by Linda Suzzanne
Griffin
An estate tax deduction for claims against an estate are allowed pursuant
to Section 2053(a) of the Internal Revenue Code (the “Code”). Contingent claims, however were often the subjects
of disputes with the Internal Revenue Service (“the Service”). Proposed regulations regarding contingent claims have
been promulgated by the Service. While not yet effective these regulations provide guidance to taxpayers. The proposed
regulations provide that the estate can deduct only amounts that are actually paid and if the resolution of a contested
claim cannot be reached before the expiration for the limitation period for a refund of estate taxes, the estate can file
a protective claim for a refund. Thus, the proposed regulations provide that post-death events are considered in the
valuation of a claim. The regulations provide taxpayers with more certainty as to what is deductible but if a deduction
is not fixed in amount, then the estate must first pay the estate tax and then later claim a refund when the claim is actually paid.
Advice:
While these regulations are only proposed they do indicate the Service’s position. Thus,
it is critical that anytime an estate has contingent claims a claim for protective refund be filed.
Single Member Limited Liability Companies (“SMLLC”)
Many people believe that SMLLC assets are completely exempt from the SMLLC owner’s creditor’s claim or
from a lawsuit against the SMLLC owner. In Mackney vs. Treasury, 99 AFTR2nd 2007-998 the Second Circuit
held that the owner of a SMLLC can be held personally liable for unpaid payroll taxes of the SMLLC.
As we all know an employer must pay its share of payroll taxes to the government. Under the Service’s regulations
a SMLLC can be classified either (1) as a corporation or (2) a sole proprietorship as a disregarded entity. The
taxpayer in Mackney was a sole owner of an accounting firm SMLLC. The SMLLC did not pay payroll taxes in 2000 and
2001. The taxpayer did not elect to have the SMLLC treated as a corporation but as a disregarded entity. The Service
assessed the unpaid payroll taxes against the taxpayer individually.
The taxpayer argued that the “check the box” regulations which indicated it was a pass through entity and thus treated
as a sole proprietorship contradicted the code sections and wrongfully ignored state laws that grant SMLLC owners limited
liability. The Second Circuit rejected his reliance and found that the regulations gave the SMLLC owners a choice of tax
treatment of either a corporation or a sole proprietor and rejected his claim that the attempt to collect the payroll taxes
was impermissible because it violated the limited liability granted him by state law. The court found that although state
law controls certain various aspects of business relations, state law does not control the federal tax provisions.
Advice:
SMLLCs are not always the panacea that clients believe. It is often wise to give a “peppercorn” of interest to a second
person to justify the protection that the LLC statutes provide.
Rollover of Individual Retirement Accounts to Charity
Generally, an individual cannot take a distribution from an individual retirement account (“IRA”) and then give a distribution to a
charity without reporting the IRA first as income and then taking a corresponding charitable deduction. The charitable deduction is further limited by
adjusted gross income and the charitable deduction rules. In the recent Pension Protection Act of 2006 (the “PPA”) a provision allows an individual
to make an IRA distribution to a charity without reporting the amount as income or deducting the charitable contribution. The individual (1) must be
70 1/2 or older, (2) contribute the money directly to the charity and (3) the amount cannot be greater than $100,000. Unless extended this provision
sunsets on December 31, 2007.
Advice:
This provision may be extremely helpful for those individuals who are otherwise charitably inclined and who have taxable estates. The IRA is
generally the best asset to give to charity because of the income tax inherent in the IRA. Thus, if your clients have other assets that would
otherwise be distributed to charity a distribution to the IRA may be a better choice. This rule ends December 31, 2007 so it is important that
your clients be advised of this law now. Charities should also advise their donors of this provision.
Rollover Options For Non-Spouse Beneficiary of Retirement Plan Accounts
Generally only a spouse can rollover an IRA or a distribution from a qualified plan. The PPA provides that a non-spouse beneficiary
can “roll” over his or her lump sum benefits to an inherited IRA and receive payments over a life expectancy rather than a lump sum.
The Service has issued guidance in private letter ruling 200717023 on a transfer to non-spouse beneficiaries of inherited qualified plan
accounts. Not all plans, however, are required to make these options available to the beneficiaries.
Advice:
Anytime there is a distribution of a qualified plan benefit to a non-spouse beneficiary carefully review these rules to see if there are
ways to extend the deferral of the income over the life of the beneficiary.
Charitable Annuity Trust
Revenue procedures 2007-45, 2007-29, IRB and 2007-46 IRB provides annotated sample declarations off charitable annuity trust that meets
the Service’s requirements for the split interest trust.
Advice:
Prior to drafting a new Charitable Annuity Trust use these forms for guidance as to such document.
Trust Code
Do not forget that the new Florida Trust Code Chapter 736 is effective as of July 1, 2007. As this author has determined your trust forms,
checklist forms and correspondence forms may reference the old trust code so those references must be changed. If you are a member of the RPPTL
section, then you can get a useful conversion table from Chapter 737 to Chapter 736 on the rpptl.org website. When you sign in go to the bottom
right of the first page.
Some Favorite Listservs
What the Heck Is Going on With the Homestead Tax Exemption!
A recent Leimberg (see above) estate planning newsletter (Archive Message #1147 by Jeffrey A. Baskies, Esq.)
provides a great summary of the recent legislation regarding the homestead exemption and the “Save Our Home” cap.
Two laws were recently passed by the government:
- House Bill 1B and Senate Bill 2B provide a tax roll back. This legislation affects all real estate owners (rentals, home, business).
This roll back requires cities and counties to assess real estate taxes at the rates in effect 5 years ago.
- House Bill 3B and Senate Bill 4B create a “super homestead” exemption and must be voted on by Florida voters (60% vote). The bills
would change the $25,000 homestead exemption to 75% of the first $200,000 and 15% of the next $300,000 and applies only to Florida homesteads.
If passed, then a current homeowner resident would have an election to either stay with the 3% annual “Save Our Home” cap or the “super homestead”
election. If an individual moves to Florida after 2008, then they have no election and would use the “super homestead” election.
Advice:
Whew! Just trying to understand this makes a tax attorney eyes roll. Already articles are appearing regarding the constitutionality of the ballot. Stay tuned.
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Contents © Copyright Linda Suzzanne Griffin,
P.A.
