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Sunday, January 20, 2019

U.S. Supreme Court to Decide Whether a State Can Tax a Trust Solely Based on Residence of a Beneficiary

The Due Process Clause of the U.S. Constitution requires a taxpayer have sufficient contacts with a state before the taxpayer can be subject to income taxes in that state. This has led to disparate results on when the income of a trust is subject to the taxing jurisdiction of a state.

One common fact pattern is a trust where a state seeks to tax a trust on its income because a beneficiary of the trust resides in the state, even though the trust was formed out of state, the trustee resides out of state and administers the trust from out of state, and the assets are situated outside of that trust. Under such a facts, the State of North Carolina has asserted it can tax the income of the trust. Eleven states tax trust income when a trust’s beneficiaries are state residents.

The Supreme Court has granted certiorari in that case, so much needed guidance should soon be coming on this important issue!

NORTH CAROLINA DEPT. OF REVENUE V. KAESTNER FAMILY TRUST

Wednesday, January 09, 2019

Mandatory Restricted Depository Arrangements in Probate Questioned [Florida]

Fla.Stats. §69.031(1) authorizes a probate court to direct the financial assets of a probate estate be deposited into a restricted depository account held by a financial institution. This is a protective mechanism, since assets may be disbursed from that account only upon court order, instead of mere direction by the personal representative. Thus, it acts a mechanism to reduce the risk of improper use, dissipation, or disbursement of estate assets by the personal representative.

Fla.Stats. §69.031(1) reads as follows:

(1) When it is expedient in the judgment of any court having jurisdiction of any estate in process of administration by any guardian, curator, executor, administrator, trustee, receiver, or other officer, because the size of the bond required of the officer is burdensome or for other cause, the court may order part or all of the personal assets of the estate placed with a bank, trust company, or savings and loan association (which savings and loan association is a member of the Federal Savings and Loan Insurance Corporation and doing business in this state) designated by the court, consideration being given to any bank, trust company or savings and loan association proposed by the officer. When the assets are placed with the designated financial institution, it shall file a receipt therefor in the name of the estate and give the officer a copy. Such receipt shall acknowledge the assets received by the financial institution. All interest, dividends, principal and other debts collected by the financial institution on account thereof shall be held by the financial institution in safekeeping, subject to the instructions of the officer authorized by order of the court directed to the financial institution. (emphasis added)

Some counties have opted to impose restricted depository accounts for all estates, raising the issue whether a blanket prohibition is appropriate, or whether the above highlighted language of the statute first requires either a determinization that the size of a bond would be burdensome or there is other good cause in each estate.

In an opinion released today, the Fourth District Court of Appeal ruled against local rules requiring the mandatory use of restricted depositories. The Court nonetheless allowed the restricted depository order under appeal in that case to stand, since there was otherwise good cause for the court to order the account under the facts. The case is not final, pending the possibility of a motion for rehearing and the outcome of such a rehearing if it is granted, but interested persons should monitor its status.

Assuming the Court’s opinion becomes final, it is difficult to know how counties with such mandatory requirements will react, both within and without the counties making up the Fourth DCA (such as whether they will remove such mandatory requirement, otherwise attempt to re-work their rules in light of the opinion, or await appellate decisions in their own circuit).

DISCLOSURE: Our firm, through Jenna Rubin, Esq., represents the appellees in this case.

STEVEN GOODSTEIN, as Personal Representative of the Estate of Andrew Scott Goodstein v. SHELLEY GOODSTEIN, as Conservator for BLAKE GOODSTEIN and CHANDLER GOODSTEIN, and GRANT GOODSTEIN, 4th DCA, Case No. 4D18-2382 (January 9, 2019)

Sunday, January 06, 2019

Rules Issued on Excess Remuneration Paid by Exempt Organizations

The 2017 Tax Act imposed a penalty on excess compensation paid to employees of an applicable exempt organizations (“ATEO”). Code §4960 imposes an excise tax of 21 percent on compensation paid to a covered employee in excess of $1 million and on any excess parachute payments paid to a covered employee.  A “covered employee” is any employee (or former employee) who is one of the five highest - compensated employees of the organization for the taxable year or was a covered employee of the organization (or any predecessor) for any preceding taxable year.

The IRS has issued Notice 2019-9, which contains interim rules on how the excise tax will apply. Some interesting aspects of the new statute and rules are summarized below:

  • Related Entity Aspects:
    • Any remuneration paid to a covered employee by a related entity is included in the calculation of the covered employee’s total remuneration for the year.
    • A payment from a related entity, including a related entity that is an ATEO, for services rendered to the common-law employer, is considered a payment to the employee from the common-law employer. Calculation of the excise tax is separate from any arrangement that an ATEO and any related organization may have for bearing the cost of the excise tax.
    • Remuneration paid by a separate organization on behalf of the ATEO, whether related to the ATEO or not, for services performed as an employee of the ATEO is treated as remuneration paid by the ATEO.
    • An employee may be a covered employee of more than one ATEO and that each ATEO employer calculates its liability under Code Sec. 4960(a)(1) taking into account the organizations to which it is related. However, an employer is liable only for the greater of the excise tax it would owe as an ATEO or the excise tax it would owe as a related organization with respect to that covered employee.
  • Determining Compensation Aspects:
    • Wages include all remuneration for services performed by an employee for the employer, except for fees paid to a public official, and other specifically excluded types of remuneration.
    • Remuneration is treated as paid when there is no substantial risk of forfeiture of the rights to such remuneration (i.e., when the compensation is vested). Remuneration in which the covered employee vested before the effective date of Code §4960 is treated as paid before that effective date. The definition of substantial risk of forfeiture under Prop Reg § 1.457-12(e)(1) is the definition of substantial risk of forfeiture within the meaning of Code §457(f)(3)(B) for purposes of Code §4960(a). Under Prop Reg § 1.457-12(e)(1), an amount of compensation is subject to a substantial risk of forfeiture only if entitlement to the amount is conditioned on the future performance of substantial services, or upon the occurrence of a condition that is related to a purpose of the compensation if the possibility of forfeiture is substantial.
    • For purposes of determining when remuneration is treated as paid, the timing rule in Code Sec. 4960(a) applies,and the timing rule for wage inclusion under Reg § 31.3402(a)-1(b) is not relevant. Under Notice 2019-9, Q/A-13, the amount of remuneration treated as paid at vesting is the present value of the remuneration in which the covered employee vests.
  • Who Is a Covered Employee:
    • Once an employee is a covered employee, he or she continues to be a covered employee for all subsequent tax years. There is no minimum dollar threshold for an employee to be a covered employee.
    • Remuneration paid for medical services is not taken into account for purposes of identifying the five highest-compensated employees.
    • Whether an employee is one of the five highest-compensated employees is determined separately for each ATEO, and not for the entire group of related organizations. Therefore, each ATEO has its five highest-compensated employees. Thus, a related group of entities may have more than five covered employees.
    • Only an ATEO’s common law employees (including officers) can be one of an ATEO’s five highest compensated employees. There is a limited services exception from highest compensated employee status under which, unless an ATEO pays at least 10% of the total remuneration paid by the ATEO and all related organizations to an employee during the calendar year, the employee is not treated as one of the ATEO’s five highest compensated employees.
  • Misc.:
    • Certain governmental entities are not ATEOs. A governmental entity (including a state college or university) that is not recognized as exempt from taxation under Code §501(a) and does not exclude income from gross income under Code §115(1) is not an ATEO described in Code §4960(c)(1). A governmental entity that sought and received a determination letter recognizing its tax-exempt status under Code §501(c)(3) may relinquish this status pursuant to the procedures described in Rev Proc 2018-5.
    • For purposes of calculating the remuneration upon which the tax is calculated, remuneration does not include certain retirement benefits or certain directors' fees.