Wills, Trusts & Estates Prof Blog

Knight Analyzed

Helen Gunnarsson (Highland Park, Illinois) has recently published her article entitled Supremes limit trusts' ability to subtract investment-advice costs, 96 Ill. B.J. 123 (2008), in which she explains how SCOTUS held that "trusts are subject to a two-percent floor for subtracting advisory fees from their taxable income" in Knight v. Commissioner, 128 S. Ct. 782 (2008).

Ms. Gunnarsson concludes that:

After Knight, lawyers will have to consider carefully whether and to what extent they may have advised their trust and estate clients on a matter related to an investment - which could be as mundane as advising the trustee or executor on hiring someone to cut the grass on a piece of real estate owned by a trust or estate - to determine to what extent their fees are fully deductible to their clients * * *.

Curious Stories of Tax Evasion

The following is from Famous Tax Scandals, describing various “[h]igh-profile tax troubles through the ages,” posted on money.aol.com:

Al Capone

The granddaddy of 'em all. Legend has it that the notorious gangster once remarked that tax laws were a joke because "the government can't collect legal taxes on illegal money."

The IRS charged the infamous Chicago mob boss with failure to pay four years' worth of taxes. Capone was sentenced to 11 years in jail and an $80,000 fine in 1931.***

Special thanks to David S. Luber (Attorney at law, Florida Probate Attorney Wills and Estates Law Firm) for bringing this article to my attention.

Valuation of Stock in Closely Held Investment Companies

James V. Roberts (Attorney at Law, Glast, Phillips & Murray P.C.) has recently published his article entitled Jelke: Simplicity in Valuation of Closely Held Investment Companies, RPPT eREPORT (2008).

Here is the opening paragraph to his article:

The Eleventh Circuit’s decision in Jelke lays down a simple rule for valuation of corporate stock in closely-held investment companies. At issue is the extent to which built-in capital gain tax liability should be taken into account. In reaching its decision, the Court provides, in an easy to read, well written opinion, a short history of valuation of investment companies. The Eleventh Circuit assumes that such corporations will always be liquidated on the date of death, and the tax liability paid, thus requiring a reduction of value by 100% of the tax attributable to the built-in capital gain, and providing an easy to understand method of valuation, similar to that mandated by the Fifth Circuit in Dunn But the dissent in the present case provides good reasons for caution against relying on the majority decision.

Tax Treatment of Blended Families - Change Needed

Wendy C. Gerzog (Professor of Law, University of Baltimore School of Law) has recently posted on SSRN her article entitled Families for Tax Purposes: What About the Steps?

Here is an abstract of her article:

At least 4.4 million families in the U.S. are blended ones that include step-children and step-parents. For tax purposes, these steps receive preferential treatment for their status because they are on the one hand included as family members for many income tax benefit sections, but on the other hand excluded as family members for business entity attribution purposes and for gift and estate tax anti-abuse provisions. In the interests of fairness and uniformity, steps should be treated as family members for all tax purposes where steps have in fact voluntarily acted as their biological or adoptive counterparts, both when such treatment would decrease and increase their tax burdens.

Proposed Treasury and IRS Rule Making May Have Significant Tax Consequences

James V. Roberts (Attorney at Law, Glast, Phillips & Murray P.C.) has recently published his article entitled New and Revamped 529 Plan Regulations Soon to Be Proposed, RPPT eREPORT (2008).

Here is the opening paragraph to his article:

On January 17, 2008, Treasury and the Internal Revenue Service issued an Announcement of Proposed Rule Making (“ANPRM”) regarding Section 529 college tuition plans. This ANPRM should be of interest to every estate planner and return preparer because it seeks to: (I) propose an anti-abuse rule (with changes to the preparer penalty provisions, all such rules now assume larger importance); (II) determine the estate, gift and GST tax results of contributions, transfers and withdrawals; and (III) create rules for making the 5 year election, addressing some income tax issues, and creating new record keeping requirements.

Tax Consequences of Financing Grandchild’s Education

Richard L. Kaplan  (Peer and Sarah Pedersen Professor of Law, University of Illinois College of Law) has recently posted on SSRN his article entitled Back to School: The New Parameters of Funding a Grandchild’s College Education. This article also appears in the Jan.- Feb. 2008 issue of the Journal of Retirement Planning.

Here is the abstract of his article:

This article examines several different mechanisms for funding college expenses from the perspective of a grandparent. The mechanisms considered include direct gifts to the grandchild or the educational institution, college savings bonds (both state and federal), prepaid tuition contracts, college savings plans created under tax code section 529, and Coverdell Education Savings Accounts.

Although these college funding mechanisms are not new, legislation enacted within the past two years has radically altered many of the rules of thumb that have applied in the past. Specifically, the Tax Increase Prevention and Reconciliation Act of 2005 (actually enacted in May 2006) and the Small Business and Work Opportunity Tax Act of 2007 that accompanied that year's increase in the federal minimum wage have basically eliminated any tax advantage of custodial accounts as college funding vehicles. On the other hand, the Pension Protection Act of 2006 has enhanced the tax appeal of 529 plans at the same time that the Deficit Reduction Act of 2005 (actually enacted in February 2006) improved the financial aid status of such plans. Finally, that Deficit Reduction Act also created significant hurdles for grandparents who anticipate accessing the Medicaid program to pay their long-term care costs.

To determine the approach that best serves all family members, this article begins by considering several factors that are relevant to the financing of a grandchild's college expenses. These factors include: (1) the grandparents' and the grandchildren's income tax situation, (2) the grandparents' possible exposure to gift taxes, (3) the grandparents' desire to ensure that the funds they provide are actually used to pay for college costs, (4) the Medicaid implications for the grandparents, and (5) the impact on a grandchild's eligibility for needs-based financial aid. The article then examines the various mechanisms that are available to fund a grandchild's college costs and analyzes each mechanism in terms of these factors.

Law School Professor Says State Tax Policies Violate Biblical Principles

According to David Cay Johnston, Professor Cites Bible in Faulting Tax Policies, NYTimes.com, Dec. 25, 2007:

At a time when some voters are asking how the religious views of candidates will shape their policies, a professor’s discovery of how little tax the biggest landowners in her state paid to finance the government has prompted some other legal scholars to scour religious texts to explore the moral basis of tax and spending policies.***

The professor, Susan Pace Hamill, is an expert at tax avoidance for small businesses and teaches at the University of Alabama Law School.***

Her latest effort is a book, “As Certain as Death” (Carolina Academic Press, 2007), that seeks to document how the 50 states, in contravention of her view of biblical injunctions, do more to burden the poor and relieve the rich than vice versa.***

Some of Professor Hamill’s critics, in letters and e-mail to her and others, argue that she just wants to soak the rich, wrapping what they called her socialistic views in biblical cloth.***

Medicaid and Estate Planning

Rick B. Weaver (Attorney at Law, Shannon, Gracey, Ratliff & Miller, L.L.P.) has recently published his article entitled How Medicaid Planning Affects Other Issues, 71 Tex. B.J. 110 (2008).

Here is an excerpt from his article:
   

Many clients are wary of making large gifts because they believe their children will pay income tax on the gifts. While this is clearly not going to occur, clients who wish to make significant gifts in order to trigger the five-year look-back period do need to consider additional income taxes that may be paid by their children on the income earned by these gifted assets following the gifts. In most cases, the children are in a higher tax bracket than their parents. Over a number of years, the difference in the brackets can make a large difference in the overall tax paid by the family. Recent extensions in the look-back period from three to five years have given families incentive to make gifts earlier in an elderly client’s lifetime. This will only increase the potential negative income tax effect of these gifts.

Tax Reforms and Their Applicability

The following excerpts are from Robert L. Moshman, The Zero Percent Capital Gains Tax Rate, Est. Analyst (Feb. 2008):

These days, tax reforms are like time-release pills; the relief comes years after the legislation. The zero percent tax bracket of 2008 originated with the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and was scheduled only for one year, 2008. Then the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) extended the zero bracket to include 2009 and 2010 as well.***

The zero bracket applies only to taxpayers who are in the two lowest federal income tax brackets of 10% and 15%. The favorable zero bracket covers long-term capital gains (after being offset by net short-term losses). Qualified  dividend income is also covered.***

Second guessing these decisions is inevitable because the fate of the stepped-up basis for assets transferred at death remains uncertain. An estate tax repeal with a carryover basis is still possible, so taking advantage of current temporary techniques to avoid capital gains is somewhat tempting.***

New Tax Law Protects Widows and Widowers Selling Their Homes

The following is from Tom Herman Tax Break for Surviving Spouses Selling Homes, WSJ.com, Jan. 20, 2008:

Some widows and widowers thinking of selling their home may benefit from a new law enacted last month.

The new law effectively gives them more time to sell and still be eligible for the maximum home-sale tax break available for married couples who file jointly. This change is effective on sales or exchanges beginning this year. Congress passed the new law to provide relief for surviving spouses. * * *

If you're married and file your federal income-tax return jointly with your spouse, you typically can sell your main residence and exclude as much as $500,000 of the gain from gross income. If you're single, the limit is $250,000.

To qualify for the maximum exclusion, you must have owned the home -- and lived in it as your primary residence -- for at least two of the five years prior to the sale.

Under the old law, a surviving spouse would have been eligible to claim the maximum $500,000 exclusion only if he or she filed a joint tax return for the year of death and sold the home during that same year * * *.

The new law includes an important change: A surviving spouse who hasn't remarried typically may be eligible to claim the full $500,000 exclusion from the gain on the sale of a principal residence owned with the deceased spouse if the sale occurs not later than two years after the date of death of the spouse * * *.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.

Knight v. Commissioner Analyzed

In his February 2008 issue of Estate Analyst, Robert L. Moshman, Esq. discusses the recent U.S. Supreme Court case of Knight v. Commissioner. The following excerpts are from his article entitled A Knight’s Tale, Est. Analyst (Feb. 2008):

The United States Supreme Court has ruled that the investment advice received by a trust is subject to the 2% threshold to be deductible.***

Trustee Knight argued that while an individual may make a voluntary and personal choice to seek investment advice, fiduciary duties render such professional advice a necessary and “involuntary” component of trust administration.***

A small window of hope was left open, however. The Court noted that a trust could have some unique investment objective or some investment advisors might have some special surcharge that is applicable only to fiduciary accounts.

Holding property as joint tenants with right of survivorship – Another possible advantage

William P. LaPiana, (Rita and Joseph Solomon Professor of Wills, Trusts, and Estates, New York Law School) and Marc S. Bekerman (Associate Director of New York Law School Graduate Tax Program) have recently published their article entitled Obtaining a Full Step-up in Basis for Jointly Held Property Between Spouses, Prob. & Prop., Jan./Feb. 2008, at 62.

Here is an introduction to their article:

Holding property together as joint tenants with right of survivorship has numerous advantages to spouses. Among the advantages are asset protection, disability planning, and possible avoidance of a probate or administration proceeding on the death of the first spouse. Because most assets can be held in this manner, many married couples own a substantial portion of their property in this form. This article will review a possible additional advantage [that is, obtaining a full step-up in basis] that may be available to a surviving spouse of jointly owned property in jurisdictions that have favorable law and when proper planning is done both before and after the death of the first spouse.

Supreme Court Holds Trust Investment Advisory Fees Subject to the 2% Floor

In its January 16, 2008 decision Knight v. Commissioner, No. 06–1286 (U.S. Jan. 16, 2008), the United States Supreme Court sided with the IRS on the issue of deductibility of investment advice fees paid by a trust.

Normally investment advisory fees incurred by individuals are deductible only to the extent they exceed 2% of an individual's adjusted gross income. In this case, the Trust argued that it should be allowed to fully deduct such fees under 26 U.S.C. § 67(e)(1).

The Supreme Court rejected the Trust’s argument and held that investment advisory fees incurred by the Trust were subject to the 2% floor. In a footnote, the court noted that the analysis in this case was equally applicable to decedents' estates.

Special thanks to Neil E. Hendershot, Esq. (Attorney at law, Goldberg Katzman, P.C., Adjunct Professor, Widener University School of Law) and Patrick S. Sylvester (Attorney at Law, Sylvester Law Firm, PC) for bringing this case to my attention.

You can read more about this case on Neil's blog at PA Elder, Estate & Fiduciary Law Blog.

Useful Tax Resources for Self-Preparers

In her article 50 Tools and Resources for Freelancers During Tax Season, businesscreditcards.com, Jan. 17, 2008, Jessica Hupp lists 50 tools to assist individuals who prepare their own income tax returns.

Here are some of the articles she recommends:

• Tax Tips for Freelancers: This article from About.com discusses Schedule C and some of the expenses you need to track.
• Freelancer Tax Insights: Learn about depreciation and expenses in this helpful dialogue.
• Tax Tips for Freelance Writers: This discussion covers self employment taxes, deductions, and more.
• Freelance Tax FAQ: The Anti 9-to-5 Guide discusses deductions and more in this simple question-and-answer session.
• Working at Home: Kiplinger offers tax advice for freelancers and independent contractors that work at home.

Special thanks to Amy S. Quinn for bringing this listing to my attention.

Taxation of Virtual Winnings or "Are your WoW earnings income"?

Bryan T. Camp (Professor of Law, Texas Tech University School of Law) has recently published his article entitled The Play’s the Thing: A Theory of Taxing Virtual Worlds, 59 Hastings L.J. 1-71 (2007).

Here is the abstract of his article as found on SSRN:

Taxation is shadow life. As our culture monetizes more and more life activities, the shadow grows. This article looks at the potential tax issues arising from a new life activity: online role-playing games in virtual worlds. Currently, some 12 million people regularly play such games and the number is growing. Exploring the reach of the Tax Code into virtual world transactions not only responds to the potentially practical needs of millions of U.S. taxpayers, it also permits a reevaluation of core principles of income tax as they interplay with life activities in the context of 21st century American culture.

This article's central thesis is that while player activity in virtual worlds produces measurable economic value to the player, player activity that occurs solely within the online virtual world is not gross income under the law. The article argues for a "cash out" rule. Players whose added wealth consists solely in what are defined as "units of play" should not be taxed unless and until they convert those units into cash or property that is something other than a unit of play. Conversely, when the play ceases, taxation begins. The resulting line-drawing difficulties have nothing to do with player intent nor with "fun" and "games." Instead, the issue presented is as old as the Tax Code itself: at what point does economic gain become legal gain? The new context of virtual words allows for a renewed exploration of how and why the legal concept of "income" differs, and indeed must differ, from the economic concept.

The article proceeds in three parts. Part I describes the relevant facts of online role-playing games. It describes two popular virtual worlds which sit at opposite ends of the spectrum of online gaming - World of Warcraft and Second Life - and describes how game-related activity produces economic income. Part II reviews the basic rules of income tax, focusing on the broadness of the theory of gross income under section 61. Part II argues that the limits of section 61, whether imposed by Congress, the courts, or the IRS, are best described as operational limits. Part III applies the basic tax rules to virtual worlds and advances a theory based on "units of play" to distinguish between virtual worlds that are games and virtual worlds that are the equivalent of bingo halls or barter clubs. Using the concept of imputed income, Part III discusses the circumstances under which economic activity in-world involving only trade of virtual goods or services for virtual money will cast a real world tax shadow.

Patents for Tax Planning Inventions – An Update

In Proposal to Prohibit Tax Planning Patents - S. 2369, RPPT eREPORT (2007), Rana Salti (Attorney at Law, McDermott Will & Emery LLP) "keeps us up to date on the continuing saga of the patenting of tax planning devises. On November 15, 2007, legislation was introduced in the United States Senate that would prohibit the issuance of any patents for tax planning inventions."

Employee Benefits and the IRS

In Executives and Others Face Tough Tax Liability Unless Deferred Compensation Arrangements Are Timely Updated For New Internal Revenue Code Section 409A Compliance, IRS and Department Of Labor Issue Automatic Enrollment and Investment Guidance, and Agencies Release 2007 Form 5500 Annual Report, RPPT eREPORT (2007), Cynthia Marcotte Stamer (Attorney at Law, Cynthia Marcotte Stamer, P.C., Glast, Phillips & Murray P.C.) "provides updates on three very timely and important issues facing Employee Benefits attorneys and their clients today."

Alternative Minimum Tax Update

Earlier on this blog, I discussed legislation that had passed the House regarding the alternative mininum tax.

Yesterday (December 19, 2007), Congress approved AMT relief legislation and President Bush has indicated that he will sign the bill.

The following excerpts are from David M. Herszenhorn, Congress Averts Higher Tax Bill for Middle Class, NY Times, Dec. 20, 2007:

The tax reprieve postpones for one year only an expansion of the alternative minimum tax, a parallel tax system enacted in 1969 to prevent very wealthy investors from using deductions and tax shelters to avoid paying income tax altogether. The alternative tax has ensnared a growing number of middle-class Americans in recent years because the 1969 law was not indexed to inflation.

Without the fix by Congress, some 25 million filers would have had to pay the tax on their 2007 income, up from four million who paid it on 2006 income, according to the White House.* * *

The measure would increase slightly the amount of income that is exempt from the alternative tax. For individuals, that means the exempt amount increases to $44,350 in 2007 from $42,500 in 2006. For married couples, the exemption amount climbs to $66,250 from $62,550.

New IRS Rules on Charitable Deductions Make Philanthropy More Difficult

The following is from Samuel L. Braunstein and Carol F. Burger, The IRS Gets Less Charitable, Dec. 2007:

Generosity is a noble trait shared by many Americans. Traditionally, this generosity has been rewarded with favorable tax treatment by the Internal Revenue Code and Internal Revenue Service regulations, primarily in the form of deductions pegged to qualifying charitable contributions of cash or property.

But the federal tax laws are getting stingy in their treatment of charitable donations***

A number of restrictions on deductions for charitable donations are contained in the Pension Protection Act of 2006.****

Taxpayers who seek deductions for their contributions to charities aren’t the only ones dealing with tougher tax guidelines. Charities themselves also must navigate through that more complex tax environment.***

Few if any charitable organizations are likely to abandon their missions under the growing burden of government regulations, nor should they expect to lose the support of donors. At the same time, their task sure isn’t getting any easier.

Inequalities in the Taxation System

Lester B. Snyder   (Professor of Law, University of San Diego School of Law) has recently posted on SSRN his article entitled Taxation of the New Era 'Family Unit'.

Here is an abstract of his article:

Virtually everyone in this country is directly affected by the material in this chapter. Whether you are single, married, cohabitating with someone of the opposite or same sex, a child, an elderly person, someone going through a divorce or separation, rich or poor, there are numerous tax issues and tax disparities that impact your daily lives. Over the past 90 or so years, the taxation of the family unit has undergone numerous changes, resulting in unequal treatment of significant numbers of citizens. The evolution of the tax law of the family unit provides us with an opportunity to view the constant interplay and conflict between federal and state laws. Keeping with the theme of this book, this chapter will focus on some of these major inequalities, many of which have received only sparse public attention and are generally unknown to the ordinary taxpayer.

Artwork, Estate Tax, and Capital Gain

On the settlor's death, the IRS Art Advisory Panel appraised the artwork in his estate as having a fair market value of $36,636,630. However, the IRS agreed to value the artwork at $14,500,000 for estate tax purposes.

After the trust termination in 1995, the distributees sold the artwork and used the Art Advisory Panel’s appraisal of $36,636,630 as their cost basis. The Tax Court stated that this amount was inconsistent with the discount used to calculate the estate tax value. The Court ruled that the distributees should have used a cost basis of $14,500,000 instead.

The court stated that “[t]he Janises [distributes] succeeded in ‘getting through the IRS audit a low valuation of their property,’ perhaps an unreasonably low one, and thus have deprived themselves of the full step-up basis to which they may have otherwise been entitled.”

Robert L. Moshman, Esq., The Janis Art Gallery, Est. Analyst (Nov. 2007), analyses this tax quandary as follows:

Considering the range of 464 assets, each with a different cost basis, some with greater potential for appreciation, some destined for museum contribu- tions, some part of the gallery business, some to be kept in the family perhaps, a more customized combination of gifts, trusts, and a family limited partnership might have been more effective at minimizing future tax consequences. Janis v. Comm'r., 469 F.3d 256 (2nd Cir. 2006).

Should Fees for Trust Investment Advice Be Fully Deductible?

James Loebl   (Associate Professor of Law, Valparaiso University School of Law) has recently posted on SSRN his article entitled The Section 67 Question: Are Fees for Investment Advice Fully or Partially Deductible by Trusts?

Here is the abstract of his article:

One of the more controversial questions in tax law in recent memory is whether a trust may fully deduct the fees it pays for investment advice or whether it must treat the fees as miscellaneous itemized deductions that are allowed only to the extent that the total of such deductions exceeds 2% of the trust's adjusted gross income. While the Sixth Circuit held in the trust's favor that such fees are fully deductible under §67(e)(1) of the Internal Revenue Code, the Federal, Fourth and Second Circuits subsequently agreed with the Government that such costs were miscellaneous itemized deductions subject to the 2% floor under §67(a). As result, the United States Supreme Court has granted the petition for certiorari in the Second Circuit case and will resolve the issue during the Court's 2007-08 Term.

This Article takes the position that fees for investment advice do not satisfy the two requirements under §67(e)(1) for full deductibility under a plain meaning interpretation of the statute. However, the Article concludes that §67(e)(1) should be amended so that costs incurred by trustees in fulfilling their fiduciary duties would be fully deductible. After providing the statutory background for the current dispute, this Article examines the opinions issued in the trial court and at the appellate level for each of the four cases that have reached the United States Court of Appeals. This Article then evaluates the decisions of the lower courts in light of the textualist approach to statutory interpretation advocated by several Justices of the Supreme Court and employed by the Court in Gitlitz v. Commissioner, and concludes that the Court will affirm the Second Circuit's decision. Finally, the Article discusses the policy considerations supporting the amendment of §67(e)(1).

Barry Bonds’ Home Run Ball – Taxable Income?

Matt Murphy, a 21-year-old New Yorker, caught Barry Bonds’ record-setting 756th home run ball and immediately sold it for $752,467.20. Murphy acted on advice that he would owe income tax on the ball.

Here is what some of the bloggers on Peter Lattman’s Tax Law Final Exam Question: Barry Bond’s Ball, had to say about Murphy’s tax consequences:

• The Ball Is NOT Taxable Income

The home-run ball is essentially a gift from (pick one, Barry Bonds, The Giants, Major League Baseball) to the recipient…like getting a Bobble-Head prize for attending on Bobble-Head day.

Finding a home-run ball should be viewed like finding any other baseball…it is simply an object worth about $8. Any value others might ascribe to the ball is purely speculative.***

• The Ball IS Taxable Income

Catching a home-run ball is analogous to finding a treasure. It is an “accession to wealth” that is taxable currently.  Reg. § 1.61-14(a) provides: “Treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession.”***

The ball is not a gift because it did not result from “disinterested generosity,” the standard of Commissioner v. Duberstein, 363 U.S. 278 (1960).***

See Robert L. Moshman, Taxing a Windfall Home Run, Est. Analyst (Nov. 2007).

Taxation Issues from August 2006 through September 2007 - an Update

Samuel A. Donaldson (Associate Professor, University of Washington School of Law) has recently posted on SSRN his article entitled Federal Tax Update: Important Developments in Federal Income, Estate & Gift Taxation Affecting Individuals - August, 2006 to August, 2007.

Here is the abstract of his article:

This update explains several developments in the substantive federal income, estate and gift tax laws affecting individual taxpayers and small businesses. It contains summaries of significant cases, rulings, regulations, legislation and other matters from August, 2006, through September, 2007. This update generally does not discuss developments in the areas of qualified plans or the taxation of business entities (except to a very limited extent).

Alternate Minimum Tax Update

The following information regarding the status of the alternate minimum tax is from Edmund L. Andrews, House Backs Tax Relief Bill, but Fate in Senate Is Unsure, NY Times, Nov. 10, 2007:

The House passed a $78.3 billion tax bill on Friday [November 9, 2007] that would shield about 21 million people from the alternative minimum tax next year, and pay for it in part by ending tax breaks for private equity funds, hedge funds and other partnerships.

But the bill, approved 216 to 193, faces a highly uncertain future in the Senate. Republicans are staunchly opposed to any tax increases, and some Democrats are torn between appealing to their party instincts and alienating some of their big contributors.

President Bush has already threatened to veto the bill, which also includes extensions of several other tax provisions, if it includes higher taxes that would shift more of the tax burden to the wealthy. He argues that Congress should freeze the alternative minimum tax without trying to make up the $50.6 billion revenue loss for the 2007 tax year. * * *

Republicans charged that Democrats were simply raising taxes, because Congress never seriously intended to impose the alternative minimum tax on anybody but a handful of millionaires.

“The A.M.T. is crazy; it was never meant to apply to middle-class taxpayers,” said Representative Jim McCrery, Republican of Louisiana.

IRC § 409A Deferred Compensation Rules and Approaching Deadlines

Richard L. Alpern, (Consultant, Frederic W. Cook & Co., Inc.) has recently published his article entitled Ten Items Estate Planners and Tax Advisers Need to Know About Code §409A Deferred Compensation Rules, Prob. & Prop., Nov./Dec. 2007, at 32.

Here is the introduction to his article:

Section 409A of the Internal Revenue Code (“Code”) became effective on January 1, 2005. Because of transition relief and postponements of the deadline for adopting amendments, many companies, executives, and their advisers have not paid full attention to its effects and requirements. The final regulations issued in April 2007 provide that the transition relief ends on December 31, 2007. The amendment deadline had been extended until December 31, 2008, under IRS guidance issued on September, 10, 2007, provided that a time and form of payment that comply with Code §409A are specified in writing before January 1, 2008.

With the amendment and full compliance deadlines almost here, it is very important to have a basic understanding of the lengthy and complex Code §409A rules and what needs to be done by the end of 2007. This article discusses ten key items that estate planners and tax advisers should know about the Code § 409A rules.

IRS Denies Charitable Deduction to Attorney Who Donated Timothy McVeigh Files to University

Leslie Steven Jones was a court appointed attorney for Oklahoma City bomber Timothy McVeigh. As part of his representation of McVeigh, Jones acquired 171 boxes of documents, computer discs, audio and video cassettes and photographs. The federal government provided similar materials to various state and federal agencies. Jones donated the documents to the University of Texas at Austin.

Although the documents were not the originals and existed elsewhere, Jones’ appraiser, John R. Payne, determined the gift value to be $294,877; Payne used gifts of original documents as comparables in establishing this amount. However, the IRS denied Jones a charitable deduction stating that Jones did not own the documents. The court explained that because the documents were not attorney work product, they belonged to the client and not the attorney.

According to the Editor’s note following this article, the court was uncomfortable with the appraisal and with the consequences of attorneys gifting their client files to public institutions for personal gain.

See No Charitable Deduction for Attorney Gift of Timothy McVeigh Files, Washington Hotline, mcintire.giftlegacy.com, Nov. 2007, Week 1.

Special thanks to Russell R. Winer, Attorney at Law, for bringing this article to my attention.

Trusts, Estates and the IRS – Regulatory and Case Law Developments

James V. Roberts (Attorney at Law, Glast, Phillips & Murray P.C.) has recently published his articles entitled Proposed Regs On 2-Percent Floor for Trusts & Estates, and Circuit Court FLP Case Makes Four, RPPT eREPORT (2007).

Here is a summary of these articles as posted on RPPT eREPORT.

Jim Roberts reports on two recent developments. First, he reports on new proposed IRS regulations that address the costs incurred by an estate or non-grantor trust and whether those expenses are subject to the 2% floor for miscellaneous itemized deductions. Second, Jim provides a short summary of the Bigelow case, in which the Ninth Circuit applies IRC § 2036 to family limited partnerships.

Year-end giving and associated tax strategies focused on charitable giving and private foundations

Foundation Source has recently issued a bulletin which offers practical advice on how to avoid common year-end funding issues entitled 7 Pitfalls to Avoid at Year-End.

Here is a list of the pitfalls detailed in this article:

• Donating highly appreciated property may give rise to only a fraction of the expected tax benefits.
• Donating indebted property may require the donor to pay a self-dealing tax.
• Donating privately held stock may be fraught with unexpected complications.
• Donating stock to a foundation through a broker may not give rise to tax benefits in the expected tax year and may not be valued as expected.
• Donating property to a foundation may result in unexpected taxation of the donor if that property is then sold by the foundation.
• Failing to consider strategies that could cut a foundation’s tax liability in half during a year when highly appreciated stock is sold.
• Failing to consider a strategy to eliminate a foundation’s potential tax liability in appreciated property.

Special thanks to Michael Hogan (Sr. Managing Director, Foundation Source) for making this bulletin available for my readers.

When is a home for the aged too commercial for a tax exemption?

David A. Brennen  (Professor of Law, University of Georgia School of Law) has recently posted on SSRN his article entitled The Commerciality Doctrine as Applied to the Charitable Tax Exemption for Homes for the Aged - State and Local Perspectives.

Here is an abstract of his article:

This Essay examines the question of how state and local government officials should consider federal tax law principles, like the commerciality doctrine, when they challenge state and local property tax exemptions that rely, at least in part, on tax-exempt charitable status for federal income tax purposes. In particular, the Essay uses the example of Continuing Care Retirement Communities (CCRC's) to consider tax-exempt law's commerciality doctrine in an attempt to discern distinctions between “homes for the aged” that are “charitable” (and thus entitled to exemption) and those that are too commercial and, thus, not entitled to exemption. In fact, one might say that this issue of the tax exemption eligibility of CCRC's is a version of John Colombo's quandary about the commerciality doctrine in general - “when . . . commercial activity will be considered 'in furtherance of' an exempt purpose as opposed to simply 'primarily' operating a business.” Ideally, these distinctions between exempt and non-exempt homes for the aged should be helpful to state and local tax officials who, in the face of shrinking revenues and increasing expenses, seek to deny tax exempt status to “homes for the aged” that are charitable primarily because they look commercialized and do not necessarily serve the poor.

IRS Proposes Modification of Tax Return Preparer Penalty Provisions

IRS has proposed new regulations that amend Circular 230 and address the tax return preparer penalty provisions under I.R.C. § 6694. In Notice 2007-54 IRS provides guidance on the proposed amendments.

Here is an excerpt from Prof. Roger A. McEowen's discussion on this issue:

The proposed regulations, when final, would amend section 10.34 of Circular 230.  Changes to the standards of practice were triggered by the Act, which became law in May and effectively extended the application of the return preparer penalties to all tax return preparers, altered the standards of conduct that must be met to avoid imposition of the penalties for preparing a return showing an understatement of liability, and increased applicable penalties.* * *

Under the proposed regulations, IRS says that the standards of practice under Circular 230 should conform to the civil penalty standards for return preparers. That means a practitioner may not sign a tax return as a preparer unless the practitioner has a reasonable belief that the tax treatment of each position on the return would more likely than not be sustained on its merits, or there is a reasonable basis for each position and each position is adequately disclosed.  The proposed regulations say that the definitions of "more likely than not" and "reasonable basis" are to be defined by the way those phrases are defined under I.R.C. § 6662.

IRS cautions about trust arrangements presented as welfare benefits

The Internal Revenue Service has recently issued two Notices and a Revenue Ruling, urging taxpayers to exercise caution with regard to certain trust arrangements sold to small businesses as welfare benefits. The IRS has also identified some of these arrangements as listed transactions.

Below excerpts from IR-2007-170, irs.gov, Oct. 17, 2007, summarizing these issues:

In Notice 2007-83, the IRS identified certain trust arrangements involving cash value life insurance policies, and substantially similar arrangements, as listed transactions.  If a transaction is designated as a listed transaction, affected persons have disclosure obligations and may be subject to applicable penalties.* * * 

In Notice 2007-84, the IRS cautioned taxpayers that the tax treatment of trusts that, in form, provide post-retirement medical and life insurance benefits to owners and other key employees may vary from the treatment claimed.  The IRS may issue further guidance to address these arrangements, and taxpayers should not assume that the guidance will be applied prospectively only.

[T]he IRS also issued related Revenue Ruling 2007-65 to address situations where an arrangement is considered a welfare benefit fund but the employer’s deduction for its contributions to the fund is denied in whole or part for premiums paid by the trust on cash value life insurance policies.

IRS Proposes Regulations on Patented Tax Methods

Proposed regulations would require taxpayers to report to the IRS when they use patented tax methods.  Reg-129916-07.

On-line EINs now available from IRS

Beginning Tuesday, October 9, 2007, taxpayers can apply for a federal Employer Identification Number (EIN) online and get it before disconnecting from the Internal Revenue Serv