Taxation & Estate Planning

ENCUMBRANCES CAN DRAMATICALLY ALTER ESTATE PLAN RESULTS

Posted on April 10, 2008
When a testator specifically leaves real estate or other property under his estate planning documents, and that property is encumbered by debt, it is important that the estate planner determine the testator's desires as to the debt and make proper provision for it...

PENALTY REFRESHER

Posted on April 07, 2008
As surely as April 15 comes every year, there will be taxpayers who do not file their income tax returns on time or who do not pay their income taxes on time. Here's a quick refresher on penalties relating to income tax filings, courtesy of the IRS:FILING LATE: If you do not file your return by the due date (including extensions), you may have to pay a failure-to-file penalty...

CREDIT CARD HOLDER COULD NOT ESCAPE DISCHARGE OF INDEBTNESS INCOME ON WRITE-OFF OF DEBT

Posted on April 03, 2008
As the economy moves closer to (or deeper into, depending on who you believe) recession, the number of credit card holders who will obtain reductions in their credit card debt from the issuer is likely to increase. Those debtors will eventually learn that the discharge of debt is taxable to them...

ESTATE TAX LIEN NOT DIVESTED BY SALE

Posted on April 01, 2008
When an individual dies, his or her assets are subject to a 10 year estate tax lien in favor of the IRS for any unpaid estate taxes. Many would think that the lien would be divested as to any third party purchaser of estate assets for fair value, since the purchaser would not have any involvement in the computation or payment of estate taxes...

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APPRAISAL RIGHTS DEEMED NOT SOLE REMEDY WHERE PRIOR BAD ACTS OF CORPORATE PRINCIPALS [FLORIDA]

Posted on March 30, 2008
Under Florida corporate law, minority shareholders of corporations are protected from majority shareholders who engage in undesirable merger, sale, or other major corporate transactions by demanding that their minority shares be purchased for fair value ("appraisal rights")...

APPLICABLE FEDERAL RATES - APRIL 2008

Posted on March 26, 2008
April 2008 Applicable Federal Rates Summary:-Short Term AFR - Semi-annual Compounding - 1.84% (2.24%/March -- 3.09%/February -- 3.16%/January)-Mid Term AFR - Semi-annual Compounding - 2.85% (2.95%/March -- 3.48%/February -- 3.55%/January)-Long Term AFR - Semi-annual Compounding - 4...

IRS CONTINUES TO ASSERT THAT COMPENSATORY STOCK OPTIONS ARE A SHARED EXPENSE UNDER SECTION 482

Posted on March 24, 2008
The qualified cost sharing regulations under Section 482 are an arrow in the IRS' quiver in its attempts to limit the ability of U.S. companies to develop an intangible, deduct the costs in the U.S., but then have a significant portion of the income earned in a non-U...

LATE CONVERSION TO LIFETIME PAYOUT FROM INHERITED IRA ALLOWED

Posted on March 22, 2008
When an IRA owner dies before the required beginning date of required IRA distributions, a nonspouse beneficiary of the IRA can either take the IRA out over the beneficiary's remaining life expectancy, or take the entire IRA out within 5 years of the IRA owner's death (by December 31st of the 5th year after such death)...

THEFT LOSS VS. WORTHLESS SECURITY LOSS

Posted on March 18, 2008
A taxpayer will often prefer a theft loss deduction to a deduction for a worthless investment security. One advantage of theft loss treatment is that the loss is not a capital loss, unlike the worthless security loss. The timing of the loss may also be more advantageous for a theft loss, since the loss for a worthless security cannot be used until the security is entirely worthless (or the security is otherwise sold)...

INTEREST RATES FOR TAX OVERPAYMENTS AND UNDERPAYMENTS (APRIL 2008 QUARTER)

Posted on March 15, 2008
The IRS has announced the interest rates for tax overpayments and underpayments for the calendar quarter beginning April 1, 2008.For noncorporate taxpayers, the rate for both underpayments and overpayments will be 6%.For corporations, the overpayment rate will be 5%...

TEST YOUR FLORIDA HOMESTEAD LAW KNOWLEDGE [FLORIDA]

Posted on March 11, 2008
An interesting homestead case gives us the opportunity to test our knowledge of Florida law. Here are the facts. Husband owns the homestead. He executes a valid deed that transfers the homestead to create a life estate interest in himself and his wife as tenants by the entireties, and a remainder interest after their deaths to one of his children...

EARNINGS AND PROFITS NEEDED FOR CRIMINAL TAX EVASION RELATING TO DIVIDEND DISTRIBUTION

Posted on March 08, 2008
A shareholder of a corporation wrote checks from the corporation to his wife and girlfriend. He did not report any income from such transfers. The government asserted that this was tax evasion and obtained a criminal conviction. The shareholder appealed, claiming that he should have been able to present evidence that the corporation had no earnings and profits and that the distributions were thus not taxable up to the shareholder's basis in his shares, applying the general rules of Sections 301 and 316 (relating to corporate nonliquidating distributions)...

IRS REJECTS KOHLER DECISION

Posted on March 05, 2008
In 2006, the Tax Court held that post-death changes in the character of stock owned by a decedent pursuant to a tax-free reorganization would be allowed to affect the alternative valuation date value of the stock for estate tax purposes. Herbert V. Kohler, Jr...

IRS STRICTLY CONSTRUES EXCESS COMPENSATION LIMITS

Posted on March 03, 2008
Code Section 162(m)(1) denies an income tax deduction to publicly traded corporations to the extent compensation paid to certain key employees ("covered employees") exceeds $1 million. However, compensation that is contingent on performance goals being met will not be counted as compensation subject to this limitation...

DEDUCTIBILTY FOR HEDGE FUND INTEREST IS LIMITED

Posted on February 29, 2008
The classification of an expense of a trade or business as a ?passive loss? or ?investment interest? is not usually desirable for individual taxpayers, since such losses can only be offset against certain specified types of income. If such classification is avoided, these limitations on use are likewise avoided...

THE BAD NEWS/GOOD NEWS FOR SMALL EXEMPT ORGANIZATIONS

Posted on February 27, 2008
First, the bad news. Unlike in prior years, small tax-exempt organizations (organizations with less than $25,000 in gross receipts) now must file an annual Form 990. The good news is that the filing can be made with a Form 990-N, which is one of the shortest tax returns around...

APPLICABLE FEDEAL RATES - MARCH 2008

Posted on February 25, 2008
March 2008 Applicable Federal Rates Summary: -Short Term AFR - Semi-annual Compounding - 2.24% (3.09%/February --  3.16%/January -- 3.84%/December) -Mid Term AFR - Semi-annual Compounding - 2.95% (3.48%/February --   3.55%/January -- 4...

SOME PERSONAL USE OF DWELLINGS WILL NOT JEOPARDIZE SECTION 1031 EXCHANGE

Posted on February 21, 2008
Section 1031 exchanges are a popular mechanism for owners of real property to exchange one property for another without recognizing gain on appreciation at the time of the exchange. To qualify, the property being disposed of (the "disposition property"), and the property that is acquired in the exchange (the "replacement property"), must both be used in a trade or business of the taxpayer or held for investment...

LOSS OF DEDUCTIONS RULE REVIVED

Posted on February 19, 2008
Under IRS regulations, foreign corporations and nonresident aliens who do not file a U.S. income tax return within certain time limits forfeit the ability to take otherwise available deductions against their income that is taxable in the U.S. While the regulations do not require that the return be filed on time, generally if the return is not filed within 18 months of the due date the deductions are lost...

HOW NOT TO DOCUMENT SHAREHOLDER LOANS

Posted on February 14, 2008
The shareholders of wholly owned corporations often end up paying for corporate expenses out of their own wallets or checkbooks, or with their own credit cards. Sometimes this is just a matter of convenience for an occasional expense - othertimes, when the corporation is short of cash this may be a regular occurrence...

"SAVE OUR HOMES" PORTABILITY DEADLINES [FLORIDA]

Posted on February 11, 2008
On January 29, 2008, Florida voters approved a constitutional amendment that allows owners of Florida homesteads to transfer all or a part of their Save Our Homes homestead exemption caps from an old homestead to a new homestead. The Florida Department of Revenue has provided information on procedures that must be followed if a taxpayer wants to transfer his or her exemption to a new homestead...

HIGHLIGHTS OF THE ECONOMIC STIMULUS ACT OF 2008

Posted on February 09, 2008
Congress is continuing its 80 year tradition of spending to spur the economy through its passage on February 7 of the Economic Stimulus Act of 2008 ("ESA"), which President Bush is expected to sign. Here are some of the major highlights: A tax credit to taxpayers...

DEVELOPMENT RIGHTS ARE LIKE-KIND PROPERTY

Posted on February 06, 2008
Section 1031(a)(1) provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment...

POWER OF ATTORNEY HOLDER COULD NOT MODIFY TRUST [FLORIDA]

Posted on February 04, 2008
A common estate planning document is a durable power of attorney. This POA typically grants broad authority to the designee to act on behalf of the principal. A durable POA will survive the incapacity of the principal, providing an alternative to guardianship in the event a principal becomes unable to act for himself or herself...

ACQUISITION OF HOMESTEAD STATUS DID NOT TRIGGER 1,215 DAY LOOKBACK PERIOD [FLORIDA]

Posted on January 31, 2008
A number of States, including Florida, provide valuable creditor protection for homesteads, and such protections can act to exempt a homestead from the reach of creditors in a bankruptcy proceeding. Because of perceived abuses of these protections, Section 522(p)(1) of the Bankruptcy Code was enacted...

FORMULA TRANSFER OKAYED BY TAX COURT

Posted on January 28, 2008
A hot topic today in estate planning is the use of formula clauses to avoid unexpected gift or estate taxes. Such clauses aim to reduce tax exposure based on uncertainty in valuation of transferred property. That is, when property is gifted or passes at death, the amount of gift or estate tax depends on the valuation...

IRS INCREASES AUDIT ACTIVITY

Posted on January 25, 2008
The IRS has released information in regard to its 2007 audit and enforcement activity. The information shows a clear trend towards more audits. Audits of individuals with more than $1 million in income increased 84% over the prior year. 1 out of 11 of such taxpayers were audited in 2007...

DEDUCTION OF BUSINESS LOSSES BY ESTATES AND TRUSTS REMAINS UNCERTAIN

Posted on January 22, 2008
Losses from business activities undertaken by a trust or estate may be suspended under the passive activity loss (PAL) rules, and thus may not be available to offset other non-passive income of the trust or estate just as if the trust or estate is an individual...

APPLICABLE FEDERAL RATES - FEBRUARY 2008

Posted on January 19, 2008
February 2008 Applicable Federal Rates Summary: -Short Term AFR - Semi-annual Compounding - 3.09% (3.16%/January -- 3.84%/December -- 4.07%/November) -Mid Term AFR - Semi-annual Compounding - 3.48% (3.55%/January -- 4.09%/December -- (4.34%/November) -Long Term AFR - Semi-annual Compounding - 4...

TRUST INVESTMENT FEES ARE SUBJECT TO 2% DEDUCTION FLOOR

Posted on January 17, 2008
The question of whether trust expenses for investment advisory fees are fully deductible or may be deducted only to the extent they exceed 2% of adjusted gross income has been resolved by the U.S. Supreme Court. The Court ruled that such expenses will usually be subject to the 2% floor...

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