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- Registration now open for September 17, 2019 CPE Seminar, “IRC Sec. 199A: Wasn’t the Code to be Simplified?” August 26, 2019
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- Tax News & Comment — August 2019 July 25, 2019
- Tax News & Comment – April 2017 March 13, 2017
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- FROM WASHINGTON & ALBANY — Current Election Probabilities; Tax Plans of Trump and Clinton May 13, 2016
- FROM FEDERAL AND NYS COURTS: Recent Developments & 2015 Decisions of Note May 13, 2016
- IRS & NYS DTF MATTERS: Recent Developments & 2015 Regs. & Rulings of Note May 13, 2016
- Creating and Maintaining Flexibility in Wills and Trusts May 13, 2016
- Escaping the Quandary Posed by Unreported Foreign Accounts May 13, 2016
- Like Kind Exchanges Alive and Well: An Update May 13, 2016
- Executor and Trustee Commissions Under NY EPTL
- September 17 CPE Breakfast Lecture in Old Westbury, New York -- "IRC Sec. 199A: Wasn't the Code to be Simplified?"
- Taxation of Foreign Nongrantor Trusts: Throwback Rule
- Depreciation Recapture
- Use of Disclaimers in Pre and Post-Mortem Estate Planning
- Legal Basis for Seeking Abatement of New York State Tax Penalties
- The Decedent's Final Income Tax Return
- Defeating The Right of Election in EPTL § 5-1.1-A
- Letters Testamentary
Registration now open for September 17, 2019 CPE Seminar, “IRC Sec. 199A: Wasn’t the Code to be Simplified?”
As of April 22, the probability of Hillary Clinton becoming the Democratic nominee is .939 (1/15 odds); that of her becoming President, .727 (2/5 odds). Mr. Trump now has a .664 probability (1/2 odds) of prevailing in Cleveland, but only a .149 probability (5.75/1 odds) of winning in November. The odds are a snapshot, and do not fully reflect momentum. Following his New York win, Mr. Trump appears to have regained momentum. The odds reveal that Mr. Trump’s problem will not likely be winning the nomination, but rather defeating Secretary Clinton in the general election. These probabilities are based on betting odds in Las Vegas, which are more accurate than polls in predicting the outcome of future elections. Their accuracy may be attributable in part to a hypothesis advanced by James Surowiecki, business columnist for the New Yorker, in his book The Wisdom of Crowds (Doubleday, 2004) which draws parallels to polling but depends more upon the aggregation of decisions of independently deciding individuals, which have been shown to be extremely accurate.
Overview of Tax Plans of Secretary Clinton & Mr. Trump
The tax plans of Mr. Trump and Secretary Clinton differ markedly. Mr. Trump favors reducing taxes and compressing the rate structure. He would eliminate “loopholes” and limit itemized deductions. “Revenue neutrality” would be achieved by limiting current deductions. A new 15 percent rate bracket would apply to corporations, partnerships and other pass-through entities. A one-time repatriation tax would be assessed on corporations repatriating accumulated profits to the United States. Mr. Trump would eliminate the estate tax. (Trump tax plan discussed on pages 4-5)
Secretary Clinton would severely restrict the current favorable taxation of long term capital gains, and would set the clock back on the estate tax. Ms. Clinton would impose a new tax — resembling but not replacing the AMT — on the highest income earners. All taxpayers with an AGI exceeding $1 million would pay a minimum 30 percent tax. A new surtax would also be imposed on AGI exceeding $5 million. Her plan would eliminate favorable capital gain treatment for assets held less than two years, and would phase in favorable capital gain treatment over years two through six. She would also reinvigorate the gift and estate tax regime by (i) increasing the top tax rate to 45 percent; (ii) reducing the applicable exclusion amount for estate tax to $3.5 million, and (iii) “decoupling” the gift tax and the estate tax, and in the process decimating the gift tax lifetime exclusion amount to $1 million. The tax proposals of Ms. Clinton are ill-conceived and not well thought out. (Clinton tax plan discussed on pages 5-6)
Reflections on President Obama’s Tenure
As of April 21, President Obama’s approval rating polled at 52 percent by Gallop. This continued an upward trend from the 40 percent nadir registered two years ago and suggests that Mr. Obama may help the efforts of Ms. Clinton in November. Personal income taxes have increased under the Obama Administration. New Yorkers, especially New York City residents, along with Californians, are assessed the highest combined income tax rates of any states in the nation. Taxes are always high on the list of Americans’ concern. Inexplicably, there has been little dialogue concerning taxes this election cycle. Therefore, the candidates’ tax policies are far from lucid. Fairly considered, though much has been accomplished, the Presidency of Mr. Obama has not been a resounding success. Perhaps the greatest failing of Mr. Obama is his unwillingness or inability to work with Congress. One has never heard “Barack has the votes,” a phrase often associated with President Johnson who, before assuming the Presidency from slain President Kennedy, was a Senator from Texas. Johnson was a master of political horse trading. His perseverance led to the enactment of the Civil Rights Act of 1964.
The economy, though perhaps not approaching the heady days of the Clinton years, is much better than when President Bush left office. Unemployment is now at 4.9 percent. When Mr. Bush left office, the rate was 7.8 percent. The Dow was at 7,949 when Mr. Obama assumed office. Today it trades near 18,000. During the Obama presidency, oil drilling has boomed, leading to what would have been unthinkable only a few years ago: America is now an oil exporter and no longer dependent on OPEC. Relations with Cuba have been resumed for the first time since the Cold War. More Americans now have health insurance. Climate change has been addressed. Russian aggression appears to have been contained to Crimea and eastern Ukraine, both of which have been historically Russian. Relations with China are generally good. However, Mr. Obama has failed in important areas. While he has kept the nation out of wars claiming American casualties, his Mideast policy has been disastrous for Israel, a close ally. The Affordable Care Act is at best a work in progress. Taxes are high, and complaints about the IRS targeting specific groups are troubling. Mr. Obama has failed to impress upon Congress the need to implement gun control. Civil unrest has risen markedly of late.
Yet time spent in office has burnished Mr. Obama’s image. Many Americans are fond of him, believing him to be trustworthy and possessed of extremely high moral character. He is well respected internationally and presents an image of the United States which is sanguine. These positive attributes will likely help Democrats in November. Still, the President should have achieved more than he has, and that is lamentable.
III. Electoral College Outlook
All current polls show that Mr. Trump would lose the election to Secretary Clinton. However, at the end of the day, four key states will likely decide the election, as has been the case in the past few Presidential elections. As election day approaches, history shows that polls converge. There is no reason to believe that the Presidential election will not be close. The Electoral College results do not always accord with the popular vote. Two hundred and seventy electoral votes are needed to win the presidency. All states in New England and New York, New Jersey, Maryland, Delaware, and the District of Columbia in the mid-Atlantic , as well as Illinois, Michigan and Minnesota in the Midwest , and California, Oregon, Washington, New Mexico, Colorado  and Hawaii  in the west appear safe for Clinton. Thus, Ms. Clinton now appears to have 230 safe electoral votes.
States in the deep south, Texas, Louisiana, Mississippi, Alabama, Georgia, and North and South Carolina , the plains states north of Texas to the Canadian Border, comprising Oklahoma, Kansas, Nebraska and the Dakotas , Appalachian states of Tennessee, West Virginia, Kentucky, and Missouri, , the Midwestern state of Indiana  and the western states of Arizona, Utah, Wyoming, Idaho, Montana  and Alaska  appear to be safe Republican states. North Carolina  leans Republican. Obama defeated McCain by 0.3% in 2008 but Romney flipped the state in 2012 and beat Obama by 2%. Thus, the Republicans now appear to have 200 safe electoral votes.
Ms. Clinton would need 53 additional electoral votes to prevail, while the Republicans, perhaps Trump, would need 85 additional electoral votes, to win the election. Pennsylvania , Ohio , Virginia  and Florida , with a total of 80 electoral votes, will again likely decide the election. Virginia  had voted for Republicans in the previous eight Presidential elections until 2008, when Obama defeated McCain by 6.3%. In 2012, Obama’s margin over Romney was 3.9%. Democrats have carried Pennsylvania  in the last six Presidential elections. Obama carried Pennsylvania by 10.2% in 2008 and by 5.4% in 2012. Only once since 1976 — when George Bush beat Clinton by 2% — has Florida  not voted with the winning Presidential Candidate. Obama won by 2.8% in 2008 and by 0.9% in 2012. However, Florida is perennially close, and as all remember, in 2000 the popular vote identical, with Bush and Gore each receiving 48.8% in a contested election.
Florida resembles a northern state that happens to be situated in the tropics. Its population is diverse and like Ohio has an uncanny ability to correctly predict Presidential winners. In 2016, those states will again play a pivotal role if the election is close. It now appears that voting trends indicate that Clinton could conceivably win without carrying Florida, but for the Republicans, Florida appears to be a must-win state. Clinton may do extremely well in the populated areas of Palm Beach, Broward and Miami-Dade counties, which comprise 28 percent of Florida’s entire population, and is the home of a great many elderly persons, who overwhelmingly appear to support Ms. Clinton. However, Mr. Trump may do very well north of West Palm Beach, and in the western part of the state.
Even if the Republicans were to prevail in Florida  and Ohio , they could still be lose the election if they were unable to turn the tide in Virginia  and Pennsylvania . Finally, any scandal visited upon Clinton nearing the election could result in close states tilting Republican. The probability of such a scandal now appears slim.
Mr. Trump’s professed greatest strength — his being outside of the Washington establishment and political circles — is also his greatest weakness. Mr. Trump obviously possesses business acumen, but he lacks political experience. Although he has struck a chord with many voters, especially Republicans, he appears to have alienated a large portion of the electorate. However, the electorate is fickle, and it may be possible that Mr. Trump can regain the support of some whom he has alienated. His promise to reduce taxes imposed on individuals is appealing. His pledge to reform corporate tax is refreshing. His policies, unlike that of Ms. Clinton, would lessen federal administrative involvement in taxation, rather an increase it. There is little doubt that if elected, Mr. Trump would choose competent advisors.
Individual Income Tax Proposals and Proposal to Eliminate Estate Tax
Mr. Trump asserts that his tax plan would simplify the Internal Revenue Code, reduce taxes for all taxpayers, and yet remain “revenue neutral.” Tax experts have opined that the proposed plan cannot be revenue neutral. The Tax Foundation (a Washington-based “think tank” established in 1937 by Alfred P. Sloan, Jr., Chairman of GM, that collects data and publishes research concerning federal and state tax policies) estimates that Mr. Trump’s plan would decrease tax revenues by nearly $12 trillion over a ten year period. The Tax Policy Center estimates that Mr. Trump’s plan would similarly reduce tax revenues by $9.5 trillion over that period.
The existing Federal deficit is estimated to now be approximately $15 trillion. Mr. Trump has pledged to reduce government spending, but has been vague with respect to how he would accomplish that objective. In any case, the Tax Policy Center (also known as the Brookings Tax Policy Center, a non-partisan Washington-based research center whose professed objective is to provide independent analyses of tax issues) has stated that Mr. Trump would need to initiate unprecedented (and likely politically infeasible) spending cuts to offset the tax cuts. Mr. Trump states that he would eliminate the federal income tax on single taxpayers earning less than $25,000 and on married taxpayers earning less than $50,000. These taxpayers would be required to submit only a one page form. Mr. Trump believes that 50 percent of taxpayers would owe no personal income tax as a result of this change. At the same time, according to Mr. Trump, this would simplify tax filing for the approximately 42 million taxpayers that currently file tax returns only to establish that they owe no tax. Mr. Trump would compress the current seven tax brackets into only four. Four brackets would impose tax at rates of 0, 10, 20, and 25 percent. The highest current tax rate is 39.6 percent. As would many of his proposals, this would require Congressional approval.
The new 10 percent bracket would apply to single taxpayers earning from $25,001 through $50,000 and to married taxpayers earning from $50,001 through $100,000. The new 20 percent bracket would apply to single taxpayers earning from 50,001 through $150,000 and to married taxpayers earning from $100,001 through $300,000. The 25 percent bracket would apply to single taxpayers with an income exceeding $150,000 and married taxpayers with an income exceeding $300,000. Mr. Trump also favors the elimination of the 3.8 percent net investment income tax on high-income taxpayers enacted as part of the Affordable Care Act. This would also significantly reduce tax revenues, as the tax falls principally upon high income taxpayers with net investment income. To compensate for lower tax revenues occasioned by the lower rates, Mr. Trump states that he would eliminate or reduce most deductions and “loopholes” currently available to high-income taxpayers. His proposal would also reduce the availability of itemized deductions. Mr. Trump has not provided details concerning new limits on deductions, but has expressed the view that deductions for charitable contributions and mortgage interest would remain.
According to the Tax Policy Center, the planned limitations on itemized deductions would offset less than a sixth of tax revenue losses attributable to the lower tax revenues expected under the proposals set forth by Mr. Trump.
Mr. Trump plans to end the “carried interest” tax break, which allows investment fund managers to pay tax on portfolio profits at the lower capital gains rate (rather than the ordinary income rate). Although Mr. Trump has touted the termination of the carried interest tax break as an element of his plan that would significantly contribute to offsetting lost tax revenues, some believe that elimination of the deduction would not appreciably affect tax revenue neutrality. The tax revenue neutrality generated by the proposal is somewhat misleading, since it assumes the top 25 percent ordinary rate proposed by Mr. Trump is never enacted. If the 25 percent top ordinary rate is enacted, then little or no benefit to revenue neutrality would occur, since the difference between the current 23.8 percent rate (including the 3.8 percent net investment income tax) imposed on carried interest is only 1.2 percent less than the proposed 25 percent ordinary income rate. (Of course, were the current top ordinary rate of 39.6 percent to remain but the carried interest “loophole” be eliminated, then the proposal would indeed contribute to tax revenue neutrality.) Mr. Trump favors eliminating the gift and estate tax. Although the tax affects far fewer estates than in the past, the existence of portability and an exclusion amount of $5.45 million, the revenue loss occasioned by the elimination of the estate would be approximately $25 billion.
Corporate Tax Proposals
Mr. Trump proposes reducing the corporate tax rate to 15 percent from 35 percent. He believes this reduction would cause the rate to be competitive with other industrialized countries and would encourage corporations to repatriate. The loss of tax revenues would be partially compensated for by a one-time 10 percent repatriation tax on accumulated profits, which would be payable over 10 years. Future profits of foreign subsidiaries of U.S. companies would be subject to tax each year as profits were earned. Currently, accumulated foreign source profits may be deferred. The 15 percent tax rate under Mr. Trump’s plan would also apply to pass-through entities, which include sole proprietors, partnerships, and limited liability corporations. [Partnership income is taxed to the partner at the partner’s tax rate, which will depend upon the character of the income (i.e., capital gain or ordinary) which also passes through to the partner. Some critics have noted that the attractiveness of the 15 percent corporate rate would create a strong incentive for employees to seek to characterize themselves as independent contractors. This would result in significant revenue loss.
Ms. Clinton was an excellent Senator and generally capable Secretary of State. Yet doubts persist as to her honesty. Now that she has disposed of the challenge of Senator Sanders, her rhetoric against the drug and biotech firms, and against banks, neither of which is particularly helpful, may lessen. To be sure, she is far from a perfect presidential candidate. Her tax policies are far to the left of Mr. Obama and Mr. Clinton. One wonders how far to the left she will be pulled from young Sanders supporters at the Democratic convention in July, and whether Ms. Clinton may emerge from the Convention beholden to socialist positions not in accord with even most Democrats’ political beliefs. The use by Ms. Clinton of her personal email server was a mistake that could have put the nation at risk. Evidently, it did not. Whether what she did was criminal will be decided by the FBI and the Justice Department. However, as of now there is little indication that the government intends to proceed against her criminally.
Individual and Estate Tax Proposals
The tax proposals of Ms. Clinton are not only unfair to even most middle income taxpayers, but if enacted would create new administrative nightmares, would overburden an IRS that even now is underfunded to the point of not being able to properly function, and present Constitutional issues involving retroactivity if her proposed estate and gift tax changes were enacted. Her proposals could only become law if passed by both houses of Congress. That now that appears remote, even if Ms. Clinton were to win by a landslide since Republicans now control both houses of Congress — the Senate by 54-44, and the House by 246—188. Senate Democrats must defend 10 seats in November, as opposed to 24 seats which Republicans must defend. Over the past century, there has been a high correlation between Presidential and Senate election results. However, unless the Republications falter badly in November, their 58 member advantage in the House (246—188) is unlikely to be reversed, even if they were to lose control of the Senate.
Ms. Clinton has proposed tax law changes that she believes would decrease the federal deficit. It should be noted that economists differ over the importance ascribed to reducing the federal deficit. Most of the revenue gain would emanate from new taxes imposed on high income taxpayers. According to the Tax Policy Center, the top ten percent of taxpayers would see a 0.7 percent reduction in after-tax income and the top one percent of taxpayers would see a 1.7 percent reduction. As yet, Ms. Clinton made no proposals that would affect middle income taxpayers, but there have been indications that proposals may be forthcoming. The Tax Foundation estimates that the proposed plan to impose new taxes on the wealthy would increase tax revenues by $498 billion over a 10 year period; the Tax Policy Center estimates revenue increases over the same period would be $1.1 trillion. Although revenues generated by the proposed plan would not eliminate the federal deficit in the immediate future, Ms. Clinton believes that it would make significant inroads into reducing the deficit. However, the plan would likely make the Internal Revenue Code more complex. Some believe that the new taxes would reduce the incentive of those affected to invest. The first of the new taxes on high income earners would be a new minimum 30 percent tax imposed on taxpayers with over $1 million adjusted gross income (AGI). This change reflects the “Buffet Rule,” inspired by Warren Buffet who claimed that he paid a lower effective tax rate than that of his secretary. The new minimum tax appears to constitute a variation of the present alternative minimum tax.
The second new tax on high income taxpayers would be a 4 percent surtax imposed on taxpayers whose AGI exceeds $5 million. Since AGI includes capital gains as well as ordinary income, both of these two new taxes imposed on high income taxpayers would work to diminish the favorable taxation of investment income, which often comprises the largest portion of income of high income taxpayers. Ms. Clinton has also proposed limiting the tax benefit of most deductions and exclusions to 28 percent. This limitation applies to all itemized deductions (except for charitable contributions), tax exempt interest, excluded employer-provided health insurance, and deductible contributions to tax-preferred retirement account. As would Mr. Trump, Ms. Clinton would seek to tax carried interest as ordinary income rather than as capital gains. The impact of this provision would be more pronounced if the top rate for ordinary income remains at 39.6 percent, which is more likely to occur if Ms. Clinton, rather than Mr. Trump, is elected.
Ms. Clinton has proposed a radical change to the taxation of capital gains. Under current law, short term capital gains are taxed as ordinary income. Long term capital gains are taxed at a favorable rate of 20 percent (23.8 percent if the net investment income tax is included). To qualify as a long term capital gain, the asset must be held for more than one year. Under the proposal, all capital gains would be taxed as short term gains for two years. Following that two-year period, the benefit of the favorable long-term capital rate would be phased in at the rate of 4 percent per year over four years. This proposal is unsound. Requiring an asset to be held for two years before beginning to achieve a favorable tax rate would discourage new investment. Equities investors would flee short-term growth opportunities in favor of dividend-paying companies since dividends are taxed at favorable rates and have no comparable holding period. The proposal would also be an administrative nightmare and would add to the list of tasks which an overburdened IRS cannot deal with even now.
Ms. Clinton has proposed restoring the tax rates and exclusion amounts for estate tax to those that existed in 2009. Thus, the top estate tax rate would rise to 45 percent from 40 percent, and the applicable exclusion amount would be reduced by nearly $2 million, to $3.5 million. The most significant change would be a reduction in the gift tax to $1 million. Today, gifts of up to the limit of the annual exclusion amount, currently $5.45 million, may be made without the imposition of gift tax. This proposal is also unsound. Requiring estates over $3.5 million to pay estate tax would again encourage the formation of unnecessary entities and would renew haggling between the IRS and the taxpayer concerning valuation discounts. “Decoupling” the estate and gift tax, which have been unified for more than a decade, would create new administrative nightmares. Constitutional issues would arise concerning retroactivity, as many persons would already have made gifts exceeding $1 million.
Gift and estate taxes have always been a “one way” street. Turning the law around and reverting to laws that were discarded years earlier would wreak havoc and would further destabilize the relationship between federal and state taxation. As was the case in 2010, when uncertainty existed with respect to what the exemption amount would be, and whether there would be a low gift tax exemption, the problems associated with these proposed changes far outweigh the benefit of revenue increases to the Treasury that these changes would produce. The IRS would likely spend an inordinate amount of resources on the task of auditing countless gift tax returns. Finally, there seems to be little point in reinvigorating a tax which has only barely survived extinction for the past two decades. It is more than likely that the tax would again be repealed if a Republican congress were elected. If the gift tax exemption amount were reduced to $1 million, many gift tax returns reporting gifts in the range of $500,000 to $1 million might become subject to audit. Since many gift tax returns now claim valuation discounts, the question arises how the IRS would choose which gift tax returns to audit.
Fortunately, it appears unlikely in the extreme that either the capital gain proposal or the estate tax proposal would pass in the House.
Corporate Tax Proposals
Ms. Clinton has expressed concern with corporations leaving the U.S. or shielding their income from tax. Instead of creating an incentive for corporations to return to the U.S. by reducing the corporate tax rate, Ms. Clinton would strengthen rules to prevent “corporate inversions,” which occurs when a foreign corporation merges with a U.S. corporation to avoid tax on the foreign earnings of the formerly U.S. corporation. The proposal would reduce from 80 to 50 percent the percentage of the entire corporation that the former U.S. corporation may own and avoid U.S. taxation. Ms. Clinton has also proposed an “exit tax” on the accumulated untaxed earnings of the foreign subsidiaries of U.S. corporations that have left the U.S.
United States v. Stiles, 114 AFTR2d 2014-6809, 2014 BL 338556 (W.D. Pa. Dec. 2, 2014) held a personal representative liable for distributing estate assets before paying the decedent’s outstanding tax debt. Distributions made to the fiduciary and his siblings nearly approximated the estate tax liability. The District Court, in granting summary judgment to the government, rejected as irrelevant reliance on the advice of counsel, reasoning that personal liability may be imposed upon a fiduciary of an estate in accordance with IRC § 6901(a)(1)(B) and 31 U.S.C. § 3713(b). The defendants were held personally liable for the unpaid taxes because (i) they distributed assets of the estate; (ii) the distribution rendered the estate insolvent; and (iii) the distribution took place after the fiduciary had actual or constructive knowledge of the liability for unpaid taxes.
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In Specht v. United States, 115 AFTR2d 2015-357 2015 BL 1651 (S.D. Ohio Jan. 6, 2015), the Court sustained penalties and interest assessed against an estate despite reliance on the advice of counsel concerning when or whether to file or pay. The executor who retained the decedent’s attorney to assist her was unaware that the attorney had brain cancer. (The attorney was later declared incompetent and voluntarily relinquished her law license.) The attorney incorrectly advised the executor that the estate tax return was due on September 30, 2009. Nevertheless, prior to that date, the executor received several notices from the probate court warning her that the estate had missed probate deadlines. In response to inquiries posed by the executor, the attorney advised that the estate had been granted an extension. In July 2010, another family which had engaged the attorney for a probate matter informed the executor that they were seeking to remove the attorney as co-executor for incompetence. Ultimately, the estate tax return was not filed until January 26, 2011. The District Court held that the “failure to make a timely filing of a tax return is not excused by the taxpayer’s reliance on an agent, and such reliance is not ‘reasonable cause’ for a late filing.”
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Similarly, the District Court for the Eastern District of Virginia sustained late filing and late payment penalties for estate tax in West v. Koskinen, No. 1:15-cv-131, 2015 BL 343234 (E.D.Va. 2015) despite claims by taxpayers of reliance on erroneous advice by counsel. The Court held that “reasonable cause” did not exist since counsel had never advised the taxpayers regarding filing deadlines.
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In Mikel v. Comm’r, T.C. Memo 2015-64 (Apr. 5, 2015), the Tax Court allowed the use of Crummey powers given to sixty beneficiaries in a situation where an irrevocable trust contained a no-contest clause and a mandatory arbitration clause. The Court held that neither clause deprived the beneficiaries of a present interest required to qualify for the gift tax annual exclusion. The no-contest clause did not invalidate the Crummey power because it applied only to disputes over certain discretionary distributions by the trustees. The mandatory arbitration clause did not invalidate the Crummey powers because the trust explicitly stated that an arbitration panel was to apply New York law in granting the beneficiaries the same rights they would have under New York law. The Court also noted that any beneficiary disagreeing with the decision of the arbitration panel could still commence legal proceedings.
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Estate of Redstone v. Comm’r, 145 T.C. No. 11 (Oct. 26, 2015) held that the transfer of stock of a family business into a trust for the benefit of the shareholder’s children in settlement of litigation was a bona fide business transaction rather than a taxable gift. In so concluding, the Court cited to the oft-cited Treas. Reg. § 25.2511-1(g)(1) which provides that “[t]he gift tax is not applicable to a transfer for a full and adequate consideration in money or money’s worth, or to ordinary business transactions.” The fact that the children were not parties to the settlement agreement was irrelevant in determining whether the shareholder received full consideration in settlement. As part of the settlement, the Company agreed that it would (in consideration of the stock transfer) recognize that the shareholder was the outright owner of his remaining shares, which it would redeem for $5 million. In determining that the transfers made pursuant to the settlement were made in the ordinary course of business, the Court found (i) that the transfers were “bona fide, at arm’s length, and free from any donative intent;” (ii) that a genuine controversy existed; (iii) that the parties engaged in adversarial negotiations and were represented by counsel; and (iv) that the settlement was motivated by the desire to avoid litigation.
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SEC v. Wyly, 56 F. Supp. 3d 394 (S.D.N.Y. 2014), held that two sets of trusts were grantor trusts and that the settlors (the “Wyly brothers”) should have been taxed on the gain and income of the trusts. The Court emphasized that although the trusts had unrelated corporate trustees, the trust protectors had too much control over the corporate trustees. The first set of trusts (the “Bulldog Trusts”) were created by the Wyly brothers for the benefit of their wives, children, and several charitable organizations. Trust protectors could add to or substitute the charitable organizations. The second set of trusts (the “Bessie Trusts”) were nominally funded by foreign individuals. The beneficiaries of the Bessie Trusts were the Wyly brothers and their families. Offshore professional management companies acted as trustees of both sets of trusts. There were three trust protectors of each trust with the power to remove and replace trustees of all of the trusts. The trustees always followed the investment directions of the trust protectors, who in turn followed the investment directions of the settlors. The basis for the Court’s holding that all of the Bulldog Trusts were grantor trusts was that in reality, the trustees were acting at the direction of the settlors, so the independent trustee exception of Section 674(c) was inapplicable. With respect to the Bessie Trusts, the Wyly brothers were deemed to be the true grantors of the trusts and the named nominal settlors were found to have made no gratuitous contributions to the trusts.
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In Estate of Pulling v. Comm’r, T.C. Memo 2015-134 (July 23, 2015) the Tax Court found in favor of the taxpayer in a dispute concerning the valuation of land held by the estate. The estate held three undeveloped agricultural parcels of land. All three parcels were contiguous with each other and with two other parcels of land (one of which was also undeveloped). The three parcels held by the estate were situated such that they could only be developed if developed together with the other two parcels. The Court held that joint development was not reasonably likely and that the three parcels should be valued independently.
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Estate of Badgett v. Comm’r, T.C. Memo 2015-226 (Nov. 24, 2015), held that a pending income tax refund was includable in the decedent’s gross estate. The Tax Court reasoned that “[t]he status of the tax refund is more than a mere expectancy; the estate has the right to compel the IRS to issue a refund for the years for which decedent overpaid his tax.” The Court distinguished this case from those in which the taxpayer had undisputed and unpaid tax liabilities which offset tax overpayments. In those cases, estate inclusion was not required since the estate had offsetting current tax liabilities.
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The Seventh Circuit found in Billhartz v. Comm’r, 794 F.3d 794 (July 23, 2015), that the Tax Court had not abused its discretion in refusing to set aside a settlement between an estate and the IRS. The settlement involved a deduction claimed by the estate as payments for a debt. The payments were made to the children of the decedent pursuant to a divorce settlement agreement. Under the settlement, the IRS recognized 52.5 percent of the claimed deduction. However, the children later sued the estate for failing to pay to them the full amount to which they were entitled. As a result, the estate moved the Tax Court to vacate the settlement since it would prevent the estate from claiming an estate tax refund for any additional amount paid to the children. By settling, the appeals court held that the parties “close the door to new information.”
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In Estate of Sanfilippo v. Comm’r, T.C. Memo 2015-15 (Jan. 22, 2015), the Tax Court held that an illiquid estate liable for $15 million in taxes had been denied a fair hearing with respect to the extension of estate tax payments. Appeals based the decision to sustain a levy on “incorrect and illogical factual and legal assumptions” in that it failed to consider the discussions between the estate beneficiary and the prior Appeals Office regarding collection alternatives. Moreover, the decision to sustain the levy was based primarily on an analysis ignoring the fact that the beneficiary owned a majority interest in certain property before inheriting an additional ten percent interest.
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Windford v. United States, 587 F. App’x 207 (5th Cir. 2014), aff’g 970 F. Sup. 2d 548 (W.D. La. 2013), demonstrates the importance of distinguishing between a tax payment and a tax deposit. The executors were unable to determine the amount of estate tax in a timely manner because of ongoing litigation. A remittance was sent to the IRS, which treated it as a “payment” rather than as a “deposit.” After litigation had concluded, the executors requested a tax refund. The IRS denied the refund stating that the three year statute of limitations for refunds of tax payments had expired. While remittances designated as tax deposits were refundable, those remittances designated as tax payments were not. Utilizing a “facts and circumstances” approach, the Court held that the remittance was a payment and not a deposit. First, it was not “disorderly” since it was a good faith approximation of the estate’s tax liability. Second, the executors did not dispute the tax liability. Finally, the executors did not designate the remittance as a deposit and the IRS did not treat the remittance as such.
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The Tax Court denied charitable deductions in Beaubrun v. Comm’r, T.C. Memo 2015-217 (2015), because the taxpayer had not obtained sufficient substantiation. To take a charitable deduction of an amount exceeding $250, taxpayers must have a contemporaneous written acknowledgment. The acknowledgment must include a description of any property contributed, a statement concerning whether any goods or services were provided in consideration by the donee, and a description and good-faith estimate of the value of any goods or services provided in consideration. Here, the written statement obtained by the taxpayer was not contemporaneous because it was not written prior to the earlier of the date on which the taxpayer filed a return, or the due date (including extensions) for filing a return.
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The Court in Hughes v. Comm’r, T.C. Memo 2015-89 (2015), rejected the taxpayer’s position that a gratuitous transfer to a non-U.S. citizen spouse would receive a basis step-up to fair market value, and that there would be no income tax on the transfer itself. The basis for the taxpayer’s position that a transfer to his wife would be considered a gain rather than a gift was that § 1041(d) denies nonrecognition on spousal transfers where one of the spouses is a nonresident alien. Further, the taxpayer argued that under United States v. Davis, 370 U.S. 65 (1962), the Supreme Court held that that a taxpayer recognized a gain on the exchange of assets with a spouse pursuant to a divorce settlement agreement. The taxpayer argued that an income tax treaty with the United Kingdom exposed him subject to capital gains tax only in Britain. The Tax Court rejected all of the arguments advanced, finding that Davis applies only in cases of an exchange of assets. Here, since the transfer constituted a gift, the done took a zero basis. In upholding the imposition of penalties, the Court appeared perturbed, commenting that “[g]iven his extensive knowledge of and experience with U.S. tax law, Mr. Hughes should have realized” that his conclusion was incorrect.
NYS Courts & Tax Tribunals
In Matter of Gaied, 2014 NY Slip Op 01101, the Court of Appeals narrowed the scope of those persons held to be a New York resident for tax purposes. Gaied was decided in 2014. Residency disputes often arise between New York and part year residents, and the Department of Taxation is aggressive in this area.
The statutory interpretation at issue involved the asserted imposition by New York of income tax on commuters (or those present in New York for more than 183 days) who also “maintain a permanent place of abode” in New York. The high New York State Court — without extensive discussion — observed that the erroneous interpretation of the lower administrative tax tribunals found no support in the statute or regulations, and consequently lacked a rational basis. Mr. Gaied owned a multi-family residence in Staten Island in which his elderly parents resided. Mr. Gaied commuted to an automotive repair business in Staten Island form New Jersey, but did not reside in the residence. Since Mr. Gaied concededly spent more than 183 days in New York, under the statute his New York State income tax liability hinged on whether the residence constituted a “permanent place of abode” maintained in New York. The Court of Appeals observed that the Tax Appeals Tribunal had interpreted the word “ ‘maintain’ in such a manner that, for purposes of the statute, the taxpayer need not have resided there, A unanimous Court held that this interpretation had “no rational basis.” Both the legislative history and the regulations supported the view that in order to maintain a permanent place of abode in New York, the taxpayer “must, himself, have a residential interest in the property.” The Court declined to speculate as to the amount of time that a nonresident would be required to spend in the New York Resident — or to elaborate upon any other factor justifying the conclusion that a taxpayer “maintained” a permanent place of abode in New York — since that issue was not before the Court. However, given the tenor of the language of the Court, it might appear reasonable to infer that a nonresident taxpayer spending only a de minimis amount of time in a dwelling maintained in New York might not thereby become subject to New York income tax.
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In 2015, the Court of Appeals again had occasion to reconsider the residency rules in Matter of Zanetti, 2015 NY Slip Op 3894 (3rd Dep’t, 2015). This time the issue concerned the effect of the taxpayer spending only partial days in New York. The Third Department in Zanetti held that partial days spent in New York constitute a full day for the purpose of determining New York residency. The determination resulted in the taxpayer being a resident of New York for income tax purposes.
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The taxpayer in Matter of Ryan, 2015 NY Slip OP 8012 (3rd Dep’t 2015), requested a conciliation conference in response to receiving a notice of deficiency. As instructed in the notice, the taxpayer made the request within 90 days. The request was denied because it was required to have been made within 30 days. The shorter statute of limitations applies where a fraud penalty is the subject of the requested conciliation conference. The Court held that the Division was not estopped from enforcing the 30-day statute of limitations.
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The Court of Appeals recently considered a civil enforcement action in which the Attorney General alleged that Sprint knowingly submitted false tax statements in violation of the New York False Claims Act. People v. Sprint Nextel Corp., 2015 NY Slip Op 7574 (NY 2015). The tax law at issue was Section 1105(b), which imposes a sales tax on flat-rate plans for voice services to customers whose “place of primary use” is in New York. The Supreme Court denied a motion made by Sprint to dismiss the complaint for failure to state a cause of action. The Appellate Division affirmed the decision of the Supreme Court. The Court of Appeals also affirmed, finding that the statute is unambiguous, that the statute is not preempted by federal law, and that the complaint sufficiently pleads a cause of action.
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In Exxon Mobil Co. v. State, 2015 NY Slip Op 1840 (3rd Dep’t 2015), the issue was whether required environmental testing and monitoring services relating to petroleum spills are subject to New York sales tax as services relating to “maintaining, servicing and repairing” real property or land. The taxpayer argued that these services were not taxable since the intention was only to assess the condition of property, rather than to remediate petroleum spills. The Tax Appeals Tribunal disagreed with the taxpayer, holding that monitoring and testing services, whether performed before or after remediation work, if any, would be taxable as standalone services because they are necessary for the properties to be in compliance. In an Article 78 proceeding, the Third Department affirmed the decision of the Tax Appeals Tribunal.