by Linda Suzzanne Griffin
In Private Letter Ruling 200602002, taxpayer has six (6) grandchildren who plan to attend a private school. Taxpayer wants to prepay the tuition for all six (6) grandchildren through high school graduation based upon the current tuition. The prepayment is not refundable if the grandchild does not attend school. Under §2503(e)(1) of the Internal Revenue Code (the “Code”) an amount paid as tuition to an educational organization is a qualified transfer not treated as a gift for gift tax purposes. Further, under §2611(b)(1) of the Code a generation-skipping transfer does not include a qualified transfer. The Internal Revenue Service (the “Service”) found that such prepayments would not constitute a gift and would not constitute of generation-skipping transfer.
Advice:
Grandparents who want to provide for grandchildren’s education can do so without adverse gift or generation-skipping transfer consequences. Caution: If the child does not attend the school, the amount is not refundable.
Overstatement of Gain (and corresponding income taxes)
Taxpayer Is Not Entitled To Relief
In 1998, taxpayer died owning shares of stock. The Service disputed the stock valuation and before the dispute was resolved, the stock was sold. The estate reported a gain on the estate’s income tax return. After the statute of limitations had closed on the estate income tax return the same court ruled that the Service’s higher valuation of the stock was correct. Therefore, the basis of the stock should have been higher making the income lower, resulting in a lower income tax.
In 2004, the estate sought a refund of the taxes it overpaid and the IRS denied the claim. Although the estate income tax return was barred by the statute of limitations, the estate argued that relief was available under the mitigation provisions of the Code. Under §1311 of the Code, an adjustment is possible when the statute of limitations has run if: (1) an error occurred in a closed tax year that cannot otherwise be corrected by operation of law; (2) a determination (ex. final court decision closing agreement) must be made for an open tax year; (3) the determination must result in a circumstance under which an adjustment is authorized; and (4) the determination must adopt a position maintained by a party that is inconsistent with the error that has occurred.
The court noted that two other courts have held that a decision in an estate tax matter is not a “determination.” The court further found that requirement (3) above was not met. Therefore, the mitigation provisions did not apply.
Advice:
The mitigation provisions of the Code are very difficult, but if you find the statute of limitations has run, review these sections to find out if mitigation relief will apply.
Spousal Waiver Of Rights
In a prior Tax Tips this author previously discussed Revenue Procedure 2005-24 which addressed the spousal election against a charitable remainder trust. Under our current elective share statute, under certain circumstances, a spouse can make an elective share election against a charitable remainder trust. According to the Service, if a spouse has the ability to make such an election, then the charitable remainder trust will not qualify under the Code. The procedure provides that a charitable remainder trust created prior to June 28, 2005 will be grandfathered as long as the spouse actually does not make an election. Revenue Procedure 2006-15 indefinitely extends the grandfather date from June 28, 2005 until the date Service issues further guidance.
Advice:
Keep an eye on this situation and in the meantime be sure that if an elective share is made that the spouse does not make an elective share election as to the charitable remainder trust.
Be Careful Who You Trust To Do Your Payroll
In Pediatric Affiliated, P.A., 97 AFTR 2d 2006-583, Pediatric hired a payroll service, PAL Data. The founder of PAL Data embezzled tax payments received from Pediatric for payment to the Service for payroll taxes. The founder was criminally prosecuted and sentenced to a prison term. Further, the company brought a civil suit against the founder and obtained a judgment.
The Service sent Pediatric notices of levy for back unpaid payroll taxes and Pediatric argued that it was not liable because of the embezzlement. IT DID NOT MATTER! The court held that reliance on an agent was not reasonable cause (a requirement to be excused for failure to timely pay taxes). EVEN WHEN THE AGENT EMBEZZLES THE TAX PAYMENTS. Pediatric bore the ultimate responsibility to ensure its taxes were paid.
Advice:
This should be a wake up call for those attorneys and clients who depend on outside payroll tax companies. Keep a close eye on the returns when they are filed and check to be sure payments are properly made.
All Contents © Copyright Linda Suzzanne Griffin, P.A.
