Wealth Strategies Journal 2.0 (Beta)

IRS T.D. 9588: Final Regulations Passed to Provide Guidance on Mortgage Insurance Premiums Under I.R.C. §163

Wed, 16 May 2012 15:43:50 -0500

The IRS issued T.D. 9588, which promulgated final regulations and replaced temporary regulations regarding the allocation of qualified mortgage insurance premiums to find out how much of the pre-paid premiums are allowed to be classified as "Qualified Residence Interest" under I.R.C. §163(h)(4)(F). Under the new final regulations, some, but not all, pre-paid mortgage insurance premiums can be treated as "Qualified Residence Interest." Importantly, the IRS also noted that it would take no action on the temporary regulations under I.R.C. §6050H(h), which expired on May 4, 2012. Those temporary regulations did not apply to any premiums paid or accrued after December 31, 2011.

See IRS T.D. 9588, 77 FR 26698 (May 7, 2012). h/t: Tax Notes Today

Posted by Matthew Evan Rappaport, Associate Editor, Wealth Strategies Journal

Tax Reform Beyond the Buffet Rule

Tue, 15 May 2012 16:30:28 -0500

Martin Lobel argues that it's time to get serious about reforming our tax code and corporate compensation to foster economic growth. Mr. Lobel advocates an increase in effective tax rates as opposed to increases on marginal rates for the wealthiest taxpayers. To achieve reform, he argues for a simplification of the tax code, eliminating most tax expenditures, and decide what to cut in the budget and how to pay for the rest.

See Martin Lobel, "Stop Whining About the Buffet Rule and Get On With Reform," 2012 TNT 94-14 (Apr. 26, 2012).

Posted by Andrew Hodes, Associate Editor, Wealth Strategies Journal.

Joint Committee on Taxation (JCT) Describes Tax Laws For U.S. Territories

Tue, 15 May 2012 16:19:44 -0500

The JCT has summarized federal tax law regarding U.S. Territories. For example, the Internal Revenue Code generally treats territories as foreign countries, even for the three mirror code possessions (Guam, Northern Marianas, and U.S.V.I.) where the Internal Revenue code is seen as the law of the land; American Samoa and Puerto Rico have their own internal tax laws. Lastly, income derived from territories is usually considered foreign-source income, and entities established in those jurisdictions are generally treated as foreign persons.

See "JCT Describes Tax Laws For U.S. Territories," 2012 TNT 94-22 (May 14, 2012).

Posted by Andrew Hodes, Associate Editor, Wealth Strategies Journal.

Ninth Circuit Court of Appeals Affirms that Amounts of Gift Tax Paid by Recipients of a QTIP Remainder are Includable in the Gross Estate under I.R.C. Sec. 2035(b)

Tue, 15 May 2012 12:34:25 -0500

The Ninth Circuit Court of Appeals has affirmed the Tax Court's 2009 decision in the Estate of Anne W. Morgens v. Comm'r that amounts of gift tax paid by recipients of a QTIP remainder are includable in the gross estate under I.R.C. sec. 2035(b).

In Estate of Anne W. Morgens, Mr. and Mrs. Morgens established a revocable inter vivos trust. After Mr. Morgens' death, his portion of the trust was allocated to a residual trust in which Mrs. Morgens received an income interest for life. A qualified terminable interest property (QTIP) election under I.R.C. sec. 2056(b)(7) was made on Mr. Morgens' estate tax return for the property passing to the residual trust, thereby allowing Mr. Morgens' estate to claim a marital deduction for the full value of the QTIP.

Subsequently, the trust was divided into two trusts and Mrs. Morgens made gifts of her interests in both trusts. These gifts triggered deemed transfers of the QTIP remainder under I.R.C. sec. 2519 and the recipients paid the gift taxes.

Mrs. Morgens died within three years of the transfers and the IRS determined a $4,684,430 deficiency in the federal estate tax of Mrs. Morgens' estate. The IRS argued that the amounts of gift tax paid by the recipients of the QTIP remainder were includable in Mrs. Morgens' gross estate under I.R.C. sec. 2035(b).

The Tax Court agreed holding that the amounts of gift tax paid by the recipients of the QTIP remainder were includable in Mrs. Morgens' gross estate under I.R.C. sec. 2035(b).

The Ninth Circuit also agreed holding that when a gift is made the gift tax liability falls on the donor. In this case, the recipients of the gifts paid the taxes and, in so doing, they satisfied the tax liability incurred by Mrs. Morgens in making the transfer.

HAT TIP:Rubin on Tax

See Estate of Anne W. Morgens, 133 T.C. No. 17 (Dec. 2009).

See Estate of Anne W. Morgens, 109 AFTR 2d ¶ 2012-736 (CA9 2012).

Posted by Brian Spring, Associate Editor, Wealth Strategies Journal.

Forbes: Eduardo Saverin Renounces U.S. Citizenship Ahead of Mega Facebook IPO

Tue, 15 May 2012 09:38:52 -0500

Forbes.com published an article by Brian Solomon titled "Eduardo Saverin Renounces U.S. Citizenship Ahead of Mega Facebook IPO." The article discusses Mr. Saverin's decision to renounce his U.S. citizenship and speculates that his decision may have been influenced by tax reasons. Mr. Saverin, who was born in Brazil and will become a resident of Singapore upon giving up his U.S. citizenship, does not mention tax reasons for his decision. If Mr. Saverin does in fact give up his citizenship for tax reasons, he will not be a first billionaire to do so. Tax avoidance is not the only reason to give up a citizenship, Bidzina Ivanishvili renounced his Russian and French citizenships in his quest to become a prime minister of Georgia.

See Brian Solomon, "Eduardo Saverin Renounces U.S. Citizenship Ahead of Mega Facebook IPO," Forbes.com (May 11, 2012)

Posted by Mariya V. Link, Associate Editor, Wealth Strategies Journal.

BNA: How Will Portability Rules Under I.R.C. § 2010 Be Fixed?

Mon, 14 May 2012 00:32:32 -0500

BNA reports that practitioners are split over a quirk in the rules regarding the deceased spouse unused exclusion amount (DSUEA) found in I.R.C. § 2010(c)(2). Under that provision of the Code, a deceased spouse's estate tax exclusion is "portable" to the surviving spouse if it is not completely exhausted. For a married couple who never had any previous marriages, this concept is simple enough: whatever part of the exemption one spouse does not use gets "rolled over" when the other spouse dies.

The plot thickens, however: when the Joint Committee on Taxation published JCX-55-10 on December 10, 2010, they included three examples about how the portability concept should work. The third example has everyone up in arms (see this ABA article for more) because it introduced a possible twist: a spouse who marries a widow or widower could use the widow or widower's prior spouse's exemption (in other words, the unused exemption would be "double portable" because it would roll over twice). Later, the JCT issued an errata statement saying that Example 3 was against Congressional intent-- a spouse who marries a widow or widower shouldn't get the benefit of the widow or widower's prior spouse's exemption. The JCT mentioned that official action would be taken to reflect that Example 3 did not reflect Congressional intent, but no such action has been taken yet.

BNA wonders: "fix the statute, or fix the example?"

See "SPECIAL REPORT: Fix Sought for Dual Estate Tax Portability Interpretations," Bloomberg BNA Daily Tax Reports (May 2, 2012).

Posted by Matthew Evan Rappaport, Associate Editor, Wealth Strategies Journal

AALU Panel Believes Congress Will Establish Permanent Estate Tax Policy in 2013

Mon, 14 May 2012 00:07:35 -0500

The Association for Advanced Life Underwriting (AALU) convened a panel of its legislative experts for its annual meeting, and the panel conveyed a consensus that Congress would reach a permanent figure for the estate tax exemption and rate schedule in the year 2013. The panel stated that regardless of whether President Barack Obama maintains his office or former Massachusetts Governor Mitt Romney supplants him, Congress will be forced to reach a stable and permanent solution to the estate tax issues because of budgetary concerns. They speculated that Congress would compromise on the 2009 exemption and top rate ($3.5 million and 45%, respectively) because of the projections that those levels could bring in about $100 billion of revenue over 10 years. The panel also gave extensive commentary on creating a "harmonized fiduciary standard of care" and the President's proposed policies regarding grantor trusts.

See Warren S. Hersch, "AALU Panel: Action on the Estate Tax is Likely in 2013," lifehealthpro.com (May 2, 2012).

Posted by Matthew Evan Rappaport, Associate Editor, Wealth Strategies Journal

Holland & Knight: IRS Passes Regulations Indicating Cooperation with Foreign Nations to Hunt Tax Evaders

Sun, 13 May 2012 23:44:41 -0500

Daniel E. Martinez and Victor Perez of Holland & Knight LLP report that the IRS has put forth new regulations regarding the reporting of financial data to foreign countries in an effort to foster cooperation with those nations in the fight against tax evasion. The new regulations require U.S. financial institutions to report interest payments on interest-bearing accounts to foreign individuals to the IRS. Under Tax Information Exchange Agreements (TIEAs) with between the U.S. and many foreign nations, the countries can submit detailed requests for that information to each other. Curiously, the regulations apply only to individuals and not to all entities, and they only apply to interest-bearing accounts. However, this indicates another advance in an ongoing trend: the IRS is continuing its endeavors to crack down on tax evasion by U.S. citizens and other residents.

To see a list of the countries with which the U.S. has these TIEAs and to get a more detailed explanation of how these regulations work, click the link below.

See Daniel E. Martinez and Victor Perez, "Reporting by U.S. Financial Institutions on Interest Payments to Foreign Individuals: Treasury Finalizes Regulations," Holland & Knight LLP (May 7, 2012).

Posted by Matthew Evan Rappaport, Associate Editor, Wealth Strategies Journal

Wall Street Journal: Wealthy Americans May Want to Transfer Wealth Before End of 2012

Sun, 13 May 2012 23:32:26 -0500

The Wall Street Journal consulted Steve Weinstein of Altar Advisers about the state of the estate and gift tax exemptions, and he recommended that wealthy individuals and couples consider taking advantage of the current regulatory climate. As of now, Congress allows for a $5.12 million lifetime exemption for gift transfers ($10.24 million for couples), but the allowance will expire at the end of the year unless Congress takes action. The exemption can fall to as low as $1 million, and Weinstein speculates that Congressional action could come down to the wire.

See Shefali Anand, "Consider Big Gifts to Family This Year," The Wall Street Journal (May 7, 2012).

Posted by Matthew Evan Rappaport, Associate Editor, Wealth Strategies Journal

PLR 201218003: IRS Rules Favorably on Transfer Tax Consequences of Proposed Division and Modification of Trust

Wed, 09 May 2012 14:13:35 -0500

In a Private Letter Ruling, the IRS ruled that the division and modification of a trust would have benign transfer tax implications. Specifically the proposed action would not cause the following: subject the divided trusts to the generation-skipping transfer tax (GSTT), result in a transfer subject to federal gift tax, cause the trust property to be includible in the beneficiaries' estates, cause the recognition of gain or loss, or affect the basis or holding period of trust assets.

See PLR 201218003 (May 4, 2012).

Posted by Andrew Hodes, Associate Editor, Wealth Strategies Journal.

Government Plans to Meet January 1 Effective Date for FATCA

Wed, 09 May 2012 14:13:10 -0500

Tax Notes has posted information regarding the effective date of the Foreign Account Tax Compliance Act. According to the article, the effective date of the Foreign Account Tax Compliance Act will be January 1, 2013 and that taxpayers and practitioners should submit comments on how much time is needed to comply with the specific requirements.

See "Government Plans to Meet January 1 Effective Date for FATCA," 2012 TNT 89-2 (May 8, 2012).

Posted By Brian Spring, Associate Editor, Wealth Strategies Journal.

PLR 201218002: Exercise of Appointment Powers Has No GSTT Consequences

Wed, 09 May 2012 14:03:27 -0500

In a Private Letter Ruling, the IRS ruled that a daughter's exercise of limited powers of appointment over two trusts did not cause those trusts, or the granddaughter's appointive trust, to lose their generation-skipping transfer tax (GSTT) exempt status. The ruling also stated that none of the trusts would lose their GSTT-exempt status if the granddaughter exercised her own limited appointment powers.

See PLR 201218002 (May 4, 2012).

Posted by Andrew Hodes, Associate Editor, Wealth Strategies Journal.

Whistleblower Officials Talk to Tax Haven Professionals

Wed, 09 May 2012 14:00:31 -0500

Tax Notes has published an article by Lee A. Sheppard discussing IRS Whistleblower Office Director Stephen Whitlock's appearance at the OffshoreAlert conference, which was held April 29 to May 1at the Ritz-Carlton South Beach in Miami.

According to the article, Senate Finance Committee member Chuck Grassley, R-Iowa, objected to Whitlock and nineteen other IRS employees appearance at the conference. Grassely, who is the coauthor of the whistleblower provisions of the False Claims Act and a cosponsor of the Incorporation Transparency and Law Enforcement Assistance Act (S. 1483), complained that the IRS was dragging its feet in processing whistleblowers cases and that the IRS employee's appearances and expenses need to be justified .

See Lee A. Sheppard, "Whistleblower Officials Talk to Tax Haven Professionals," 2012 TNT 89-1 (May 8, 2012).

Posted By Brian Spring, Associate Editor, Wealth Strategies Journal.

May Wealth Managment Updates from Proskauer Rose LLP

Tue, 08 May 2012 17:58:05 -0500

Included in May's Wealth Management Updates:

1. Increased interest rate for § 7520, up to 1.6% from 1.4% (in Jan. - Apr.). This rate is used for estate planning techniques such as CRTs, CLTs, QPRTs, and GRATs.

2. Tax Court approved of a defined value clause where there was no charitable donee to receive part of the property for the first time. Wandry v. Commissioner, T.C. Memo 2012-88 (Mar. 26, 2012).

3. Tax Court found that property of a family limited partnership should not be included in a decedent's estate, despite the fact that the decedent owned 100% of the stock of the corporate general partner, and a management fee was paid to the corporation, which could have potentially been used for decedent's living expenses. Kelly v Commissioner, T.C. Memo 2012-73 (Mar. 19, 2012).

4. Tax Court held that a decedent's estate was not entitled to a marital deduction because allowing the deduction would result in the assets leaving the marital unit without being taxed. This case was a follow up to "Turner I." Turner v. Commissioner, 138 T.C. 14 (Mar. 29, 2012).

See Proskauer Rose LLP, "Wealth Management Update - May," www.jdsupra.com (May 3, 2012).

Posted by Theresa Androff, Associate Editor, Wealth Strategies Journal

Beating the 2013 Estate Tax Increase

Tue, 08 May 2012 14:40:24 -0500

Forbes has published an article by Peter J Reilly discussing the challenges that individuals with a net worth of four to fifteen million may face with the scheduled changes in the estate and gift tax rates and exemptions.

Under the current law, the estate tax exemption is scheduled to drop from $5,120,000 in 2012 to $1,000,000 in 2013, while the estate tax rate is scheduled to increase from 35% to 55%.

See Peter J Reilly, "Beating The Possible Estate Tax Increase Without Switching To Cat Food - The Midmill Dilemma," Forbes (May 2, 2012).

See Brian Spring, Associate Editor, Wealth Strategies Journal.