by Linda Suzzanne
Griffin
In Wells Fargo Bank New Mexico vs. U.S. (CA10 2/11/2003) an individual, Mary Kate Nielsen, attempted to create a lifetime qualified terminal interest property trust ("QTIP"). A gift to this trust would qualify for the marital deduction if properly elected on the gift tax return. Ms. Nielsen created the QTIP, transferred property to the trust for the benefit of her husband, and upon his death the property would be distributed to Mary's children. Mary had no right to alter, amend or revoke the trust and relinquished all rights to the property. The trust was intended to qualify as a QTIP but, unfortunately, no election was made to treat the trust as a QTIP on the gift tax return.
The Internal Revenue Service ("IRS") disallowed the marital deduction and imposed a gift tax. The estate paid the gift tax and sued for a refund. The Tenth Circuit found that the gift was complete as Mary completed parted with dominion over the transferred funds. Unfortunately, because the QTIP election was not claimed on the gift tax return, the marital deduction was denied and a gift tax was due.
Advice:
While a QTIP election seems to be minor, it seems that somehow cases are litigated over this "minor" step. Accordingly, it is imperative, when preparing a gift tax return or estate tax return, to have the return carefully reviewed.
Contingent Attorney Fees
In Raymond v. U.S., 2002-436 (D. Vt. 2002) the plaintiff, David Raymond, retained a law firm to represent him in a wrongful termination suit. Under the contingent fee agreement fee agreement the law firm was to receive _ of the recovery. The total recovery was sent to the law firm and Raymond's share was deposited into his bank account.
Raymond included the entire judgment on his income tax return and, because of the alternative minimum tax, was unable to deduct the attorney fees and was taxed on the total amount, including the contingent fee payable to the law firm. He filed an amended return to receive a refund and the IRS denied such refund. The District Court framed the issue as to whether the taxpayer ever had, or could have, control over the judgment assigned to the law firm. The court found that the "contingent fee contract confers an interest in the claim itself upon the attorney." The IRS erred in applying the assignment of income to Mr. Raymond.
Advice:
This is a great case to argue to determine whether attorney fees are not includable in income. Note that in the Fifth, Sixth and Eleventh Circuits contingency fees are not included in income while in the Third, Fourth, Seventh, Ninth, Tenth and the Federal Circuits contingency fees are includable in income. This district court is appealable to the Second Circuit which has not yet decided the issue.
No Discount for Tax Due on Savings Bonds
In the estate and gift context tax discounts are provided to reduce the value of an estate or gift. Discounts include, but are not limited to, lack of marketability, lack of control, and built-in gains. Unfortunately, in IRS Letter Ruling 200303010, the IRS concluded that, in determining the value of Series E, U.S. Savings Bonds, one cannot claim a discount for lack of marketability for the income taxes due on the interest. The IRS found that the only willing seller is the decedent and the only willing buyer is the U.S. government and therefore bonds will be redeemed by the U.S. Treasury at the redemption price. The estate argued that the IRS ignored the willing buyer standard in the regulations and a hypothetical willing buyer would consider the built-in income tax liability. The IRS emphasized that the seller, not the buyer, includes the interest accrued in his or her income.
Advice:
While a novel argument, the IRS reasoning is correct.
Waiver of 60-Day Rollover Period
Generally, if assets are transferred to an individual from an IRA or retirement account, they must be rolled over into an IRA within 60 days of the transfer. The 60-day period has been fixed and in the past the IRS has not been lenient about extending the 60-day period. Fortunately, under a new revenue procedure 2003-16, 2003-4 IRB, the IRS states that it will automatically waive the 60-day rule for qualified plan and IRA rollovers if a financial institution's error caused the rollover to be untimely. The automatic waiver is granted only if: [1] the financial institution received the funds before the 60-day rollover period; [2] the taxpayer followed all the procedures; [3] solely due to the financial institution's error, the funds were not deposited; [4] there would have been a valid rollover; and [5] the funds were actually deposited within one year from the beginning of the 60-day rollover period.
Advice:
Any time the 60-day rollover period has not been met carefully review this procedure.
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Contents © Copyright Linda Suzzanne Griffin,
P.A.
