by Linda Suzzanne
Griffin
In Revenue Procedure 2003-76, 2003-43 IRB, the Internal
Revenue Service (“IRS”) announced that the mileage rate is
now 37.5¢ for business travel after 2003. In 2003 the
mileage rate is 36¢.
Advice:
Be sure to use this reimbursement rate beginning
in 2004.
Substantiation For Charitable Deductions
In Weyts v. Comm’r., T.C. Memo 2003-68, the court once
again reiterated the importance of substantiation for
charitable deductions. Mr. Weyts paid $700 to attend a
benefit to raise scholarship money and originally did not
claim a charitable deduction. After his return was audited, he argued that he was
entitled to deduct $620 of the $700 payment as the fair market value of his gift. The
court applied Section 170(f)(8)(A) of the Internal Revenue Code (the “Code”) which
states that the contribution of $250 or more must be substantiated by “contemporaneous
written acknowledgment.”
Mr. Weyts argued that the Cohan rule, Cohan v. Comm’r., 39 F.2d 540 (2d Cir.
1930), should apply. The Cohan rule should be used when certainty is impossible,
and not necessary. The court found that the Cohan rule was inappropriate, and that
written substantiation was designed to increase compliance.
Advice:
Be sure that your clients understand that any time a charitable contribution
over $250 is made they MUST receive a contemporaneous written acknowledgment.
While this may seem a minor requirement, if this is not done, then the deduction is
subject to disallowance.
Valuation Of Lottery Payments
For those fortunate enough to win the lottery, but unfortunate enough to die soon
after, the Estate of Gribauskas (CA2 8/26/2003), provides your personal representative
guidance on the valuation of the present value of lottery payments.
Normally, annuity payments are valued under Section 7520 of the Code
valuation tables. The taxpayer argued that, instead of using the tables the value
should be determined under the “willing buyer, willing seller” test using a lack of
marketability discount. The IRS argued that the 7520 rates should apply.
In 1992, Mr. Gribauskas won almost $16 million in the Connecticut lottery, payable
in 20 annual installments of about $790,000. The parties divorced soon after receiving
the first payment, and in June of 1994 Mr. Gribauskas died . The taxpayer discounted
the value of the remaining installment payments to account for restrictions; such as no accelerations under any circumstances,
and no assignment or transferring of his
right to future installments. After factoring
in the market discount, the estate valued
the winnings at about $2.6 million, and
the IRS determined the value at $3.5
million in accordance with Section 7520
annuity tables.
The Second Circuit agreed with the
estate, and rejected the IRS’s assertion
that departure from the tables was
inappropriate.
Advice:
If any of your clients have this
type of situation, then this case is
important to review. However, be careful
to observe Florida law as to the specific
discount factors. Furthermore, estate
planning should always be provided as
soon as an individual wins the lottery.
Unpaid Payroll Taxes From
Single Member LLC
In Chief Counsel Advice 200338012, the
IRS discussed how to collect unpaid
payroll taxes from a bankrupt disregarded
single member limited liability
company (LLC). Generally, the owners
are not liable for the debts of an LLC
because an LLC is treated as a corporation.
However, if a single member does
not “check the box” to treat the LLC as a
corporation, then the LLC is disregarded
as a separate entity and is
reported on Schedule C of the individual
owner. Because the disregarded LLC is
not treated separate from its owner, the
single member owner is the taxpayer,
and the IRS may collect liabilities by
assessing the owner. Under state law, the
owner does not have an interest in the
LLC property. Thus, the IRS could not
satisfy the owner’s tax liability from the
LLC’s assets.
Advice:
This is important for your clients
as more and more single LLCs are being
formed. As in any other corporate
situation, payroll tax liabilities are a
major source of conflict with the IRS.
Tenancy-By-The-Entireties
Notice 2003-60, 2003-39 IRB (9/29/03)
and U.S. v. Craft, 535 U.S. 274 (2002),
have held that a federal tax lien attaches
to the rights of the taxpayer held as tenancy-by-the-entireties. While too
long to address in these Tax Tips, this
Notice is an excellent guideline to the
law in this area, and is in a question and
answer format.
Advice:
In advising your clients that
“tenancy-by-the-entireties” properties
are exempt from creditors of one spouse,
do not forget to advise the clients about
the Internal Revenue Service tax lien
exception.
Gift Taxes Are Brought Back
Into The Estate
In Brown, 91 AFTR 2d 2003-2085 (CA-
9,0203), the decedent, Willet Brown,
established an irrevocable life insurance
trust to hold insurance on his wife’s life.
To fund the life insurance trust Mr.
Brown gave his wife a gift, and then
Mrs. Brown immediately wrote a check
to the life insurance trust from her own
checking account. Mrs. Brown then filed
a gift tax return for the transfer to the
life insurance trust. The gift tax liability
was paid by Mr. Brown to his wife and
she, in turn, wrote a check to the Internal
Revenue Service.
Mr. Brown died within 3 years of the
gift taxes being paid, and the IRS sought
to bring the gift taxes paid by Mrs.
Brown back into Mr. Brown’s estate
under Section 2035 of the Code. The IRS
argued that under the step-transaction
doctrine the taxes were paid by Willet
Brown and, therefore, would be taxable
within his estate.
All the parties admitted that Mrs.
Brown had no contractual obligation to
use the money her husband gave her to
pay the gift taxes, but the court found
that the step-transaction applied, and the
paid gift taxes should be included in Mr.
Brown’s estate since he died within 3
years of the gift taxes being paid.
Advice:
If planning on the above, then it
would be best for time to lapse between
the gift to the spouse and his or her
payment of the gift tax. Alternatively,
Mrs. Brown could have borrowed money
and then paid it back from the proceeds
of the estate.
All
Contents © Copyright Linda Suzzanne Griffin,
P.A.
