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Saturday, December 28, 2019


Taxpayers who fail to file an FBAR to report a foreign account can escape penalty if they can show reasonable cause for the failure (if the failure to file was nonwillful). A recent district court case failed to allow for reasonable cause - click here for a condensed summary of the good and bad facts and the court’s conclusions. The case illustrates that the failure of a taxpayer to disclose the account on Schedule B of their Form 1040 is a big obstacle to a finding of reasonable cause.

U.S. v. AGRAWAL, 124 AFTR 2d 2019-6970 (DC WI 2019)

Saturday, December 21, 2019

Taxpayers with Conduit Trust Planning Should Consider Revising that Planning ASAP

Taxpayers often direct their IRA accounts to be paid into trust for beneficiaries at their death. This is often done to accomplish the usual benefits of trusts, including limiting beneficiary access to funds, protection of trust assets from creditors, and third party management over trust assets. If accomplished through properly drafted trusts, the trusts can allow for the payouts to be stretched out over the lifetime of the trust beneficiaries. Such stretching of distributions also stretches out the taxability of those distributions, thus allowing for substantial income tax deferral opportunities.

Qualifying a trust for maximum deferral involves meeting various regulatory requirements in the form of what is commonly referred to as an “accumulation trust.” As a safe harbor method of meeting some of these requirements, accumulation trusts often are drafted so as to qualify as “conduit trusts.” A conduit trust for these purposes requires the distribution to the beneficiaries of no less than the required minimum distributions received by the trust from the subject IRA account in the tax year of receipt. Such required distributions are not usually problematic since as a stretch IRA, the required minimum distributions in any given year are usually not that large.

Along now comes the Setting Every Up Community for Retirement Enhancement (SECURE) Act. Enacted into law on December 20, 2019 and effective January 1, 2020, one aspect of the Act is an end to stretching distributions over the lifetime of trust beneficiaries other than spouses (with some exceptions). Instead, such accounts must be paid out no later than 10 years after death of the account owner.

This may adversely impact taxpayers who have conduit trusts named as beneficiary of their IRA accounts. Commentators are noting that the distribution at the end of the 10 year term out of the IRA into the trust will likely constitute a required minimum distribution that must be paid out to the trust beneficiary pursuant to the conduit provisions. If this turns out to be correct, then the purpose of having a trust to receive the IRA payouts will be materially dominished or defeated, since all of the IRA balances will have to go into the trust, and then out to the beneficiary, within 10 years of the death of the account owner.

So taxpayers with conduit trusts built into their planning may want to consult with their planners to see if some adjustment in planning is called for, such as removing the conduit aspects from the trust so that the trust can continue for periods longer than the 10 year deferral period. Mixing these rules with the limited circumstances under the Act that may allow for deferral (e.g., as to spouses and minors) may also complicate the original planning and provisions. How any new regulations may impact these conclusions and planning remains to be seen.


On December 20, 2019, President Trump signed into law the Setting Every Up Community for Retirement Enhancement (SECURE) Act, which was incorporated into the Further Consolidated Appropriations Act.

The SECURE Act makes significant changes to the tax rules applicable to qualified retirement plans and IRAs. Key changes include deferring of the commencement of required minimum distributions until age 72, and requiring payouts after the death of an account holder to be completed within 10 years of death (with some exceptions).

The Act should cause taxpayers to revisit their planning for dispositions and distributions of their retirement and IRA accounts and plans.

I’ll be writing separately regarding the impact of the Act on conduit trusts shortly.

Sunday, December 08, 2019


For liability protection, the question regularly comes up who in the family should own the cars. Ask a number of lawyers and you are likely to get a number of different answers.

Note that there are generally two (or more) people who can be liable when a negligently driven vehicle injures another person or another person’s property. The driver is going to be responsible for their own negligence. This is the primary liability, and is unlimited. The owner of the car is also liable - but this liability is limited to $500,000. If the driver has their own property and bodily injury insurance coverage, then this cap is even lower. See Fla.Stats. §324.021(9).

As between spouses, my rule of thumb is that when the wealth differential or earning potential between the spouses is not too great, the principal driver of the car should own that vehicle. If one spouse owns the car and the other drives it and injures someone, then both of them are on the hook (albeit with the liability limits above as to the owner). If the driver owns the car, then only the driver has liability. Aside from the general desire not to have both spouses liable, joint liability also exposes joint assets of the spouses to claims of the injured party.

What if one spouse has most of the wealth in the family, or is the major source of income? Here, we still want the unwealthy spouse to own his or her own car, to keep liability away from the wealthier spouse. As to the wealthier spouse, since he or she will have unlimited liability as driver of his or her car, changing our general rule above to have the car owned by the less wealthy spouse yields no real benefits and exposes the less wealthy spouse to limited liability as owner. However, if the less wealthy spouse also drives the auto of the wealthier spouse from time to time, then perhaps it is worthwhile to put that vehicle in the name of the less wealthy spouse - then, if the less wealthy spouse runs over a brain surgeon who is crossing the street while driving her wealthier spouse’s car, all the liability is on the less wealthy spouse.

In almost no circumstances does it make sense, from a liability perspective, to have the automobiles owned jointly by the spouses. That guaranties joint liability to the spouses at least as to the limited liability obligations of the owner.

These are rules of thumb only - the particular facts may warrant a different conclusion. I’d be curious to hear from anyone who disagrees with the above rules of thumb - please contact me directly or through the comments below.

Of course, your automobile insurance policy with high liability coverage, and better yet an umbrella policy for extra liability insurance coverage, are the first lines of defense against these liability exposures.

Another general rule is to have any children own their own vehicles, to avoid parental liability as vehicle owner. However, this may have gift tax implications as to funding the purchase of the car, may increase premiums, and may make obtaining insurance more difficult. Note that for persons under age 18, the parent who signs their driver license application has full liability for the minor, although the full reach of that provision (Fla.Stats. §322.09) is uncertain. Therefore, some attention should be paid between which spouse signs that application - perhaps the less wealthy spouse should be the signatory, and if the child will not own the car, that spouse should also be the owner of the car.

Sunday, November 24, 2019

Applicable Federal Rates - December 2019

To view a PDF table and diagram of the current rates, click here.

Interestingly, the mid-term rate has moved back up above the short-term rate. Thus, the yield curve inversion (a recession predictor) shows sign of ending.

Sunday, November 17, 2019

Transfer Tax Inflation Adjustments

The IRS has announced for 2020:

A. The basic estate and gift tax exclusion amount (and the GST exemption) will be $11,580,000;

B. The gift tax annual exclusion will remain $15,000; and

C. The gift tax annual exclusion for gifts to a non-U.S. citizen spouse will be $157,000.

I have updated my historic table of exclusion amounts for the new year. You can download a copy here.

Sunday, November 03, 2019

Section 385 Documentation Requirements Eliminated

In 2016, the IRS issued regulations under Section 385 that, among other things, imposed various documentary requirements that would need to be met before certain related party indebtedness would be respected as debt and not equity. These regulations caused much consternation regarding costs and burdens of compliance.

The IRS postponed the effective date until 2019. However, under President Trump’s initiative to reduce regulatory burdens, these reporting requirements were targeted for review.

In welcome news to taxpayers, the IRS has now acted to revoke the documentation requirements by eliminating Treas.Reg. Section 1.382-2. It also announced that such documentation requirements may return in the future, albeit with streamlining and simplification.

In a separate announcement, the IRS indicating that future proposed regulations will be forthcoming that will address other aspects of the proposed Section 382 regulations, including the distribution requirements included in those regulations.

Treasury Decision 9880; Preamble to Prop Reg REG-123112-19

Florida Underpayment/Overpayment Interest Rate

Florida adjusts its interest rate on underpayments, late payments, and overpayments, twice a year. The Florida interest rate on underpayments and overpayments remains 9% for the period January 1, 2020 through June 30, 2020.

Sunday, October 27, 2019

Employment of Family Members

Employing a family member can have tax and personal benefits. In regard to tax issues, the IRS recently issued a Fact Sheet summarizing some of these.

I have prepared a summary of the Fact Sheet, and some other tax aspects of employing family members. Click the link here [} and that will open a mindmap in your browser that contains the summary.

IRS Fact Sheet FS 2019-14

Wednesday, October 09, 2019

Pending Merger Required to be Considered in Valuing Stock

In Chief Counsel Advice, the IRS concluded that in valuing a gift of publicly traded stock to a grantor retained annuity trust, the announcement of a merger shortly thereafter after the gift must be factored into the valuation.

FACTS: A taxpayer who was a co-founder and Chairman of the Board of a publicly traded corporation gifted shares of stock of the company to a newly-formed grantor retained annuity trust. After the transfer date, the corporation announced its merger with another corporation. Prior to the gift date, the corporation had undergone negotiations with multiple parties and on the gift date had been engaged in exclusive negotiations with the corporation that was the subject of the merger announcement. The IRS determined that the pending merger should have been considered in arriving at the value of the gifted stock.


A common issue in income and transfer tax planning is whether post-transaction events should impact the value of the subject asset. Oftentimes, there are subsequent events that in hindsight appear appropriate to the valuation, such as a post-transaction sale, merger, or business announcement. The planner and appraiser have the difficult task to determine the necessity of inclusion of such on-the-horizon events in valuation, and what weight to give them.

In determining that the merger announcement should be considered, the IRS relied on several valuation maxims, interpretations and precedents that practitioners should give consideration to. These include:

     (a) In applying the willing buyer and willing standard for valuation (here, as provided in Treas. Regs. § 25.25.12-1), a willing buyer and seller are presumed to have reasonable knowledge of relevant facts affecting the value of the property at issue, even if the facts are unknown to the actual owner.

     (b) Both parties are presumed to have made a reasonable investigation of the relevant facts. Thus, in addition to facts that are publicly available, reasonable knowledge includes those facts that a reasonable buyer or seller would uncover during the course of negotiations over the purchase price of the property. Moreover, a hypothetical willing buyer is presumed to be “reasonably informed” and “prudent” and to have asked the hypothetical willing seller for information that is not publicly available.

     (c) While publicly traded stock is generally valued based on the average of the highest and lowest selling price on the day of the transfer, if such prices do not represent the fair market value then a modification of the value is required. Treas. Regs. § 25.2512-2(e).

     (d) In Silverman v. Commissioner, T.C. Memo. 1974-285, aff'd, 538 F.2d 927 (2d Cir. 1976), cert. denied, 431 U.S. 938 (1977), the petitioners gifted shares of preferred stock while in the process of reorganizing with the intent to go public. The Tax Court rejected the expert testimony presented by the petitioners because the expert failed to take into account the circumstances of the future public sale.

     (e) In Ferguson v. Commissioner, 174 F.3d 997 (9th Cir. 1999), aff'g 108 T.C. 244 (1997), an assignment of income case, a transfer of shares was undertaken in stock of a corporation after an investment firm had located a purchaser for the corporation, a merger agreement had been entered into, and a tender offer was underway. The court concluded that the shares were transferred after the shares had ripened from an interest in a viable corporation into a fixed right to receive cash and the merger was “practically certain” to go through, and therefore applied the assignment of income doctrine to tax the transferor on the gain from the tender offer exchange that occurred after the transfer.

Various rules of thumb and factual inquiries are employed by taxpayers and the IRS in determining how to apply post-transfer events. One important element is time – how long after the subject transfer did the post-transfer event occur. Unfortunately, in the subject CCA, the date information that would advise of the time period between the gift and the merger announcement was redacted. Another factor is whether the subsequent event was contractually committed – again, the facts here do not disclose whether the merger was irrevocably committed to occur at the time of the gift. The CCA also demonstrates the similarity of inquiry that can exist between transfer tax valuations, and whether an assignment of income occurs as to a sale event that occurs after property is transferred.

Just because a subsequent event should be considered does not mean a tender or purchase price should be fully substituted for other measures of value. Case law typically requires that such events be considered in the valuation, but what weight should be given is always a facts and circumstances test. Of course, one important factor in such valuation should be the likelihood that the post-transfer event will occur, as measured on the date of transfer. This circles back to questions including whether the post-transfer event is the subject of a binding contract or agreement, and even then questions of whether the contract will close due to contractual contingencies and other applicable facts should be considered.

Chief Counsel Advice 201939002, September 27, 2019

Monday, September 30, 2019

Old and Cold Offshore Asset Protection Trust Assets Not Reachable by U.S. Creditors

In re Rensin involved an “old and cold” offshore asset protection trust arrangement which a trustee in bankruptcy sought to pierce. The case provided some interesting facts and conclusions that should be of interest for those contemplating offshore APTs.

The trust was established and funded well before the beneficiary had issues with the Federal Trade Commission, a holder of a judgment of over $13.4 million arising in 2018. The debtor could withdraw assets from the trust, but the trustee could veto those distributions. The debtor could not remove the trustee and could only fill vacancies if the protector did not fill them. The trust was initially established in the Cook Islands and was later moved to Belize.

In 2015, the debtor transferred $350,000 to the trustee. The trustee purchased a deferred variable annuity, of which the debtor would be the lifetime annuitant and the trust would be the owner. Also in 2015, the trustee purchased a fixed annuity with similar payment and ownership using $1.7 million of trust assets.

In trying to gain control over the annuity payments and the trust interests in the annuities, the court ruled on various issues:

  1. The debtor argued that the bankruptcy estate was barred by the spendthrift clause of the trust from treating the trust assets as subject to bankruptcy administration, per the respect for such clause given under Belize law. The Florida court rejected the application of Belize law, under the principal that choice of law under a contract is binding in Florida unless it offends Florida public policy. Since Florida courts will not enforce a spendthrift clause in favor of a settlor in a self-settled trust, the Belize law violates Florida public policy and thus Florida law instead applies and the assets of the trust are subject to bankruptcy estate administration.
  2. Under Fla.Stats. § 736.0505(1)(b), in a discretionary trust, creditors can reach the maximum amount that can be distributed to the settlor. Thus, the entire amount of the trust is reachable by the bankruptcy trustee.
  3. Notwithstanding the above inclusion in the bankruptcy estate, the annuity protections of Fla.Stats. §222.14 may apply.
  4. A Florida debtor can use the annuity exception as annuitant, even though the owner of the contract is not a Florida person. There is mixed law on this question, but the majority view is this.
  5. The purchase of the annuities paid by the trustee of the trust with trust assets was not a fraudulent asset conversion that would void the annuity exception. Fla.Stats. §222.30(2), which voids a fraudultent asset conversion, applies to conversion to an exempt asset by the debtor. The debtor here was not the trust and did not purchase the annuity, so Fla.Stats. §222.30(2) did not apply. The same result would apply, even if the debtor had requested the trustee to make such purchases – so long as the debtor did not have the power to comple the trustee to do so.
  6. Similarly, the transfer of the $350,000 into the trust by the settlor was not a fraudulent conversion, since Fla.Stats. §222.3)(2) requires the debtor have made a transfer that results in the transferred assets becoming “exempt by law from the claims of a creditor. Since there was no provision in Florida law that exempts the trust assets from claims of the debtor’s creditor, that transfer alone did not result in the assets becoming so exempt by law. Thus, Fla.Stats. §222.30(2) did not apply. Thus, from a planning perspective, if a settlor directly acquires exempt assets, then the fraudulent transfer statute can apply – but it won’t (at least under the facts and analysis of this case) when the assets are transferred first to an APT, and the APT then purchases an exempt annuity interest for the settlor.
  7. Therefore, while the trust assets are subject to bankruptcy administration, the debtor’s annuity interest was an exempt annuity interest. The bankruptcy trustee nonetheless argued that it can obtain ownership of the trust’s annuity ownership rights, including the power to withdraw from and/or surrender the annuities and the remainder rights. However, the court declined to provide that relief since the trustee of the trust was not joined as an indispensable party.
  8. The Court indicated it could not use the precedent of In re Lawrence to order the beneficiary to have the property be delivered from a discretionary trust without joinder of the trustee. In that case, a key fact was that the settlor/debtor had the power to replace the trustee, so that it effectively had the power to replace the trustee until one complies with the wishes of the beneficiary to distribute the subject assets. Here, the debtor did not have such a power. This suggests that the power to replace the trustee may not be advisable in APTs, even though it is commonly used for protective purposes.
  9. Even if the trustee had been a party to the litigation, it is questionable whether Belize would order the trustee to comply with a U.S. bankruptcy court order. Failing that, perhaps the bankruptcy court could proceed to enforce the court’s order against the insurance companies that issued the annuities in their home jurisdictions, if allowable under the law of such jurisdictions.

The case is a Bankruptcy Court decision, so its precedential authority is limited.

In Re Rensin, 600 B.R. 870 (S.D. Florida 2019)

Sunday, September 15, 2019

More on Passport Revocation

I previously wrote about passport revocation or denial to those with significant unpaid federal tax liabilities – see, for example, the post here. Last month, an IRS News Release provided various details about the program.

Highlights include:

  • The current threshold of delinquent tax debt is $52,000 (or more)
  • When the IRS certifies a taxpayer as delinquent to the Dept. of State, the taxpayer will receive a Notice CP508C, which provides information on resolving the debt.
  • For taxpayers with current travel plans, the IRS has an expedited reversal mechanism to help get the certification reversed faster once the debt is addressed.
  • Ways to resolve the debt include payment in full, timely paying under an approved installment agreement, timely paying under an accepted offer in compromise, timely paying under a settlement agreement with the Dept. of Justice, having a pending collection due process appeal with levy, and having collection suspended based on innocent spouse relief.
  • Other exceptions from delinquent certification not directly related to paying the debt include taxpayers in bankruptcy, taxpayers that are identity theft victims, accounts that are not collectible due to hardship, taxpayers in a disaster area, pending requests for an installment agreement or offer in compromise, and an IRS accepted adjustment to satisfy the debt in full, taxpayers in a combat zone,

The Acting national Taxpayer Advocate has also shared information in a blog that taxpayers who are working with the Taxpayer Advocate Service may also avoid certification.

IR News Release 2019-141

Monday, September 02, 2019

CLAT Can Determine Charitable Lead Period by Formula

An estate tax charitable deduction under Code §2055(a) is permitted when a qualified charity first holds an interest in a trust followed by a noncharitable beneficiary, based on actuarial computations, if the lead interest is in the form of a guaranteed annuity (CLAT) or unitrust payment (CLUT). Both Code §2055(e)(2)(B) and Treas. Regs. §20.2055-2(e)(2)(vi) require that for a CLAT, the lead interest must have a specified term of years.

What happens if there is no express term of years for the lead interest, and instead the trust provides for the term to be computed by a formula included in the trust instrument? Is this sufficient?

PLR 201933007 addressed this issue, and held that a formula is sufficient if, as to a testamentary CLAT, the term of years is determinable at the date of death funding based on the formula provided.

PLR 201933007

Sunday, August 25, 2019

Late Filing Penalties Apply When Accountant Erroneously Fails to Hit “Send”

Taxpayers who file a return late are subject to penalty under Code §6651 “unless it is shown that such failure is due to reasonable cause and not due to willful neglect.” In United States v. Boyle, 469 U.S. 241 (1985), the U.S. Supreme Court adopted a bright line rule that if a taxpayer relies on a third party professional to prepare and file the return and the professional does not timely do so, that is not reasonable cause and the taxpayer can be penalized.

Boyle was adopted well before the era of electronic filing of tax returns. Indeed, Rev. Proc. 2011-25 provides that specified tax return preparers, including any paid professional planning to prepare more than 10 returns a year, MUST file returns through e-file software. Thus, more and more taxpayers are relying on professionals to file their returns electronically, instead of receiving a paper version and filing it themselves. Further, verifying that a professional return has been electronically filed is not a simple process, and not one typically undertaken by client taxpayers.

This change in circumstances resulted in taxpayers in a recent case arguing that Boyle should no longer apply. In the case, the taxpayer’s return preparer set up an extension request on April 15 on its software, but failed to hit the “send” button and thus the extension request was not sent to the IRS. When the taxpayers later filed their return in reliance on the extension but without realizing the extension had not been filed, the IRS imposed a $120,607.27 late filing penalty.

The U.S. District Court ruled that the taxpayers could be penalized, and that Boyle is still good law. The key fact that persuaded the Court that the increased use of agents to file did not necessitate a change in the law is that in both Boyle and current law, a taxpayer is not REQUIRED to file electronically. Indeed, even a return prepared by a “specified tax return preparer” can still be paper-filed by the taxpayer – it is only if the preparer files the return that it must be submitted electronically. The Court noted that if the IRS ever requires taxpayers to submit the forms electronically, then a different result might occur.

However, even then, the Court indicated that if Boyle ceased to be good law, a taxpayer still has the obligation of “reasonable reliance” on the tax preparer to file in fulfilling its duty of “ordinary business care and prudence.” This duty of “ordinary business care and prudence” is imposed under Treas. Regs. §301.6651(c)(1). It noted that:

“Irrespective of Boyle's applicability, it would never be reasonable to blindly take someone's word that he will timely file your taxes.”

That is, even without Boyle, some efforts by the taxpayer to verify filing would likely be needed  to demonstrate ordinary business care and prudence before the reasonable cause exception would apply.

Of course, this case is not just of interest to taxpayers, but to tax preparers and the professional liability insurance carriers since one would expect injured taxpayers to look to them for reimbursement of any tax penalties arising from the professional’s failure to timely file.

Intress and Steffen v. U.S. (USDC MId. Distr. of Tenn. August 2, 2019)

Sunday, August 18, 2019

Proposed Regulations on Cross-Border Cloud Transactions and other Digital Content Transactions

Determining the source and character of transactions involving the Internet or digital items for U.S. income tax purposes is not always easy, given the paucity of IRS guidance on the subject. Treas. Regs. §1.861-18 is the exception, which addresses how to characterize transactions involving “computer programs,” but that is as far as it goes.

In an effort to bring clarity and guidance to this exploding area of commerce, the IRS has issued proposed regulations under Treas. Regs. §1.861-18 and introduced a new proposed Treas. Regs. §1.861-19.

The proposals under Treas. Regs. §1.861-18 expand the characterization guidance applicable to computer programs to all transfers of “digital content” including digital books, movies and music. The proposals there also undertake to provide a sourcing rule for title passage for digital content. Generally, the income from such transactions will be sourced to where the downloaded items are installed on the end-user’s device that is used to access the content. Thus, it appears the location of the provider’s servers and storage devices or base of operations is not relevant.

Proposed Treas. Regs. §1.801-19 takes on a different subject and provides rules for classifying a “cloud transaction” as either the provision of services or a lease of property, for income tax purposes. A cloud transaction is one through which a person obtains non-de minimis on-demand network access to computer hardware, digital content, or other similar resources. It includes what are commonly known as Saas, PaaS, and LaaS models, and other transactions relating to on-demand network access of technological resources, including access to streaming digital content and information in databases. It does not include a mere download or other electronic transfer of digital content for storage and use on the devices of the acquirer. The regulation provides a list of factors to be used in making the characterization.

Both of the proposed regulations provide useful examples.

While taxpayer’s may quibble with the details, and perhaps question the source rule for downloaded digital content as the location where the content is installed on the acquirer’s device, the Service’s seeking to provide guidance by regulation in this area is to be applauded.


Sunday, August 11, 2019

District Court Strikes Regulation Defining Educational Organization Under Code §170(b)(1)(A)(ii)

EXECUTIVE SUMMARY: The U.S. District Court for the District of Minnesota ruled in favor of the Mayo Clinic and held that in determining whether an organization meets the definition of an educational organization under Code §170(b)(1)(A)(ii), the primary function test imposed by regulation is invalid.

FACTS: The Mayo Clinic sought to exclude debt-financed passive income from unrelated business income by qualifying as an organization described in Code §170(b)(1)(A)(ii). That provision describes an organization that is:

an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.

The Government acknowledged that the Mayo Clinic “normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.” However, the Government argued that the Mayo Clinic was not an “educational organization” within the meaning of the statute since the Clinic did not meet the primary function and incidental activities requirements of Treas. Regs. §1.170A-9(c)(1). This regulation provides:

An educational organization is described in section 170(b)(1)(A)(ii) if its primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. The term includes institutions such as primary, secondary, preparatory, or high schools, and colleges and universities. It includes Federal, State, and other public-supported schools which otherwise come within the definition. It does not include organizations engaged in both educational and noneducational activities unless the latter are merely incidental to the educational activities. A recognized university which incidentally operates a museum or sponsors concerts is an educational organization within the meaning of section 170(b)(1)(A)(ii). However, the operation of a school by a museum does not necessarily qualify the museum as an educational organization within the meaning of this subparagraph. (emphasis added)

The District Court ruled that the primary function and incidental activities requirements imposed by the regulation were not a valid exercise of regulatory authority and were thus not valid requirements in determining what organizations are described in Code § 170(b)(1)(A)(ii).

Before overriding the regulation, the District Court first had to determine that it had authority to do so under the Chevron deference doctrine arising under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). The Court noted that the framing of the Chevron deference issue is critical to the result, and framed the issue as whether Code §170(b)(1)(A)(ii) is silent or ambiguous with respect to the primary-function and merely incidental requirements in the regulation. With that framing, the Court determined that the Government’s regulation was not entitled to Chevron deference, and thus opened the door to an exaination whether the primary function and merely incidental requirements were a proper interpretation of the statute without giving substantial deference and advantage to the Government’s purported interpetation.

The Court determined the Government’s interpretation under the regulation as improper for various reasons. Principal among them is that Congress knew how to impose a primary function test if it wanted, as evidenced by Code § 170(b)(1)(A)(iii) which expressly imposed a principal purpose test for certain medical organizations seeking to be described therein. The Court noted that “principal” and “primary” were essentially the same for these requirements. By not writing such a requirement into the statute, the Court determined that Congress intended that no such requirement applied.


The “why” of the rejection of the primary function and merely incidental requirements is less important than the rejection itself. This rejection of the regulatory requirement will assist many organizations in meeting the requirements of Code §170(b)(1)(A)(ii). This will have relevance in determining the deductibility of contributions to such organizations, exclusion of debt-financed income from UBI, and the application of numerous other provisions of the Internal Revenue Code that involve organizations described in Code §170(b)(1)(A)(ii) (such as the exclusion of tuition payments to such educational organizations from taxable gifts under Code §2503).

Of course, the determination is that only of a District Court, and not a Circuit Court of Appeals or the U.S. Supreme Court. Thus, its precedential authority is limited, and may be overturned on appeal (or sustained, of course). Nonetheless, it may presently support reporting positions and litigation positions of taxpayers that are limited by the regulatory requirements invalidated by the Court.

Tax practitioners often deal with regulations which in their opinion exceed statutory authority or are unreasonable. In determining whether to challenge a regulation, Chevron deference is a major obstacle, and typically kills the challenge in its cradle. Any case that acknowledges Chevron deference as something that in the real world can be overcome under the right circumstances is always welcome in my book.

Mayo Clinic v. U.S., 124 AFTR 2d 2019-XXXX (DC MN) (8/6/2019)

Sunday, August 04, 2019

IRS Sending Out Cryptocurrency Warning Letters

According to the IRS, cryptocurrency like Bitcoin is treated as property, not money. Notice 2014-21. Therefore, taxpayers who use it buy things or convert it to dollars are treated as having sold it, and have to recognize gain or loss based on what they receive when the dispose of it compared to what they paid for it.

In 2016, only 802 individual income tax returns reported cryptocurrency transactions out of the 132 million filed electronically. The IRS is clearly concerned about a lack of knowledge and/or intentional lack of compliance in this area. Late last month, it announced it is sending 10,000 warning letters to taxpayers it suspects of having owned cryptocurrency and not reporting.

The letters are of three variations, Letter 6173, 6174, and 6174-A.  The 6173 will require a response from the taxpayer - either the filing of returns (delinquent or amended) reporting cryptocurrency transactions, or providing a statement to the IRS that he or she has fully complied with such reporting. Taxpayers are warned that if they ignore the letter, they may be subject to examination activity. The other two forms do not require a specific response, but warn about potential enforcement activity in the future. Taxpayers who receive the letter will likely have more difficulty in asserting an “ignorance” defense if future penalties for cryptocurrency transactions are ever imposed on them.

IR-2019-132, July 26, 2019

Saturday, July 06, 2019

Update: Appellate Court Upholds Denial of Charitable Deduction for Reporting Omission

Back in 2017, I discussed the case of Reri Holdings I, LLC here. There, the Tax Court denied a charitable deduction of over $33 million since the taxpayer did not include the adjusted basis information for the property in its Form 8283 filing. The Tax Court concluded that the substantial compliance doctrine could not be used by the taxpayer to salvage the deduction since the reporting of the basis, while not directly relevant to a charitable deduction, would have assisted the IRS in evaluating the contribution without an audit since a large disparity between basis and the value of the deduction would alert the IRS to potential issues.

The case was affirmed by the D.C. Court of Appeals in May of this year.

RERI Holdings I, LLC, 149 TC 1 (2017), aff’d, D.C. Court of Appeals, No. 17-1266 (May 24, 2019)

Employers Can Truncate Employee Social Security Numbers on Forms W-2

In an effort to reduce identity theft, the IRS has issued final regulations that permit employers to truncate the social security numbers of employees on Forms W-2. Thus, the employer can elect to report the number in the format of XXX-XX-1234 or ***-**-1234 instead of providing the whole number. It is not a mandatory provision – the employer can choose to do it if it wants.

Full taxpayer identification numbers are still required on the copies of the Forms W-2 that are filed with the Social Security Administration, and on those of payers of third-party sick pay to employers.

The regulations are effective for items filed or furnished after December 31, 2020.

TD 9861

Sunday, June 30, 2019

Good News/Bad News on GILTI Exclusion for Highly Taxed Income

I noted in my February 23, 2018 posting that the taxation of GILTI under Code §951A does not apply to foreign base company income and insurance income that is excluded from Subpart F by reason of being highly taxed by a foreign country. The way the statute was drafted, income that was NOT foreign base company income or insurance income, but otherwise would be GILTI and subject to pass-through tax, could NOT use the high tax kickout to avoid tax. I noted that this appeared to me to be a statutory glitch and was inconsistent with the policy of allowing a high tax kickout and the overall purpose of the GILTI provisions.

Others have brought this issue to the attention of Treasury in regard to comments to the GILTI proposed regulations. The bad news is that while Treasury did take those comments under consideration, in enacting final regulations it declined to extend the high tax kickout to income other than foreign base company income and insurance income under Subpart F. See Treasury Decision 9866 (6/19/2019).

The good news is that Treasury also released a proposed regulation that allows a CFC to make an election to have gross income items qualify for exclusion from GILTI if such income is subject to foreign income taxes at an effective rate that is greater than 90% of the §11 maximum tax rate. Prop. Treas. Regs.§1.951A-2(c)(6). While not entirely clear from the language of the proposed regulation (at least to me), the Preamble to the proposed regulation confirms this intent:

For the foregoing reasons, the proposed regulations provide that an election may be made for a CFC to exclude under section 954(b)(4), and thus to exclude from gross tested income, gross income subject to foreign income tax at an effective rate that is greater than 90 percent of the rate that would apply if the income were subject to the maximum rate of tax specified in section 11 (18.9 percent based on the current rate of 21 percent). See proposed §1.951A-2(c)(6)(i). . .If an election is made with respect to a CFC, the election applies to exclude from gross tested income all the CFC's items of income for the taxable year that meet the effective rate test in proposed § 1.951A-2(c)(6)(iii). Preamble to Prop Regs., Fed. Reg. Vol. 84, No. 120 at p. 29114 [REG-101828-19]. 

Back to some bad news. The proposed regulations “are proposed to apply to taxable years of foreign corporations beginning on or after the date that final regulations are published in the Federal Register, and to taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end.” Preamble to Prop Regs. If there is any doubt as to not being able to use the proposed regulations before they are finalized, the Preamble to the final and temporary regulations provides: “until the regulations described in the separate notice of proposed rulemaking are effective, a taxpayer may not exclude any item of income from gross tested income under section 951A(c)(2)(A)(i)(III) unless the income would be FBCI or insurance income but for the application of section 954(b)(4) and § 1.954-1(d).

Sunday, June 23, 2019

Due Process Limitations Apply to Limit State Tax of Trust Beneficiaries

States with income taxes have varying rules on when they assert authority to tax income of trusts, based on combinations of contacts with their state of settlors, trustees, beneficiaries, assets, and management activities. In one of the more aggressive assertions of authority to tax, several states assert that they can tax the income of a trust merely because a beneficiary resides in the state. In a challenge to North Carolina’s scheme, the U.S. Supreme Court ruled that the presence of in-state beneficiaries alone does not empower a state to tax undistributed trust income when the beneficiaries have no right to demand that income and are uncertain to receive it.

In the case, the settlor formed a trust for his children in his home state of New York. The trustee of the trust was a New York resident. Trust documents and records were kept in New York, and the asset custodians were in Massachusetts.The trust granted the trustee absolute discretion to distribute assets to the beneficiaries. One of the children moved to North Carolina, and North Carolina sought to tax all the income of a subtrust because that child was a North Carolina resident. The child had no right to, and did not receive, any distributions from the trust.

The Court based its decision on the requirements of the Due Process Clause of the U.S. Constitution, which limits states to imposing only taxes that bear fiscal relation to protection, opportunities and benefits given by the state. Some definite link, some minimum connection, is required so that the income attributed to the state for tax purposes be rationally related to values connected with the taxing state. Applied to beneficiaries, this results in taxation turning on the extent of the in-state beneficiary’s right to control, possess, enjoy, or receive trust assets.

A key aspect was that the beneficiary could not count on necessarily receiving any specific amount of the income in the future. The Court noted that the assets of the trust could end up with others, and that the beneficiary had no power to assign her interest.

Some preliminary thoughts/observations:

     a. The use of a purely discretionary trust to avoid state income tax when a beneficiary resides in a state with an income tax is a valid planning mechanism, so long as no other ties and connections with the taxing state exist. It would appear that a spendthrift clause that prevents a beneficiary from assigning his or her beneficial interest is a necessary aspect of such planning. Of course, such planning has real world consequences, such as limited access to, and rights over, trust assets by the beneficiary.

     b. Would a power of appointment over trust assets in a discretionary trust by the in-state beneficiary give rise to taxing jurisdiction? This was not discussed in the case. If presently exercisable in the subject tax year, then probably yes. If not presently exercisable, maybe not.

     c. Would a right to receive all or a share of trust assets at a given future age give the requisite taxing nexus for an in-state beneficiary? This fact was present in the case. However, in the case there were facts that made this future right contingent which appear to have influenced the court, such as the ability for the trust to be re-written to exclude such a right under decanting provisions of law (which power was actually exercised after the tax years in issue) and that the trustee could exclude one beneficiary to the benefit of another.

     d. The Court noted that tests of nexus are different as to rights of settlors, trustees and beneficiaries. For example, prior precedent confirms that a resident trustee is enough nexus for state income tax, as well as residence of a settlor (at least where the settlor retains rights over the trust assets, such as a power of revocation). I believe there is at least one state that asserts continuing taxing jurisdiction over a trust with no contacts with the state other than the settlor was a resident of the trust at creation – perhaps a challenge to that nexus authority may be forthcoming based on the principles elucidated in this case.

     e. For practitioners in states without a state income tax on individuals, the case is still relevant, since in preparing or advising on a trust in your state you should still be planning for the circumstance of beneficiaries who reside in other states.


Tuesday, June 18, 2019

Limits on Effects of Order Determining Homestead on Title [Florida]

A recent appellate decision addresses the effect of an order determining homestead vis-à-vis title to the homestead. In the case, a decedent left her homestead by will to her three children. The will also provided a life estate in the property to two of the children. The probate court entered an order determining homestead, which determined that the homestead property was divided in equal shares to the children, but did not mention the life estate provided for in the will. The trial court determined the order determining homestead divested the life tenants from their life estate per the absence of any mention of the life estate (thus allowing partition of the property to proceed on petition of two of the children). Florida’s 5th DCA reversed the trial court, and held that the order determining homestead did not terminate the life estate provided for in the decedent’s will.[1] The appellate court noted that the homestead order did not create new rights, but only explained or clarified the rights that already existed by operation of law.

The appellate court rejected arguments that the children’s consents to the homestead order altered the parties’ individual interests in the estate. It also ruled that the order was not a title transaction within the meaning of Fla.Stats. §712.01(3) noting:

the Homestead Order in this case does not constitute a title transaction, as defined by section 712.01(3), Florida Statutes (2011), extinguishing the life estates in the property. ‘A title transaction within the meaning of this act is defined in section 712.01(3), Florida Statutes, and means any recorded instrument or court proceeding which affects title to any estate or interest in land and which describes the land affected with legal sufficiency.’ Cunningham v. Haley, 501 So. 2d 649, 652 (Fla. 5th DCA 1986). Although the probate and recording of a will constitutes a title transaction within the meaning of section 712.01(3), see Mayo v. Owens, 367 So. 2d 1054, 1057 (Fla. 1st DCA 1979); Kittrell v. Clark, 363 So. 2d 373 (Fla. 1st DCA 1978), Kenneth and Carla point to no authority holding or suggesting that an order determining homestead property constitutes the same.

Mullins v. Mullins, No. 5D18-1672, 2019 WL 2396753, at *4 (Fla. Dist. Ct. App. June 7, 2019)noting

Sunday, June 09, 2019

Electronic Notarization Comes Alive in Florida, and Electronic Notarization and Witnessing of Wills and Trusts Comes Along for the Ride [Florida]

A 78 page bill on the subject of electronic and remote notarization and witnessing of documents was approved by the governor two days ago. Here is some info to start to get you up to speed.

General Provisions:

  • In addition to the statute, the Florida Department of State will adopt rules that online notaries will need to follow.
  • Online notarization is conducted through and requires audio-video communication technology.
  • Notarial certificates should indicate whether they are notarizing in person or online. Sample certificates are in the new statute.
  • The online notary must confirm the identify of the principal, either by personal knowledge or all of the following: remote presentation of identification, credential analysis of identification provided, and identity proofing based on knowledge-based authentication or similar method. Credential analysis involves a third party aiding the notary in affirming the validity of government-issued identification credentials. Identify proofing involves a a third party affirming the identity of an individual through use of public or proprietary data sources, including knowledge-based authentication (question and answer systems) or biometric verification.
  • Errors and omissions insurance is required by the notary, his or her employer, or a remote online notarization (RON) service provider.
  • A notary can notarize even if the principal or any witnesses are located outside of Florida.
  • A notary can serve as an online notary only after taking a course of study.
  • A notary will need to work with a RON services provider to use their communication technology and processes for credential analysis and identity proofing.
  • A notary will need to provide a $25,000 bond.
  • A notary will have to keep an electronic journal of online notarizations, and keep them secured and backed up. The record will have to record various information about the notarization.
  • The notary will have to retain an copy of the recording of the audio-video communication relating to the notarization.
  • The notary may not charge more than $25. It may also charge for copies provided of electronic records, subject to caps and restrictions.
  • The notary can also supervise the witnessing of documents online in a similar manner to notarizing the signature of the principal signor. The witness need not be in the physical presence of the signor or notary. A remote witness must be a resident of and physically located within the U.S. or a territory of the U.S., presumably to make them available to court proceedings if necessary.

Special provisions for wills, trusts with testamentary aspects, health care advance directives, waivers of spousal rights, or powers of attorney authorizing certain types of acts:

  • The notary must ask certain questions of the principal signor relating to impairment or disability if the witnesses are not in the physical presence of the principal signor. If they are not properly answered, then remote witnessing is ineffective.
  • If the principal signor is a “vulnerable adult” as defined in Fla.Stats. §415.102, the witnesses must be in the presence of the principal signor. If they are not, the witnessing is invalid.
  • If witnesses are not in the physical presence of the signor, then additional questions are asked of the principal signor for thelvideo/audio record are undertaken by the notary.
  • An electronic will or codicil is revoked by deleting or obliterating an electronic record, with the intent to revoke, as provided by clear and convincing evidence.
  • Remote witnessing requires that the witness hear the signer acknowledging the signer’s signature.
  • Self-proof affidavits for wills can be electronically witnessed and notarized, if the electronic record that contains the will is held by a qualified custodian at all times before being offered to probate.
  • The electronic will can be admitted to probate if filed through the e-filing portal, and is deemed to be an original of the electronic will. A paper copy of an electronic will which is certified by a notary public to be a true and correct copy can also be admitted to probate as an original will.

Some preliminary thoughts/questions of mine:

  • How much will RON service providers charge?
  • How many notaries will go through the hassle of qualifying to be an online notary and meeting all the requirements for qualification and online notarizations (including the storage and delivery of recordings and the electronic documents that are notarized) – or will such services end up being provided almost exclusively by companies engaged in the business of providing online notarization? The Act has 70+ pages of rules and requirements, and of course more will be coming by regulation.
  • What happens when electronic records are inadvertently destroyed or are not available? Of course, paper records can suffer the same fate – but think about ransomware and other electronic hacking that the has the potential to void and destroy hundreds of thousands of electronic documents at one time.
  • If remote witnessing is not available for a will or similar document (e.g., the signor is a vulnerable adult), testators and signors of such documents may think they have a valid document when they in fact do not.

Good thing? Bad thing? Probably both, but it doesn’t really matter since it is now the law of the land (subject to a delayed effective date). The old way of doing things is still valid – it remains to be seen how widespread the use of electronic notarization and witnessing (and how widespread any resulting fraud and other problems)  will be. My gut instinct is that taking a process that is fairly straightforward (notarization) and subjecting it to a multitude of rules, regulations, costs, and new business interests suggests that perhaps the old ways may be the better way, especially as to testamentary documents.

The foregoing is based on a preliminary read of the new law only. There will be a lot of real ink and electronic ink spilled on this subject for sure. Let the articles, seminars, books, and litigation commence!

Read the new law here.

Monday, May 27, 2019

This is Just Plain Wrong

Alva and Alberta Pilliod recently were awarded $2 billion in punitive damages from Monsanto, related to claims of cancer from using Roundup weed killer. Unfortunately, the big winners here are not the Pilliods, but the U.S., the State of California, and their attorneys, due to changes in the deductibility of legal fees in the 2017 Tax Act.

The big change was the elimination of miscellaneous itemized deductions through 2025, even for those taxpayers that itemize their deductions. Attorney’s fees generally are miscellaneous itemized deductions, so taxpayers that obtain a judgment and pay their attorneys from the judgment cannot deduct those fees.

So let’s review the math for the Pilliods (let’s assume the judgment remains the same after appeals and is paid). They have $2 billion of income from the judgment. With maximum federal tax rates of 37% and California income taxes of 13.3%, and with no deduction for the attorney’s fees and costs they pay, their combined income taxes should be around $1 billion. Their is speculation that their attorney’s fees and costs could total $1 billion. Net left for the Pilliods: $0.

Their attorneys will be taxed on the fee portion of what they receive. If we assume $200,000 in costs, the attorney’s fees will be $800,000. Since we don’t know where they live or what type of entities they practice in, we don’t know their tax bill. But let’s assume 50% - their after-tax receipts are $400,000.

Totals for the tax authorities under this scenario is $1.4 billion.


When an income tax rises to 100% due to the disallowance of costs to obtain the income, does it cease to be an income tax? And what about the effective double taxation of the attorney’s fees - both the plaintiff and the attorneys are effectively taxed on the same payment?

As these results filter out in the world, it is going to impact the economics of litigation, and may work to the benefit of defendants where the financial incentives to plaintiffs are substantially diminished.

The Pilliods problems are exacerbated by living in a state with high income taxes, such as California, so residents of other states might be able to pocket more from such recoveries. The Pilliods were awarded an additional $55 million in compensatory damages. If qualifying as damages for physical injuries, the $55 million is not subject to income tax. After paying their lawyers, they would end up with $27.5 million. However, the physical injury exception will not be available to plaintiffs in lawsuits where the award is not for physical injury.

Note that there are some exceptions to nondeductibility. Costs involving discrimination suits and attorney’s fees relating to whistleblower awards are above-the-line deductions that were not chopped by the 2017 Tax Act. The same applies to recoveries relating to a taxpayer’s trade or business (other than sexual harassment and abuse cases where there is a nondisclosure agreement). Also, attorney’s fees that are court awarded or statutory are not included in income.

Taxes Slash $2 Billion Roundup Weedkiller Verdit to $27.5 Million, (May 14, 2019)

Thursday, May 23, 2019

Documentary Stamp Tax Newlywed Exception Now Applies to All Married Persons [Florida]

Generally, transfers of real property in Florida are subject to documentary stamp taxes based on the consideration paid. If the real property is subject to a mortgage when transferred, the unpaid balance of the mortgage is counted as consideration for this purpose.

There is no general exception to this rule for transfers between spouses. However, Fla.Stats. §201.02(7)(b) does provide that no documentary stamp taxes will apply to a transfer of homestead property between spouses (a) if the only consideration is the mortgage debt, and (b) the deed or other instrument of transfer is recorded within 1 year of the marriage. Many questioned why this exception was limited to newlyweds.

Effective July 1, 2019, requirement (b) above no longer will apply, per Florida House Bill No. 7123 which has been enacted into law. Thus, spouses can transfer homestead property between themselves, even if encumbered by a mortgage, without documentary stamp taxes – so long as there is no other consideration for the transfer other than the mortgage.

Sunday, May 05, 2019

Economic Substance Requirements and Tax Haven Jurisdictions

Not receiving much attention are new economic substance requirements that have recently been enacted in several tax haven jurisdictions, including the Cayman Islands, Bermuda, and the British Virgin Islands.

Tax planning structures often involve the use of corporations and other entities formed in tax haven jurisdictions. To give one example, tax haven companies are often used as blocker holding companies to insulate foreign persons from U.S. estate taxes on their U.S. assets. These new economic substance requirements threaten to complicate such planning structures.

The new requirements are an outgrowth of pressure from the EU and OECD to limit the use of tax haven companies for tax planning and base erosion purposes, especially where the companies have little or no activity, assets, or staff in the subject jurisdiction. When applicable, such companies will require adequate local premises, employees, activities, income, and expenses. Companies that do not comply are subject to civil penalties in the hundreds of thousands of dollars, criminal penalties if not properly reported, and being struck-off the register as a company in good standing. Thus, applicable companies will have to increase their local activities (and concomitant costs) to be compliant – many times this may not be practical or cost-effective.

Companies will be subject to these rules if they engage in “relevant activities.” These typically include banking, insurance, shipping, fund management, finance/leasing, holding company activities, IP holding activities, and service center or distribution center activities. The scope of what is required to comply may be reduced for pure equity holding companies, so this may allow continued use of pure holding companies, but it remains to be seen exactly how those reduced requirements will play out.

Companies already situated in these jurisdictions should review the application of these new rules to them – the use of companies in the future should include a review of the impact of these rules on their circumstances.

Sunday, April 28, 2019

Does a Disclaimer of Real Property Require a Legal Description in Florida?

In a recent case, a disclaimant signed a disclaimer that purported to include real property owned by a decedent, but did not provide a legal description for the real property. After entering into the disclaimer, the disclaimant apparently had a change of heart and desired to retain the disclaimed real property, claiming the disclaimer was invalid.

Here are the key statutory provisions (emphasis added):

Fla.Stats. §739.104(3): “To be effective, a disclaimer must be in writing, declare the writing as a disclaimer, describe the interest or power disclaimed, and be signed by the person making the disclaimer and witnessed and acknowledged in the manner provided for deeds of real estate to be recorded in this state. In addition, for a disclaimer to be effective, an original of the disclaimer must be delivered or filed in the manner provided in s. 739.301.”

Fla.Stats. §739.601:

     “(1) A disclaimer of an interest in or relating to real estate does not provide constructive notice to all persons unless the disclaimer contains a legal description of the real estate to which the disclaimer relates and unless the disclaimer is filed for recording in the office of the clerk of the court in the county or counties where the real estate is located.

      (2) An effective disclaimer meeting the requirements of subsection (1) constitutes constructive notice to all persons from the time of filing. Failure to record the disclaimer does not affect its validity as between the disclaimant and persons to whom the property interest or power passes by reason of the disclaimer.

As noted, Fla.Stats. §739.104(3) does not require a legal description. Fla.Stats. §739.601 does require it. The trial court held that the disclaimer was ineffective without a legal description.

Reversing the trial court, the 3rd DCA determined that a legal description is required for constructive notice purposes only via recording. As between the disclaimant and the persons who would receive the real property if there is a valid disclaimer, a legal description for real property is NOT required to enforce the disclaimer.

As an aside, the disclaimer was also rejected by the trial court as failing to meet the writing requirements of the statute of frauds. The appellate court noted that the disclaimer was in writing and signed by the disclaimant, and thus the statute of frauds was met.

Lee v. Lee, 44 Fla.L.Weekly D284 (3rd DCA 2019)

Friday, April 12, 2019

NFL Draft Day and Federal Income Tax

Two concepts that you don’t often see together!

While only of direct interest to a few taxpayers, a Revenue Procedure addressing draft picks and player contracts issued this week does make for interesting reading.

Tax professionals know that the sale or exchange of property gives rise to taxable gain or loss if the amount received is more or less than the taxpayer’s basis in the property, absent the application of a nonrecognition provision of the Internal Revenue Code. Player contracts and draft picks are property. Therefore, when they are exchanged or traded between teams, gain or loss can result. Gain is the excess of the amount realized from the exchange over the tax basis of the property given up. Loss occurs if the amount realized is less than the basis.

In Revenue Procedure 2019-18, the IRS has provided a safe harbor for professional sports teams to avoid gain on such trades. It provides that teams can assign a zero value to player contracts and draft picks. Thus, a team receiving a contract or draft pick has an amount realized of $0 and will not recognize any gain on the transaction. They will also obtain a $0 basis in the received contract or draft pick.

A loss is possible, if the exchanging team has more than a $0 basis in the contract or draft pick that is being disposed of. Also, if there is cash being paid or received in the transaction, then those amounts WILL enter into the amount realized or the basis of an acquired asset.

To use the safe harbor, the following requirements must be met:

1. The parties to the trade that are subject to federal income tax must treat the trade on their respective federal income tax returns consistent with the Revenue Procedure;

2. Each team that is a party to the trade must transfer and receive a personnel contract or draft pick. In the trade, no team may transfer property other than a personnel contract, draft pick, or cash;

3. In the trade, no personnel contract or draft pick may be an amortizable Code Sec. 197 intangible; and

4. The financial statements of teams that are parties to the trade must not reflect assets or liabilities resulting from the trade other than cash.

Why the special treatment for the teams? Is it the special love that Treasury officials have for professional sports? Or is it because the value of player contracts and draft picks is extremely difficult to value, is subjective to the particular team,  and is subject to constant fluctuation? The IRS says it is the latter.

Who says tax law can’t be fun?

Revenue Procedure 2019-18

Friday, March 29, 2019

The End to Agency Deference in Florida Tax Disputes [Florida]

Many a Florida taxpayer has disagreed with the Department of Revenue’s interpretation of a tax statute. I recently was involved in an audit where it was clear to us that the Florida Administrative Code provisions were not supported by the statutory provisions.

A taxpayer seeking to challenge the DOR’s interpretation in court have had the deck stacked against them under the concept of agency deference. This gives the DOR the benefit of the doubt in its interpretation of the law – court’s will typically defer to the DOR’s interpretation on the theory that the DOR is an “expert” in tax matters.

In great news for taxpayers, those days are now over. Recently approved Amendment 6 to the Florida Constitution adds new Section 21 to Article V of the Florida Constitution. This provision reads:

Judicial interpretation of statutes and rules.—In interpreting a state statute or rule, a state court or an officer hearing an administrative action pursuant to general law may not defer to an administrative agency’s interpretation of such statute or rule, and must instead interpret such statute or rule de novo.

In other words, agency deference is now dead in Florida. This will assist taxpayers in deciding whether to comply with an administrative code provision, in negotiating with the DOR during an audit, and in litigating with the DOR in court, if they believe a DOR pronouncement or interpretation of the law is erroneous.

This new provision also has important implications outside of the tax arena, but of course that is not our interest here.

The fate of agency deference at the federal level is also under fire in federal courts these days – it will be interesting to see what develops there, including in the U.S. Supreme Court. If only we could get a similar amendment into the U.S. Constitution!

Saturday, March 23, 2019

Qualified Beneficiaries–Recent Case is Puzzling in its Logic and Scope [Florida]

A recent 4th DCA opinion on who is a “qualified beneficiary” under Florida’s Trust Code is a puzzler, at least to me. Status as a qualified beneficiary is important – it determines who is entitled to receive an accounting for a trust.

To simplify the facts, 3 separate trusts were held for 3 daughters – each daughter was the current income and principal beneficiary of their own separate trust. At the death of a daughter, the assets of her trust would be transferred to the trusts of her surviving siblings. At the death of the last daughter, the trust assets would go outright to 3 named charities.

Fla.Stats. §736.0103(16) provides general rules on when a living beneficiary is a qualified beneficiary. Generally, the rules include the current beneficiaries, and the next level of persons who would take if the trust then terminated or the current beneficiaries then ceased to be beneficiaries. Because a charitable organization is not a “living beneficiary,” Fla.Stats. §736.0110 applies similar rules when the beneficiary is a charitable organization. Relevant to the above facts, the statute provides “A charitable organization expressly designated to receive distributions under the terms of a charitable trust has the rights of a qualified beneficiary under this code if the charitable organization, on the date the charitable organization’s qualification is being determined:. . .  (b) Would be a distributee or permissible distributee of trust income or principal on termination of the interests of other distributees or permissible distributees then receiving or eligible to receive distributions.”

The trial court held that the charities were not qualified beneficiaries, since if a current trust terminates, they do not become a current distributee – instead it passes to the trusts for the other daughters. Presumably, the trial court would have ruled differently as to the last of these trusts after the other 2 daughters passed away, since then the charities would be next in line to benefit.

The 4th DCA reversed and found the charities were qualified beneficiaries. The court held that all the trusts should be viewed together and the rules should be applied as if all the individual beneficial interests terminated at the same time (and not sequentially). This is questionable to me, since it seems to disregard the word “then” in the statute. That is, the statute says call the new distributee a qualified beneficiary if the interests of a distributee THEN receiving or eligible to receive distributions has her interest terminated. The charities take only if the other non-beneficiary daughters have their interests terminated by death – but on the testing date they are not THEN receiving distributions from the subject trust because the current beneficiary of the trust is still living.

It is difficult to decipher what the court is saying. It appears to me that they are instead saying that the phrase “then receiving” is not applied just in the present moment, but also to future moments. That is, if the list of beneficiaries is A, then B, then C, then outright to D, the court appears to be saying that D is a qualified beneficiary under the above rules because D “would be a distributee. . . on termination of the interests of other distributees [our C]. . . then receiving” if we apply the rules prospectively to the point in time where C would be a current distributee even though C is not presently a current distributee. Under this logic, C would also be a qualified beneficiary. If this is the court’s theory, then I think it is nonsensical since effectively it makes everybody in the line of succession as a present OR FUTURE distributee a qualified beneficiary which is clearly not the purpose of the statute.

Note that if correct the analysis may apply equally to determining whether living persons are qualified beneficiaries – that is, the case may expand beyond the limited charitable beneficiary scenario and impact all trusts. If one compares the above language in Fla.Stats. §736.0110 with the general rules of Fla.Stats. §736.0103(16), there is little difference. The 4th DCA’s decision would seem to apply equally to that statute, and thus allow contingent beneficiaries who are more than one death away from becoming an active beneficiary (either by reason of transfers to different trusts at the death of a beneficiary or perhaps are in line of succession in one trust) may be qualified beneficiaries.

Hadassah, The Women’s Zionist Organization of America, Inc. v. Stephen G. Melcer, Trustee, et al, 2019 WL 141039 (4th DCA 2019)

Saturday, March 09, 2019

Bernie Sanders’ Tax Proposals

We all know that come 2025 the aggregate transfers covered by the unified credit for estate and gift taxes will revert to pre-Trump levels (subject to adjustments for inflation), thus ensnaring more taxpayers in the estate and gift tax web. Of course, should a Democrat be re-elected in 2020, changes in taxes to the higher side may occur even sooner than 2025.

A recent tax bill filed by Senator Bernie Sanders, a candidate for President, gives some insight about what tax legislation might look like if a Democrat is elected – more so if he is elected, but perhaps also as to other Democratic candidates.

Some key changes he would make to the high side include:

a. Increases in estate, gift and GST rates, to a maximum of 77% for members of the billionaire’s club;

b reduction in the unified credit exclusion amount to $3,500,000;

c. elimination of entity valuation discounts as to entity assets that are not business assets;

d. imposing a 10 year minimum term for grantor retained annuity trusts;

e. subjecting grantor trusts to estate tax inclusion at the death of the deemed owner;

f. limiting the GST exemption to a 50 year term; and

g. reduction in the annual gift tax exclusion.

These changes would be good news for tax planners, and bad news for those of moderate or higher wealth.

The old Chinese curse says – may you live in interesting times. I think most of us can agree, at least from a tax perspective if not a political perspective, we are all cursed under that measure.

S.309 — 116th Congress (2019-2020)

Sunday, March 03, 2019

Beneficiaries Hit with Transferee Liability Suit for Estate Taxes 19 Years After Date of Death

A recent case illustrates how beneficiaries and recipients of property from a decedent do not receive the property free and clear from estate tax liabilities. If estate taxes are not paid, the IRS can seek collection of the taxes from such beneficiaries and recipients as transferees under Code §6324(a)(2). And it may be a long, long time before the IRS ‘comes a knocking.’

The case illustrates to us that:

a. Transferee liability is not limited to those who receive a gift or bequest pursuant to a last will or disposition of property being administered under a revocable trust. Instead, it extends to recipients of all property included in the gross estate including:

     1. Transferees who received lifetime gifts that are included in the gross estate under Section 2035 because made within 3 years of death;

     2. Gift recipients whose gift was a discharge of indebtedness to the decedent;

     3. Transferees who receive the property as surviving joint tenants;

     4. Property passing to remaindermen when the decedent had a life tenancy in the property;

     5. Life insurance proceeds on the life of the decedent;

b. The IRS may take a long time before asserting transferee liability. The statute of limitations is 10 years from the date the assessment of tax is made against the estate. Here, the IRS filed suit in the 9th year of that 10 year period (and 19 years after the date of death).

c. The IRS will pursue transferee liability even when the estate tax liability is not that significant. Here, the unpaid tax was $28,939 (but with interest and penalties the amount sought was $65,874.80.

There are numerous Code provisions and procedures for relieving a fiduciary from liability for such taxes - but this is not the case for beneficiaries. Conservative recipients of property may not want to spend their inheritances or received property until they know the 3 year assessment period has expired without an assessment.

U.S. v. Ringling, 123 AFTR2d 2019-XXXX (DC SD 2/21/19)

Monday, February 18, 2019

IRS Blesses 2nd Marriage Planning Technique for IRA

A common issue in planning for marriages with prior children is how to provide for the surviving spouse, while also making provision for children of a prior marriage or relationship. A regularly used planning arrangement is to designate as successor owner at death of the original owner a marital trust that provides for assets to be expended for the surviving spouse during his or her lifetime, with a remainder to the children and lineal descendants of the first spouse to die. This avoids the problem of leaving the assets outright to the surviving spouse, who then can leave the assets to other beneficiaries at his or her death.

If the asset at issue is an IRA or qualified plan interest, the owning spouse may have similar concerns. However, income tax issues complicate the planning. For income tax planning purposes, it is usually desirable that the owning spouse have the option to “stretch” the payouts over the life expectancy of the surviving spouse (or of the decedent spouse) and thus defer income taxes by having the beneficiary be a “qualified beneficiary” of the IRA/qualified plan assets. This can be done via an outright beneficiary designation to the surviving spouse, but presents the same issues with prior children of the decedent spouse as discussed above. Unfortunately, in regard to an IRA or qualified plan asset, the use of trusts to receive the interests faces planning obstacles per the provisions of the Regulations that limit the ability to have the trust beneficiary(ies) be treated as "qualified beneficiaries.”

A recent private letter ruling confirms a fairly straightforward planning mechanism to obtain stretch status for an IRA via a trust under these circumstances. The blessed methodology is for the IRA owner’s revocable trust to be named as beneficiary of the IRA at the owner’s death. The revocable trust provides that a separate trust will be created to hold all IRA and qualified plan assets received. The spouse is named as the sole lifetime beneficiary of the trust, and the owner’s children are named as remaindermen. The IRS ruled that this arrangement passes muster under the Regulations, and the surviving spouse is treated as a qualified beneficiary of the IRA,and the sole one at that.

To reach this result, the general provisions for qualifying trust beneficiaries as qualified beneficiaries must be met. These include the requirements under section 1.401(a)(9)-4, Q&A-5:  (1) the trust is valid under state law, or would be but for the fact there is no corpus; (2) the trust is irrevocable or will, by its terms, become irrevocable upon the death of the employee; (3) the beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the employee's benefit are identifiable within the meaning of section 1.401(a)(9)-4, Q&A-1, from the trust instrument; and (4) the documentation described in section 1.401(a)(9)-4, Q&A-6, has been provided to the plan administrator. Further, for the spouse to be sole designated beneficiary, the trust must be a conduit trust - it must contain provisions requiring the immediate distribution of all retirement plan or RIA distributions by the trustee to the beneficiary.

The payment to two trusts (first the revocable trust, and then onto the separate trust for IRA/retirement plan assets), is permitted under section 1.401(a)(9)-4, Q&A-5(d). That provision states that if the beneficiary of the trust named as beneficiary of an employee's interest is another trust, the beneficiaries of the other trust will be treated as having been designated as beneficiaries of the first trust, and thus, as having been designated by the employee under the plan for purposes of determining the distribution period under section 401(a)(9)(A)(ii), provided that the requirements of section 1.401(a)(9)-4, Q&A-5(b), are satisfied with respect to such other trust in addition to the trust named as beneficiary.

PLR 201902023

Sunday, February 10, 2019

Court Order Enjoining Occupancy or Residence by Owners Did Not Terminate Homestead Status [Florida]

A recent case addressed whether owners who had to cease living on homestead property by reason of a court order to vacate the property and enjoining them from residing thereon due to unsafe conditions and code violations, should automatically be treated as having abandoned their homestead. Homestead status was relevant because the husband deeded the property away without joinder of his wife – such a transfer is void under Florida’s Constitution if the property remained homestead property. Here, the husband and wife had moved off the property and been living in a rented residences or stayed with friends for five years after the court order.

The trial court found that the property ceased to be homestead property. Reversing the trial court, the 4th District Court of Appeal ruled that abandonment of homestead status under these circumstances was not automatic, and denied the buyer’s request (who was seeking to enforce the transfer) for summary judgment on the issue. While homestead status can be lost through abandonment, a finding of abandonment requires a strong showing of intent not to return to the homestead. Such a determination requires a review of the totality of circumstances to determine such intent. Case law supports that an involuntary cessation of residency on the homestead does not alone constitute abandonment. Based on the foregoing, the appeals court remanded the case for further proceedings, including resolving the question of fact of the wife’s intent (or absence of intent) to abandon the subject property.

Yost-Rudge v. A-to-Z Properties, Inc., 2019 WL 459015 (4th DCA, February 6, 2019)

Saturday, January 26, 2019

Real Property Rental Safe Harbor under Code §199A

Code §199A allows taxpayers up to a 20% income tax deduction for business income earned through a sole proprietorship or pass-through entity. There are numerous requirements to meet, and one of these is that the business constitute a trade or business under Code §162.

Unfortunately, for rental real estate activities it is not often clear whether the activity constitutes a trade or business. To assist taxpayers, the IRS has published Notice 2019-07 which provides a safe harbor to obtain trade or business status for rental real estate activities. Note that if a taxpayer does not meet the requirements, they can still claim trade or business status – they just do not have the benefit of automatic IRS approval of that conclusion via the safe harbor.

I have summarized in this link a mind map summary of the safe harbor requirements, so those with an interest can get quickly up to speed on them. It is possible that these requirements may be tinkered with by the IRS when it issues a final Revenue Procedure, so readers should check whether such a procedure has been issued before relying on the Notice. Of course this is a summary only – check the Notice provisions directly instead of relying on this summary alone.

Notice 2019-07 – LINK TO MAP SUMMARY

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!