Important Tax News

IRS Suspends FBAR Filing for Non-Citizens (for Now)

WASHINGTON, D.C. (FEBRUARY 26, 2010)

The Internal Revenue Service has temporarily suspended the requirement to file a Report of Foreign Bank and Financial Accounts for the 2009 and earlier calendar years, for

people who are not U.S. citizens, residents or domestic entities.

Announcement 2010-16

temporarily suspends the requirement to file Form TD F 90-22.1, also known as the FBAR, as the IRS tries to clear up the definition of “United States person.” In addition, the IRS issued

Notice 2010-23

which provides FBAR filing relief for some persons with signature authority and who own commingled funds.In October 2008, the IRS published a revised FBAR form, together with accompanying instructions, changing the definition of “United States person.” The IRS received numerous questions and comments from the public concerning the changed definition. In response, and to reduce the burden on the public, the IRS issued Announcement 2009-51, 2009-25 I.R.B. 1105, which directed people to refer to the definition of “United States person” in the July 2000 version of the FBAR instructions to determine if they had a filing obligation. This effectively suspended the filing of FBARs due on June 30, 2009, by people who were not U.S. citizens, residents, or domestic entities. Announcement 2009-51 stated that additional FBAR guidance would be issued for subsequent filing years and invited public comments.

After receiving a significant number of public comments, the Treasury Department published proposed FBAR regulations to provide taxpayers with guidance on who is required to file FBARs due on June 30, 2010, and how to answer FBAR-related 2009 federal income tax return questions.

The IRS and the Treasury Department now believe it is appropriate to provide the following administrative relief: The requirement to file an FBAR due on June 30, 2010, is suspended for persons who are not U.S. citizens, U.S. residents, or domestic entities. Additionally, all persons may rely on the definition of “United States person” found in the July

2000 version of the FBAR instructions to determine if they have an FBAR filing obligation for the 2009 and earlier calendar years. The definition of “United States person” there is:

(1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust.

This substitution of the definition of “United States person” applies only with respect to FBARs for the 2009 calendar year and to earlier calendar years.

All other requirements of the 2008 version of the FBAR form and instructions, as modified by Notice 2010-23, remain in effect until changed by subsequent guidance issued by the Treasury Department, including the IRS.

(See http://www.webcpa.com/ for more information.)

“The Internal Revenue Service will extend until October 15, 2009 the ability of Americans with undeclared offshore accounts at UBS AG and other banks to avoid criminal prosecution and some fines if they disclose their holdings. Americans with large undeclared offshore accounts have been under growing pressure since Switzerland agreed on August 19, 2009 to hand over data to the U.S. on as many as 52,000 accounts. The IRS says it expects to handle as many as 10,000 cases related to the matter and about half will come from the voluntary disclosure program.  On March 26, the IRS announced a six-month voluntary disclosure program that requires people with income in undeclared bank accounts to amend six years worth of tax returns and pay back taxes and some penalties. Those who come forward may be able to avoid criminal prosecution and the IRS may seize smaller amount of an account’s assets that it would be entitled to otherwise under the law.  The IRS can confiscate the higher $100,000 or 50 percent of an offshore account’s value when the holder deliberately doesn’t disclose the account to Treasury. The penalty can apply each year the form isn’t filed, so after three years of noncompliance the account holder can owe 150 percent of the account’s value. Under the IRS program announced in March, the tax agency will take 20 percent of the account’s assets based on its peak value in the previous six years. In cases where the accounts were inactive, the agency will confiscate as little as 5 percent.  The IRS said it won’t grant any further extensions of the disclosure program.  The IRS began the offer in March, soon after giant Swiss Bank UBS AG turned over the name of some account holders as part of a $780 million criminal settlement with the U.S. Government. it is part of a broad crackdown on tax evaders as countries hunt revenue in the global recession.  After months of tortuous negotiations that involved the Swiss government and challenged that country’s tradition of banking secrecy, UBS agreed in August to disclose the named of 4,450 American holders of secret accounts at the bank, ending a civil lawsuit.  This year’s program gas received outsize attention thanks to a dispute between the U.S. and Swiss governments over the identities of U.S. Taxpayers holding at least $10 billion in some 52,000 secret accounts at UBS. Advisers say there has been no discernible pattern as to which customers were selected, dashing the hopes of those who might  have thought they could escape scrutiny because their accounts were too small or were devoid of potential evidence of intent to evade taxes.  Officials  have set up a center in Philadelphia to coordinate the processing of these disclosures. Attorneys say it already seems to overwhelmed, and no disclosure cases appeared to have been resolved to date.  An IRS spokeswoman declined to comment on the agency’s progress.”

(See Bloomberg.com, WSJ.com, and U.S. Reuters.com)

“DOJ SAYS IT WILL NOT DROP UBS CASE”

A deadline requiring offshore banking clients to file a foreign bank account report (commonly referred to as an FBAR) is June 30th.  The IRS voluntary disclosure program deadline  for offshore accounts is September 23, 2009.

YEAGER v. UNITED STATES

SUPREME COURT OF THE UNITED STATES, 2009 U.S. LEXIS 4538

June 18, 2009, Decided

Following an acquittal on fraud and securities fraud charges and a mistrial on insider trading and money laundering charges under 15 U.S.C.S. §§ 78j(b) and 78ff, 17 C.F.R. § 240.10b5-1, and 18 U.S.C.S. § 1957, defendant was recharged with some of the mistried counts. Defendant moved to dismiss. The district court denied the motion, and the United States Court of Appeals for the Fifth Circuit affirmed. The Supreme Court granted certiorari.

Defendant was accused of making false and misleading statements about a corporation’s product development. He allegedly sold more than 700,000 shares of the corporation’s stock at prices inflated by the alleged deception. The jury hung on the insider trading and money laundering counts. Defendant argued that his acquittals on the fraud and securities fraud charges precluded his retrial on the insider trading and money laundering charges under the issue-preclusion component of the Double Jeopardy Clause of the Fifth Amendment. The Fifth Circuit determined that the jury must have found that defendant did not have any insider information and that a conflict between the acquittals and the hung counts barred the application of issue preclusion. The Supreme Court held that the hung counts should not have been considered in the issue-preclusion analysis. If possession of insider information was a critical issue of ultimate fact in all of the charges against defendant, a jury verdict that necessarily decided that issue in his favor would protect him from further prosecution. On remand, the Fifth Circuit could reconsider whether the acquittals necessarily decided that issue.

The Fifth Circuit’s judgment was reversed, and the matter was remanded for further proceedings. 6-3 Decision; 1 Concurrence in Part; 2 Dissents.

The indictment charged petitioner with money laundering for conducting various transactions with the proceeds of his stock sales. The jury acquitted Yeager on the fraud counts but failed to reach a verdict on the insider-trading and money-laundering counts. After the Government recharged him with some of the insider-trading and money-laundering counts, Yeager moved to dismiss the charges on the ground that the jury, by acquitting him on the fraud counts, had necessarily decided that he did not possess material, nonpublic information about the project’s performance and value, and that the issue-preclusion component of the Double Jeopardy Clause therefore barred a second trial for [*2] insider trading and money laundering. The District Court denied the motion, and the Fifth Circuit affirmed, reasoning that the fact that the jury hung on the insider-trading and money-laundering counts — as opposed to acquitting petitioner — cast doubt on whether it had necessarily decided that petitioner did not possess material, nonpublic information. This inconsistency between the acquittals and the hung counts, the Fifth Circuit concluded, meant that the Government could prosecute petitioner anew for insider trading and money laundering.

Held: An apparent inconsistency between a jury’s verdict of acquittal on some counts and its failure to return a verdict on other counts does not affect the acquittals’ preclusive force under the Double Jeopardy Clause.

This case is controlled by the reasoning in Ashe v. Swenson, 397 U.S. 436, 90 S. Ct. 1189, 25 L. Ed. 2d 469, where the Court squarely held that the Double Jeopardy Clause precludes the Government from re-litigating any issue that was necessarily decided by a jury’s acquittal in a prior trial. For double jeopardy purposes, the jury’s inability to reach a verdict on Yeager’s insider-trading and money-laundering counts was a nonevent that should be givenno weight in the issue-preclusion analysis. To identify what a jury necessarily determined at trial, courts should scrutinize the jury’s decisions, not its failures to decide. A jury’s verdict of acquittal represents the community’s collective judgment regarding all the evidence and arguments presented to it. Even if the verdict is “based upon an egregiously erroneous foundation,” Fong Foo v. United States, 369 U.S. 141, 143, 82 S. Ct. 671, 7 L. Ed. 2d 629, its finality is unassailable, see, e.g., Arizona v. Washington, 434 U.S. 497, 503, 98 S. Ct. 824, 54 L. Ed. 2d 717. Thus, if the possession of insider information was a critical issue of ultimate fact in all of the charges against Yeager, a jury verdict that necessarily decided that issue in his favor protects him from prosecution for any charge for which that is an essential element.

Neither Richardson v. United States, 468 U.S. 317, 104 S. Ct. 3081, 82 L. Ed. 2d 242, nor United States v. Powell, 469 U.S. 57, 105 S. Ct. 471, 83 L. Ed. 2d 461, supports the Government’s argument that it can retry Yeager for insider trading or money laundering. Richardson’s conclusion that a jury’s “failure . . . to reach a verdict is not an event which terminates jeopardy,” 468 U.S., at 325, 104 S. Ct. 3081, 82 L. Ed. 2d 242, did not open the door to using a hung count to ignore the preclusive effect of a jury’s acquittal, but was simply a rejection of the argument — similar to the Government’s today — that a mistrial is an event of significance. Also rejected is the contention that an acquittal can never preclude retrial on a hung count because it would impute irrationality to the jury in violation of Powell’s rule that issue preclusion is “predicated on the assumption that the jury acted rationally,” 469 U.S., at 68, 105 S. Ct. 471, 83 L. Ed. 2d 461. The Court’s refusal in Powell and in Dunn v. United States, 284 U.S. 390, 52 S. Ct. 189, 76 L. Ed. 356, to impugn the legitimacy of jury verdicts that, on their face, were logically inconsistent shows, a fortiori, that a potentially inconsistent hung count could not command a different result.

The Government has argued that, even if hung counts cannot enter the issue-preclusion analysis, Yeager has failed to show that the jury’s acquittals necessarily resolved in his favor an issue of ultimate fact that must be proved to convict him of insider trading and money laundering. Having granted certiorari on the assumption that the Fifth Circuit ruled correctly that the acquittals meant the jury found that Yeager did not have insider information that contradicted what was presented to the public, this Court declines to engage in a fact-intensive analysis of the voluminous record that is unnecessary to resolve the narrow legal question at issue. If the Court of Appeals chooses, it may revisit its factual analysis in light of the Government’s arguments before this Court.

Reversed and remanded.

BAKERSFIELD ENERGY PARTNERS, LP, ROBERT SHORE, STEVEN FISHER, GREGORY MILES, SCOTT MCMILLAN, PARTNERS OTHER THAN THE TAX MATTERS PARTNERS, Petitioners-Appellees,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

The IRS generally has three years after a return is filed to assess a tax deficiency, but it has six years to do so when the return “omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return.” . 26 U.S.C. §6501(a),(e)(1)(A). This case requires us to decide whether the IRS can use this extended six-year limitations period to assess a deficiency where a taxpayer has overstated its basis in an asset and thereby lowered the amount of gross income reported in its return. In other words, does a taxpayer “omit [] from gross income an amount properly includible therein” for purposes of § 6501(e)(1)(A) by overstating its basis? We conclude, like the Tax Court below, that we are bound by Colony, Inc. v. Comm’r, 357 U.S. 28, 33, 78 S. Ct. 1033, 2 L. Ed. 2d 1119, 1958-2 C.B. 1005 (1958), which held that a taxpayer’s overstatement of basis does not “omit[] from gross income an amount properly includible therein” for purposes of § 6501(e)(1)(A). Accordingly, the IRS had only three years to assess the tax deficiency at issue in this case, and it failed to do so. We therefore affirm the Tax Court’s judgment in favor of the taxpayer.

FIRST TAX FRAUD CASE FROM UBS RESULTS IN GUILTY PLEA

Accountant Michael Rubinstein, an accountant from Boca Raton, Florida entered a plea of guilty to wilfully filing false and fraudulent U.S. Income Tax Returns (Form 1040) for the 2007 tax year in United States v. Steven M. Rubinstein, case number 09-6116-BSS.

On February 18, 2009 as part of a deferred prosecution agreement entered between UBS (Switzerland’s largest bank) and the United States, UBS admitted that it conspired with certain U.S. customers to aid them to evade U.S. Income Taxes.

UBS agreed to turn over bank records of 250 to 300 of its U.S. Customers to the IRS. UBS obtained notice this would be permitted under Swiss law. However, the IRS is suing UBS to produce all bank records of all of its U.S. customers. It is estimated that there are over 50,000 people that may be affected. UBS has stated that this would violate Swiss bank secrecy laws.

Rubinstein’s records were produced to the IRS by UBS as part of the agreed production. He is believed to be the first criminal case brought as a result of the records produced by UBS. The complaint alleged that from 2001 through 2008 Rubinstein transferred millions of dollars through various UBS accounts using offshore corporations formed for the purpose to evade U.S. taxes.

The complaint was filed against Rubinstein on April 1, 2009. A one count information was filed on June 23, 2009. The plea was entered on June 24, 2009. Sentencing is scheduled before Judge Marcia G. Cooke in Miami, Florida on September 30, 2009 at 11:00 a.m.

There is wide spread speculation that many more indictments will follow especially from the records UBS produced on the 250 to 300 customers to the IRS under it deferred prosecution agreement. Many taxpayers who are not on that list are scrambling to participate in what is commonly referred as to Voluntary Compliance Program by filling Amended Returns in an effort to avoid criminal prosecution.

Any person considering voluntary compliance should contact a qualified criminal tax attorney.

IRS VOLUNTARY DISCLOSURE UBS AND RELATED MATTERS

Jan. 25 (Bloomberg) — A Florida man was charged by U.S. prosecutors with filing a false tax return for 2007 that failed to disclose hisSwiss accounts at UBS AG and income he earned on them.

Jack Barouh, a resident of Golden Beach, Florida, was charged in federal court in Miami through a criminal information, which typically precedes a guilty plea. Six U.S. clients of UBS, the largest Swiss bank, pleaded guilty to tax crimes last year.

The charge filed today does not provide details about Barouh, who faces up to three years in prison, or the nature of his account. The case was assigned to U.S. District Judge Adalberto Jordan in Miami, court records show.

UBS avoided U.S. prosecution on Feb. 18 by admitting it aided tax evasion, paying $780 million, and handing over data on 255 accounts. The U.S. sued in federal court in Miami to obtain data on thousands of other accounts. UBS settled that case on Aug. 19 by agreeing to turn over information on 4,450 accounts involving “tax fraud or the like.”

Assistant U.S. Attorney Jeffrey Neiman, who filed the charge today, declined comment. Barouh didn’t immediately return a phone message left at an ocean-front home listed in his name.

U.S. prosecutors are combing through data on the 255 accounts covered by the criminal investigation of UBS and have said they opened 150 criminal tax investigations. Beyond the six clients who pleaded guilty, several European financial professionals were indicted in the U.S.

Former UBS banker Bradley Birkenfeld, a key informant in the U.S. investigation of offshore tax evasion aided by the bank, reported on Jan. 8 to a federal prison in Pennsylvania to start a 40-month term that he said was unfair.

The case is United States of America v. Jack Barouh, 10-cr-20034, U.S. District Court, Southern District of Florida (Miami).

IMPORTANT TAX INFORMATION TRUSTEE FEES

We are often asked what a reasonable trustee fee is. Like many states, Florida does not provide a statutory schedule as to what is a reasonable fee.

One way to get a feel for an appropriate fee is to see what professional trustees charge. A recent blog posted its survey results as to current rates being charged by various trustees. The results can be viewed here.

Near as we can tell, these fees relate to fees charged when the investment of the trust assets is being handled by someone other than the trust company. Such investment advisory services can add materially to the fees being charged.

ANOTHER CHINK IN THE ASSET PROTECTION ARMOR?

In SEC v. Solow, 2010 WL 303959 (S.D. Fla 2010), a federal court imposed a contempt order on Mr. Solow. Mr. Solow was the subject of a significant disgorgement order by the SEC. Prior to the imposition of the order, but clearly in contemplation of SEC and other sanctions, Mr. Solow engaged in various structuring transactions to move assets beyond the reach of creditors, including mortgage and transfers of Florida property owned jointly with his spouse and an offshore trust.

There is little doubt that such transactions were undertaken by Mr. Solow with the purpose of using creditor protection laws to move assets beyond the reach of the SEC. However, Mr. Solow made the argument that he should not be held in contempt for undertaking such actions, because the SEC could not reach the value of the jointly held residence under Florida law even before he undertook any of his transfers since the assets were protected as property held as joint tenants by the entirety. Generally speaking, property held by a husband and wife as joint tenants by the entirety cannot be reached by the creditor of one spouse alone.

The overarching question arising from this case is whether the SEC, and indeed other federal agencies, have the ability to override state creditor exemptions, in the same plenary fashion that the IRS has. There is plenty of language in the opinion to suggest that a federal court has the equitable power to so override state exemptions, at least in favor of the SEC. However, there are a number of facts and circumstances involved in this case that make it unclear whether such a general rule can be extracted. As I see it, some of these are as follows:

-This case involves whether a contempt order should be imposed on Mr. Solow. It does not address the question whether the SEC can get its hands on the assets themselves which are now presently controlled by Mrs. Solow and/or an offshore trust. Therefore, while the case may be precedent for the ability of the court to put Mr. Solow behind bars, it is questionable whether the case is precedent for the ability of the federal agency to actually reach the assets in satisfaction of its disgorgement order.

-The case involves a “disgorgement order.” The opinion notes that a disgorgement order is something different from a creditor judgment. Therefore, perhaps, the holding of the case is limited to disgorgement order situations.

-The case involves the SEC. It is unknown whether the law and theory of the opinion can be extended to other federal agencies, but of course one could expect those other agencies to try.

-The case involves transfers conducted after Mr. Solow was in hot water. The court cites heavily to its “equitable” powers in exercising its contempt powers. An asserted principle of asset protection is that transfers undertaken before a creditor shows up on the scene are entitled to significantly more respect under state creditor protection laws than transfers undertaken to provide specific protection against a known creditor. This principle is typically applied pursuant to the concept of “fraudulent conveyance.” Thus, the precedential value of the opinion may be limited to egregious transfers of assets undertaken in regard to a known creditor, and may not apply towards general transfers undertaken well in advance of any creditor problems.

-Interestingly, the case makes no reference to the Supremacy Clause of the US Constitution. Presumably, such a clause would impact greatly on any actual attempt to collect assets that are otherwise protected under state law by a federal agency. Its absence here is not problematic because this again, is not a recovery of assets case but a contempt case.

To the dismay of the asset protection bar, these type of cases with bad facts often encourage courts to find a way to reach the right result. What ends up happening, however, is that case law that arises in such egregious cases ends up becoming the law for everyone, including persons not engaging in such egregious conduct. The creation of such exceptions to statutory and common law creditor protections tips the balance in favor of creditors and sacrifices the policy protections in the statutory and common law protections.

SEC v. Solow, 2010 WL 303959 (S.D. Fla 2010)

TURNABOUT [FLORIDA]

Florida attorneys often help their clients use Florida’s homestead protection to protect assets from claims of creditors pursuant to Article X, Section 4 of the Florida Constitution. In a recent case, the client used the homestead protection to stiff his law firm in regard to their fee.

In the case, a law firm took on a matter to collect homeowners’ insurance proceeds from an insurer on the client’s homestead that related to hurricane damage. The law firm was successful and was due a contingent fee from the client. The client terminated the contingent fee arrangement without payment, so the law firm asserted a charging lien against the insurance proceeds for its fee.

Under Florida law, if a homestead is damaged through fire, wind or flood, the proceeds of any insurance recovery are also treated as homestead property. Since the client could not, through an unsecured agreement, enter into an enforceable contract to divest himself of his constitutional homestead protections, the trial court held, and the appellate court affirmed, that the law firm could not claim a lien in the insurance proceeds.

This does not mean that the law firm cannot seek to collect its fee from other assets of the client. But if there are no other assets, the law firm lost out on its fee even though the client gets to enjoy the fruits of its labor.

Interestingly, the client was represented by an attorney on this fee dispute. We hope the attorney got his fee paid in advance or received a sufficient retainer to cover his fees!

Quiroga v. Citizens Property Insurance Corporation, 3rd DCA, Case No. 3D0-2942

TIDAL WAVE OF EXEMPT ORGANIZATION

STATUS REVOCATIONS LOOMS

Most organizations that are exempt from Federal income tax are required to file a Form 990 or some variation thereof on an annual basis. Previously, smaller organizations were exempt from the filing requirements. Smaller organizations can often still file with a short- form filing on an e-postcard Form 990-N.

The Pension Protection Act of 2006 requires that non-profit organizations that do not file a required information form for three consecutive years automatically lose their Federal tax-exempt status. This requirement has been in effect since the beginning of 2007. See IR-2010-10, Jan. 21, 2010.

These returns are generally due by May 15 of the year following the year for which reporting is due for those organizations that are on a calendar year reporting cycle. This means that a lot of returns are due soon.

The problem is that there are a tremendous number of non-profits with exempt status that have not been filing the required Forms 990. If they do not file (or extend and later timely file) by May 15, this will be the third year of non filing and will likely result in loss of exempt status. The New York Times, in an April 22, 2010 article, estimates that the number of organizations that are at risk of losing their exemptions is over 400,000.

Most larger organizations know of, and comply with, their filing obligations. Therefore, it is likely that most of the threatened organizations are smaller organizations. By reason of their small size, these are the organizations that can least afford the cost of preparing and submitting new applications to reinstate their exempt status.

The New York Times article opines that Congress should have only mandated that the exempt status of these organizations been suspended, and not revoked. This would make it easier to reinstate them. Arguably, however, the IRS should have regulatory authority for providing an expedited method of reinstating the status of these organizations short of a full application process.

MORE ON EXEMPT ORGANIZATION STATUS REVOCATIONS

Subsequent to the distribution of the above article, the IRS released a FAQ discussing the issue.

The FAQ did not bring any real relief to taxpayers, but did answer some questions. Some of the highlights included:

-confirmation that revocation is automatic – that is, the IRS has no discretion not to revoke.

-confirmation that if revoked, the entity will have to begin filing regular tax returns, pay applicable federal taxes, and transfers to it will lose whatever applicable contribution deductions would have been allowed.

-the revocation is effective as of the filing due date of the third year (and thus not at the later date when the IRS takes official action).

-an extension of time to file the applicable Form 990 will stave off the revocation if the 3rd required return is filed within the allowed extension.

-a full application process will be needed to reinstate status, including payment of applicable user fees. If reinstated, the effective date will be the date of the application, so there may be a gap “taxable” period between revocation and reinstatement. The organization can request an effective date back to the date of revocation, but the request will be granted only if the IRS finds the organization had “reasonable cause” for not filing the return for the three consecutive ears.

While not mentioned in the FAQ, note that the revocation of exemption  will also probably affect state and local exemptions that are based on federal exempt status.

Automatic Revocation of Tax-Exempt Status for Failure to File Annual Return or Notice – Frequently Asked Questions and Answers, April 27, 2010

HOMESTEAD CAN STILL BE SUBJECT

TO FRAUDULENT CONVEYANCE

WHEN IRS INVOLVED [Florida]

A transferee of an insolvent debtor that receives property from the debtor may be required to disgorge the received property or its equivalent value to the debtor’s creditors, if the transfer to the transferee was a “fraudulent conveyance.” However, a fraudulent conveyance only applies to a transfer of property of a debtor. Property of a debtor for this purpose does not include property that is “generally exempt under non bankruptcy law.”

In a recent case, an insolvent debtor transferred his homestead property to his transferee. The creditor sought to recover the homestead property from the transferee as a fraudulent conveyance. Per the above rules, the transferee defended the creditor’s claim per the homestead property being exempt from creditor claims under Florida law – thus, it was not “property” of the debtor for this purpose so that the fraudulent conveyance laws did not apply.

A strong argument, but the twist in this case was that the creditor was the Internal Revenue Service. The IRS is a super creditor in that, as a matter of federal supremacy, it is not bound by state law homestead protections. Since the IRS could have levied on the transferred homestead prior to its transfer and regardless of its homestead status, the Tax Court held in a case of first impression that the transferred homestead was not “generally exempt under non bankruptcy law” (at least as to the IRS) and thus was an asset of the transfer or that could be reached by the IRS under Florida’s fraudulent transfer laws.

Scott E. Rubenstein, et al. v.  Commissioner, 134 T.C. No. 13 (2010)

DESIGNATED BENEFICIARY COULD NOT

BE CREATED THROUGH A POST-DEATH

TRUST REFORMATION

Individual retirement account (IRA) assets can be made payable to a trust at the death of the account owner. If the trust has a “designated beneficiary” under the Code and Regulations, the payout from the IRA can typically be spread (and tax deferral maximized) over the lifetime of the designated beneficiary.

In a recent private letter ruling, a beneficiary trust of an IRA did not have a designated beneficiary. The trustee undertook a reformation action in state court to modify the trust so that after there formation the trust then had a designated beneficiary.

In the ruling, the IRS rejected the attempt to create a designated beneficiary. The IRS indicated that a retroactive modification to the date of death of the account owner would not be respected for federal tax purposes. While the IRS will respect state court orders in many circumstances, it will respect it in regard to a reformation only if reformation is specifically authorized by the Code.  For example, Code §2055(e)(3) specifically allows parties to reform a charitable split interest trust to make the charitable interest eligible for the charitable deduction. Since there is no applicable Code provision authorizing a reformation so as to qualify a trust as having a designated beneficiary, the reformation would not be given effect.

Private Letter Ruling 201021038

SALE RESTRICTIONS AND FORFEITURE RISK DID

NOT INHIBIT CONSTRUCTIVE RECEIPT

In a recent District Court case, a taxpayer sold a partnership interest in exchange for shares of stock. The stock had significant restrictions, including limits on the ability to sell the received stock for up to 5 years, and the taxpayer would have to forfeit shares if they went into competition with the buyer of the partnership interests, if they quit working for the buyer, or were fired for cause or poor performance.

The taxpayer claimed that he did not have to recognize gain on the value of the received shares, since he could not realize anything from the shares upon receipt and they could be forfeited in the future.

In analyzing the situation, the court noted that “constructive receipt” occurs under Section 451 Regulations if as to a taxpayer an amount is “credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given.” Income is not constructively received “if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.”

The court found that a number of facts combined to indicate there was sufficient “control” in the taxpayer to find constructive receipt. These facts included that the seller would eventually benefit from any appreciation that occurred in the shares while they were subject to restrictions, the seller would receive the dividends from the shares during the restriction period, and the seller could direct how the shares were voted. The court also took into consideration that the transaction was specifically structured to result in full taxation in the year of sale and not a later year, because the taxpayers anticipated future appreciation (in this case, the taxpayer changed his mind and sought to “defer” the tax because the stock actually ended up going down in value, so that the taxpayer picked up income in the year of sale that would never have arisen if the stock was taxable only when the restrictions lapsed).

Given the number of factors cited by the court, it is difficult to tell which ones were more critical than the others in the finding of constructive receipt. Further, if the transaction had not been carefully structured with one tax result in mind, but with the taxpayer then adopting the opposite characterization when the stock value went down instead of up, perhaps a more sympathetic hearing by the District Court may have resulted.

U.S. v. Fort, 105 AFTR 2d 2010-XXXX, (DC GA), 05/20/2010

APPLICABLE FEDERAL RATES – JUNE 2010

A table of the June 2010 applicable federal rates can be viewed at http://tinyurl.com/247wsk7.

TAX COURT COMBINES GIFT AND SALE TRANSACTION

In a recent Tax Court decision, the Court applied the step transaction doctrine to collapse a separate gift and sale of LLC interests to gift trusts into a gift transaction. Perhaps the presidential value of the case can be limited due to some bad facts present in the case, but the broad use of the step transaction doctrine simply by reason of a taxpayer bifurcating transfers into a gift and sale element so as to be able to use available gift and generation skipping tax exemptions is quite troubling.

The decision is also somewhat troubling since it involves many elements that are present in current sales transactions that are undertaken in transfer tax planning. However, the particular holding of the case does not act to convert the entire sale transaction into a taxable gift but appears to only have created a gift to the extent of discounts taken on the sold property.

For a more detailed review of the case and its facts, go to http://tinyurl.com/2b74mce for a summary in map format which can be viewed using most versions of Adobe Acrobat or Adobe Reader (click on the ‘+’s in the map to expand it).

Suzanne J. Pierre, TC Memo 2010-106

A METHODOLOGY FOR DISCOUNTING JOINT OWNERSHIP INTERESTS

Federal transfer taxes are based on the value of the property transferred. When the property transferred is a joint interest in property, some reduction from the pro rata share of the full value of the property is appropriate since a willing buyer would not pay 100% of the pro rata share of the value due to restrictions on enjoyment of the property or freely liquidating the property.

All qualities of appraisals to quantify this discount are obtained by appraisers, ranging from detailed to valuations akin to estimates. In a recent case gift tax case, the Tax Court rejected the data and appraisals offered by both the IRS and the taxpayer. Instead, the Tax Court applied its own methodology. This well-thought-out methodology should be useful to appraisers and taxpayers alike.

The property interest involved was a 50% tenancy-in-common interest of residential real property situated in Hawaii. The following summarizes the methodology used.

FIRST, determine a value as if partition is not necessary to sell the property.

A. Determine the pro rata share of the appraised value of the full parcel, projected 1 year into the future (the estimated time to complete the sale in the case).

B. Reduce that value by an appropriate discount for the time period needed to sell.

C. Reduce by the pro rata share of selling costs (e.g., broker fees).

D. Reduce by estimated operating costs for the time period needed to sell.

SECOND, determine a value as if partition is necessary to sell the property.

A. Determine the pro rata share of the appraised value of the full parcel, projected 2 years into the future (the estimated time to complete both the partition and the sale).

B. Reduce that value by an appropriate discount for the time period needed to partition and sell.

C. Reduce by pro rata share of selling costs (e.g., broker fees) and partition costs.

D. Reduce by estimated operating costs for the time period needed to partition and sell.

Then, find a value in-between FIRST and SECOND, based on an expert opinion on the likely need of a partition (in the case, that was estimated at 10% likelihood of need for partition).

Andrew K. Ludwick, et ux., TC Memo 2010-104

TAX COMPETITIVENESS SURVEY

A theme we have often mentioned is that capital flows to where it is best treated. Obviously, the level of tax imposed on businesses is a key element of how capital is treated in any given jurisdiction.

A 2010 KPMG guide analyzes the current tax competitiveness of 10 major countries, and 41 major cities in those countries. Among those countries, Mexico provides the best overall tax environment, with Canada following closely in second place. Japan and France find themselves in the highest tax positions at number 9 and 1 respectively. The table published in the report can be viewed at: http://tinyurl.com/28r2mmh (the first table).

Note that the tax competitiveness analysis also includes a  currency factor  so that the results are not entirely based purely on tax issues.

A listing of the top 10 major cities in the subject jurisdictions can be viewed at http://tinyurl.com/28r2mmh (the second table). Interestingly, Vancouver has a better tax environment than two Mexican cities, even though Mexico as a country has an overall better tax environment than Canada.

The entire KPMG report can be viewed at http://tinyurl.com/25hdn84.

30-DAY LETTERS VS. 90-DAY LETTERS

IN ESTATE TAX AUDITS

In estate tax audit situations, the IRS only has a 3 year statute of limitations to assess additional taxes. If the IRS takes too long to initiate an audit, or the audit drags on too long, the taxpayer may lose an opportunity to have unagreed audit issues reviewed by an Appeals Office prior to the issuance of a 90-day letter.

When audit items are unagreed, the normal course of operation is for the IRS to issue a 30-day letter of the IRS’ findings. The 30-day letter asks the taxpayer to agree to the IRS’ findings. The taxpayer can either agree, go over the examiner’s head and take the issue up with the IRS Appeals Office, or do nothing (in which case the IRS will then send a notice of deficiency). Thus, the 30-day letter is the taxpayer’s ticket to the Appeals Office where the taxpayer may receive a more favorable result than at the agent level, especially since appeals officers can factor into settlements the likelihood of IRS success if an issue is litigated.

If there is not enough time before the statute of limitations expires, the IRS will skip the 30-day letter and instead issue a 90-day letter (notice of deficiency). The 90 -day letter indicates a deficiency in tax. The taxpayer that wants to fight on can either pay the tax and sue for a refund in District Court, or file a petition for review in the Tax Court without paying the tax. There is no effective opportunity for Appeals Officer review prior to taking one of those two steps (although the taxpayer can file in the Tax Court and then go to Appeals).

Recent guidance to auditors provides that Appeals will need to at least 180 days left on the statute of limitations before a case should be referred to them. Adding the 30 days provided under a 30-day letter, examiners are directed to skip the 30-day letter and issue a 90-day letter if there are less than 210 days remaining on the statute of limitations on the day that the taxpayer communicates disagreement with the proposed adjustments.

If there are more than 210 days, the examiner need not automatically issue a 30-day letter. Instead, the examiner should examine all the facts and circumstances to see if a 30-day letter is appropriate. The factors to be reviewed include:

-how much time is needed for the examiner to  issue the 30-day letter, receive the taxpayer’s response, and then consider that response;

-how likely is it that the taxpayer will request an extension of the initial 30 day response period;

-a minimum of 30 days to process the case file to Appeals;

-a minimum of 10 days to account for time needed to process the case filing from the date of closing to review and closing by the Group Manager;

-the nature of the issues and the complexity of the facts involved; and -the applicable legal authorities.

Throughout the audit process, taxpayers and their representatives that anticipate going to Appeals should endeavor to move the case along as quickly as possible so as to not lose the opportunity to go to Appeals under a 30-day letter.

SB/SE Division’s Interim Guidance On Issuance of Statutory Notice of Deficiency  (June 24, 2010)

CHARGING ORDERS AS EXCLUSIVE

REMEDIES IN LLC’S – PART ONE

A recent Florida Supreme Court case addressing whether a charging order is an exclusive remedy for a creditor of a member of an LLC as to the LLC interest is creating a stir. This posting addresses the case. A future posting will address the question of whether the exclusive remedy of charging orders issue should be garnering so much attention.

First, some background. Assume that Owner O is a member of an LLC, and owes $1 million to judgment Creditor C. O has no assets other than his LLC interest. The LLC owns substantial assets, so that O’s share of the LLC exceeds $1 million in the underlying assets.

C can obtain a “charging order” against O. This requires that if and when the LLC makes distributions to its members, the amount due to O has to be paid to C instead to the extent of its $1 million judgment. C does not become a member of the LLC and obtains no voting or other rights as to the LLC. O remains the member. Once C is fully paid, O can then begin again to receive member distributions from the LLC. Thus, a charging order does not provide a lot of leverage to C – it cannot force a distribution so it has to wait around until the members decide to vote a distribution. This could involve a very long wait for C.

In most states, in the absence of a specific statutory provision that a charging order is an exclusive remedy for a creditor, a creditor could alternatively judicially foreclose on a debtor’s interest. This would require the sale of O’s member interest either to third parties or to C. If this happens, then C loses his member interest permanently.

If C can only obtain a charging order as his sole remedy, this is generally perceived to be favorable to debtors like O.

The purpose of the charging order remedy is to protect the other members of the LLC. This avoids innocent co-members from having their entity hijacked or interfered with by a third party creditor of a debtor member that succeed to the ownership interest of a debtor member. Instead, the creditor has to stand by on the outside of the entity awaiting distributions and cannot interfere with LLC operations.

So what happens if the LLC is only owned by one person? Since there are no other members of the LLC to protect, the question arises whether a creditor should be limited to charging order remedies only. This was the question raised in the recent Florida case.

The Florida Supreme Court held that even though Florida law provides for a charging order as a remedy as to LLC interests, a charging order is not the exclusive remedy for a creditor. When one considers that the purpose of the charging order remedy is to protect other members, it is not surprising that a creditor was not limited to a charging order as its sole remedy in the single member LLC situation.

However, the way that the Court went about this is questionable. Instead of simply addressing the situation of a single member LLC, the Court ruled with a broad stroke, seemingly interpreting that the Florida Statutes do not support a reading that charging orders are an exclusive remedy for LLC interests. The problem is that the case may stand for the proposition that charging orders are not an exclusive remedy, even in the case of multiple member LLC’s.

In the end, this may not be that big a deal, at least in Florida. There is a strong likelihood that a legislative fix will be enacted to clarify that charging orders are an exclusive remedy, at least for multiple member LLC’s (as many commentators thought was already presently the case).

Did you buy some artwork out of state that you brought back to Florida and did not pay Florida use taxes on? Did you forget that your ‘c’ corporation has to pay Florida corporate income taxes? Did you sell items upon which  you should have collected Florida sales tax?

If a taxpayer answers yes to any of these, or has any other failures to pay Florida taxes, a tax amnesty program opened on July 1 and will run through September 30, 2010. Those coming forward will have no penalties imposed and need not worry about criminal prosecution. They may also get a break on up to half of the interest owed on delinquent taxes if there is no ongoing audit or investigation by Florida.

The last time Florida had an amnesty program such as this was in 2003.

The program will not apply, however, to Florida unemployment taxes and Miami-Dade County Lake Belt Fees. Further, those who are under criminal investigation, whose liability is already covered by a settlement or payment agreement, or are involved in certain other programs are ineligible.

To participate in the program, a Tax Amnesty Agreement has to be submitted by the September 30 deadline. This can be done online. Proper returns must also be filed for the applicable taxes.  It may be possible to make an installment arrangement for payment of the late taxes.

Interestingly, taxpayers currently under audit can participate in the program.

More information on the program is available at http://dor.myflorida.com/dor/amnesty/.

MUTABILITY DOCTRINE

When tax issues turn on international conflict of laws analysis, attempting to determine tax consequences can become a hair-pulling exercise. A recent Tax Court case provides a good illustration.

On its face, the tax issue was fairly simple. A married resident and domiciliary of Belgium died while owning a significant amount of shares in a U.S. corporation. Under U.S. tax law, those shares are subject to U.S. estate tax. The issue for the court was whether the decedent owned 100% of the shares for estate tax purposes, or whether he owned only 50% with the other 50% of the shares being deemed owned by his surviving spouse under community property principles.

The husband and wife were married in Uganda, which at the time of their marriage was governed by United Kingdom law. The UK is a “separate property” regime not a community property regime. The couple later moved to Belgium, where they resided for many years and had their domicile. Belgium is a community property regime. They never changed their nationality, however, out of the UK. It was while they were domiciled in Belgium that the decedent acquired the U.S. shares.

To determine whether the surviving spouse had a community property interest, the Tax Court had to work through and ultimately apply the following conflict of law and marital property issues:

a. Which country’s conflict of laws provisions should be applied? In this situation, the general rule that the law of the country of domicile applies to determine ownership of intangible property was applied – so Belgium law applied. Interestingly, Belgium conflict of laws rules then kicked the question of ownership back to England since both the husband and wife were U.K. nationals.

b. Which country’s spousal ownership rules should be applied? Applying the doctrine of immutability, the Tax Court determined that the law of the couple at the time of their marriage applied. This was the U.K.’s separate property regime. Thus, since the stock was titled solely in the name of the decedent, all of the stock was included in the decedent’s U.S. gross estate and subjected to U.S. estate tax.

The case is interesting for two particular reasons.

The first relates to the discussion under a. above. Applying the “use the law of the country of domicile for intangibles” rule to determine ownership of intangible personal property, many would think that Belgium law should decide the ownership of the marital property. As noted above, however, since the individuals were UK nationals, Belgium conflicts of law rules apparently applies UK law even though the individuals were Belgium domiciliaries.

The second relates to the doctrines of mutability vs. immutability. It isn’t often that one sees these doctrines discussed in tax cases, so the case provides a good review (and learning opportunity for those not familiar with the concepts). The doctrines apply to determine what happens when a married couple get married under one marital property regime, but later acquire property while domiciled under another regime. The doctrine of mutability provides that the law of the country of domicile at the time of acquisition of the property governs questions of separate vs. community property. This doctrine is more often applied in the U.S. The doctrine of immutability provides that the law of the country of marriage applies (absent affirmative steps by the spouses to change the applicable law) to any later property acquisition. This concept is more often applied in European jurisdictions. In the case, it was a finding by the Tax Court that a U.K. court would apply the doctrine of immutability that ultimately resulted in 100% gross estate inclusion.

Estate of Charania, et al. v. Shulman, 105 AFTR 2d ¶2010-988 (1st Cir. 2010)

GIFT TAX GROSS-UP DOES NOT

APPLY TO NONRESIDENTS

Under Code Section 2035(b), if a U.S. person makes a gift and pays gift tax within 3 years of his or her death, the amount of the gift tax is included in his or her gross estate for federal estate tax computation purposes. In an interesting ruling, the IRS has indicated that such inclusion will not apply if the decedent is a nonresident alien of the U.S. for transfer tax purposes.

Code Section 2104(b) generally applies Code Sections 2035 through 2038 to the estates of nonresidents.  However, Code Section 2104(b) by its language only applies to “property of which the decedent has made a transfer.” The IRS is interpreting this language to require a “gratuitous transfer,” and further believes that the payment of gift tax is not such a gratuitous transfer. Thus, Code Section 2035(b) will not apply.

Nonresidents have various transfer tax planning opportunities that are not available to U.S. citizens and residents. Add this to the list!

CCA 201020009

In just six months, the largest tax hikes in the history of America will take effect.  They will hit families and small businesses in three great waves on January 1, 2011:

First Wave: Expiration of 2001 and 2003 Tax Relief

In 2001 and 2003, the GOP Congress enacted several tax cuts for investors, small business owners, and families.

These will all expire on January 1, 2011:

Personal income tax rates will rise.  The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which two-thirds of small business profits are taxed).  The lowest rate will rise from 10 to 15 percent.  All the rates in between will also rise.  Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates.  The full list of marginal rate hikes is below:

- The 10% bracket rises to an expanded 15%
- The 25% bracket rises to 28%
- The 28% bracket rises to 31%
- The 33% bracket rises to 36%
- The 35% bracket rises to 39.6%

Higher taxes on marriage and family.  The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of income.  The child tax credit will be cut in half from $1000 to $500 per child.  The standard deduction will no longer be doubled for married couples relative to the single level.  The dependent care and adoption tax credits will be cut.

The return of the Death Tax.  This year, there is no death tax.  For those dying on or after January 1 2011, there is a 55 percent top death tax rate on estates over $1 million.  A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones.

Higher tax rates on savers and investors.  The capital gains tax will rise from 15 percent this year to 20 percent in 2011.  The dividends tax will rise from 15 percent this year to 39.6 percent in 2011.  These rates will rise another 3.8 percent in 2013.

Second Wave:

There are over twenty new or higher taxes.  Several will first go into effect on January 1, 2011.  They include:

The “Medicine Cabinet Tax”  Americans will no longer be able to use health savings account (HSA), flexible spending account (FSA), or health reimbursement (HRA) pre-tax dollars to purchase non-prescription, over-the-counter medicines (except insulin).

The “Special Needs Kids Tax”  This provision imposes a cap on flexible spending accounts (FSAs) of $2500 (Currently, there is no federal government limit).  There is one group of FSA owners for whom this new cap will be particularly cruel and onerous: parents of special needs children.  There are thousands of families with special needs children in the United States , and many of them use FSAs to pay for special needs education.  Tuition rates at one leading school that teaches special needs children in Washington , D.C. (National Child Research Center) can easily exceed $14,000 per year.  Under tax rules, FSA dollars can be used to pay for this type of special needs education.

The HSA Withdrawal Tax Hike.  This provision increases the additional tax on non-medical early withdrawals from an HSA from 10 to 20 percent, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10 percent.

Third Wave: The Alternative Minimum Tax and Employer Tax Hikes

When Americans prepare to file their tax returns in January of 2011, they’ll be in for a nasty surprise—the AMT won’t be held harmless, and many tax relief provisions will have expired.  The major items include:

The AMT will ensnare over 28 million families, up from 4 million last year.  According to the Tax Policy Center, Congress’ failure to index the AMT will lead to an explosion of AMT taxpaying families—rising from 4 million last year to 28.5 million.  These families will have to calculate their tax burdens twice, and pay taxes at the higher level.

Small business expensing will be slashed and 50% expensing will disappear.  Small businesses can normally expense (rather than slowly-deduct, or “depreciate”) equipment purchases up to $250,000.  This will be cut all the way down to $25,000.  Larger businesses can expense half of their purchases of equipment.  In January of 2011, all of it will have to be “depreciated.”

Taxes will be raised on all types of businesses.  There are literally scores of tax hikes on business that will take place.  The biggest is the loss of the “research and experimentation tax credit,” but there are many, many others.  Combining high marginal tax rates with the loss of this tax relief will cost jobs.

Tax Benefits for Education and Teaching Reduced.  The deduction for tuition and fees will not be available.  Tax credits for education will be limited.  Teachers will no longer be able to deduct classroom expenses.  Coverdell Education Savings Accounts will be cut.  Employer-provided educational assistance is curtailed.  The student loan interest deduction will be disallowed for hundreds of thousands of families.

Charitable Contributions from IRAs no longer allowed.  Under current law, a retired person with an IRA can contribute up to $100,000 per year directly to a charity from their IRA.  This contribution also counts toward an annual “required minimum distribution.”  This ability will no longer be there.

Now your insurance is INCOME on your W2′s……
One of the surprises we’ll find come next year, is what follows – - a little “surprise” that 99% of us had no idea was included in the  ”new and improved” healthcare legislation.

Starting in 2011, your W-2 tax form sent by your employer will be increased to show the value of whatever health insurance you are given by the company. It does not matter if that’s a private concern or governmental body of some sort.  If you’re retired?  So what; your gross will go up by the amount of insurance you get.

You will be required to pay taxes on a large sum of money that you have never seen.  Take your tax form you just finished and see what $15,000 or $20,000 additional gross does to your tax debt.  That’s what you’ll pay next year.  For many, it also puts you into a new higher bracket so it’s even worse.

This is how the government is going to buy insurance for the15% that don’t have insurance and it’s only part of the tax increases.

On page 25 of 29: TITLE IX REVENUE PROVISIONS- SUBTITLE A: REVENUE OFFSET PROVISIONS-(sec. 9001, as modified by sec. 10901) Sec.9002  ”requires employers to include in the W-2 form of each employee the aggregate cost of applicable employer sponsored group health coverage that is excludable from the employees gross income.”