Tax Quote of the Week

"I can't make a thing out of this tax problem. I listen to one side and they seem right -- and then I talk to the other side and they seem just as right and here I am where I started. What a job!"




Estate Tax Repeal?

On January 1, 2010 there will be no estate tax or generation skipping transfer tax. If Congress remains deadlocked, the estate tax returns on January 1, 2011 with a $1,000,000 exemption and 55% tax rate.

When the repeal was passed in 2001, Americans expected Congress to act to provide a reasonable level of certainty by passing legislation during the next nine years to enable sound estate planning. While the House passed an extension of the 2009 $3.5 million estate exemption and 45% estate tax rate, the Senate was deadlocked and left Washington in late December with no resolution.

At a hearing on November 14, 2007 by the Senate Finance Committee, estate planning attorney Conrad Teitell compared estate planning law to a game of Monopoly. In this game, the rent for landing on Boardwalk for the first person is high, for the second is moderate, for the third is zero and for the fourth is very high. For Americans with large estates, the cost of passing away in 2008 was high, in 2009 was moderate, in 2010 is zero and in 2011 is very high. Mr. Teitell observed that it is neither logical nor fair for taxpayers to be treated so differently based only on their date of demise.

On December 23, 2009, attorney Teitell wrote a letter to Sen. Max Baucus, Chair of the Senate Finance Committee and urgently requested an extension of existing law until the Senate can pass a compromise on estate taxes. Mr. Teitell noted, "Many estate plans key the amount that various beneficiaries would receive to the federal estate tax exemption. Under many formula clauses, a spouse and other beneficiaries can be disinherited or receive different bequests than intended. The formula clauses are based on the assumption that an estate tax exists and that there is an exemption."

Particularly for blended families or in states with an inheritance tax, the formula clauses in current documents may not function correctly. For second marriages, the plan is often to divide the estate between the children of the first marriage and the second spouse. With no federal estate tax, a formula clause may transfer an entire estate to one or the other, a result that is obviously not intended.

For states with an inheritance tax, transfer of the entire estate to a trust to bypass future estate tax may be good federal tax planning, but it could accelerate payment of the state inheritance tax.

With this uncertainty, Sen. Baucus hopes to pass a bill that restores the estate tax retroactively to Jan. 1, 2010. However, it is now uncertain whether this will be possible.


Happy New Year Congress - Unfinished Tax Bills Are Waiting

Many tax provisions will expire on Jan. 1, 2010. When Congress returns to Washington in January, the House Ways and Means Committee and the Senate Finance Committee will take up legislation to update the tax laws.

Major provisions that lapsed include the following:

1. AMT Exemption - The exemption amounts for married couples and single persons are usually indexed for inflation.


2. Business Benefits - Bonus depreciation, expensing of up to $250,000 of new purchases and a host of energy credits are likely to be passed.


3. Tax Extenders - The House passed its Tax Extenders bill in December 2009, but the Senate failed to act. An extenders bill with state and local sales tax deductions, deductions for college tuition and teachers' classroom expenses is anticipated.


4. Charitable Extenders - As part of the Tax Extenders Act of 2010, there may be included an IRA charitable rollover, enhanced deductions for gifts of books, computers, apparently wholesome food and other deductions.

Hopefully, updated tax laws can be passed early in this year. Sen. Baucus (D-MT) and Sen. Grassley (R-IA) have said they will move quickly. By mid 2010, Congress will be focused on the fall elections. If the tax bills are delayed until fall, they may need to be passed after the election.


No Substantiation - No Charitable Deductions

In Rhett Rance Smith et al. v. Commissioner; Nos. 08-72402, 08-74160 (11 Dec 2009), the Ninth Circuit held that the donors did not fully or substantially comply with the standards for charitable deductions for gifts of noncash assets.

Joel and LaRhea Smith were parents of Rhett and Zane Smith. Joel and LaRhea owned 50.1% of Beneco, Inc., an Arizona C corporation that provided retirement benefits management. Rhett and Zane Smith and their wives each owned 24.95% of Beneco.

In 1995, all three couples created Arizona FLP's through attorney Robert A. Kelly, Jr. The FLP's held the respective Beneco stock interests of each of the three couples. During the years 1995 through 2001, the three couples gifted various percentages of their FLP interests to charity and claimed contribution deductions totaling well over one million dollars. Because the gifts were over $5,000, IRS Forms 8283 and appraisals were required. While most of the required Forms 8283 were filed by their CPA Edward Kramer, there were numerous irregularities. A number of Forms 8283 did not include the required signature of the appraiser. In addition, rather than securing an outside appraisal, CPA Kramer conducted some of the appraisals.

The IRS denied deductions for the FLP charitable gifts for failure to comply with the requirements of Sec. 170. Reg. 1.170A-13(c)(i) generally requires that a property gift charitable deduction over five thousand dollars must be supported by a qualified appraisal, by the attachment of the Form 8283 appraisal summary and by maintenance of appropriate records. The appraisal must not be earlier than 60 days prior to the date of the contribution and completed by the due date of the return, including extensions. The appraiser must be qualified, hold himself or herself out to the public as an appraiser for that type of property, include a statement that the appraisal has been made for income tax purposes, and describe in "sufficient detail" the characteristics of the property, the date of the gift, the fair market value and the method of evaluation.

Despite a failure to include appraisal summaries in all of the tax years and failure to have a qualified appraiser sign some of the Forms 8283, the three families claimed "substantial compliance" that should be sufficient to support the charitable deductions for the FLP gifts. While there was a valuation by CPA Kramer and a 2001 evaluation by Mr. Koehl of Management Planning, Inc., neither were acceptable to the IRS or the Tax Court. Even the appraisal by Mr. Koehl "fell far short of meeting the statutory and regulatory requirements for an appraisal summary."

Because the appraisals were inadequate and the appraisal summaries were not signed and dated by qualified appraisers, the FLP gift deductions failed to meet Reg. 1.170A-13(c)(4)(ii) requirements. They also did not meet the "substantial compliance" standard. Therefore, the deductions were denied. However, since the three Smith couples relied on CPA Kramer and other tax professionals, the Sec. 6662 penalty on the charitable deduction deficiency was avoided through the "good faith" exception.


Applicable Federal Rate of 3.0% for January -- Rev. Rul. 2010-1; 2010-2 IRB 1 (21 Dec. 2009)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2010. The AFR under Sec. 7520 for the month of January will be 3.0%. The rates for December of 3.2% or November of 3.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2010, pooled income funds in existence less than three tax years must use a 4.6% deemed rate of return. Federal rates are available at clicking here.