by Linda Suzzanne
Griffin
Tax Return Preparer Penalties
Under Section 8246 of the Small Business and Work Opportunity Act of 2007 tax return preparer penalties
under Section 6694 of the Internal Revenue Code (the “Code”) now apply to preparers of all tax returns including estate,
gift and generation skipping transfer tax returns. The standard for avoiding penalties is, instead of realistic possibly of
success, a “more likely than not standard”, i.e. from a 33% standard to a more than 50% standard.
Avoidance of the penalties is available only if there is a reasonable basis for the taxpayer position even if there is
adequate disclosure. The penalty was $250 and now is the greater of $1,000 or 50% of the income received by the preparer for
the preparation of the return. Notice 2008-13 was issued to provide interim guidance until regulations are promulgated. The Notice
provides that a return (or portion of a return) will be subject to the new standards if the return constitutes a “substantial portion”
of the taxpayer’s return. A substantial portion means a schedule, return or other portion of a tax return, if the preparer knows or
reasonably should know that the return is a significant portion of the tax liability reported on the tax return. The reasonable cause
and good faith exception applies to penalties.
Signing and nonsigning tax return preparers avoid the penalties with respect to a position for which
there is a reasonable basis but for which the preparer does not have a reasonable belief that the
position would more likely than not be sustained if certain conditions are met.
Advice:
While most of us do not prepare income tax returns many of us prepare
and file Forms 706 and Forms 709 or give advice regarding these tax returns.
Carefully review Section 6694 of the Code and the related notice to determine your exposure.
Formula Disclaimer with Excess Passing to Charity
In the Estate of Christensen vs. Commissioner, 130 T.C. No. 1 (2008), the court approved a formula disclaimer
to a private foundation and provided that such a clause did not violate public policy.
The decedent’s will left her entire estate to her daughter and any disclaimed assets would pass 75% to a
charitable lead annuity trust for which the daughter was a remainder beneficiary and 25% to a private foundation.
The disclaimer was found invalid as to the property distributed to the charitable lead trust as the daughter was a
remainder beneficiary in the charitable lead trust. She would have had to also disclaim that interest. The language,
however, also provided that the 25% of the amount disclaimed would be distributed to the private foundation and the
court found the disclaimer valid as to the private foundation.
The Internal Revenue Service (the “Service”) adjusted the value of the estate upon audit and the formula language
applied to distribute 25% of the adjusted amount to be distributed to the private foundation. The Service challenged
the “savings” language because the Service asserted that the amount passing to the foundation was contingent on a
condition subsequent and the disclaimer’s adjustment phrase “as finally determined for federal estate tax purposes”
was void as contrary to public policy. The court determined that the language was valid.
Advice:
In drafting to avoid an increase in estate or gift tax when the Service increase the value, planners
often draft to have an amount distributed to individuals and any excess distributed to a charity.
The value to the charity may be adjusted depending on the adjustment on audit by the Service.
Generally the Service challenges such clauses because once the Service has made the valuation the
adjustment would be “self adjusting” such that the Service receives nothing upon audit and therefore
the clause is “void as contrary to public policy” of collecting taxes. There has been considerable
controversy in this area. Read this case and find the formula that worked.
Homestead Item of Interest
A committee meeting of the Real Property Probate &Trust Law Section – Probate Law
Committee will be held in Gainesville and one of the topics to be discussed involve
possible revisions to the homestead statutes relating to devise and descent.
The committee members will be discussing (1) changes to Section 64 of the Florida Statutes
to allow for a partition if a spouse receives a life estate, (2) changes to Section 732.401
of the Florida Statutes regarding descent and devise and (3) an addition of a new Section
732.4017 to clarify the impact of homestead laws on intervivos transfers in trust.
Advice:
Unfortunately, estate planners can not distribute homesteads that must be distributed to
minor or disabled children via a trust. These proposals would provide estate planners with
alternatives in their homestead planning. Keep a look out for further discussion.
Estate Tax Flash
Senate budget resolution passed March 2008 to provide 3.5 million exemption per person with 45% rate. Look for upcoming House action.
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Contents © Copyright Linda Suzzanne Griffin,
P.A.
