US Property Passing to Your Surviving Spouse Does Not Always Qualify for the Marital Deduction!

Many American estate tax preparers who prepare returns infrequently fall into a trap. The general concept that many preparers have is that assets passing to a surviving spouse qualify for a marital deduction under section 2056 which basically exempts all assets passing to a surviving spouse from taxation in the estate of the first to die. Read the fine print before you go any farther.                  

Since 1998, the rules of changed a bit. True, the property still must pass to a surviving spouse to qualify for the marital deduction but that spouse must be a US citizen. Being a US resident taxpayer or a green card holder is not enough to fill the bill. Remember the words "must be a US citizen". But what if assets pass to a surviving spouse who is not a US citizen? In order to level the playing field, the Congress created, via section 2056A, the Qualified Domestic Trust.

This trust must satisfy certain special requirements to qualify for the marital deduction.  The executor of the estate, who must be a citizen of the United States, must make an irrevocable election to create a QDOT on form 706-A. The trust has certain requirements unlike usual Q-tip trusts. If the assets are below $2 million, a US trustee must be appointed and is responsible for to paying any tax. Each time there is a corpus distribution to the surviving spouse, the trustee must file a form 706-QDT with the IRS and pay the deferred portion of the tax. If the trust contains more than $2 million, the trustee must be a US financial institution or, in the alternative, the estate can post a bond with the Internal Revenue Service. This QDOT can be created posthumously by the US trustee or the estate.

Think of it in terms of an interest-free loan. The estate may owe the IRS several hundred thousand dollars. The payment of that amount of money is deferred, free of any interest or penalty, until corpus distributions are made to the surviving spouse. 

I am currently aware of one case in which, to date, a payment in excess of $1 million has already been deferred for eight years. The spouse is in her 50s and has taken no distributions from the trust corpus. Actuarially, she could live for another 33 years which means that, in essence, this estate is received an interest free loan on $1 million from Uncle Sam for basically one third of the century. Even my own uncles wouldn't give me such a deal! 

Think about it the next time you prepare an estate tax return where the surviving spouse receives the assets but is not a citizen of the United States. The time value of deferring repayment of a loan by 33 years is less than 3%! 

If the glove fits, put the estate into the QDOT!

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Robert S. Blumenfeld  - Senior Estate Tax Audit Counsel
Mr. Blumenfeld concentrates his practice in the areas of International Tax and Estate Planning, Probate Law, and Representation of Resident and Non-Resident Aliens before the IRS.

Prior to joining Marini & Associates, P.A., he spent 32 years as the Senior Attorney with the Internal Revenue Service (IRS), Office of Deputy Commissioner, International.

While with the IRS, he examined approximately 2,000 Estate Tax Returns and litigated various international and tax issues associated with these returns.As a result of his experience, he has extensive knowledge of the issues associated with and the preparation of U.S. Estate Tax Returns for Resident and Non-Resident Aliens, Gift Tax Returns, Form 706QDT and Qualified Domestic Trusts.

Depletion of Eventual Probate Estate Through Inter Vivos Transfers

nlrg.com  One problematic issue regarding the administration of probate or intestate estates is that in which property of mentally or physically incapacitated persons is found to have been significantly depleted through lifetime transfers in the period just prior to death.

The Virginia Supreme Court recently addressed this problem, establishing that where such lifetime transfers benefit persons standing in a confidential relationship to the grantor, a rebuttable presumption of fraud arises so as to protect decedent estates from the depredations by third parties upon whom the decedent relied at the end of life. more

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Pistachio Importer Says "Ah Nuts" and Makes Plea Deal for FATCA Violations

The U.S. government charges an owner of an Iranian pistachio processing and distribution company with operating an unlicensed money transmitting business, failing to disclose foreign bank accounts and filing a false tax return.

In United States of America vs. Ali Amin the government alleged that Ali Amin, who wholly owned and operated Primex International Trading Company Inc. (Pitco), had approved the illegal transfer of approximately $600,000 from Iran to the U.S., and concealed unreported income of about $1.93 million for 2009 through commercial transactions involving the purchase and sale of Pistachios with related parties who transferred funds between each other using an informal network (often known as a Hawala). The Indictment illustrates how the system worked:

"8. For example, defendant AMIN approved the transfer of approximately $600,000 from Iran to the United States as follows:

a. On or about October 27, 2 008, defendant AMIN received an email from Fatemeh Amin, a relative of defendant Amin, in which Fatemeh Amin requested the transfer of $600,000 from Amin Padidar to Fatemeh Amin's brother in the United States, and explained how Fatemeh Amin would arrange to deposit rivals equal to $600,000 with Amin Padidar for the transfer. Defendant AMIN sent an email in response to Fatemeh Amin and explained that "we can transfer the $600K tomorrow Europe time. You should have the funds in your account by tomorrow Thursday Los Angeles time"

The Hawala system was used extensively to transmit over $17 million dollars over four years. The use of a Hawala may violate the provisions of the Bank Secrecy Act which requires registration of Money Transmitting Businesses.

 The Indictment further alleges that because Amin had an unreported interest in foreign financial accounts he was required to file a Report of Foreign Financial Account (FBAR) on an annual basis.

"13.AMIN had a financial interest in, and signature and other authority over, account number xxxxxxx.254, in the name of Imavel Corporation, at Hyposwiss Private Bank in Zurich, Switzerland, which account had an aggregate value exceeding $10,000 during the calendar year 2009, that is, approximately $2.9 million in September 2009, and defendant ALI AMIN did so (a) while violating other laws of the United States, namely, operation of an unlicensed money transmittal business, in violation of 18 U.S.C. § 1960; and (b) as part of a pattern of illegal activity involving more than $100,000 in a 12-month period."

AMIN, a resident of Los Angeles, California, willfully made and subscribed, by a written declaration verifying that he was doing so under penalty of perjury, and filed with the Internal Revenue Service, a U.S. Individual Income Tax Return, Form 1040, for the calendar year 2009, which defendant ALI AMIN did not believe to be true and correct as to every material matter, in that the tax return reported total income of -$1,127,331 on line 22, whereas, as defendant ALI AMIN then knew and believed, his total income for the year 2009 was in excess of -$1,127,331, specifically, defendant ALI AMIN concealed unreported income of approximately $1,926,742.47.

This case highlights the need for competent experienced legal advice in order to avoid serious criminal and civil penalties associated with Offshore Accounts and FBAR Filing!

Do You Have Undeclared Income from a Foreign Bank?

Want to Know if the OVDP Program is Right for You?

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at: www.TaxAid.us or www.TaxLaw.ms or

Toll Free at 888-8TaxAid ((888) 882-9243)

Sources:



Bloomberg

JDSupra

60 Crummey Withdrawal Beneficiaries Allowed

RUBIN ON TAX: 60 Crummey Withdrawal Beneficiaries Allowed: For many years, courts have recognized that gifts to a trust can qualify for the gift tax annual exclusion as “present interest” gifts if withdrawal powers are granted to beneficiaries.

The IRS is hostile to persons being treated as a beneficiary for this purpose if they have no rights to income or principal nor vested rights as remaindermen.
 
In a recent Tax Court case, Mikel v. CIR, T.C. Memo 2015-64, a trust had as its beneficiaries 60 persons – all of the lineal descendants of the settlors and the spouses of those descendants.

This was an issue because the initial resolution of disputes has to be submitted to arbitration before a panel consisting of three persons of the Orthodox Jewish faith. Such a panel in Hebrew is called a beth din. If a disputant does not like the results of the beth din, they could still go to court, but the trust has an in terrorem clause that would cut off the rights of the disputing beneficiary if he or she did that. 

So the IRS argued that the in terrorem clause effectively voided the withdrawal beneficiaries power to legally enforce his or her withdrawal powers, thus they were illusory and not a qualified present interest.

The flaw in this argument is that the beth din was still obligated to apply the provisions of the trust instrument and New York law. So since the beneficiaries had withdrawal rights under the trust and New York law the beth din could not disregard them; the rights were thus enforceable. The fact that they were enforceable by the beth din and not a court of law was not important to the Tax Court.

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Court Approves FBAR Penalty and Addresses Previously Unknown Issues!

We had previously posted  Court Approves FBAR Penalty and Raises Important Administrative and Constitutional Law Issues where we discussed that on April 1, 2015, in response to a summary judgment motion, in Moore v. U.S., (DC WA 04/01/2015) 115 AFTR 2d ¶2015-591 the district court for the western district of Washington reviewed the procedures and standards that apply to penalties for non-willful failure to file the FBAR.

The opinion was interesting for many reasons, including its extensive discussion of the Administrative Procedure Act and the constitutional challenges Moore raised in opposition to the  IRS’s assessing FBAR penalties. Rubin on Tax details the decision and how it address some of the unknown and uncertain penalty issues relating to failure to file FBARs. These issues include:

a. Definition of Reasonable Cause. The penalty for failure to file an FBAR will not apply if the taxpayer has reasonable cause for the nonfiling. Unfortunately, there is no definition of reasonable cause under the Bank Secrecy Act or its regulations for FBAR penalty purposes. The court determined that the best meaning would be to borrow from the Internal Revenue Code provisions (such as Sections 6664(c)(1) and 6677(d)), and held that a person would have reasonable cause for an FBAR violation if he exercised of ordinary business care and prudence.

b. No Reasonable Cause Facts. Applying the above definition, the court found the taxpayer did not have reasonable cause for his failure to file. The same facts will have a different impact on different courts, both as to having different judges and different overall circumstances. Nonetheless, it is useful to see what facts are relevant to deciding in courts. 

In this case, some of the bad facts were that the court determined that the taxpayer knew of his filing requirements (in part because in prior years he had filled out his own tax returns and knew of the question on the income tax return about foreign accounts even though he did not answer that question), that he incorrectly denied having foreign accounts in filling out tax organizers/questionnaires of the return preparer, and there was no evidence that he otherwise advised the preparer of the account.

c. Assessment Procedures Met Due Process. By interviewing the taxpayer, giving him a notice proposing to assess the penalties, affording the taxpayer an appeal process, and issuing a notice of assessment, the IRS was found by the court to have met the requirements of procedural due process. 

d. No 8th Amendment Violation. The IRS imposed $10,000 per year penalties on the accounts. The court found that the imposition of such maximum penalties were not an 8th Amendment “excessive fine” violation. The court found the penalties were not disproportionate to the offence, since Congress authorized them without regard to the size of the unreported accounts, and the actual size of the account not reported here (account with balances between $300,000 and $550,000).

Do You Have Undeclared Income from a Foreign Bank?

Want to Know if the OVDP Program is Right for You?

Contact the Tax Lawyers at 

Marini & Associates, P.A.  

 

for a FREE Tax Consultation

at: www.TaxAid.us or www.TaxLaw.ms or

Toll Free at 888-8TaxAid ((888) 882-9243)

Practitioner Fears Over LB& I Document Requests Not Substatiated In Practice? What Has Been Your Experience?

According to Bloomberg/BNA there hasn't been a surge in the number of summonses from the Internal Revenue Service as its Large Business &  International Division has shifted attention to new processes for information document requests, an IRS official said, alleviating some concern from practitioners about the effects of the processes.
        

“Since it's been rolled out, there has not been a noticeable uptick in summons at all,” said David Bergman, an attorney in the IRS Office of Chief Counsel (Procedure &  Administration), at an event April 15 hosted by the DC Bar Association Tax Audits &  Litigation Committee. “So far, it's been rolled out smoothly.”
        

We previously posted 2014 LB&I Information Document Request (IDR) Enforcement Process - Ready or Not? where we discussed that the Acting LB&I Commissioner issued a directive (LB&I Control No: LB&I-04-0613-004) to LB&I employees announcing that for all IDRs issued after June 30, 2013:

1. The examiner must identify and state the issue that has led the examiner to request the information included in the lDR.
2. The examiner must discuss the lDR with the taxpayer in advance of issuing it, and
3. Both parties must discuss and determine a reasonable timeframe for response.

When all of these steps are followed, the expected outcome is that the lDR process will be more efficient, and as a result, there will be less need to enforce IDRs through summonses. 

 

The new IDR Enforcement Process involves three graduated steps:  

1. a Delinquency Notice,
2. a Pre-Summons Letter and
3. a Summons. 

If a taxpayer does not provide a complete response to an IDR by the response date in the Pre-Summons Letter, the examiner or specialist will complete the next phase of the enforcement process, the Summons.

 

The new process specifies deadlines for information document requests in audits. Taxpayers are sent a delinquency notice and a pre-summons letter before a summons is prepared. Examiners have the discretion to delay the process an additional 15 days.
                 

As new guidance for IDR enforcement processes has been introduced in recent years, some practitioners feared the procedures would give examiners too much power to quickly trigger summonses.

Give us your comments as to whether you've seen an increase in summonses being issued by the IRS in your practice.

Have A Tax Problem?

  

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Toll Free at 888-8TaxAid (888 882-9243).

 

Everything You Ever Wanted to Know about FATCA IDES, But Wish You Did Not Need to Ask!

Updated! IDES Web Pages

The following web pages or documents have been updated on the FATCA International Data Exchange Service (IDES) site:

• IDES Alert Codes
• IDES Resources
• Global IT Forum

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2.  Updated! IDES User Guide (04-2015)

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The IDES User Guide has been updated for April 2015 and includes enhancements for reporting and other instructions.
Back to top

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3.  Updated! FATCA IDES Data Preparation Examples Available on GitHub

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Users have inquired about technical solutions and specifications regarding data preparation to create IDES data packets. In response, the IRS developed examples that conform to published guidelines.  The examples, available on GitHub, explain how to create an IDES data packet and decrypt a notification.
GitHub is an open source repository hosting service that allows users to collaborate and share code. You are invited to review the examples, participate in the online community and create your own technology solutions.
• IDES Data Preparation for.NET 
• IDES Data Preparation for Java
• IDES Data Preparation for OpenSSL
Note: Please note that there are many open market tools that produce the same results; however, the IRS does not endorse any commercial products, including the frameworks used in the example.  All contributions and discussions must be done using the collaboration feature available directly within GitHub. Please do not contact the IRS with questions related to GitHub or the information posted in the repository.

Disclaimer:
We waive copyright and related rights in the work worldwide through the CC0 1.0 Universal public domain dedication. Unless expressly stated otherwise, the person who associated a work with this deed makes no warranties about the work, and disclaims liability for all uses of the work, to the fullest extent permitted by applicable law. When using or citing the work, you should not imply endorsement by the author or the affirmer.

Have A Tax Problem?

  

Contact the Tax Lawyers at 

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for a FREE Tax Consultation

at: www.TaxAid.us or www.TaxLaw.ms or

Toll Free at 888-8TaxAid (888 882-9243).