Posts Tagged ‘trust’

On Friday, July 31, 2015, President Obama signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the “Act”), which extended funding to the Highway Trust Fund (“HTF”) for an additional three months.
This Act contains several important tax provisions, including modified due dates for several common tax returns, overruling of the Supreme Court’s Home Concrete decision, required additional information on mortgage information statements, and required consistent basis reporting between estates and beneficiaries.
Tax Return Due Date Modifications

The Act sets new due dates for partnership and C corporation returns, as well as FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”), and several other IRS information returns.

Partnership Returns

The new due date is March 15 (for calendar-year partnerships) and the 15th day of the third month following the close of the fiscal year (for fiscal-year partnerships). Currently, these returns are due on April 15 for calendar-year partnerships. The Act directs the IRS to allow a maximum extension of six months for Forms 1065, U.S. Return of Partnership Income.

C Corporations

The new due date is the 15th day of the fourth month following the close of the corporation’s year. Currently, these returns are due on the 15th day of the third month following the close of the corporation’s year.

Corporations will be allowed a six-month extension, except that calendar-year corporations would get a five-month extension until 2026 and corporations with a June 30 year end would get a seven-month extension until 2026.

The new due dates will apply to returns for tax years beginning after December 31, 2015. However, for C corporations with fiscal years ending on June 30, the new due dates will not apply until tax years beginning after December 31, 2025.

Other Forms Affected

The new Act directs the IRS to modify its regulations to allow the following maximum extensions:

5 and 1/2 months on Form 1041, U.S. Income Tax Return for Estates and Trusts;
3 and 1/2 months on Form 5500, Annual Return/Report of Employee Benefit Plan;
6 months on Form 990, Return of Organization Exempt From Income Tax, Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code, Form 5227, Split-Interest Trust Information Return, Form 6069, Return of Excise Tax on Excess Contributions to Black Lung Benefit Trust Under Section 4953 and Computation of Section 192 Deduction, Form 8870, Information Return for Transfers Associated With Certain Personal Benefit Contracts, and Form 3520-A, Annual Information Return of a Foreign Trust With a U.S. Owner.
The due date for Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, will be April 15 for calendar-year filers, with a maximum six-month extension.

FinCEN 114 (former FBAR)

The due date for FinCEN Form 114 is changed from June 30 to April 15, and for the first time taxpayers will be allowed a six-month extension to October 15.

Additional Information on Mortgage Interest Related Returns

The Act amends Sec. 6050H to require new information on the mortgage information statements that are required to be sent to individuals who pay more than $600 in mortgage interest in a year. These statements will now be required to report the outstanding principal on the mortgage at the beginning of the calendar year, the address of the property securing the mortgage, and the mortgage origination date. This change applies to returns and statements due after December 31, 2016.

Changes Related to Basis Reporting Between Estate and Beneficiaries

The Act amends Sec. 1014 to mandate that anyone inheriting property from a decedent cannot treat the property as having a higher basis than the basis reported by the estate for estate tax purposes. It also creates a new Sec. 6035, which requires executors of estates that are required to file an estate tax return to furnish information returns to the IRS and payee statements to any person acquiring an interest in property from the estate. These statements will identify the value of each interest in property acquired from the estate as reported on the estate tax return. The new basis reporting provisions apply to property with respect to which an estate tax return is filed after the date of enactment.

The Home Concrete Case is Overruled

In Home Concrete & Supply, LLC, 132 S. Ct. 1836 (2012), the Supreme Court held that the extended six-year statute of limitation under Sec. 6501(e)(1)(A), which applies when a taxpayer “omits from gross income an amount properly includible” in excess of 25% of gross income, does not apply when a taxpayer overstates its basis in property it has sold.

In response to this decision, the Act amends Sec. 6501(e)(1)(B) to add this language: “An understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income.” The change applies to returns filed after the date of enactment as well as previously filed returns that are still open under Sec. 6501 (determined without regard to the amendments made by the Act).

If you have any questions, please contact your WithumSmith+Brown professional, a member of WS+B’s National Tax Services Group or email us at taxbriefs@withum.com.

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From the estate and trust world comes this post from WS+B partner Hal Terr, who reminds us that estate tax returns are under heavy scrtunity, so record keeping and adequate substantiation of all expenses are a must.

When reading this case you can only imagine the presiding judge listening to the evidence and proclaiming in his best John McEnroe “You cannot be serious!”

The executrix was the mother of the decedent. When the decedent was injured in 1992 his mother took care of him; he lived in her house, she fed and clothed him and paid his bills. She did this, according to the facts of the case, “without expectation of repayment.” The expenses for his care were paid in cash and no records were kept substantiating the amounts paid.

When the son passed away in 2006, as executrix the mother gathered the information and provided it to her attorney for the preparation of the federal estate tax return, but kept no records of the work performed by her or her attorney.  As such, there was also no substantiation of the amounts paid for executor’s commissions or attorney fees.

The federal estate tax return contained (or failed to contain) the following items at issue:

  • Two life insurance policies, the ownership of which were disputed, were omitted from the return;
  • A note owned by the decedent was not included as an asset of the estate;
  • Deductions for executor commissions of $87,000 and attorney fees of $94,000 were reflected on the return;
  • A deduction was taken for a charitable contribution of $142,000; and
  • The estate reflected a debt of $175,000 owed to the mother by the decedent to repay her for the expenses she incurred in his care.

Life Insurance Policies

The executrix claimed that two life insurance policies were actually owned by her and not the decedent.  She claimed the record of the insurance companies was a mistake of the agent and produced copies of checks of the payments of premiums by her.   However, the executrix could not produce any documents concerning the ownership of the policy or testimony of the agent.  The Tax Court found the two life insurance policies were included in the taxable estate as it was more likely she paid the premiums on behalf of her son as she paid other expenses for him while he was alive.

Inclusion of the Note

The executrix argued that the note had no value since a January 2005 brokerage statement did not indicate a value and that the issuer “went broke”. The Tax Court found that although the value of the note was not readily ascertainable, it was unlikely that it was worthless since the company’s stock was valued at $19.05 per share.   As such, the note should have been included in the taxable estate for the face value of $10,000.

Estate Deductions

Under IRC Section 2053(a)(2), amounts deductible as administration expenses on the estate tax return are limited to those actually and necessarily incurred.   The Tax Court found that because the executrix had not substantiated the claimed deductions and had not maintained required records, the executrix had to prove the statutory notice issued by the IRS was incorrect. The Tax Court was not persuaded that the amounts claimed by the executrix for commissions or attorney’s fees were reasonable or that they had been actually and necessarily incurred.  

Charitable Contribution

Under IRC Section 2035, an estate is allowed a charitable contribution for amounts transferred to a qualified charitable organization if made during the decedent’s lifetime or by Will.   However, the decedent did not have a Will, and the amounts paid to charity were made after the son’s death.   As such, the Tax Court disallowed the charitable deduction.

Note Due to Mother

IRC Section 2053(a)(3) provides that a claim against an estate can be deducted if the claims “when founded on a promise or agreement were contracted bona fide and for an adequate and full consideration in money or money’s worth”. 

The mother claimed her son owed her $165,000 plus interest for the care she provided during his lifetime.   The mother did not keep records for the amounts she provided on the behalf of her son and in her testimony stated “I’m trying to get it from his estate” which suggested to the Tax Court the debt was not valid and enforceable during the son’s lifetime. The son had adequate investments in his brokerage account which suggested that the debt owed to his mother could have been paid if the son recognized the debt as valid. The Tax Court was not convinced the debt was real and did not allow the deduction.

What can be learned from this case:   The executrix was assisted by the attorney who had prepared the estate tax return but was not admitted to practice before the Tax Court.   It should go without saying that if one is due before the Tax Court, one should make sure their counsel is actually allowed to help.  As Sean Connery says in the movie “Untouchables”  you don’t bring a knife to a gunfight.

Given the increases in the federal estate exemption, fewer federal estate tax returns will be filed and those that are actually filed will be scrutinized.   As such, executors should make sure they have adequate documentation to support the assets and deductions claimed on the estate tax return in the event of examination.


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