Texas Estate Planning

Accurate Gift Tax Returns Can Literally Stop the Clock (on the IRS) in Houston and Galveston Texas

Why wouldn’t you file a gift tax return if you made a taxable gift? Well, for a lot of people, the answer might be “I didn’t know it was required.” But, in this case, Redstone argues the transfer wasn’t gift, but rather the result of an “intra-family lawsuit” and thus “an ordinary business transaction.”

So, how long does (or can) the IRS scour your financial history to find taxable gifts? Well, it seems they do (or can) go back some 41 years. Whether you are a billionaire or a regular “Joe,” this case is worth watching.

You can get the high points of the case from a recent Bloomberg article titled “Billionaire Redstone Challenges IRS on Tax for 1972 Gift.” Normally the IRS is bound by a statute of limitations set to about three years. However, an exception to this rule includes the failure to file a tax return like the allegedly missing gift tax return of Mr. Redstone.

Apparently, the difficulty arose over certain shares of National Amusements Inc., and a family lawsuit resulting in a “transfer” of shares. The IRS is now calling that “transfer” a “gift” with $1.1 million in taxes, penalties, and interest due and owing.

According to Richard Behrendt, a former estate and gift tax auditor turned director of estate planning, “This is unheard of… I can’t remember ever hearing of anybody going back 41 years to raise an issue. It’s really unprecedented in my experience.”

Note: Mr. Redstone may have become a target, given the fact he is the chairman of both Viacom and CBS, not to mention National Amusements and all the related subsidiaries of the three. Reportedly, Mr. Redstone is worth approximately $4.9 billion. Nevertheless, this 41-year-look-back is a troublesome precedent.

The take-away (even if you have a smaller fortune) is that timely filing of an accurate gift tax return will start the clock running on a three-year statute of limitations. If no gift tax return is filed, the statute does not apply. Thus, if a taxpayer fails to file a gift tax return, the IRS can pursue you indefinitely.

Reference: Bloomberg (May 1, 2013) “Billionaire Redstone Challenges IRS on Tax for 1972 Gift”

IRS Dissects Trusts with Pass-Through Entities

Trusts can accomplish many goals and, usually, can secure some real tax advantages. Powerful estate planning tools indeed! But take note – ObamaCare may be changing all of that in the pursuit of revenue to pay for the program.

It may not be a game changer, but it may be worth noting that some trusts might get a bit more dinged up this year with the new 3.8% surtax on investments created by ObamaCare.

Indeed, the accountants are just starting to do the math after the IRS staked out its position in a new “technical advice memorandum” (see TAM 201317010). Forbes has weighed in on the consequences of this new TAM in an article titled “Tough IRS Position Means More Trusts Will Get Hit With New ObamaCare 3.8% Tax.”

Cutting to the chase, the new 3.8% ObamaCare surtax hits investment income, and trusts that own interests in pass-through entities are construed as ‘passively active’ (a bitter oxymoron in accounting-speak) and thereby produce investment income to tax.

To make matters worse, such trusts see the tax kick in at a much lower income rate than for an individual. And, to further complicate things, such trusts are not often designed to be “active” entities. A complex plan might involve various trusts with various holding interests in companies, and might be targeted at various levels. As you can see, things can get complicated fast.

Like most matters on the tax (and political) front, it remains to be seen how the year and the tax battle will be played out. Nevertheless, you should keep an eye on Washington, D.C., and a hand on your wallet.

Reference: Forbes (April 29, 2013) “Tough IRS Position Means More Trusts Will Get Hit With New ObamaCare 3.8% Tax”

Obama’s Proposed Budget Goes after IRAs

You may have heard there are a few budget plans meandering around the capitol, one of which is President Obama’s proposed budget. We don’t have many details as of yet, but self-employed professionals should take note – they could be tax targets when it comes to their retirement savings.

For retirement savers and those making powerful use of an IRA, here’s at least one tidbit the rumor mill has been circulating well before the budget’s release. If enacted, “wealthy” individuals would be pinched with a $3 million cap on their IRA holdings.

Several sources have reported on this, to include Time Magazine in an article titled “Obama’s Budget Would Cap Tax-Advantaged Savings.” Although $3 million may sound like a lot, it may end up affecting more savers who otherwise might not be considered traditional tax targets: self-employed individuals like doctors, lawyers, and entrepreneurs. The self-employed all have unique abilities (and needs) to contribute large amounts to their IRAs.

So, who is the intended target of this kind of a cap? One name keeps surfacing: Mitt Romney. Remember that fabled $100+ million IRA, as pointed out by the Boston Globe in an article titled “Obama budget would pinch IRAs of wealthy with $3m cap.”

The analyses of the proposal are still being churned out, and there are some important details to be hammered out as well. At present, this cap is no more than a proposal and part of a budget plan none-too-well-liked by either side. Nevertheless, this kind of cap and its prying look at tax-advantaged plans is worth watching.

Reference: 

Time Magazine (April 10, 2013) “Obama’s Budget Would Cap Tax-Advantaged Savings”

The Boston Globe (April 10, 2013) “Obama budget would pinch IRAs of wealthy with $3m cap”

The Highlights of 2012

This past year will undeniably be remembered for several important events, such as the Supreme Court’s decision upholding Obamacare, the London Olympics and the reelection of President Obama. In order to recap this year’s Supreme Court rulings, Tax Court cases, celebrity estates, and other interesting events, a recent article, “The Year in Review – 2012: A Retrospective of the Whole Shebang” by The Estate Analyst, took a comedic approach to what has passed in 2012. One notable tax decision involved the Alabama Waffle House waitress who was given a lottery ticket worth $10 million from a customer. The waitress, her parents, and her siblings set up a corporation, which eventually claimed the winning ticket and elected to receive annual payments of $354,000 for 30 years. Not surprisingly, other Waffle House employees claimed they were entitled to a share of the winnings because all tips were to be shared. The IRS also claimed its share by finding that the waitress had made a taxable gift by sharing the lottery ticket with her family. In Dickerson v. Commissioner, T.C. Memo 2012-60 (March 6, 2012), the Tax Court decided that: (1) the customer who gave the waitress the lottery ticket did not make a taxable gift; (2) the waitress’s former Waffle House co-workers were not entitled to any share of the lottery ticket – which was a gift to the waitress and not a tip; and (3) the waitress’s long-standing family agreement to share tickets was not binding, so a taxable gift of 51% of the lottery ticket was made with a value of $1.1 million. A gift tax delinquency of $771,000 was owed with interest and penalties. Be sure to explore the above-mentioned article to review other tax, charitable and estate planning missteps of 2012. Reference: The Estate Analyst (December 2012) “The Year in Review – 2012: A Retrospective of the Whole Shebang”

Houston, Texas Families Should Check Out Charities Before Cutting Check

My grandparents always said a giving heart is easily broken. I try to teach my children to be smart about spending, saving and giving and not to let one bad apple ruin the bunch.

If charitable giving is important to you, you may want to do some investigating to ensure that the charities you support are in good standing with the IRS. Fortunately, a new IRS search tool for tax exempt organizations can simplify this process for you.

While the tool (known as the Select Organizations Exempt Check) isn’t exhaustive, it does offer some helpful information, to include whether an organization:

• Is eligible to receive tax-deductible contributions.
• Had its tax exemption automatically revoked for failing to file a required Form 990, Return of Organization Exempt From Income Tax, for three consecutive years.
• Filed a Form 990-N, Annual Electronic Filing Requirement for Small Exempt Organizations, also called an e-Postcard.

Such information can help a potential donor see an organization as the IRS does. However, the tool is not without some glitches, as addressed in a recent article in the Journal of Accountancy. For example, once an organization is placed on the auto-revocation list (triggered when the organization fails to file a form) it won’t be removed from the list even if the organization re-applies and is re-admitted back into tax exempt status.

With that caveat, the tool provides an excellent means to check the status of a given charity. Nevertheless, if one of your favorite charities is on the auto-revocation list, then you may need to confirm the current standing directly with the charity itself.

For more information, read the original article in The Journal of Accountancy and the IRS news bulletin.

 

For legal advice and counseling on Giving during your lifetime and after death talk to Ard Law Firm.