LEGAL UPDATES

Florida Eliminates the Benefit of the Beneficiary Rule

Historically, the settlor’s intent is the key item in guiding the administration of a trust. Further, a settlor has a pretty free hand in crafting how a trust will operate, subject to some public policy limitations and legal doctrines (such as the Rule Against Perpetuities).

Knowingly or unknowingly, Florida may have elevated the interests of the beneficiaries of a trust over the settlor’s desire and intent, when it adopted provisions from the Uniform Trust Code into the Florida Trust Code. In adopting these UTC provisions, the Florida Trust Code adopted the benefit-of-the-beneficiary rule. That rule . . .

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Applying Overpayments of Tax to Tax and the Offshore Penalty in the OVDP Program

The OVDP program allows taxpayers to remedy deficient disclosure filings relating to offshore accounts for a fixed penalty amount. As part of the program, taxpayers must file either original or amended tax returns which include the income earned by their foreign accounts for the most recent eight tax years for which the due date has passed. In addition to other applicable penalties, an offshore penalty is imposed in lieu of other penalties relating to failure to properly disclose foreign accounts.

In preparing or amending returns. . .

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Florida Wills go Electronic

A bill has cleared both Houses of the Florida legislature authorizing electronic wills and electronic will execution in Florida. Absent an unexpected veto by Gov. Scott, the last wills of testators may now precede them into the cloud(s).

The new statute has endeavored to reduce avenues for fraud and misdeeds. Only time will tell whether electronic wills will be more or less subject to fraud and improper usage than paper wills. Paper wills are not affected by the new legislation, except as they may be revoked and replaced by electronic wills.

Here are some key provisions and observations regarding the new statutes, based on my initial review:

1. If the testator signed electronically…

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Tax Changes in the Republican Bill to Replace Obamacare

Most of the attention on the bill relates to coverage and subsidy changes. However, the bill does have some significant tax relief included. While the bill still faces changes to get through both houses of Congress and the existential question whether the Senate will pass it, it is not too early to take a look at these changes.

One key change is to eliminate the 0.9% Medicare surtax on wages. Currently, earners pay a 1.45% payroll tax on wages up to $200,000 ($250,000) if married. Earnings above that level are subject to an additional 0.9% payroll tax. This 0.9% payroll tax will go away under the bill (but not until 2023).

Another is the elimination . . .

IRS Issues Guidance Regarding Estate Tax Lien Discharge Process

When an individual dies, an estate tax lien attaches automatically to all of the property included in the gross estate. It arises prior to tax assessment, and is not recorded.

Persons inheriting property, or purchasers of property, are interested in having the lien released. As to real property that an estate seeks to sell, a discharge of the lien can be applied for with a Form 4422. A Form 792 is issued to discharge particular property.

In the past, if accepted the IRS would release the lien within a few days. Starting in 2016, the procedures changed, and all applications are now processed through Specialty Collection, Offers, Liens and Advisory. Once the IRS accepts the Form 4422. . .

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Two Important New International Tax Filings

While not the only international reporting changes that are occurring, there are two significant ones that apply for the current filing season for 2016 returns.

First is the FBAR, which reports interests in foreign accounts. This used to be due on June 30, but is now due by April 18. . .

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Asserting Reasonable Cause Defense to Penalties in a Pleading Does Not Automatically Waive Attorney-Client Privilege

Reliance on a tax professional can constitute reasonable cause, and thus avoid the application of an accuracy-related penalty under Code §6662 or a fraud penalty under Code §6663. When the professional is an attorney, case law indicates that this reliance waives the attorney-client privilege so that the government can determine if such reliance occurred and met the reasonable cause exception. See New Phoenix Sunrise Corp. v. C.I.R., 106 AFTR 2d 2010-7116 (CA 6 2010) and Ad Investment 2000 Fund, LLC, 142 TC 248 (2014).

So will the mere assertion. . .

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Discretionary Trust Beneficiary Had No Standing to Challenge Adoption [Florida]

Since many estates and trusts define beneficiaries by description (e.g., “child” or “lineal descendant”) and it is a natural propensity for persons to gift or leave property to lineal descendants, the adoption of an individual can have a major impact on who benefits under a last will or a trust. Well drafted wills and trusts will typically contain provisions regarding adopting – such as whether an adopted person should be treated as a child or lineal descendant, and perhaps excluding persons who are adopted over a certain age from coming into those classes (so as minimize the risk of adoption being intentionally used to upset a dispositive scheme).

Ryan was a beneficiary of a trust established by his great-grandparents. His interest was discretionary only – distributions to him as a descendant were to be made only at the sole discretion of the trustees.

Ryan’s father adopted Brindley in 2004. . .

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In re Cross Trusts

By Jenna G. Rubin

This decision raises a host of trust administration questions regarding claims of breach of fiduciary duty. While the specific breaches at issue in this case were very fact specific, the Court’s findings are useful in a variety of trust administration contexts:

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Receiver Put in the Same Shoes as Underlying Taxpayer under Claim of Right Claim

At times, a taxpayer may receive and report income, and then in a later year have to return the income item. Depending on the circumstances, this could give rise to a deduction in the later year under Code §§162 or 165 under the Claim of Right Doctrine.

If the taxpayer does not have significant income in the year of repayment (or in the NOL carryback or carryforward periods if the deduction is under Code §162), the taxpayer not get much mileage from the deduction due to a lack of income to offset by the deduction. To remedy this situation, Code §1341, when operable, will allow the taxpayer a refund in the year of repayment equal to the tax savings that would have resulted if the initial income reporting was not required, regardless of the amount of income arising in the year of repayment.

A requirement to use Code §1341 is that at the time. . .

Robb Evans & Associations, LLC v. U.S., 119 AFTR 2d 2017-XXXX, (CA1), 03/03/2017

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Strict Charitable Contribution Substantiation Requirements Trip Up Another Taxpayer

Taxpayers making contributions to charities that seek a charitable deduction have a myriad of reporting and receipt requirements to comply with. Code §170(f)(12) imposes additional requirements as to contributions of motor vehicles, boats, and airplanes. These various requirements are a major trap for taxpayers, as the IRS will often assert the most harmless errors or omissions in compliance as grounds for denying the deduction.

In a recent Tax Court case, a taxpayer lost a $338,080 charitable deduction for the contribution of an aircraft. . .

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Michael Jackson Estate Tax Case Moving Forward

Most estate tax practitioners will tell you estate tax it is all about valuation when assets are other than cash and marketable securities. The estate tax case of the Michael Jackson estate is an ideal demonstration. Tax Court proceedings are presently underway in that case.

The fiduciaries of Michael Jackson’s estate filed an estate tax return showing a value of $7 million. The IRS issued a notice of deficiency claiming a value of $1.32 billion, and demanded additional estate taxes of $505.1 million and $196.9 million in penalties and interest. Wow!

A large issue in the case, and one that is relevant to other celebrities, is the value at death of Jackson’s name and likeness. The estate reported the value at $2,105.00, claiming his reputation was tainted by child-abuse allegations and strange behavior. The IRS pegs that value at. . .

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Birds-Eye View of New Gain Recognition Rules on Transfers of Appreciated Property to Partnerships with Related Foreign Partners

The IRS recently issued extensive regulations under the authority of Section 721(c) that denies nonrecognition treatment for transfer of appreciated property to a controlled partnership (domestic or foreign) by a U.S. person if there are related foreign partners.

I have a prepared a map diagram (viewable in any browser) that provides an overview of the new provisions. Its purpose is to generally familiarize you with the new rules – you will need to review the rules themselves for full detail (translation: do not rely on the diagram since it is an abbreviated summary only). . .

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IRA Owner Taxed on Distribution, Even Though Funds Were Improperly Rolled into IRA

A deceased husband’s IRA was incorrectly rolled over into an IRA of his widow, instead of being paid to his estate. The widow then distributed funds from the IRA to her stepson.

The Tax Court held that the widow was taxable on the funds distributed from the IRA under normal IRA distribution rules, even though the funds appear to have come from the erroneously rolled over IRA of her deceased husband. . .

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30% Penalty Is Not an Excessive Fine

So says the Tax Court in the recent decision involving the 30% penalty imposed under Code §6662A(c). The penalty can be imposed if a taxpayer fails to adequately disclose a reportable transaction giving rise to an understatement of tax. The penalty is 30% of the tax understatement. When the penalty applies, there are no defenses allowed.

The Eighth Amendment to the United States Constitution provides “excessive bail shall not be required, nor excessive fines imposed. . .

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IRS Permits Trust Division Without Adverse Federal Tax Consequences

In Private Letter Rulings 201702005 and 201702006, the IRS favorably ruled on federal tax consequences of a proposed trust division. But for a minor change in facts, the two rulings are identical, so we will focus only on 201702005. Two trusts are involved in the rulng – with each trust to be divided pursuant to state statute and court approval. The trusts involved are irrevocable trusts established for the benefit of the descendants of a child of the settlor (A). A has three adult children (B, C & D) and four minor grandchildren. Income is distributable to A’s children and the descendants of any deceased child of A (although in one trust such descendants are not included). The trustee has authority to withhold income and accumulate it or later pay it out. The trustee may also distribute principal if needed for care, eduation and support beyond what is being satisfied by income distributions. One year after A’s death the trust principal and accumulated income is to be distributed to A’s lineal descendants per stirpes. Proposed new subtrusts will be funded by fractionally dividing the existing trust assets of each trust into 3 new subtrusts, one for each of B, C & D. Trust provisions for the subjtrusts are similar, but not identical to the existing trusts, subject to the siloing of the interests of B, C & D and their descendants into separate trusts so as not to be directly impacted by the exercise of trustee discretion outside of their respective silo. The PLR sought rulings to the effect that (a) the new subtrusts will maintain the “grandfathered” trust status of the predecessor trust for GST purposes, (b) each subtrust will be treated as a separate trust for federal income tax purposes, (c) the division will not cause the predecessor trusts nor any new subtrust to recognize gain or loss from a sale or other disposition of property under Code §§61, 662, or 1001, (d) the subtrusts will inherit the tax basis and holding periods of the predecessor trust as to assets received, (e) the division will not result in any assets of the subtrusts being included in the gross estate of their beneficiaries, and (f) the divisions will not result in transfers subject to gift tax. The IRS favorably ruled on all of the requested rulings…

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IRS Formalizes Transcripts as Substitute for Estate Tax Closing Letters

In 2005, I discussed here how the IRS had posted information on its website that an account transcript notation bearing transaction code “421” could be used to determine that the IRS had concluded its review of a filed estate tax return and has accepted the return as filed (or after an adjustment by the IRS to which the estate agreed to), in lieu of obtaining a closing letter. The IRS indicated that closing letters would no longer be automatically issued, but could be requested 4 months or later after the return was filed.

The IRS has now formalized this information into a Notice. The Notice is helpful, and presumably was promulgated . . .

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Grant to Public Charity Qualifies as “Unusual Grant” for Public Support Test

Publicly supported charities provide favorable benefits under the Code for both the organization and donors, in contrast with non-publicly supported private foundations. To qualify, the organization must receive a substantial part of its support from either governmental bodies or from direct or indirect contributions from the public. The regulations provide tests for public support (the 1/3-of-support test and the 10% facts and circumstances test (Treas. Regs. §1.170A-9(f)). Under these tests, large grants from any individual (namely, grants exceeding 2% of the organization’s total support), can make it difficult to pass these tests. However, if a greater than 2% grant qualifies as an “unusual grant” under Treas. Regs. §1.170a-9(f)(6)(i), they are disregarded under the tests.

A recent private letter ruling determined that a large grant . . .

PLR 201701023

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Treasury Department Unofficial Statements on Proposed Section 2704 Regulations

There is a lot of uncertainty whether the Section 2704 proposed regulations will ever be finalized, either due to policy to be set by President-elect Trump, and/or Congressional efforts to block those regulations. Nonetheless, practitioners still need to keep an eye on this project in the event they are finalized.

Kathy Veihmeyer Hughes of the Treasury Department’s Office of Tax Policy, provided some information on the project and what was intended by the proposed regulations in speaking to the Heckerling Institute on Estate Planning today in Orlando, Florida. Some key points (some of which have been previously put out there at other conferences) include:

a. Treasury is working on digesting. . .

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Some Tax Law Changes That Take Effect in 2017

No new tax legislation has come forth yet, but per tax laws passed in prior years, some changes in the law will occur in 2017. Chief among them:

The floor beneath the itemized deduction for medical expenses of taxpayers who are age 65 or older increases from 7.5% of AGI to 10% of AGI. Thus, fewer medical expense deductions for older taxpayers. Code §213. . .

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Stretch IRAs to be Hit?

Presently, if an IRA owner does not fully withdraw the balance of his IRA during lifetime, his or her heirs may be able to spread the withdrawal of the inherited IRA over the life expectancy of the recipient. By being able to slow down the required distributions, the taxation of the income that has been deferred from income tax within the IRA will be deferred further and spread over an extended period of time. Such IRAs are referred to as “stretch IRAs.”

A provision of the Retirement Enhancement and Savings Act of 2016, which cleared the Senate Finance Committee in September by a vote of 26-0 and which was introduced to Congress in November, seeks to limit stretch IRAs. Under the proposed legislation, IRA balances of an individual that aggregate over $450,000 will need to be distributed within 5 years of the death . . .

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New Reporting Requirements for U.S. Disregarded Entities Owned by Foreign Persons

Code § 6038A imposes reporting and recordkeeping requirements on domestic corporations that are at least 25% foreign-owned. They are required to file an annual return on Form 5472 with respect to each related party with which the reporting corporation has had any reportable transactions.

In newly issued regulations, the IRS will treat U.S. disregarded entities, such as single member LLCs not electing to be taxed as a corporation, as U.S. corporations for this purpose. . .

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IRS FINALIZES REGULATIONS THAT LIMIT NONRECOGNITION ON CERTAIN OUTBOUND SECTION 367(a) TRANSFERS & OTHER OUTBOUND RULE CHANGES

U.S. persons transferring appreciated property to foreign corporations may be eligible for nonrecognition of gain using Section 351 or the corporate reorganization provisions. However, Code §367(a) and its regulations provide exceptions to nonrecognition for transfers of certain property based on the policy that it is appropriate for the U.S. to tax the gain in such items at the time they move to foreign corporate taxpayers.

Previously, foreign goodwill and going concern value were excepted from gain recognition under Code §367(a), based on legislative history that allowing such items to escape gain recognition would not adversely impact the U.S. Per more recent Treasury determinations . . .

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RECKLESS INDIFFERENCE IS ENOUGH FOR WILFULLNESS FINDING FOR PURPOSES OF FBAR NONFILING PENALTIES

A husband and wife had an accounting in Switzerland at UBS AG, into which they deposited commissions from camera sales and also directed some of their international customers to make deposits. In 2007, the tax year at issue, the taxpayers did not file the required Form TD F 90-22.1 (FBAR) form with the Department of Treasury which they should have filed to disclose their interest in the UBS account (such FBAR reporting now occurs on FinCen Form 114). They also did not file FBARs, nor U.S. income tax returns, for other tax years. In 2010, the taxpayers applied to participate in the Offshore Voluntary Disclosure Program (OVDP), and filed delinquent income tax returns and FBARs. The FBARs failed to report other non-U.S. accounts of the taxpayers, and the income tax returns failed to report certain commission income. The taxpayers were ultimately rejected from the OVDP program. . .

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Existence of Unpaid Tax Claim in Bankruptcy Opens the Door to Expanded Statute of Limitations on Fraudulent Conveyances

In bankruptcy proceedings, if the bankruptcy trustee seeks to gain access to assets that the debtor transferred prior to bankruptcy under fraudulent conveyance law, the trustee must act within the applicable state fraudulent conveyance law statute of limitations. For example, in Florida, this would mean transfers occurring more than 4 years prior to the bankruptcy could not be challenged by the trustee.

A recent Bankruptcy Court case demonstrates a large loophole in this limitation, In that case. . .

[In re Kipnis, —- B.R. —-, 2016 WL 4543772, 118 A.F.T.R.2d 2016-5639 (S.D. Fla. 2016)]

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3 Strikes Against the IRS in Attempting to Impose Fiduciary and Beneficiary Liability for Estate Taxes

During her lifetime, Anna Smith established the Anna Smith Family Trust, a revocable trust administered for her benefit. Initially, Anna was initially a co-trustee with two of her children, but eventually became sole trustee. A significant asset of the trust was stock of a closely held company that owned a gaming license.

Anna later died, and her estate filed an estate tax return showing $15.958 million in gross estate assets, showing $6.631 million in estate tax, and the estate paid $4 million in taxes with the return. The estate made a Section 6166 election to pay the remaining taxes in installments. The trust provided for distributions of trust assets to limited partnerships owned by the heirs, and for direct distributions to heirs, after Anna’s death.

An additional $1 million was paid in estate taxes. Eventually, the closely-held stock was distributed to the beneficiaries due to issues with state law restrictions on a gaming license being owned by a trust – at that time . .

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Burden of Proof Issues in Gift Tax Matter

A recent case illustrates 3 important burden of proof issues.

The general facts of the case involved a merger of a company owned by parents with a company owned by children. The gift tax issue involved the relative value of the two companies to determine how much, if anything, was transferred to the children by the merger due to their resulting stock ownership in the merged company.

A rebuttable presumption of correctness cloaks an IRS notice of deficiency. Thus, the taxpayer typically bears the burden of proving by a preponderance of the evidence that the Commissioner’s assessment is erroneous. However, there are some circumstances where the burden of proof shifts to the IRS. . .

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New Regulations Issued Regarding CFCs and Investment in U.S. Property

Income earned abroad by U.S. controlled foreign corporations can often qualify for deferral of U.S. income tax. If the foreign corporation is a controlled foreign corporation (CFC), its U.S. shareholders may be taxable on such untaxed income if the corporation converts the property to U.S. property (Code §956).

The U.S. has now issued new and revised regulations . . .

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What Kind of Tax Changes Can We Expect From Trump’s Presidency?

The tears have not yet dried for some, and the celebrating is not yet over for others, but let’s turn our attention to taxes. With a Republican Congress and a Republican president, some measure of tax relief is a given. What can we expect?

A good place to start is Trump’s platform. Here are the key elements:

1. Cut in half the number of individual income tax brackets and bring rates down to 12%, 25% and 33%.

2. Elimination of the 3.8% Obamacare tax.

3. Lower the business tax rate for corporations and small businesses alike to 15%, but with elimination of many deductions. . .

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$100 Million FBAR Penalty – Ouch

Taxpayers who fail to file Reports of Foreign Bank and Financial Accounts (FBARs) disclosing their non-U.S. accounts can suffer a 50% penalty on the balance of the unreported accounts. In one of the largest penalties I have seen, a New York professor of business administration has been subjected to a $100 million civil FBAR penalty for failing to report a $200 million account.

Clients often enquire . . .

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Exceptions to Limited Liability for LLC Members [Florida]

Fla.Stats. §605.0304(1) provides for the limited liability of LLC members – it provides: “A debt, obligation, or other liability of a limited liability company is solely the debt, obligation, or other liability of the company. A member or manager is not personally liable, directly or indirectly, by way of contribution or otherwise, for a debt, obligation, or other liability of the company solely by reason of being or acting as a member or manager.”

Nonetheless, there are other routes to liability for members, arising in their capacity as members. A recent article in the Florida Bar Journal provides details on many of these. These routes include . . .

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2017 Inflation Adjustments

Rev. Proc. 2016-55 has provided adjusted figures for 2017 for tax items subject to inflation adjustments. Here are some highlights . . .

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Overview of New Section 385 Regulations

The IRS has issued final and temporary regulations under Code Section 385. These provisions, intended to limit earnings stripping, will enhance the IRS’ ability to characterize related party ownership arrangements, purportedly established as debt, as equity instead.

One set of rules provides prerequisite requirements …

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Executor Loses Out on Fees Due to Section 6166 Lien

A personal representative/executor for an estate granted a special estate tax lien under Code §6324A to the U.S. as part of a Section 6166 election to defer payment of federal estate tax. At the time, the executor had been paid only been part of his fees, leaving $486,265 unpaid. The IRS has the ability to demand a lien before allowing a Section 6166 election if adequate bond is not posted.

During the course of the lien period, the value of the liened property fell below the amounts still due to the IRS . . .

U.S. v. Spoor, 118 AFTR 2d 2016-xxxx (11th Cir 10/4/16)

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Filing an Entity Income Tax Return Does Not Constitute a Check-the-Box Election

A single member limited liability company (SMLLC) is treated by default under the check-the-box rules as a disregarded entity. If a Form 8832 is filed, the owner can elect to treat it as a corporation/association.

A single owner corporation was merged into an SMLLC owned by the same person. The surviving SMLLC filed Forms 1120 as a ‘c’ corporation thereafter. The IRS processed the Forms 1120. No Form 8832 election was ever made to treated the SMLLC as a corporation…

Heber E. Costello, LLC, et al., TC Memo 2016-184

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Business Protection from Payroll Provider Fraud

Many businesses rely on third parties to handle their payroll, including making withholding deposits with the IRS on behalf of the business. Way too often, the payroll provider will embezzle the funds and not pay them over to the IRS.

In this circumstance, the business is still on the hook for the unpaid employment taxes. To add insult to injury, if the IRS takes a hard line it will usually be successful in obtaining interest and penalties from the business. This is based on the view of the courts that a taxpayer’s duty to file returns and pay taxes is nondelegable. For a recent example where the employer was held responsible for interest and penalties, see Kimdun, Inc. v. U.S., 118 AFTR 2d 2016-5508 (DC CA 2016).

So what can employers do to protect themselves? . . .

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Mission Near Impossible – Reliance on Professionals Defense to Late Filing and Payment Penalties

An estate sought relief for $1.189 million in penalties for the late filing of a Form 706 and the late payment of estate taxes when the filing and payment were over a year late. The U.S. District Court granted the government’s motion for summary judgment upholding the penalties, and the 6th Circuit Court of Appeals affirmed the lower court. The late filing and payment were principally attributable to the estate attorney who was responsible for the filings. The courts ruled for the government notwithstanding the following favorable facts supporting reasonable cause: (1) the executor was elderly, (2) he only had a high school diploma, (3) he had never interacted with attorneys before serving as executor, (4) he had never served as an executor, (5) the attorney was suffering from brain cancer and her competency was deteriorating during the applicable period, (6) the attorney told the executor that extensions had been obtained whenever questioned about the filing status, but this was a lie, (7) the State of Ohio refunded the penalties as to state estate taxes for reasonable cause, and (8) the government conceded . .

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IRS Attempts Collection Against Surviving Spouse and Marital Deduction Property

In a recent U.S. District Court case from the Southern District of California, the court ruled on several motions to dismiss relating to the IRS’ attempt to impose liability on a surviving spouse for estate taxes on the estate of her decedent husband, even though the property received by the surviving spouse was eligible for the marital deduction. The IRS attempted various approaches. Some of the more interesting approaches are discussed below, along with the court’s resolution.
The facts are somewhat lengthy. Boiling them down to the key aspects, Allen Paulson (the decedent) entered into a prenuptial agreement with his spouse-to-be, Madeleine Pickens. The agreement included obligations for Mr. Paulson to make certain gifts to Ms. Pickens when he died. Mr. Paulson’s living trust made provisions for Ms. Pickens, but gave her the ability to elect to receive either under the prenuptial agreement or the living trust provisions. The living trust provided for substantial gifts to a marital trust.

After Mr. Paulson’s death . . .

U.S. v. Paulson, Case No. 3:15-cv-02057, U.S. District Court, Southern District of California (September 6, 2016)

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Regulations Issued to Make Marriage References Gender Neutral

Further to the recent U.S. Supreme Court cases recognizing same-sex marriages, the IRS has issued final regulations that codify same-sex marriages for federal tax purposes, regardless of gender. Under Treasury Regulations § 301.7701-18(a), the terms “spouse,” “husband,” and “wife” mean an individual lawfully married to another individual, and the term “husband and wife” means two individuals lawfully married to each other.

Different jurisdictions have different rules . . .

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Treasury Provides Relief for Late 60-Day Rollovers

The Internal Revenue Code allows qualified plan participants and IRA owners to withdraw assets from a plan or IRA and contribute them to another (or the same) plan or IRA without being taxed on the distribution, if the rollover occurs within 60 days. If the deposit occurs after 60 days, the taxpayer can seek a Private Letter Ruling that avoids taxation if the taxpayer has good cause. Unfortunately, such a route is expensive, requiring a $10,000 user fee.

In Rev.Proc. 2016 – 47, Treasury is now allowing taxpayers that make a late rollover to avoid tax without having to seek a Private Letter Ruling if the . . .

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Spouses Need to Exercise Care in Transferring Property between Them When Subject to a Marital Agreement [Florida]

Many prenuptial and postnuptial agreements provide for a class of property known as Separate Property. Such Separate Property will often not be subject to claim by or transfer to the non-owning spouse upon death or divorce. When Separate Property is provided for in the agreement, the participants need to exercise care in transferring property between and among them to avoid unintended consequences.

This was illustrated in a recent case when . . .

Colino v. Volino, 41 Fla. L. weekly D1990b (5th DCA, August 26, 2016)

Practice Aid – A Redlined Version of the Proposed Section 2701 and 2704 Regulations

These proposed regulations are difficult enough in substance to deal with, without having to piece together the changes that they make to the existing regulations. Maybe there is a redlined version out there already, but I could not find one, so I created a redlined comparison of the recently proposed regulations that show the current full regulation as redlined to show the new proposed changes. I did it myself so I don’t attest to total accuracy – use with caution and if anyone locates any errors, let me know…

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No Obligation to File Inaccurate Return to Avoid Failure to File Penalty

A partnership was a partner in a Cayman Islands partnership – that investment made up most of its assets. The Cayman Islands partnership did not file a Form 1065 income tax return and did not give a Form K-1 to the taxpayer partnership, because it was determined that the partnership accounting records were such a mess that it would cost several million dollars to put them in good shape and meanwhile the Cayman Islands partnership was liquidating.

Thus, the taxpayer partnership did not have the information it needed to file its own Form 1065, and did not file one. The IRS sought to impose a failure to file penalty under Section 6698. This penalty is only $195 multiplied by the number of partners – but this partnership had about 1600 partners. That would put the penalty at $312,000! And this went on for 3 years.

The taxpayer partnership claimed reasonable cause. The partnership tried, but failed…

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Updated ITIN Procedures

Foreign individuals who are ineligible to obtain a social security number but who require a U.S. taxpayer identification number can apply for a an Individual Taxpayer Identification Number (ITIN) using Form W-7. The process is cumbersome since it requires the provision of original identity documents.

Treasury recently released Notice 2016-48 which provides some changes to the procedures, arising principally from 2015 legislation. Highlights of the Notice include:

The basis methodology of the Form W-7 and the provision of original identity documents remains in place, principally through certified acceptance agents (CAAs)who have received certification from the IRS or through some IRS Taxpayer Assistance Centers.
Taxpayers should check https://www.irs.gov/uac/tac-locations-where-in-person-document-verification-is-provided to find IRS Taxpayer Assistance Centers that can perform these functions, and to make appointments. . .

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Some Food for Thought – Code Section 2704 Proposed Regulations

As the proposed regulations are digested by practitioners, here is some food for thought:

a. Will GRATs be underwater from the start – that is, nondiscounted values for the funding transactions, and discounted values for distributions back to the grantor?

b. Nondiscounted values required for sales to IDGTs?

c. Silver lining – assuming the higher Section 2704 values allow for higher basis for interests held at death, this will allow for income tax savings. For estates within annual exclusion amounts (and thus no estate tax) such basis step-ups could make this a revenue loser for the IRS.

d. For interests in corporations . . .

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IRS Issues Long-Awaiting Section 2704 Proposed Regulations

In case you haven’t heard, these proposed regulations were issued on August 2. The particular focus is to substantially reduce valuation discounts for transfer tax purposes on minority interests, nonvoting, and limited control interests that are transferred to family members. Some of the restrictions will only apply if a transfer is made within 3 years of death – others will apply more broadly. The definition of “control” is expanded to catch more circumstances within its net. The use of non-family owners of interests in entities to avoid Section 2704 will be made more difficult.

The regulations are only in proposed form. With hearings set for early December, they should not be finalized until at least 30 days after that (if ever)…

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Executrix Held Liable Under Federal Claims Statute For Actions Taken Prior to Appointment as Executrix

A decedent died while owing over $340,000 in unpaid federal income tax liabilities. His estate was insolvent. The assets of his estate consisted almost entirely of a 100% interest in one corporation and 50% of another corporation. Each corporation owned a fishing vessel as its sole asset. Shortly after the decedent died, the decedent’s surviving spouse transferred the shares of the 100% owned company to herself. About six months later, she was appointed executrix of the decedent’s estate, and later transferred the shares of the second corporation to herself. At the time of these transfers, she knew of the unpaid tax liabilities.

The IRS sought to impose liability on the wife for the unpaid tax liabilities per the application of the federal claims statute for the value of the stock she distributed (31 U.S.C. Section 3713). The trial court concurred and entered a judgment against the wife, and the appellate court affirmed the judgment, even though some of the shares were distributed prior to the wife being appointed executrix.

31 U.S.C. Section 3713(a)(1)(B)…

U.S. v. McNicol, 118 AFTR 2d 2016-5150 (CA1 2016))

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IRS Wins Debt vs. Equity Case

A frequent area of dispute between taxpayers and the IRS is whether an indebtedness obligation should be treated as debt, or an equity investment, for income tax purposes. Taxpayers often seek debt treatment to obtain interest deductions, defer gain to a seller, or avoid gift treatment. Sometimes the underlying transaction is a straight loan – other times it involves a financed purchased of property.

The latter is what occurred in the subject case – a U.S. corporation purchased partnership units from a foreign corporation for a debt obligation. The debt was helpful since it provided an interest deduction to the U.S. obligor, deferred gain on the sale to the selling foreign corporation, and no taxable interest income to the foreign corporation obligee per qualification of the debt as tax-exempt portfolio interest debt.

There were factual aspects of the transaction…

American Metallurgical Coal Co., TC Memo 2016-139

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Treasury Removes a Reporting Trap for Section 83(b) Elections

Taxpayers who receive property as payment for performing services are generally taxable on the value of the property received in the year of receipt. Section 83 may allow such taxation to be deferred when the property received is subject to a substantial risk of forfeiture (e.g., an employee is issued stock, but will forfeit it if he quits or is fired) until the risk of forfeiture is removed.

Such a delay can hurt the employee, since the value of the property may increase before the risk of forfeiture is removed – the employee is required to include the value of property in income based on the value at the time such forfeiture risk goes away.

Section 83(b) provides relief to the employee – …

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Safe Harbor Acquisition of Control for Spin-Offs

Code Section 355, and related Code provisions, when applicable, will allow a corporation to spin-off or split-off a subsidiary corporation to its shareholders without triggering gain to the corporation or its stockholders. One of the requirements for this treatment is that the distributing corporation “control” the distributed corporation (i.e., own 80% or more of the voting power and number of shares of the distributed corporation) immediately before distributing it to its shareholders.

To come under Section 355, the distributing corporation may intentionally acquire control before the spin-off or split-off, and then transactions are undertaken after the distribution that reverse in whole or in part such acquired control as to the shareholders that succeed to ownership of the distributed corporation. Determining whether the IRS will respect such acquisition and subsequent disposition of control and the application of Section 355 can be difficult to determine.

The IRS has now issued a Revenue Procedure…

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State Court Retroactive Change to IRA Beneficiary Not Given Tax Effect by IRS

A decedent had 2 IRAs. The death beneficiaries of the IRAs were trusts that qualified as “look through” trusts, such that the payout period for the IRAs after the decedent died could be computed using the life expectancy of the trust beneficiaries.

However, before he died, the decedent moved the IRAs to another firm, and entered into new paperwork that erroneously designated his estate as the death beneficiary. With the estate as beneficiary, the payout period for the IRAs could not be “stretched” under IRS regulations The decedent thereafter died…

Private Letter Ruling 201628004, July 8, 2016

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Napkin Theory Saves the Day [Florida]

Renee established and funded a revocable trust, with charitable residuary beneficiaries at her death. The trust was revocable, but it did not provide a method for revocation.

Four years later, Renee prepared a will that left all of her estate to a caretaker. The will included language that “I…declare this to be my Last Will and Testament, revoking all other wills, trust and codicils previously made by me.” …

Bernal v. Marin, 3rd DCA (Case No. 3D15-171, June 15, 2016)

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Anatomy of a Busted Tax Rescue Transaction

For many years, there were companies out there that marketed a service to tax professionals to help their corporate clients with large tax liabilities. I remember receiving solicitations to think of them if I came across companies that could benefit from their services. The bare bones of a typical transaction involved a C corporation that had sold assets for a gain or otherwise incurred a large amount of income (or expected this to happen in the near future). The rescue company would purchase the sale of the stock of the company, either with rescue company funds, funds from a lender, or possibly from the target company itself…

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Withholding Agents–Obligation to Withhold On Payments to Foreign Persons When Source of Payment Uncertain

In recent guidance to auditors, the IRS discusses what happens when a payor withholding agent pays items to a foreign payee when the withholding agent is uncertain whether the payment is U.S. source.

By way of background, Code Sections 1441 and 1442 impose a 30% withholding obligation (less under treaties) on payors of U.S. source fixed or determinable annual or periodical income (FDAPI). In most cases, the payor will know if the source is U.S. source. The guidance notes these common rules: …

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Anderson v. McDonough

By Jenna G. Rubin

In this appeal, the appellant appealed a final order requiring him to pay fees and costs to his mother’s estate following an unsuccessful will contest. The fee award was granted pursuant to F.S. 733.106 (which provides that the court can direct from what part of an estate fees are to be paid) even though the appellant did not receive anything from the estate.

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Whose Fraud Extends the Statute of Limitations on Assessment?

The IRS generally has 3 years to assess additional tax after a return is filed. Code Section 6501(a).However, an important exception is Code Section 6501(c)(1). Under that provision, if there is fraud in regard to the preparation of a return, there is no statute of limitations for assessment of tax relating to that return…

Finnegan v. Commissioner, T.C. Memo. 2016-118 (June 16, 2016)

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IRS Tax Liens and Discretionary Trust Interests – Part 2

In April, I wrote how a U.S. District Court held that a beneficiary’s discretionary interest could be liened by the IRS for tax liabilities of the beneficiary. The interest was “halfway” between a purely discretionary interest and a mandatory HEMS ascertainable standard interest (health, education, maintenance, support) clause – it provided for HEMS-like distributions, but only in the “sole discretion” of the trustee. You can read my post here.

The District Court has now issued an order relating to enforcement of the lien. The IRS sought an order forcing a distribution to pay the beneficiary’s liabilities. The District Court denied the IRS’ request.

The IRS’ rights under its lien only extend as far as the beneficiary’s right to trust funds. Here, that right “has no permanently fixed dollar value” and “is variable according to [his] needs.” The amount of the beneficiary’s interest is equal to “payments the withholding of which would constitute an abuse of discretion in applying an ascertainable standard.” This could vary from $0 to some other dollar amount…

Duckett v. Enomoto, Et Al., 117 AFTR 2d 2016-XXXX, (DC AZ), 06/06/2016

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Northern Trust Co. v. Shaw

By Jenna G. Rubin

This decision deals with an interpretation of a surviving spouse’s rights under a prenuptial agreement. While the spouse argued that she was entitled to both $500,000 under the agreement and other assets left to her by the decedent, the personal representative felt that she was only entitled to the $500,000, and the other assets left to her by the decedent should be taken into account in satisfying that amount. The Court, relying on North Carolina contract law, ultimately felt that the personal representative’s interpretation was correct.

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Taxpayer Required to Pay Tax Twice on the Same Income – Tax Court Unsympathetic

A taxpayer in the medical supply business received payments from Cigna before 2005. He reported those items in income and paid federal income tax on them.

A dispute later arose and the taxpayer returned payments to Cigna. He did not deduct the repayments in the year of repayment, even though Code Section 1341 might have allowed it.

In 2010, Cigna paid the funds back to the taxpayer in resolution of the dispute. The taxpayer did NOT report those payments, reasoning that he had already paid income tax on them the first time he received them…

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Howard v. Howard

By Jenna G. Rubin

While most practitioners are familiar with the rules and procedures surrounding the guardianship process, many are less familiar with the procedural requirements for the appointment of a guardian advocate on behalf of someone with a developmental disability. This decision deals with two such procedural requirements: (1) what constitutes a finding of “good cause” to proceed with the guardianship proceeding without the potential ward present and (2) the requirements for a written order appointing guardian advocates.

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What Happens to Jointly Owned Property When One of the Owners Owes the IRS

Leonard and Joyce owned 50% of a commercial property. Their son, Derek, owned the other 50%. The IRS liened the property due to amounts owed by Leonard and Joyce to the IRS for unpaid taxes. The IRS sought to foreclose its tax liens and force a sale of the property. 50% of the proceeds would go to the IRS, and 50% would go to Derek.

The taxpayers argued that the district court should not order the sale.

Code Section 7403 provides authority to the government to file suit to enforce its lien and force a sale of the liened property. There is no exception in Section 7403 that prevents its operation even though there are “innocent third-party” interest holders in the subject property that do not owe taxes to the IRS. The U.S. Supreme Court, in US v. Rodgers, 461 US 677 (1983), confirmed that the Code Section authorizes the sale of the whole property in these circumstances, and that the Supremacy Clause of the U.S. Constitution overrides any state law to the contrary that seeks to protect innocent third-party interest holders.

However, Code Section 7403…

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Make Sure the Corporation is in Good Standing Before Filing a Tax Court Petition

Many states will involuntarily or administratively dissolve a corporation for not paying or filing annual reports, fees, or tax returns. The ability of a dissolved corporation to engage in activities after dissolution depends on applicable state law, and typically there are procedures for reinstating such a dissolved corporation.

So what happens if such a dissolved corporation receives a notice of deficiency and petitions the Tax Court for review? Under applicable state law, there may be specific guidance on whether a dissolved corporation can prosecute or defend a lawsuit. Also, some states allow for a dissolved corporation to conduct winding up activities after the dissolution. Such state law provisions have at times allowed authority for a dissolved corporation to file a valid Tax Court petition.

A recent case indicates there are limits…

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2014 Statistics of Income

The IRS regularly releases information garnered from tax filings. For those with an interest in this sort of information, based on individual income tax returns for 2014:

-Taxpayers filed 148.7 million U.S. individual income tax returns, an increase of 0.6% from 2013;
-There were significant increases in adjusted gross income (AGI), which rose to $9.7 trillion (an increase of 6.1% compared to 2013);
-Taxable income increased to $6.9 trillion (an increase of 8% compared to 2013); and
-Total income tax rose to $1.4 trillion (an increase of 10% compared to 2013).

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Florida Sales Taxes on Internet Sales Outside of Florida [Florida]

Question: A Florida corporation, with a physical location and principal address in Florida, sells flowers, gift baskets, and other items of tangible personal property over the Internet. The company does not maintain any inventory and instead uses the inventory of florists in the delivery location to deliver purchased products. Are deliveries outside of Florida subject to Florida sales tax?

Answer: Reversing the lower appeals court, the Florida Supreme Court says yes.

The florist mounted two challenges. First was a Due Process argument. The Due Process Clause requires some type…

Florida Department of Revenue v. American Business USA Corp., 41 Fla.L.Weekly S237a (Florida Supreme Court, May 26, 2016)

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Cole, TC Summary Opinion 2016-22

Facts: A U.S. citizen and permanent resident of Israel incurs capital gains from the sale of stock of a U.S. corporation.

U.S. – Israel Income Tax Treaty Provisions:

Article 15, Paragraph 1: “[a] resident of one of the Contracting States shall be exempt from tax by the other Contracting State on gains from the sale, exchange, or other disposition of capital assets.”

Article 6, Paragraph 3: ““[n]otwithstanding any provisions of this Convention except paragraph (4), a Contracting State may tax its residents and its citizens as if this Convention had not come into effect.”

Question: Can the U.S. subject the taxpayer’s gain to U.S. income tax…

Cole, TC Summary Opinion 2016-22

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Form 5472 Reporting by Foreign Owned Disregarded Entities Established in the U.S. – Coming Soon!

Presently, a domestic single member LLC, and other similar single owner entities, absent a check-the-box election to the contrary, are disregarded for almost all U.S. tax purposes.

Presently, a foreign owner of such disregarded entity need not file a Form 5472 regarding that entity, since it is a non-entity for tax purposes. The Form 5472 form (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) is authorized under Code Sections 6038A and 6038C, with respect to each related party with which the reporting corporation has had any “reportable transactions.” These corporations must also keep permanent books of account or records as required by section 6001 that are sufficient to establish the accuracy of the federal income tax return of the corporation, including information, documents, or records to the extent they may be relevant to determine the correct U.S. tax treatment of transactions with related parties. Failure to report can result in significant penalties.

New proposed regulations will treat such entities as a corporation for purposes of Section 6038A, thus giving rise to the above…

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Richard v. Richard

By Jenna G. Rubin

This decision deals with the application of the relation back doctrine found in F.S. 733.601, and whether it would apply to validate a notice to creditors that was published one day prior to the appointment of the PR. The Court interpreted the meaning and history behind F.S. 733.601 and ultimately found that the doctrine does apply to validate the earlier filed notice to creditors.

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Marital Deduction Trusts and Expatriates – More Questions Than Answers

If an expatriate dies and leaves property to a U.S. citizen or resident spouse, can a marital trust be used to defer or avoid the transfer tax imposed under Section 2801? Both the Code and the Regulations seem to say yes, but a closer reading suggests that absent further regulatory relief, the answer is uncertain. And will the surviving spouse be taxable on the marital trust assets at his or her later death?

FACTS: Code Section 2801 imposes a transfer tax at the highest estate tax rate of estate tax on a covered gift or bequest to a U.S. citizen or resident. In the circumstances of death of an individual, a covered bequest is any property acquired directly or indirectly by reason of the death of an individual who, immediately before such death, was a covered expatriate. Code Section 2801(e)(1)(B). A covered expatriate is an individual who expatriated from the U.S. and met or exceeded certain asset or income thresholds at the time of expatriation. This tax is not a Chapter 11 estate tax (nor a Chapter 12 gift tax) – this will be an important fact.

Code Section…

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Woodward v. Woodward

By Jenna G. Rubin

This decision deals with whether res judicata and laches barred a beneficiary’s claim against a trustee. The Court held that neither applied, since the beneficiary’s two claims against the trustee did not contain identity of the causes of action, and because the beneficiary did not know about the trustee’s actions until he was served with an accounting.

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Hall v. Hall

By Jenna G. Rubin

The Court took the opportunity in this decision to “reiterate a fundamental tenet of appellate advocacy.” Appellants attempted to appeal a probate court decision denying an undue influence claim and petition to revoke probate of a will and trust.

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Breach of Trust Statute of Limitations Held Open for 10 Years – With New Summary Chart [Florida]

The concepts of statute of limitations and repose, and laches, exist to bring finality after the passage of time as to liability risks. Claims for breach of trust against a trustee can be subject to a confusing array of rules as to when the statute expires, especially when the concept of fiduciary accountings, and different rules for a continuing trust versus a terminating trust, are thrown into the mix. A recent Florida case demonstrates these complexities.

A short summary of the facts: (a) in 2002, the assets of the subject trust…

Woodward v. Woodward, 41 Fla. L. Weekly D1073a (4th DCA, May 4, 2016)

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Giller v. Giller

By Jenna G. Rubin

This case involved whether a personal representative has the right to bring a suit for declaratory action under F.S. 689.07(1), which deals with real estate deed and conveyances which add the words “trustee” or “as trustee” to the name of the grantee, or whether relief under that section is limited only to subsequent purchasers or others relying on the deed.

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Genauer v. Downey & Downey, P.A.

By Jenna G. Rubin

Does a trust beneficiary have the right to intervene in trust litigation already being defended by the trustee? In this decision, which involved a dispute about the right of an attorney for a former trustee to recover his fees from the trust, the Court ultimately held that the beneficiaries of the trust had a sufficient interest in the proceeding that they should have been given the right to intervene and participate.

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Brokerage Account is a Safe Account to Temporarily Hold Homestead Sale Proceeds for Reinvestment [Florida]

An individual sold his interest in a Florida homestead, and put a portion of the proceeds in two Wells Fargo brokerage investment accounts entitled “Fl. homestead account..” The account was invested in mutual funds and unit investment trusts.

The Florida constitution protects a Florida homestead from claims of creditors of the owner. This has been extended to the proceeds from sale of a homestead if (1) there is a good faith intention, prior to and at the time of the sale, to reinvest the proceeds in another homestead within a reasonable time; (2) the funds are not commingled with other monies; (3) the proceeds are kept separate and apart and held for the sole purpose of acquiring another home…

JBK Associates, Inc. v. Sill Bros., Inc., Florida Supreme Court (April 28, 2016)

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Foreign Financial Asset Reporting – Coming Soon to a Domestic Entity Near You

When Form 8938 reporting for foreign financial assets of U.S. taxpayers was first imposed a few years, only U.S. individuals were subject to it. The IRS has now issued final regulations that will commence reporting by domestic corporations, partnerships and trusts owning such assets. Nothing to worry about for this tax season – but next year will be different as this reporting commences for tax years starting after 12/31/15.

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Post-Death Action Reduced Amount of Estate Tax Charitable Deduction

Decedent died and left a majority stake in a real property management corporation to a private foundation. The estate tax value of the stock was $14.182M.

After the decedent’s death, but before the stock was transferred to the foundation, certain things happened, including:

a. The corporation elected Subchapter S status;

b. The corporation redeemed from the decedent’s trust a large portion of the company shares for a value far less than the estate tax value.

At least part of the difference in value was attributed to changes in business climate after the date of death and before the 7th month date after death when the stock was appraised for the redemption. The Tax Court, however, found that there was insufficient evidence to support the large decrease in value. There was also concern that the redemption price was calculated on a minority basis even though the decedent owned a majority interest…

Estate of Victoria E. Dieringer, et al., 146 T.C. No. 8

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Parker v. Parker

By Jenna G. Rubin

This decision deals with whether an estate is an indispensable party in a proceeding to recover properties transferred by the decedent prior to his death.

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New Regulations Issued to Expand the Reach of Anti-Inversion Rules

Code Section 7874 seeks to remove the U.S. tax benefits that can apply by inserting a non-U.S. holding company into the ownership structure of businesses formerly conducted through a U.S. holding company. This is a big political issue as several large U.S. multinationals have shifted into a foreign holding company structure in ways that have skirted these rules. Many in the U.S. want to stop such corporate expatriations, and thus the IRS is beefing up the reach of Section 7874 to disincentivize such transfers.

Taxpayers have attempted to work around the technical rules of Section 7874…

T.D. 9761, 04/04/2016

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Oreal v. Steven Kwartin, P.A.

By Jenna G. Rubin

This appeal deals with a claimant’s attempt to collect interest due the claimant on a promissory note. The claimant filed a timely statement of claim in the estate, seeking payment due on a note plus interest.

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The IRS Is Looking to Recharacterize Related Party Debt as Equity Simply for Failing to Meet on a Timely Basis New Contemporaneous Written Documentation Requirements

In the early 1980’s, the IRS issued regulations on the question of when loans to corporations would be recharacterized under Code Section 385 as equity. The conversion of purported debt can have significant adverse income tax effects for the borrower and lender. Those regulations were withdrawn and we have been without regulations since then. The IRS has now issued new proposed regulations on the subject.

Below is a short overview of the new regulations and some observations. The proposed regulations are lengthy and complicated, so there will surely be a lot written about the as they are digested by the tax community…

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A Death Abroad – Assistance and Issues

The death of a loved one is obviously a difficult time and process for family and friends. If the decedent dies outside of the U.S., the family and friends have the additional burden of dealing with local law and requirements.

The legal and practical process varies by country. So while not comprehensive, below is a list of key practical and legal concerns and information.

Notification of death to the local authorities.
Obtaining a local death certificate (which can often take awhile)…

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Out of State Homestead Exemption Voids Florida Exemption [Florida]

Florida exempts a portion of a Florida homestead from ad valorem tax. This could save a taxpayer a few hundred dollars a year. The real economic value to such an exemption is that under Florida’s Save our Homes provision, ad valorem tax value increases are limited to 3% per year even though the value of the residence increases more.

A husband owned a residence in Indiana. He received a residency-based property tax exemption from Indiana on that property. His wife owned a Florida residence…

VENICE L. ENDSLEY, Appellant, v. BROWARD COUNTY, FINANCE AND ADMINISTRATIVE SERVICES DEPARTMENT, REVENUE COLLECTIONS DIVISION; LORI PARRISH, as Broward County Property Appraiser, et al., Appellees. 4th District. Case No. 4D14-3997. March 23, 2016

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Form 8971 Filing Date Extended

The new Form relating to reporting to beneficiaries of estates and the IRS on the tax basis of distributed assets has had its first filing due date extended to June 30, 2016. The IRS has taken notice of the scrambling around imposed on estates to meet the end of March deadline, and is giving more time for compliance.

Notice 2016-27

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Income Tax Assessment on Beneficiary Allowed Even Though the Statute of Limitations Had Expired

A recent Tax Court case illustrates how the IRS was able to assess income taxes against two trust beneficiaries even though the statute of limitations for assessment had expired, via the mitigation provisions of the Internal Revenue Code.

FACTS: A father established a revocable trust during his lifetime. Several IRAs of father named the trust as beneficiary. Father then died on June 21, 1998. In 2001, $228,530.44 was distributed to the trust from the IRAs. In the same year, the trust distributed the same amount to two beneficiaries of the trust (who were children of the father).

On its timely Form 1041 for 2001, the trust reported $228,530 in gross income, and also deducted that amount as an income distribution, so that it had no net income. It reported the distributions to the beneficiaries on Schedules K-1. The two beneficiaries each reported $114,265 in income from the distributions on their Forms 1040 for 2001.

The Form 1041 was selected for audit, and in 2004 the IRS disallowed the income distribution deductions, and determined an $80,302 deficiency for the trust for 2001…

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IRS Audit Instructions for Outbound Section 482 Transactions

Code Section 482 requires taxpayers that conduct related party sales and transactions to use arms-length pricing. Section 482 particularly applies to international transactions given the possibility to shift taxable income out of the United States by overcharging or undercharging in these transactions.

Taxpayers who violate these pricing rules can be subject to a 20% adjustment penalty, or at times a 40% adjustment penalty. However, if taxpayers at the time of the transaction make a good-faith effort to compute a fair arms-length price and properly document their efforts, even if the IRS later adjusts the pricing, the 40% penalty will not apply. Treasury regulations provide what documentation and analysis is required of the taxpayer. Generally, this documentation and analysis must be provided to the IRS within 30 days of an IRS request.

In a recent International Practice Unit (IPU) advice, the IRS provides steps…

Review of Transfer Pricing Documentation by Outbound Taxpayers (ISO/PUO/P_1.7_02(2014)) (Mar. 4, 2016)

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Expatriation Case

Cases on the new expatriation regime under Code Section 877A are few and far between. The Tax Court has now issued an opinion involving a U.S. resident who gave up his green card and the resulting consequences under Code Section 877A.

The case has two interesting points. The first goes to the issue whether one can be a covered expatriate solely by not filing a Form 8854 that certifies five years of tax compliance at the time of expatriation. Remember that Code Section 877A applies to persons giving up their citizenship or U.S. residency only if they are a “covered expatriate.” This generally means the expatriate has income or assets in excess of statutory thresholds, or does not certify the five years of compliance.

Here, the taxpayer did not file a Form 8854 when he surrendered his green card. Further, the taxpayer in fact had not fully complied with required filings for the preceding five years.

Do these provisions really mean that even…

Gerd Topsnik, 146 TC No. 1 (January 20, 2016)

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Smith v. Smith

By Jenna G. Rubin

This decision deals with the question of whether a ward’s right to marry is subject to court approval during a guardianship proceeding.

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New Basis Consistency and Reporting Proposed Regulations – Did the IRS Go Too Far?

The IRS has issued proposed regulations under new Code Sections 1014(f) (relating to requirements that the initial income tax basis of an asset received from a decedent cannot exceed the estate tax basis of that asset) and Section 6035 (relating to the reporting of basis on property acquired from a decedent). You can read those regulations here and here.

The proposed regulations have two requirements which are eyebrow raising (to say the least), and of questionable validity.

Zero Basis for Assets Not Reported on an Estate Tax Return. The regulations provide that if an asset is required to be reported on an estate tax return, is otherwise subject to the basis consistency rules of Section 1014(f) (e.g., assets that do not increase the estate tax after credits are not subject to the rules), and is NOT reported on a return before the expiration of the estate tax statute of limitations, the basis of the asset in the hands of the recipient is adjusted to ZERO!

Looking back at Section 1014(f), I do not see…

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Guardianship Court Permitted to Annul Marriage [Florida]

An incapacitated ward had his rights to contract removed by a guardianship court. The ward thereafter married, without court approval. The marriage was then challenged based on FS 744.3215(2)(a) (2013). That statute provides “[i]f the right to enter into a contract has been removed, the right to marry is subject to court approval.”

So the statute definitely raises problems for the marriage. The real question turned out to be …

Smith v. Smith, 4th DCA (March 2, 2016), Case No. 4D14-1436

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Code Section 752 Liabilities Include Obligations Under Construction Contract

Partners in a partnership receive adjusted basis in their partnership interests for their allocable share of partnership liabilities. Since basis will allow for distributions to be made to partners without gain, losses to be deducted by partners, and gain reduction on a sale of a partnership interest, such basis is often advantageous.

When thinking about what partnership liabilities count for this purpose, most practitioners will first think of promissory notes, mortgages, and other major booked liabilities of the partnership. A recent private letter ruling points out that other esoteric liabilities can enter this computation.

In the PLR, the partnership received “notice to proceed” payments..

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Uniform Voidable Transactions Act (UVTA) Threatens Asset Protection Planning

The UVTA has been enacted in several states. The Act is a reworking of fraudulent conveyance law, which allows a creditor to avoid transfers made that attempt to put property beyond the reach of a creditor. A number of attorneys and others are beginning to realize that the UVTA is a threat to debtor protections that might exist outside of the UVTA.

For example, Section 10(b) of the Act reads “[a] claim for relief in the nature of the claim for relief under this Act is governed by the local law of the jurisdiction in which the debtor is located when the transfer is made or the obligation is incurred.” Thus, if a resident of a state without domestic asset protection trust provisions settles such a trust in another state, the settlor may not be able to rely on the law of that other state to protect himself or herself against a voidable transaction claim – Section 10(b), if applicable, would arguably require that the law of the home state of the debtor would instead apply. If that home state fraudulent conveyance…

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New FIRTPA Regulations

As previously noted, the Protecting Americans from Tax Hikes Act of 2015 modify the withholding provisions under FIRPTA. The Service has now issued regulations implementing the statutory changes. Key among them are:

A. The increase of the withholding rate on dispositions of US real property interests from 10% to 15%;

B. Implementation of a new reduced 10% rate of withholding when the US real property interest transferred will be used by the transferee as a residence and the amount realized for the property does not exceed $1 million…

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Delay in Need to Report Basis

Currently, taxpayers have until February 29, 2016 to file Forms 8971 for estate tax returns previously filed. Form 8971 is used to report basis to beneficiaries of inherited assets, pursuant to provisions that came into law in 2015.

The IRS is providing taxpayers with a further breather – such forms now need not be filed with the IRS nor furnished to a beneficiary until March 31, 2016.

Notice 2016-19

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Gort v. Gort

By Jenna G. Rubin

In this decision, the Court considered, among other things, whether a petition to determine incapacity may be voluntarily dismissed. The statutes governing guardianship do not expressly address this issue.

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Form 8971 Filing Unhappiness

The IRS has now issued a final Form 8971 and instructions. If you recall, this Form is newly required by executors of estates filing a Form 706 (federal estate tax return). The Form requires a schedule for each beneficiary which lists the assets received by the beneficiary and the estate tax value of those assets. The purpose is to put documentation in the hands of the beneficiary to allow it to calculate basis in the received assets. This will allow the beneficiary to calculate gain or loss on a subsequent sale of the assets received…

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Not Enough Activity to Be a Developer

If you suffer a loss on the disposition of real property, you want to be treated as a developer for income tax purposes – that is, to be treated as engaged in a trade or business. That way, you can get ordinary loss treatment and not a long termor short term capital – the ordinary loss will typically be available to offset more types of income than a capital loss.

So how many properties must one be dealing with and how much activity is needed to cross into developer territory? This question comes up a lot – it is a question of facts and circumstances. In a recent Tax Court case, ownership of 3 properties coupled with sporadic development activities was not enough for ordinary loss treatment…

Evans, TC Memo 2016-7

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Elective Share Rulings

Under Florida law, a surviving spouse can elect to receive 30% of the elective share estate of his or her deceased spouse, in lieu of receiving what was left to the surviving spouse under the decedent’s estate planning documents. This prevents a spouse from entirely cutting a surviving spouse out of his or her Last Will and other dispositive documents.

In determing what makes up the total value of the elective estate (against which the 30% is multiplied), Florida Statutes provide a listing of what to include. They also provide a listing, in Fla.Stats. §732.2055, of what is allowed to reduce the size of that estate for purposes of the 30% computation…

ACE J. BLACKBURN, JR., CHRIS A. ECONOMOU, GUS MORFIDIS and JOAN S. WAGNER, as Personal Representatives of the Estate of Konstantinos Boulis, a/k/a, Gus Boulis, Appellants, v. EFROSINI BOULIS a/k/a FRANCES BOULIS, Appellee. 4th District. Case Nos. 4D14-1579 and 4D14-2048. January 20, 2016.

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Blackburn v. Boulis

By Jenna G. Rubin

This appeal centers around two distinct issues with regard to a surviving spouse’s elective share: (1) first, whether a court can direct the payment of interest on a portion of the elective share amount, and (2) whether attorney’s fees can be charged against the elective share.

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Lodestar Methodology for Determining Reasonable Attorney Fees is Rejected

Fla.Stats. §736.0708(1) tells us that unless the trust agreement says different, “a trustee is entitled to compensation that is reasonable under the circumstances.” The statutes do not tell us how to compute what is “reasonable.”

Back in 1958, the Florida Supreme Court, in West Coast Hospital Ass’n v. Florida National Bank of Jacksonville, 100 So.2d 807 (Fla. 1958), listed out the factors that should determine what is reasonable for this purpose. These factors are: …

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Dowdy v. Dowdy

By Jenna G. Rubin

This decision centered around whether the construction of a trust could support the issuance of a temporary injunction directing the trustee to deposit proceeds of a property sale into the court registry pending the court’s decision on the construction petition.

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Robert Rauschenberg Foundation v. Grutman

By Jenna G. Rubin

In this decision, the Court considered which methodology to apply when calculating trustee fees. The beneficiary of the trust, a charitable foundation, argued that the trustee fees should be calculated using the lodestar method set forth in Florida Patient’s Compensation Fund v. Rowe, 472 So.2d 1145. The trustees argued that their fees should be calculated based on the factors set forth in West Coast Hospital Ass’n v. Florida National Bank of Jacksonville, 100 So.2d 807 (Fla. 1958).

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Fraudulent Conveyance Litigation Expenses are Not Deductible

Chief Counsel Advice 201552028

Expenses of business litigation, and litigation involving the production or collection of income or of property held for the production of income, are typically deductible under Code Sections 162 or 212. It is often forgotten, however, that if the subject of litigation is the defense of, or to perfect title to, real or personal property, such expenses must be capitalized into the asset and not deducted. See Treas. Regs. §1.263(a)-2(e)…

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Did You Get An Erroneous IP-PIN Number from the IRS?

Taxpayers who are the victim of identity theft in regard to tax filings are eligible to receive an IP-PIN number from the IRS. This is a special number issued to the taxpayer that the taxpayer uses when filing the income tax return…

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Improper Decanting [Florida]

In a case of first impression, Florida’s 5th District Court of Appeals interpreted Fla.Stats. §736.04117 relating to the ability of a trustee to decant a trust into a new trust arrangement. A trustee transferred the funds of a trust…

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FIRPTA WITHHOLDING RATE BUMPED UP TO 15%

The Protecting Americans from Tax Hikes Act of 2015 was recently signed into law. Section 324 of the Act modifies Code Section 1445 to increase the required withholding amount on dispositions by nonresident aliens and foreign entities of U.S. real property interests from 10% to 15%…

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Deeds to Trusts [Florida]

One statute that most Florida real estate and trust lawyers have to deal with at some time is Fla.Stats. Section 689.07(1). Let’s read it together:

(1) Every deed or conveyance of real estate…

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Gossett v. Gossett

By Jenna G. Rubin

In this decision on the equitable doctrine of “renunciation,” the Court held that a trust beneficiary who challenged a trust document did not have to repay distributions made to him from the trust in order to challenge the trust document.

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Gulag America

A few years back, Congress passed FATCA. While purportedly aimed at reaching money of tax evaders hidden offshore, a practical effect has been it is nearly impossible for U.S. persons to hold or open bank or brokerage accounts outside of the U.S. That is, for a tax policy objective, the freedom enjoyed by U.S. persons to hold their liquid assets wherever they want in the world has been substantially curtailed…

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An Illustration of How NOT to Do an Related Party Loan

While the Internal Revenue Code does have provisions that may impact the tax consequences of related party loans, conceptually there is nothing wrong with a related party loan. Loans can have favorable tax aspects, including deductibility of interest payments, principal repayments by entities being treated as such instead of taxable distributions, and bad debt deductions if the obligations cannot be repaid…

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Keul v. Hodges Blvd. Presbyterian Church

By Jenna G. Rubin

This decision deals with whether a POD designation can be invalidated for undue influence , as well as the right of a probate court to require a party to return POD funds to an estate instead of entering a money judgment against the party for the amount of the funds.

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Identity Theft Victims Can Now Get a Copy of Fraudulently Filed Returns

Many taxpayers, upon filing (or trying to file electronically) their income tax return, hear back that the IRS has already received a filed return for them. Typically, this is due to a fraudulent return filed using the taxpayer identification number and name of the taxpayer that seeks a fraudulent refund of taxes already paid to the IRS – the IRS version of identity theft…

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Be Cautious of Late In the Year Mutual Fund Purchases

This is the time of year to be cautious about buying a mutual fund. Many funds pay dividends near the end of the calendar year in December. If you buy one now, and it pays a dividend, you will be paying taxes for 2015 on the dividend. However, you are not any “richer” for the dividend, since the mutual fund value will usually decline by the amount of the dividend you receive…

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Rocke v. American Research Bureau et al.

By Jenna G. Rubin

For anyone looking for a refresher on the doctrine of dependent relative revocation, this decision is a good read.  In this case, after 9 years of litigation, the Court ultimately determined that the probate court’s failure to apply the doctrine of dependent relative revocation incorrectly resulted in the distribution of an estate worth $12 million to the decedent’s intestate heirs rather than to the beneficiary of one of her prior wills.

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Power of Attorney Holder Cannot Sign for Another

Tax practitioners are familiar with Form 2848. With that form, a taxpayer authorizes an attorney, accountant, or other authorized representative to act as attorney-in-fact for the taxpayer as to the specified tax matter in dealing with the IRS…

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Some 2015 Florida Law Changes

Below are some statutory changes enacted in Florida in 2015 that you may not have noticed:

GRANDPARENT VISITATION RIGHTS. In a major rewrite of Chapter 752, statutory rights of a grandparent to obtain visitation rights…

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Another Advantage of Proceedings Supplementary

Debtors oftentimes attempt to shield their assets from creditors by transferring them away to others. If this is done, a creditor can bring an action under Florida’s Uniform Fraudulent Transfer Act (UFTA) to attempt to undue the transfer and execute on the transferred property as a fraudulent transfer…

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Substantial Compliance Doctrine Will Not Override Return Signing Requirement

In a recent Tax Court case, a joint return was timely filed by a husband and wife. However, the return was filed without the wife signing the return. The IRS rejected the initially filed return and imposed late filing penalties. Note that the late taxes here came to over $5 million (over two tax years), so the penalties involved were very significant…

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Soriano v. Estate of Manes

By Jenna G. Rubin

This decision centered around whether a potential civil claimant arising out of a pending criminal prosecution was a “reasonably ascertainable creditor” entitled to personal service of the notice to creditors.  The Court ultimately held that the claimant was not a reasonably ascertainable creditor, because the personal representative has no actual knowledge of the claimant’s civil claim, nor would a more diligent search have revealed the existence of the claim.

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The Benefit of Establishing an Offshore Asset Protection Trust While the Coast is Clear

Offshore asset protection trusts avoid or diminish a number of creditor exposures that apply to such trusts organized in the U.S. High net worth individuals and persons involved in high liability exposure businesses and professions should consider establishing a “nest egg” offshore trust to provide a protected fund that is exempt from creditor claims but which can still be expended for the benefit of the grantor/settlor and his or her family…

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Loan Transaction Costs IRA its Bankruptcy Exemption

A recent case illustrates a common problem with IRAs when their participants declare bankruptcy. Generally, IRAs are exempt assets in bankruptcy proceedings, and are thus beyond the reach of the bankrupt individual’s creditors. This exemption in the Bankruptcy Code is tied to the tax-exempt status of the IRA. 11 USC §522(d)(12) provides an exemption to “[r]etirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section … 408 … of the Internal Revenue Code of 1986.”

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Delbrouck v. Eberling

By Jenna G. Rubin

In this case, one of the sons of the decedent claimed a constructive trust over certain properties titled in the name of the decedent.  The personal representative moved to compel the son to surrender to her the properties and to cease his business activities on the properties.  This decision dealt with whether the probate court was required to hear evidence before directing the son to turn over possession of the property to the personal representative.

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Prenuptial and Postnuptial Agreements

I gave a presentation yesterday at the Florida Bar Tax Section CLE How to Be an Estate Planning Wizard. The subject was the tax and other aspects of prenuptial and postnuptial agreements. The presentation covered both federal and Florida issues.

For those with an interest in the subject, you can watch slides the slides here

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No Charitable Set Aside Deduction for Estate Due to Litigation

Under Code Section 642(c)(2) an estate may claim a current charitable contribution deduction for income tax purposes, notwithstanding that the income earned will not be paid or used for a charitable purpose until sometime in the future. That is, the estate need not actually pay income over to the charity in the year it is earned to obtain a charitable deduction – it is enough if the funds are set aside for later payment to the charity…

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Florida Supreme Court Gives Expansive Protection to Husband’s Separate Property under a Prenuptial Agreement

A divorcing wife asserted that because a 20 year old prenuptial agreement made no specific reference to enhancement in value of nonmarital property attributable to marital labor or funds, the enhancement in value to the husband’s assets during the marriage is subject to equitable distribution. Similarly, the agreement did not specifically provide that the husband’s earnings will be his separate property, so the wife sought a finding that these were not protected under the prenuptial agreement…

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No Section 121 Gain Exclusion When Seller of Residence Obtains it Back in Foreclosure

By: Charles (Chuck) Rubin

Marvin sold his principal residence for $1.4 million on an installment basis. He reported current gain of $657,796, and excluded $500,000 of that gain from income under Code Section 121 as a sale of a principal residence. The remaining $157,796 of gain was reported on the installment basis. After the sale, Marvin reported $56,920 of gain from cash installment payments received…

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Adelman v. Elfenbein

By Jenna G. Rubin

Following the dismissal of a petition for incapacity because the court found sufficient least restrictive alternatives to guardianship, the petitioner brought a subsequent “petition to reopen” the guardianship, alleging that the fiduciary appointed in the alleged incapacitated person’s advance directive documents was not providing adequate care for that person.

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Table of Revised Income Tax Return Filing Due Dates

by Charles (Chuck) Rubin

A cheat sheet summary of the new filing dates enacted in the recently enacted Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. Note that most of these will start applying only to filings for the 2016 tax year.

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IRS Announces Delay in Consistent Basis Notice to Beneficiaries Rules

I recently wrote about the provisions of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 that require estates to give statements to beneficiaries regarding the basis of property if an estate tax return is required to be filed, generally within 30 days of the due date of the return.

The IRS has now issued guidance delaying…

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Congress Sneaks in Some Important Procedural Tax Changes

On July 31, 2015, President Obama signed HR 3236, the “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.” While you wouldn’t know it from the title, Congress included some important procedural tax changes that are of special interest to tax return preparers and estate administrators…

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Goldman v. Estateof Goldman

By Jenna G. Rubin

This decision deals with an award of attorney’s fees and costs against a party without a finding of bad faith by the trial court.  An attorney, in her capacity as Guardian Ad Litem, inadvertently disclosed confidential financial and medical information of the ward to the ward’s nieces and nephews.

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Article Abstract: Estate Planning with Carried Interests & Code §2701

By Charles (Chuck) Rubin

Issue: Fund managers of private equity funds typically obtain a percentage of total profits via general partner interests – a “carried interest.” Because the GP is not entitled to its carried interest unless the fund’s investments generate sufficient profit to return all invested capital…

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Fiel v. Hoffman

By Jenna G. Rubin

This case involved the effect of the Slayer Statute and undue influence on a murdered decedent’s will.  The decedent was murdered by his wife, who also murdered the decedent’s mother, to ensure that she and her family would receive the decedent’s estate on his death.

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In re Estate of Maldonado

By Jenna G. Rubin

In this case, the former spouse of a decedent appealed an order directing the personal representative to distribute the estate’s assets and close the estate.  The decedent and his ex-wife divorced in 1993 in Puerto Rico, but the Puerto Rico order dissolving the marriage did not distribute the spouses’ marital assets.

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No Four Year Statute of Limitations for Fraudulent Conveyance

By Charles (Chuck) Rubin

Florida Statutes Section 726.110 generally provides for a four year statute of limitations in regard to fraudulent conveyances (or if longer, 1 year after the transfer was or could have reasonably been discovered by the claimant). Fraudulent conveyance law generally allows a creditor…Biel Reo, LLC v. Barefoot Cottages Development Co., LLC, 156 So.3d 506 (1st DCA 2014)

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No Need to File §83(b) Election with Tax Return

By: Charles (Chuck) Rubin

Not a big item, but a helpful one – under proposed regulations a taxpayer need no longer file a copy of their Code §83(b) election with their income tax return for the year of the election…

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Flegal v. Guardianship of Swistock

By Jenna G. Rubin

This case centered around the ownership of stock shares and due process within a guardianship proceeding.  The dispute arose over the ownership of stock shares which were initially purchased by a father and his daughters as joint tenants with right of survivorship….

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Article Abstract: CPA Contingency Fees

By Charles (Chuck) Rubin

In Ridgely v. Lew (2014), the court found the IRS exceeded its statutory authority when it prohibited tax practitioners (including CPAs) from charging contingent fees for preparing and filing “ordinary refund claims…”

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Brown v. Brown

By Jenna G. Rubin

This decision serves as a nice reminder about a court’s jurisdiction over real property.  A circuit court in an estate proceeding cannot direct a personal representative to divide and distribute a decedent’s real estate in another state, since the court lacks in rem jurisdiction to order and partition the sale of that real property…

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Living at the Casino Does Not Make You a Professional Gambler

By Charles (Chuck) Rubin

Professional gamblers can offset their losses from gambling against their gambling winnings. They can also deduct their other gambling expenses. Non-professionals (those not engaged in the trade or business of gambling) are limited in deducting their losses against gains as miscellaneous itemized deductions…

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Carroll v. Israelson

By Jenna G. Rubin

The focus of this case was the applicability of F.S. 732.507(2), dealing with the effect of divorce on a decedent’s will which included a devise to his former spouse and a trust for her family….

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Pierre v. Brown

By Jenna G. Rubin

In this guardianship fee dispute, the Court affirmed a harsh result for a successor guardian who incurred fees in cleaning up a mess created by the initial guardian…

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First Time Abate

By Charles (Chuck) Rubin

Taxpayers who file a return late, make a late payment, or make a late tax deposit are subject to penalties. What is not known by most taxpayers, and a lot of tax practitioners, is that the IRS has a program to abate these penalties…

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No Theft Loss for Securities “Pump-and-Dump”

By Charles (Chuck) Rubin

Pump-and-dump occurs when corporate officers or other shareholders fraudulently promote shares of a company and engage in fraudulent sales to increase the value of shares. This is injurious to other shareholders who suffer losses when the value of the stock ultimately collapses…

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Saadeh v. Connors

By Jenna G. Rubin

In this portion of the Saadeh guardianship saga, the court was asked to determine whether an attorney representing a court-appointed guardian in a guardianship proceeding owes a duty to the ward under a third-party beneficiary theory.  The Court ultimately found that it did…

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UF Advisor Network

Charles (Chuck) Rubin joined the UF Advisor Network as a founding member.

Harrell v. Badger

This case highlights the lack of understanding many trust and estate practitioners have about what “decanting” actually means.  Despite the clear language of F.S. 736.04117, it seems  many are still confused about when decanting is appropriate, and about how to follow the simple rules provided in the statute….
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Outbound IP Transfer in an F Reorganization

In one corner, we have Code §368(a)(1)(F) which generally allows for a corporation to move from one jurisdiction to another without triggering gain or other immediate adverse income tax consequences…

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Critiques, Strategies, and Analysis of Current State of Offshore Compliance Initiatives and Programs

Richard (Rick) Josepher has prepared an excellent and detailed review that analyzes and critiques the current state of affairs in regard to the various offshore enforcement environment. It provides a unique in-depth review of the failings and problems of the current system, suggestions to the government to address these issues, and specific strategic analysis for tax practitioners operating in this area.

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Supreme Court Mandates State Income Tax Credits, Pretty Much

Maryland imposes income taxes on its residents. There is a state level income tax, and a county level tax. If a Maryland resident incurs income in other states and pays state income tax to those other states, there is a mechanism for the resident to receive a credit against the Maryland state…

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