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Sunday, March 21, 2021

No "All Going to Charity" Exception for Chenoweth/Ahmanson Funding Issue

Taxpayers and planners love to use valuation reductions for partial interests in entities as a method for reducing transfer taxes. Such reductions and discounts can be a two-edged sword, however.

The Ahmanson and Chenoweth cases point out that when a majority interest in an entity is included in a taxpayer's gross estate, the valuation discounts will typically be substantially less than will apply to a noncontrolling or minority interest, and that this can have undesirable consequences when a portion of the entity is transferred to a charity or a marital deduction trust. For example, assume that a 100% interest owned by a decedent as his sole asset in an operating corporation is valued at $10 million, with little or no discounts taken.

Then assume that 60% of the corporation will pass to a bypass trust, with the remaining 40% passing to a charity. One might think that there should be no estate tax, because the 60% is covered by the decedent's unified credit exemption, and the 40% is covered by the charitable deduction. However, the case law advises that the value passing to the charity for which the charitable deduction is allowed is not 40% of the company's reported value. Instead, the 40% interest must be valued on its own, and as a minority interest, larger valuation discounts will apply. Thus, if we assume a 25% combined marketability and lack of control discount on the 40% interest, if it has a gross value of $4 million, the charitable deduction is limited to $3 million in the example. This leaves $1 million exposed to estate tax.

In a recent Tax Court memorandum decision, controlling interests in several real estate holding LLCs owned by a decedent were given 75% to one charity and 25% to a different charity. The IRS argued that the 25% piece going to one charity would need to be heavily discounted (citing Ahmanson), thus reducing the charitable deduction for that piece and having the same issue as noted in the previous paragraph.

The taxpayer tried to rebuff the discount's application by claiming that since 100% of the business interests were going to charity (albeit two separate charities), then no discount should be taken for purposes of the charitable deduction. The Tax Court rejected the argument, noting that there were two separate transfers to two separate charities, and standard valuation principles should apply to each gift on its own.

Note that while this decision involved the charitable deduction, the concept similarly applies to the marital deduction. In planning where marital deduction gifts or charitable gifts are likely and closely held business interests are involved, efforts should always be undertaken to anticipate these issues in the planning stage to avoid the division of a majority interest in a business into minority interests that are used to fund these deductible transfers.

Estate of Warne v. Comm., T.C. Memo 2021-17

Tuesday, March 16, 2021

Cryptocurrency and the IRS - Some Important Updates

 Cryptocurrency is treated like any other investment asset for federal income tax purposes and not "money." Therefore, taxpayers that sell cryptocurrency for a gain incur taxable capital gains for income tax purposes.

It is likely that a fair amount of cryptocurrency has been sold for gain by U.S. taxpayers without that being reported - either out of ignorance or intentional tax avoidance. Importantly, cryptocurrency transactions are not invisible but are available for review on the blockchain. Some sleuthing may be required to tie a particular transaction to a taxpayer, but this is often not that difficult. Further, cryptocurrency exchanges may be able to identify crypto transactions and tie them to specific persons.

Taxpayers with gains in the past or present years should note Operation Hidden Treasure, which was recently revealed by IRS personnel. This is an IRS program focused on taxpayers who omit cryptocurrency income from their tax returns, and is comprised of agents trained in crypto and virtual currency tracking. Civil and criminal enforcement elements of the IRS are involved.

The IRS also updated its Frequently Asked Questions on Virtual Currency Transactions on March 2.  This can be accessed at

One interesting change in the FAQ relates to whether the mere purchase of virtual currency must be reported on a taxpayer's Form 1040 pursuant to the new question that asked whether the taxpayer was involved in any virtual currency transaction during the year. The question itself strongly suggests that the answer is 'yes.' However, the FAQ says 'no.' Here is the question and answer:

I don't know about you, but buying virtual currency sure seems like "acquir[ing an] interest in any virtual currency." A FAQ issues by the IRS does not have the force or effect of law. While one is probably okay with relying on a FAQ to answer 'no' to the question, the more conservative answer would be to answer 'yes' to this question.

Sunday, March 14, 2021

Applicable Federal Rates - March 2021

 For the applicable federal rates for the above month, preceding months, and a data table that visually shows trends, click here!  

Direction of rates: moving up

Saturday, February 06, 2021

Beware the Last Minute Signing of a Prenuptial Agreement [Florida]


Marital attorneys know that upon divorce, spouses who signed a prenuptial agreement will often raise arguments of coercion and duress to void the agreement. Factually, such allegations and arguments may or may not be true, and in either case may be hard to prove or disprove many years after the fact. A good story and sympathetic court can spell doom for the agreement. Therefore, practitioners seeking to enhance the likelihood of an enforceable agreement should manage the objective and verifiable facts that mitigate against coercion and duress so as build defenses against future attack. One of those objective facts that can usually be managed is when the prenuptial agreement is signed – signings the day before or the day of the wedding should be avoided.

A recent Florida case presented various facts that both supported and weakened the agreement. The end result was the voiding of the prenuptial agreement. One of the facts was that the agreement was signed the day before the agreement. We can wonder whether if the agreement had been signed well before that whether the court would have voided the result.

The case also provides a lengthy analysis of the meaning of the terms coercion and duress in context of voiding a prenuptial agreement. It also has an interesting set of facts.

The key facts of the case were:

  • Husband was a divorced 41 year old. Wife turned 18 three days prior to meeting Husband. She had never married and was a virgin when she met him. She was living in Columbia, and was looking for a wealthy American man to marry and to bring her to the U.S. They met on May 29, 2001 through a matchmaking website.
  • The Husband did not speak Spanish and the Wife spoke little English.
  • In June 2001, the parties had sex and became engaged on the same day.
  • The Wife became pregnant and there was an abortion in mid-August.
  • According to Wife, Husband told her the prenuptial agreement was a requirement for her to immigrate to the U.S. However, Wife admitted she would have signed anything because she loved and wanted to marry Husband and because she wanted to immigrate to the U.S.
  • Husband obtained a form prenuptial agreement and modified it to his satisfaction. The parties did not discuss the agreement or negotiate its terms.
  • Wife took the agreement to a Colombian attorney. The attorney provided Wife with a Spanish translation on August 29, 2001. The attorney signed a certification that she was knowledgeable in Florida law and had advised Wife about her rights. She now admits she did not know Florida law and did nothing more than translate the agreement. The Wife claimed that she was in severe pain and distress relating to the abortion on August 29 and August 30. Wife also feared exposure of the premarital sex and abortion to her strict Catholic family.
  • On August 30, 2001, the parties executed English and Spanish versions of the agreement before a notary public. Wife did not read it.
  • The parties married on August 31, 2001.
  • Several days later, the parties went to a previously scheduled appointment at the Colombian embassy to start the Wife's immigration process.
  • Several months later the parties moved to Florida, where Husband resided and owned businesses. They had five children together.
  • In May 2017, Wife filed for divorce.

The trial court invalidated the agreement since it "was the product of duress and coercion."

The court found "duress" relating to the unequal bargaining positions, the pregnancy and abortion, and the risk of exposure of those things to her family.

The court found that Husband's threat of no wedding and no immigration on the day before the signing was "coercion." The court concluded that the Husband exploited the time pressure aspects of the courtship and Wife's "vulnerable  emotional position" to his pecuniary advantage.

The appellate court noted two grounds for invalidating a prenup. The first is where the defending spouse has engaged in "fraud, deceit, duress, coercion, misrepresentation, or overreaching."

The second is when the agreement makes an unfair or unreasonable provision for the challenging spouse, given the parties' relative circumstances. The second ground was inapplicable since this was not what the trial court relied on.

As an aside, this second ground will not apply if there is full and fair disclosure of assets, so it is not an automatic circumstance of voiding a prenuptial agreement. Disclosure is generally not relevant to the first ground – thus, the presence of duress or coercion can void the agreement even with disclosure of financial information. Disclosure was not an issue in the case.

The appellate court noted that duress exists if the signing was effected involuntarily and was thus not an exercise of free will, AND this condition of mind was caused by some improper and coercive conduct of the other side – i.e., the other spouse must bring external pressure bring to bear.

The appellate court noted that coercion is not the same as duress, but there is no Florida case law providing a definition for coercion for these purposes. To distinguish the two and provide a definition, the court borrowed from an Ohio Supreme Court case that held that duress means actual physical force or the threat of same to one's person, property or reputation, with coercion being more broadly defined to include undue influence and other lesser forms of compulsion such as moral or economic force sufficient to overcome the recipient's free will.

The appellate court overruled the trial court and found there was no duress. This was because there was no evidence that the Husband threatened to tell the Wife's family about their circumstances if she did not sign the prenuptial agreement.

The court did sustain the finding of coercion, however. The mere threat of not proceeding with the marriage is not enough for coercion, based on case law cited by the court. Indeed, if that was the case, many more prenuptial agreements would be subject to successful challenge. However, additional acts did raise the level of compulsion into the realm of coercion. These acts included Husband’s representations that the prenuptial agreement was a prerequisite to immigration into the U.S. This, combined with the time pressure aspects and the Wife's vulnerable condition was enough to support a finding of coercion. The court's citation of problematic prenups in the case law where presentation and/or signing occurred shortly before the wedding indicates that this was a key component in its holdings.

Husband does not appear to have had the assistance of counsel in the preparation or signing of the agreement. Knowledgeable counsel can go a long way towards minimizing both actual and the appearance of coercion and duress. As noted, objective actions such as not signing the agreement on the eve of the wedding, and the representation of the other spouse by a Florida attorney with the proper expertise would have gone a long way to defuse the allegations of duress and coercion.

Bates v. Bates, 46 Fla. L. Weekly D287c (3rd DCA, February 3, 2021)

Tuesday, February 02, 2021

New Rules Coming on Brokers and Other Financial Representatives Being Named as a Fiduciary or a Beneficiary

 Securities brokers and other registered representatives often develop close relationships with their clients. Those clients may make provision for them to become a fiduciary or beneficiary in trusts and wills due to these relationships.

For those representatives who are subject to FINRA, new FINRA Rule 3241 becomes effective on February 15, 2021 that generally requires review and approval of such circumstances by member firms so as to avoid conflicts of interest. The new rules can be reviewed here.

Exceptions apply to representatives that are family members of the appointing client. In addition to direct appointments, the rules treat similarly circumstances where the representative directs the appointment of other persons in these roles such as family members of the representative.

Draftspersons should be familiar with these limitations, to assist their clients where they desire to make such appointments.

FINRA Rule 3241. Registered Person Being Named a Customer’s Beneficiary or Holding a Position of Trust for a Customer

Thursday, January 28, 2021

FBAR Reporting to Be Expanded to Include Foreign Accounts Holding Virtual Currency

Presently, for U.S. persons a foreign account holding virtual currency is not a reportable account for purposes of having to file an FBAR.

In a recent announcement FinCEN has advised that it intends to amend the FBAR regulations to include those accounts.

In today's environment, this is about as surprising as the sun coming up this morning.

FinCEN Notice 2020-2

Tuesday, January 26, 2021

Applicable Federal Rates - February 2021

For the applicable federal rates for the above month, preceding months, and a data table that visually shows trends, click here!  

Direction of rates: moving up 

Wednesday, January 20, 2021

Antideferral Tax Legislation on the Horizon? What is Antideferral Tax Legislation?

President Biden has made no secret of his plans to raise taxes. One possible avenue is through the adoption of antideferral rules, along the lines recently outlined in a report by Senator Ron Wyden, the ranking member of the Senate Finance Committee.

Presently, taxpayers who own appreciating assets are not taxed on the appreciation until the sale of those assets. Further, the gains may be subject to preferential rates of tax.

Both of these concepts would go out the window in an antideferral regime. First, the report recommends the elimination of favorable capital gains rates. Second, as to publicly traded securities, taxpayers would be required to "mark-to-market" the value of their accounts each year for income tax purposes. To the extent those assets went up in value during the year, taxes would be due on that appreciation (or a deduction would be allowed for any loss) even though the asset was not sold. The taxpayer could no longer defer tax on gains until sale. Third, as to nonpublicly traded property, in lieu of a mark-to-market arrangement, a penalty would be imposed on the taxpayer which would grow for the longer the property is held, so as to deny the benefits of tax deferral to the taxpayer. The penalty might be an interest charge or a tax surcharge.

Special rules could apply to residences, retirement assets, and other special classes of assets. The report suggests the rules should apply only to high income or high asset households.

Such a plan would radically transform the taxation of capital in the U.S. While purportedly applicable only to wealthier taxpayers, history shows that such taxable classes tend to expand to less wealthy taxpayers over time. The plan would also result in increased tax return complexity and bookkeeping, and costs of compliance. 

Most importantly, the plan does not discuss the impacts on capital formation. It is capital investment and formation that drives economies and is the policy behind reduced capital gains rates. This new arrangement would eliminate the tax incentives to capital investment that currently exist, and may punish long-term capital investments. Treating capital badly has two principal effects. First, it takes productive capital out of circulation, where it otherwise would be producing goods, services, jobs, and innovation through research and development. Second, it would drive capital out of the U.S. to other jurisdictions that treat capital investment more favorably under the principle that capital goes to where it is treated best. None of this will improve the economy and indeed could adversely affect it in a material manner.

President Biden promised to undo the tax cuts made by President Trump. The antideferral rules, if adopted, would go far beyond undoing those cuts and instead would install a tax regime that never existed in the U.S. and a new drag on the economy that would likely have both unforseen and unfavorable consequences. Keep an eye out to see where this is going.

Below is a link to the report.

Treat Wealth Like Wages Report

high taxpayers - how long

tax compliance and compolexity


Saturday, January 02, 2021

IRS Is Proposing a User Fee for Estate Tax Closing Letter

Executors and personal representatives of estates of decedents can be held personally liable for distributing or applying estate assets when there are unpaid estate taxes due, if the IRS does not get paid. When an estate tax return is filed, the final amount of estate taxes due is not known until either the statute of limitations expire, or there is an audit (possibly followed by ongoing dispute, resolution through Appeals, and/or litigation). The estate fiduciaries are thus in the dark about whether or when an adjustment to the estate taxes will be forthcoming, or if the IRS has accepted an estate tax return as filed. This is unfair to the fiduciaries, and the beneficiaries, since a prudent fiduciary will need to hold back on distributions until the tax amount is more certainly known.

So as to assist the fiduciaries in determining if tax is or will be due, when an estate tax return is filed the IRS has traditionally issued an estate tax closing letter when an estate tax return has been filed. This is generally issued after the IRS' review of the return and determination not to audit or after completion of post-audit procedures or litigation.

Several years ago, the IRS stopped automatically issuing them. This was done in part as a cost-saving measure, and because the IRS believed that fiduciaries could obtain the same information as a closing letter by determining if the transaction code and explanation of "421 - Closed examination of tax return" was entered on the estate's tax transcript.

However, since fiduciaries, local probate courts, State tax departments, and others had come to rely on the convenience of estate tax closing letters and the explanations they contained, estates could still request a closing letter if they wanted one. This request could be made by telephone or fax  - but presently only by fax due to COVID-19 operational restrictions.

Noting the continuing burden of responding to these requests, and the continuing volume of estate tax returns (in part due to the portability rules and the need to file estate tax returns to obtain the benefits of portability), the IRS is now proposing, via proposed regulations, a $67 user fee to request a closing letter to help it defray costs.

While the fee amount is not outrageously high, it is always irksome when the government charges members of the public before the government will discharge its duty. In this case, that is particularly so since it is the liability that the government imposes on fiduciaries (both in their fiduciary capacity and their individual capacity) that necessitates a closing letter.

A secondary concern is fee creep. We have all seen modest government fees increase over time to unreasonable amounts. Look no further than the fees charged for private letter rulings - these at one time had no fee, then a small fee, and now bear fees in the many thousands of dollars.

As of now, the fee is only proposed. Stay tuned.

Proposed Regulation Section 300.13