-compensable and the Court cannot award compensation for various extensive conferences between lawyers without any indication of how those conferences advanced the case. . .. Finally, “excessive time spent on simple ministerial tasks such as reviewing documents or filing notices of appearance” is normally not compensable. . . Nor are duplicative reviews and consultations by numerous attorneys.

It appears that most of the problems here would not be problems as to compensating the PR or the attorney for the estate under ordinary fee arrangements - instead, the delegation of ordinary administrative tasks to another attorney while the PR and estate attorney were charging for ordinary services was a problem.

Note, that this opinion was issued by the Circuit Court, and is not an appellate decision. Thus, its precedential value in other cases may be limited

RE: ESTATE OF GINGER ECKERT ROBERTS, 15th Judicial Circuit in and for Palm Beach County, Probate Division, Case No. 50-2016-CP-004272. January 4, 2018.

Sunday, April 15, 2018

IRS Provides Some Relief for Post-Divorce Grantor Trust Rule Issues

During happy days, one spouse (call him or her the “Donor Spouse”) sets up an irrevocable trust for the benefit of the other spouse (call him or her the “Donee Spouse”). Under Code §672(e)(1)(A), a grantor of a trust is treated as holding any power or interest in a trust that is held by an individual who was the spouse of the grantor at the time of the creation of such power or interest. This typically results in grantor trust status for the trust since the Donor Spouse is treated as having retained rights to income and principal in the trust - with the Donor Spouse being taxable on some or all of the trust income.

Fast forward, and the happy couple is not so happy. They divorce, but the trust lives on. Since the testing under Code §672(e)(1)(A) of the spousal relationship that gives rise to the grantor trust status looks to the time of the creation of the trust, not the status in any later tax year, the Donor Spouse continues to be taxable to the Donor Spouse after the divorce. This is typically an unexpected and unwanted surprise to the Donor Spouse.

Previously, Code §682 remedied this circumstance by providing the Donee Spouse would be taxable on the income. Even then, it was not a perfect solution, with some income potentially remaining taxable to the Donor Spouse, such as capital gains.

In the 2017 Tax Act, special rules allowing shift of alimony tax consequences to a payee spouse were repealed. As part of that repeal, Code §682 was removed from the Code. This presents at least two major issues.

First, what happens to trusts that were formed prior to the repeal of Code §682? Notice 2018-37 has answered this question. It indicates that regulations will be issued to provide that former Code §682 will continue to apply to those older trusts, so the Donee Spouses will remain taxable thereunder. However, this applies only to spouses divorced or legally separated under a divorce or separation instrument executed on or before December 31, 2018, unless that instrument is modified after that date and the modification provides that the changes made by the 2017 tax act apply to the modification.

The second major issue is what happens to trusts for spouses whose divorce or separation occurs after December 31, 2018? Without Code §682, Donor Spouses should remain taxable on those trusts under the grantor trust rules because Code §672(e)(1) continues to apply. Ramifications for persons setting up spousal trusts, either during the marriage or providing for them in prenuptial or postnuptial agreements, is to consider these issues and perhaps to come up with a way to terminate the grantor trust treatment to the Donor Spouse upon divorce if that is the desired arrangement. One way perhaps may be to terminate the trust upon divorce - as to who the assets will be payable can be worked out with regard to the other tax and planning consequences to such a termination or having such a termination provision in existence (e.g., provisions relating to the qualification for and termination of QTIP trust status). Another might be to trigger a mandatory reimbursement provision for the taxes to the Donor Spouse from the trust, or other Donee Spouse assets (again, subject to other applicable tax and planning considerations).

The Notice does request comments on whether guidance is needed regarding the continued application of the grantor trust provisions after divorce or separation. Perhaps Treasury is thinking about instituting its own regulatory relief to the application of the grantor trust rules after divorce or separation, but the Notice provides no indication that is on the table.

Notice 2018-37 (4/12/2018)

Sunday, April 08, 2018

IRS Guidance Issued on New Interest Stripping Rules

The Tax Cuts and Jobs Act substantially modified the interest stripping rules of Code §163(j). In a recent IRS notice, the IRS provided guidance on some of the provisions of the revised limitation and what new regulations will say. Here are some highlights:

a. The old provision allowed for the carryforward of disallowed interest expense to future years. The notice advises that any disallowed interest expense for the last tax year beginning before 1/1/2018 can be carried over (to be subject to the new provisions in the next year). Such a carryforward does not apply to an “excess limitation carryforward” from such prior year. A similar provision applies to such a carryover in regard to the Code §59A base erosion minimum tax.

b. The new rules allow interest to be deducted to the extent of the taxpayer’s business interest income, plus 30% of adjusted taxable income, plus floor plan financing interest. The notice indicates that any interest paid or accrued by a C corporation on its indebtedness will be business interest income for these purposes. This is based on the premise, noted in the legislative history, that a corporation does not earn investment interest or investment income. This treatment will not apply to S corporations, however. The regulations will also address C corporations that are partners in partnerships paying interest.

c. The notice provides that the new provision applies at the level of a consolidated group, and also that regulations when issued will address other consolidated group issues.

d. The notice provides that the IRS will be issuing regulations to the effect that a disallowance and carryforward of an interest expense deduction under Code §164(j) will not impact the reduction in earnings and profits of a payor C corporation.

e. The notice indicates regulations will be issued regarding the application of Code §163(j) in the partnership scenario.

Notice 2018-28, 2018-16 IRB

Sunday, March 25, 2018

Offshore Voluntary Disclosure Program (OVDP) Closing in September

The OVDP commenced in 2009, and provided a mechanism for U.S. taxpayers who had not complied with various non-U.S. information disclosure and tax payments to square up with the IRS without risk of criminal prosecution, but at the cost of fixed penalties, back taxes, and interest. Over 56,000 taxpayers have used one of its programs. With a steady decline in submissions from 18,000 in 2011 to only 600 in 2017, the IRS has determined to close the program on September 28, 2018. Taxpayers who have been on the fence about joining the program will need to do so before that date.

For now, the other special compliance initiatives for the reporting of foreign financial assets remain in place, principally:

a. IRS-Criminal Investigation Voluntary Disclosure Program;
b. Streamlined Filing Compliance Procedures;
c. Delinquent FBAR submission procedures; and
d. Delinquent international information return submission procedures.

IR-2018-52, March 13, 2018

Monday, March 19, 2018

JD Supra Readers Choice Award 2018

I’m happy to announce that I have been issued a JD Supra Readers Choice Award for 2018 for the articles I write for you here. You can read more about the award here.

Thank you to those of you that voted for me!

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Applicable Federal Rates - April 2018

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Sunday, March 11, 2018

Key Federal Inflation-Adjusted Amounts for 2018

In Rev.Proc. 2018-18, the IRS has released various tax rates, brackets, and threshold amounts for 2018, incorporating inflation adjustments and the new tax act. Some of the principal figures are as follows:

Alternative Minimum Tax Exemption for Individuals: $109,400 for married individuals filing joint returns and surviving spouses - $70,300 for other unmarried individuals - $24,600 for estates and trusts.

Standard Deduction: $24,000 for married individuals filing joint returns and surviving spouses - $12,000 for unmarried individuals - additional standard deduction for the aged or blind of $1,300.

Election to Expense Certain Depreciable Assets: The aggregate cost of any § 179 property that a taxpayer elects to treat as an expense cannot exceed $1,000,000. The $1,000,000 limitation is reduced (but not below zero) by the amount the cost of § 179 property placed in service during the 2018 taxable year exceeds $2,500,000.

Expatriate Gain Exclusion Amount: $711,000.

Foreign Earned Income Exclusion Amount: $103,900.

Unified Credit Against Estate Tax: $11,180,000.

Notice of Large Gifts Received from Foreign Persons Threshold: $16,076.

Property Exempt from Levy: $4,680.

HSA Contribution for High Deductible Health Plans: $3,450 for individual coverage and $6,850 for family coverage.

Thursday, March 08, 2018

State Asset Protection Trusts Take Another Hit

Numerous states have statutes that allow for the creation of self-settled discretionary trusts that are protected from claims of the settlor while allowing the settlor to be a discretionary beneficiary. Such trusts are likely valid for settlors who are residents of the particular state, the property in the trust is located in that state, and no other state has jurisdiction over the parties. While these states seek the trust business of persons outside of their borders seeking these benefits, the validity of these benefits to such person has been an unanswered question.

In a recent Supreme Court of Alaska case (Alaska being one of the states that allow for asset protection trusts), judgment debtors transferred Montana property to an Alaska asset protection trust after judgments were entered against them. The judgment creditors brought an action to void the transfer to the trust as a fraudulent conveyance in Montana applying Montana law, and prevailed. A bankruptcy trustee in a Chapter 7 bankruptcy brought in Alaska also sought to have the transfer voided as a fraudulent transfer in federal court, and prevailed.

The debtors sought to have both of these determinations voided because they should have been heard in Alaska state court. This was based on Alaska law that conferred jurisdiction regarding fraudulent conveyance claims involving Alaska asset protection trusts exclusively to Alaska state courts. The Alaska Supreme Court ultimately ruled:

a. The Full Faith and Credit Clause of the U.S. Constitution does not force states to be bound by another state’s law that exclusive jurisdiction to hear matters based on a cause of action even though that state created the cause of action. The court also noted that a fraudulent transfer action is a “transitory” action so that it may be brought in a court having jurisdiction over the parties without regard to where the transfer took place.

b. The Supremacy Clause of the U.S. Constitution prevents a state from depriving federal courts of their jurisdiction.

The U.S. Constitution has always been a concern regarding the enforceability of the protections of state asset protection trust law when the debtor resides in another state or is exposed to the jurisdiction of another state’s law or courts, but given the relative newness of these statutes there was a dearth of case law resolving whether these concerns would be recognized by courts hearing these cases. This case, along with other similar decisions that are springing up, validate these concerns and cast doubt on the ability of asset protection trust states to offer enforceable protection when the debtors reside outside of the state, have property outside of the state, or are subject to the jurisdiction of courts outside of the asset protection trust state.

Note that these constitutional concerns are not an issue when the trust is situated outside of the U.S. in a non-U.S. asset protection (at least when the assets are situated outside of the U.S).

Toni 1 Trust v. Wacker, 2018 WL 1125033 (Alaska 2018)

Friday, February 23, 2018

High Tax Kickout from GILTI Inclusion for CFC's May Be Too Restrictive

The new Tax Act added new Code Section 951A. This provision creates a new class of income of a CFC that is taxed currently to U.S. shareholders. That class is "global intangible low-taxed income" or "GILTI." 

GILTI starts broad - it is all gross income of the CFC, and then is cut back with certain exclusions (and is also reduced by certain deductions and an amount equal to 10% of all depreciable tangible assets). One of those exclusions is for high taxed income per Code §951A(c)(2)(A)(i)(III), which reads:
"any gross income excluded from the foreign base company income (as defined in section 954) and the insurance income (as defined in section 953) of such corporation by reason of section 954(b)(4)."
Code §954(b)(4) is an exception from Subpart F income for foreign base income and insurance income that is highly taxed by a foreign jurisdiction. It reads:
 "For purposes of subsection (a) and section 953, foreign base company income and insurance income shall not include any item of income received by a controlled foreign corporation if the taxpayer establishes to the satisfaction of the Secretary that such income was subject to an effective rate of income tax imposed by a foreign country greater than 90 percent of the maximum rate of tax specified in section 11."
So here is the question - does the high tax kickout from GILTI include all of the CFC's income that is subject to a high foreign tax, or is it limited to removing from GILTI only foreign base company income and insurance income that would otherwise be included as Subpart F income (but for being highly taxed)?

Tracking the above provisions, the better interpretation appears to be that the high tax kickout from GILTI only covers income that comes within the definitions of foreign base company income and insurance income.

This borders on the nonsensical, and leaves one wondering whether this is a technical error by Congress that is in need of correction. Why should income that is NOT foreign base company income or insurance income lose out on being excluded from current taxation, when income that is far closer to disfavored Subpart F character obtains the exclusion? If there is a policy reason for this, it is pretty obscure. This suggests that the exclusion of non-FBCI and non-insurance income is an error and not an intended effect. This is belied by the committee reports which do not acknowledge that there should be a distinction based on classes of income along these lines. Further, the pass-through taxation of highly taxed income is adverse to the title of the label for the income that is subjected to pass through treatment - i.e., "globably intangible low-taxed income." 

Here is my proposed statutory fix - modify Code §951A(c)(2)(A)(i)(III) to instead read: "any gross income that would be excluded from the foreign base company income (as defined in section 954) and the insurance income (as defined in section 953) of such corporation by reason of section 954(b)(4) regardless of whether that gross income actually is foreign base company income or insurance income."

Hopefully, this will be brought to the attention of Congress and dealt with in a technical correctons bill. 

Good News on Florida Homestead Protections

I had previously written that as part of the 20 year revision process, a proposal to reduce Florida's constitutional homestead protection against claims for creditors was advancing. That posting can be read here.

The good news (if you are in favor of vigorous homestead protections - not so good news if you are opposed to them) is that this provision was voted down before a subcommittee of the Constitution Review Commission and is now a dead item. The deadline for new items has not yet expired so another or a revised proposal could surface, so the door is not yet fully closed, however.

Sunday, February 18, 2018

Updated Historical Federal Transfer Tax Rates, Exemptions, and Related Information Table

I have updated this table to include 2018 data based on inflation adjustments and changes in the 2017 Tax Act. The $11,180,000 exemption and exemption equivalent amounts for estate, gift and GST tax are not yet out, so estimates are used - final figures usually match these estimates but if the estimates are off, they shouldn’t be off by much. I will update the table to show the final values when they come out.

You can download the table here, and you can also access it any time from the link in the right-hand column under LINKS AND RESOURCES.

Sunday, February 11, 2018

No Homestead Treatment for Property Owned by a Corporation [Florida]

In a recent case, residential property was owned by a corporation. The sole shareholder and president of the corporation resided on the property, and the corporation had attempted to convey the residence to the shareholder, but its deed was effective and ineffective. In attempting to fend off a creditor, it was argued that the property qualified as homestead property and was thus beyond the reach of creditors, and the trial court agreed.

Article X, section 4 of the Florida Constitution, which provides protection against forced sale for homestead property, reads in relevant part:

There shall be exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon, except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement or repair thereof, or obligations contracted for house, field or other labor performed on the realty, the following property owned by a natural person. . . (emphasis added).

Since a corporation is not a natural person, that would seem to be the end of the argument that the property was homestead property. However, in Callava v. Feinberg, 864 So.2d 429, 431 (3rd DCA 2004), and other cases similar to it, property owned by a trust qualified as homestead property. Since a trust is not a natural person, why should ownership be a corporation be treated differently than a trust for this purpose?

In reversing the trial court, the 2nd DCA noted the crucial difference. In Callava, an individual beneficiary of the trust was found to hold an equitable interest in the subject property. Legal ownership was in the trust. Equitable ownership in a natural person is sufficient for these purposes – legal ownership is not required.

The problem for the shareholder in the instant case is that the shareholder had neither legal nor equitable/beneficial ownership, and thus the property did not qualify for homestead protection.

DeJesus v. A.M.J.R.K., 43 Fla. L. Weekly D331a (2nd DCA 2018).

Saturday, February 03, 2018

When a Nightclub is Not a Business

Under Code §183(b), a taxpayer’s activity that is not engaged in for profit gives rise to deductions only to the extent of income. No excess deductions arise that can be used to offset other income, and no net operating losses are produced.

Joy Ford, a country music recording artist and promoter, owned and operating the Bell Cove Club, a lakeside music venue in Hendersonville, Tennessee. The club featured live country music on Friday and Saturday nights. Joy devoted most of her time to the club and paid all of its expenses. The club charged a $5 admission fee and a nominal amount for snacks and beverages.

The club operated at a loss, reporting losses in 2012-14 of $39,285, $74,120, and $96,893. Joy used the losses to offset other income she had. The club’s recordkeeping was atrocious and didn’t match up to the tax filings. Joy had opportunities to make the club profitable, including a possible television show and converting it into a restaurant. Joy declined these opportunities.

Upon review, the Tax Court concluded that the club was not engaged in for profit, and applied Code §183(b) to eliminate Joy’s use of the losses against other income. Key factors cited by the court were that Joy had no expertise in club ownership, maintained inadequate records, disregarded expert business advice, nonchalantly accepted Bell Cove's perpetual losses, and made no attempt to reduce expenses, increase revenue, or improve Bell Cove's overall performance.

Why was Joy operating this way? Owning Bell Cove elevated her status in the country music community, allowed her to further the careers of young performers, offered her weekly opportunities to interact with country music fans, and satiated her love for promoting country music. She earnestly devoted time and energy to Bell Cove but was primarily motivated by personal pleasure, not profit.

One would think that a night club would always qualify as a business for these purposes, but there you go. The lesson here is that what looks like a business, smells like a business, and in many ways operates like a business, may not be one for purposes of the Code §183(b) limitations.

Joy Ford, TC Memo 2018-8

Sunday, January 28, 2018

The U.S. Will Now Bar Tax Delinquents from Travelling Abroad

I wrote back in 2015 here about new legislation that gave power to the Secretary of State to deny, revoke or limit the passport of persons with delinquent taxes. Code §7345 provides that the Commissioner of the IRS will provide notice to the Secretary of the Treasury, who will then transmit that notice to the Secretary of State, in regard to a taxpayer’s delinquent tax debt. Generally, it applies to delinquent tax debt over $50,000 (adjusted for inflation), for which a notice of lien has been filed or a levy has been made. Upon receipt of a Code §7345 certification, §32101(e) of the 2015 FAST Act provides that the State Department will generally deny an application for issuance or renewal of a passport from such individual, and may revoke or limit a passport previously issued to such individual.

In Notice 2018-01, the Treasury Department announced that the IRS and the State Department will begin implementing these provisions in January, 2018. The Notice provides information about the implementation of the rules.

The National Taxpayer Advocate in its annual report to Congress noted the right to travel internationally is a fundamental right of citizenship. Many civil libertarians would assert that the right to travel is more than this - it is a natural right of individuals that is not bestowed by governments, and should be restricted only for security purposes (including immigration and criminal enforcement). Restricting a fundamental and natural human right for the enforcement of civil debt obligations is a new chapter in U.S. tax law, and one that can be expected to give rise to constitutional challenges.

Notice 2018-01, Revocation, Limitation or Denial of Passport in Case of Certain Tax Delinquencies


Monday, January 15, 2018

Obscure Provision of New Tax Act Complicates Testamentary Tax Planning for Nonresidents with U.S. Beneficiaries

Nonresidents with a significant portfolio of U.S. stocks typically use a non-U.S. corporation to hold their portfolio. This is because U.S. stocks are generally subject to U.S. estate taxes at the death of their owner, and absent treaty relief a nonresident owner can only exempt $60,000 in assets from U.S. estate taxes. Since stock of a non-U.S. corporation is not a U.S. situs asset for estate tax purposes, assets held in the corporation, such as U.S. stocks, avoid U.S. estate taxation.

If the nonresident owner has U.S. individual heirs who will succeed to the stocks, the transfer of the shares of stock of the foreign corporation at death can create unpleasant tax consequences for the new U.S. shareholders. If they will own a majority of the shares, in most circumstances the foreign corporation will become a controlled foreign corporation (CFC) for U.S. income tax purposes. This will result in the 10% or more U.S. shareholders becoming taxable on the investment income of the company, including capital gains, on a flow-through basis and at ordinary income rates by reason of such income being characterized as foreign personal holding company income (FPHCI). The U.S. shareholders will also suffer some level of double taxation as to U.S. withholding taxes imposed on the foreign corporation (e.g., on its U.S. source income and dividends), and on any non-U.S. withholding and other taxes - no full U.S. tax credit arises and the individual shareholders only receive in effect a deduction for such taxes. Municipal bond interest also becomes taxable to the U.S. shareholders under the CFC rules.

Until now, these problems were easily resolved by liquidating the foreign corporation within 30 days of the death of the foreign stockholder. If the U.S. shareholders received a stepped-up basis in their shares (which is usually the case, subject to some questions when there is an intervening trust), the liquidation generally would have no adverse U.S. income tax consequences to them. This is because the foreign corporation would not become a CFC if the U.S. shareholders did not own it for 30 days. This could be accomplished either by an actual liquidation within the first 30 days after the death of the stockholder, or a check-the-box election (if the company was eligible) with an effective date within that period. Since a check-the-box election can be retroactive up to 75 days, this effectively provided a 105 day window to take care of things.

The problem today is that the new Act repeals the 30 day window, thus resulting in CFC status immediately as of death of the stockholder. Thus, a liquidation or check-the-box election effective within the first 30 days is taxed as a CFC liquidation, which is not nearly as painless as a non-CFC liquidation. Note that making a check-the-box election with an effective date PRIOR to death of the shareholder may resolve the liquidation problem, but will likely void the estate tax insulation of the foreign corporate ownership of the securities.

What's the problem with liquidating the CFC? Under Code §336, the CFC is treated as having sold its assets on liquidation for their value. If the stocks are appreciated in value, and assuming this results in overall net gain, that gain is treated as FPHCI which flows through to the U.S. shareholders and is taxable to them as ordinary income. The U.S. shareholders do get a basis step-up under Code §961 for this income, and they also likely received a basis step-up at death of the stockholder - this will typically result in a capital loss to the U.S. shareholders equal to the FPHCI they realized on the liquidation. Since the capital loss cannot offset the ordinary income treatment of the FPHCI (beyond $3,000), the loss is of not much help as to the FPHCI, resulting in the burdensome taxation of the passed-through ordinary income.

Thus, the removal of the 30 day exempt period in the new Act makes things difficult for nonresidents with U.S. heirs and their planners who sought to avoid the negative CFC implications of the foreign holding company structure.

The problem is not insurmountable - there are ways to deal with it.

One way is via churning. This involves regular and periodic sale and repurchase of the appreciated stock by the foreign corporation during the lifetime of the nonresident stockholder. Such sales and repurchases will increase the income tax basis of the stocks on a regular basis. In most circumstances any gain from such sales is not subject to U.S. income tax absent the involvement of real property holding companies. It does require some diligence to keep current on the churning, however. Further, if the U.S. stock is not publicly traded, then the sale and repurchase can be more difficult. The step transaction doctrine and attempts by the IRS to disregard the churning are always an issue. Note that this is not a "new" technique - many practitioners in the past have been leery of their clients taking immediate action upon death of the stockholder within the 30 day/105 day windows discussed above, so churning was recommended to avoid the need for such immediate action.

An alternative method to deal with the issue would be to domesticate the foreign corporation post-death, make a Subchapter S election to avoid double tax on the appreciation, and wait out the 5 year built-in gains period. This is a possible approach, but clients may be uncomfortable with having to hold the stock for the five year period.

Another approach involves having the foreign holding company owned in turn by two foreign corporation holding companies, with the nonresident owner being the shareholder of those companies. A check-the-box election is made after death, retroactive to prior to death, for the foreign subsidiary holding the U.S. stock. On the deemed predeath liquidation, a deemed sale occurs of the U.S. stock, but since it occurred prior to death there is no CFC or FPHCI flowing through to U.S. shareholders - but a basis step-up still occurs by reason of the liquidation. The two intermediate holding companies then liquidate after death - while they are CFC's, there is no gain on the U.S. stocks they received from the liquidating subsidiary and thus no FPHCI (except perhaps on appreciation occurring after the deemed liquidation date of the subsidiary foreign corporation). This still requires diligent action near the time of death, and issues of tax relevancy of the check-the-box election may apply.

Of course, there are alternate methods of planning for the U.S. securities, such as the use of an irrevocable trust to own the U.S. stocks, dual partnership structures, and tiered foreign corporate structures that can do a post-death check-the-box election retroactive to predeath to enter into a dual partnership structure.

Non-U.S. situs appreciated assets held through a foreign corporation can result in similar problems for the U.S. heirs. However, if those are segregated into their own foreign corporation, a pre-death effective check-the-box election can be conducted to eliminate the taxable gain. This can be done for the non-U.S. situs assets since they will not be subject to U.S. estate taxes even if deemed owned by the nonresident shareholder directly at the time of death.

These problems and resolutions may also apply to other U.S. situs assets other than stock of U.S. corporations. However, U.S. real property interests (including stock of U.S. real property holding companies) are more problematic given that capital gains from disposition are nonetheless subject to U.S. income tax under Code §897.

Giving Credit it Where it is Due Department: As to the dual corporate holding structure described above, to Seth Entin's presentation at the recent Florida Bar International Tax Conference.

Sunday, January 07, 2018

The Stealthy Tax Increase in the Tax Cuts and Jobs Act of 2017

Ever since the Reagan Administrative, tax brackets have been indexed for inflation. This avoids bracket creep when taxpayers move into a higher tax bracket because inflation pushes up their income. The thinking is that inflation increases are not real increases in earnings, so the rate tables should be indexed to avoid tax increases arising solely from inflation. This seems like less of an issue today with relatively tame inflation rates, but remember that inflation went into the teens in some years in the1970’s making bracket creep a big issue.

The new Act changes rate indexing and other Code indexing from the former Consumer Price Index (CPI) to a new creation known as “chained CPI.” Chained CPI is an adjustment to CPI that reduces the inflation rate by attempting to factor in human behavior that when prices rise, some consumers will look for less expensive substitute products, so that the overall inflation is lower than it would first appear when measured by actual spending.

So was chained CPI brought in due to a desire by Congress to more accurately measure inflation? Doubtful. By reducing the inflation rate for tax purposes to what may be less than the actual rate, bracket creep will now increase faster for taxpayers. This will increase taxes, and is thus a hidden revenue raiser. The differences between the two rates are not that significant, but will add up over time. See this table for how the cumulative spread increases over time:

[source: BloombergPolitics]

I have seen estimates that the effective tax increase next year will be $800 million, and is estimated to be $31.5 billion by 2027. Bracket creep tends to burden lower income taxpayers more than higher income taxpayers, because the brackets are smaller and thus will trigger more increases on the low end - further, for taxpayers already at the highest rate there is no higher bracket to creep into.

The wealthy will still be impacted as the unified credit exemption from transfer taxes is now coming under chained CPI adjustments. This means slower increases in such exemptions and thus more potential transfer taxes.

It is interesting that chained CPI was brought in by the Republicans and in a tax cut bill. I assume it was included to help the budget numbers work.

Note that Pres. Obama tried to bring chained CPI to social security increases during his administration which would have the effect of reducing social security payouts, but was beat down by Democrats. Don’t be surprised if we see that before Congress again in the near future.