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TRUSTS & ESTATES, WILLS, AND TAX LAW UPDATE

TAX: U.S. Tax Court Quotes Show Business Celebrity

Posted by James P. Witt on Thu, Oct 26, 2017 @ 12:10 PM

Jim Witt, Senior Attorney, National Legal Research Group 

            It is not often, if ever, that the U.S. Tax Court quotes a show business celebrity in its opinions, but it did so in a summary opinion filed on August 16, 2017, in the case of Omoloh v. Commissioner, T.C. Summ. Op. 2017-64, 2017 WL 3530853. The case turned on whether the taxpayer, Wilfred Omoloh, was age 59½ at the time that he took a distribution from his individual retirement account ("IRA"). I.R.C. § 72(t) ("10-percent additional tax on early distributions from qualified retirement plans") provides in subsection that (1) if the taxpayer receives a distribution from a qualified retirement plan such as an IRA, the taxpayer's income tax liability for the year will be increased by an amount equal to 10% of the portion of the distribution includible in gross income. However, under subsection (2), the 10% penalty of subsection (1) shall not apply if the distribution is made on or after the date on which the taxpayer attains age 59½.

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Topics: tax law, distribution, income tax liability, IRA account, age and penalty

Creation/Timing of Self-Proving Affidavits

Posted by Matthew T. McDavitt on Fri, Sep 22, 2017 @ 11:09 AM

Matthew McDavitt, Senior Attorney, National Legal Research Group

            In the execution of wills, many testators utilize the optional execution of self-proving affidavits, where statutorily authorized, wherein the will execution witnesses sign a statement before an officer authorized to administer oaths affirming their observation of the testator's mental capacity and testamentary intent, as well as the signing of the will. A properly executed self-proving affidavit raises a legal presumption of due execution and eliminates the normal requirement mandating that witnesses to a will testify in court as to the authenticity of the will.

            In practice, self-proving affidavits are normally created contemporaneously with the execution of the will, and some states' statutes mandate such simultaneous affidavit execution. However, some state statutes expressly allow self-proving affidavits to be executed at any time after the observed will execution. Thus, for example, we see both simultaneous and postexecution self-proving affidavit execution mentioned in Michigan's statutory provision on the subject:

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Topics: trusts, timing, self-proving affidavits, contemporaneous with will

TAX:  Corporate Income Tax Reform

Posted by James P. Witt on Fri, Jun 9, 2017 @ 17:06 PM

The Lawletter Vol 42 No 4

Jim Witt, Senior Attorney, National Legal Research Group

     The one area of taxation that is recognized on both sides of the political aisle as badly needing reform is the federal corporate income tax. One fact that signals the need for reform is that the maximum tax rate for the ordinary income of U.S. corporations is at 35% on taxable income exceeding $10 million (Internal Revenue Code of 1986, § 11(b)(1)(D)), among the highest marginal rates in the world (e.g., Ireland 12.5%; Germany 29.65%). As a result, and as prominently reported in recent months, a number of U.S. corporations (notably Apple and Alphabet (Google)) have shifted the locus of intangible assets and/or corporate headquarters to countries with favorable tax rates (a procedure known as a "corporate inversion"). United States corporations are subject to federal income tax on their global profits, but by not repatriating their profits attributable to a foreign situs, those corporations avoid paying taxes by simply not bringing those profits back to the United States.

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Topics: tax law, U.S. high rate on taxable income, corporate income, location of corporate headquarters

TRUSTS: Charitable Trusts and Bankruptcy Proceedings

Posted by Matthew T. McDavitt on Mon, Mar 6, 2017 @ 17:03 PM

The Lawletter Vol 42 No 2

Matt McDavitt, Senior Attorney, National Legal Research Group

     Where testators or settlors create charitable gifts in trust for named institutional beneficiaries, when the contemplated distribution is ready to be made, sometimes it is found that the intended charity is involved in bankruptcy proceedings. Therefore, the question arises as to the proper disposition of such charitable gifts in trust to the bankrupt institutional beneficiaries.

     There is little law, even nationally, discussing the proper course of action in the event that a named charitable beneficiary is found to be in bankruptcy at the time of distribution. It is logical that a testator who makes a charitable gift would not want his or her gift to be subject to collection by the intended recipient institution's bankruptcy trustee, as such action would solely benefit the charity's creditors, rather than advancing the intended charitable purpose. There is at least one federal opinion interpreting and predicting state law on this point, holding that: (a) Under Massachusetts law as predicted by the First Circuit Court of Appeals, a charitable organization that has ceased to perform charitable work, and that is incapable of redirecting funds for charitable purposes, is ineligible to receive a charitable bequest or gift, absent a contrary provision in will or trust instrument; and (b) It is "difficult to imagine" that, absent special circumstances, a testator seeking to advance general charitable interests would ever intend her gift to be used for the benefit of creditors rather than to promote charitable purposes actually intended. In re Boston Reg’l Med. Ctr., Inc., 410 F.3d 100 (1st Cir. 2005).

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Topics: bankruptcy, trusts, charitable trust, proper disposition of gift

TAX: Legal Issues Arising from Tax-Related Identity Theft

Posted by Lee P. Dunham on Mon, Mar 6, 2017 @ 16:03 PM

The Lawletter Vol 42 No 2

Lee Dunham, Senior Attorney, National Legal Research Group

     Tax-related identity theft occurs when someone uses a taxpayer's stolen Social Security number to file a fraudulent refund. Often, the taxpayer is not aware of the identity theft until he or she files a valid tax return and is notified by the Internal Revenue Service ("IRS") that multiple returns have been filed in his or her name. Its incidence, like that of other forms of identity theft, has increased in recent years due to hacking and phishing scams that have enabled cybercriminals to obtain far-reaching access to taxpayers' personal data, including Social Security numbers.

     The schemes of the criminal defendants described in United States v. Philidor, 717 F.3d 883 (11th Cir. 2013), and United States v. Gonzalez, No. 13 CR 154 RWS, 2014 WL 316984, at *2 (S.D.N.Y. Jan. 27, 2014), are illustrative of the nature and scope of the problem.

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Topics: tax, identity theft, stolen Social Security number

ESTATES: The Inheritability of Digital Music Files

Posted by Matthew T. McDavitt on Thu, Dec 1, 2016 @ 09:12 AM

Matthew McDavitt, Senior Attorney, National Legal Research Group

     The average layperson might assume that digital music files (i.e., songs purchased from services such as iTunes and Amazon) can be passed by will or intestate succession. This is certainly true for music recorded onto physical media, such as CDs. However, the law currently treats digital files differently, given (a) the manner in which digital music is purchased, (b) the use of multiple digital files when accessing digital music files, and (c) the perishable nature of non-digital media.

     Because most consumers never read the "Terms & Conditions" agreements when purchasing digital music, they may be surprised to learn that when buying a song from iTunes or Amazon, the purchaser is not granted ownership of the downloaded song file, but merely acquires a non-transferable license to use the file on the purchaser’s device for the contract duration. Thus, by contract, such files cannot pass at the death of the purchaser, as the usage license is non-transferable to other persons.

     Digital music services have justified the new ownership regime based upon the manner in which digital music is accessed and played, as well as the non-perishability of digital files. Digital music providers argue that the digital file is necessarily "copied" each time it is accessed from the purchaser's device, the "cloud," or when streamed from the service-provider, so that the seller rightfully structures consumer access of the purchased music files as a personal, non-transferable license to access such usage "copies" during the term of the contract.

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Topics: Matthew T. McDavitt, estates, digital music files, usage license is nontransferable

TAX: IRS v. Facebook

Posted by James P. Witt on Mon, Oct 10, 2016 @ 13:10 PM

The Lawletter Vol 41 No 8

Jim Witt, Senior Attorney, National Legal Research Group

     Over the last 30 years or so, American companies have sought to reduce their U.S. federal income tax liability by employing the tactic known as the "tax inversion." Typically, in an inversion transaction, one or more of the corporation'’s shareholders transfer stock to a controlled foreign corporate subsidiary in exchange for stock in the subsidiary. The goal is to shift corporate revenue from the United States to the jurisdiction to which the subsidiary is subject, presumably a country with favorable rates of corporate income taxation.

     It has recently come to light that corporate tax avoidance issues can arise in connection with a tax inversion transaction that are in addition to any question as to the validity of the inversion transaction itself. In proceedings involving Facebook'’s inversion transaction shifting a large portion of its tax base to Ireland, the Internal Revenue Service ("IRS") is seeking the production of books and records from Facebook with the object of determining whether Facebook improperly avoided U.S. income tax on its royalty by undervaluing the assets transferred to its Irish subsidiary as part of its inversion transaction.

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Topics: Facebook, tax law, James P. Witt, income tax liability, tax inversion

WILLS: Execution Evidence—Testator Incapacity Due to Permanent Mental Impairment

Posted by Matthew T. McDavitt on Tue, Jul 12, 2016 @ 15:07 PM

Matthew McDavitt, Senior Attorney, National Legal Research Group

     While the issue is apparently one of first impression in many jurisdictions, a handful of courts nationally have addressed the relevancy and admissibility of evidence of pre- or post-will-execution mental capacity—normally deemed irrelevant to will-execution mental capacity—where it has been shown that the testator suffered from a permanent mental deficiency. Importantly, as observed by the U.S. Supreme Court, where evidence is developed of permanent or continuing mental incapacity, the burden properly shifts to the will proponent to prove a lucid interval, rather than the normal burden upon the contestant to prove incapacity, as continued mental incapacity is legally presumed:

In addition to the proof . . . of his undoubted insanity prior [to] and for some time subsequent []to [the will execution], there was slight evidence of insane acts during the month of February, though there was no opinion expressed by anyone that he was incapable of making a valid deed or contract. The whole testimony regarding his insanity was duly submitted to the jury, who were instructed that if they found his insanity to be permanent in its nature and character, the presumptions were that it would continue, and the burden was upon the defendant to satisfy the jury by a preponderance of testimony that he was, at the time of executing the will, of sound mind. There was no error in this instruction.

Keely v. Moore, 196 U.S. 38, 46-47 (1904) (emphasis added).

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Topics: wills, Matthew McDavitt, DNA testing, evidence, permanent mental impairment, testator incapacity

ATTORNEY-CLIENT: Colorado Retains the "Strict Privity Rule" for Malpractice in Estate Planning

Posted by Lee P. Dunham on Tue, May 3, 2016 @ 13:05 PM

The Lawletter Vol 41 No 4

Lee Dunham, Senior Attorney, National Legal Research Group

     In general, an attorney's duty of care extends only to his or her clients, not to third parties. This rule makes intuitive sense in most areas of the law, where the client is typically the party who is injured directly by attorney malpractice. However, in the estate planning context, where the client is often long dead by the time the malpractice is discovered, the true victims of malpractice may be the beneficiaries, or would-be beneficiaries, of the client's estate.

     Recognizing this problem, courts of several states have relaxed the "strict privity rule" in malpractice suits against estate planning attorneys. Most notably, in Biakanja v. Irving, 320 P.2d 16 (Cal. 1958), and Lucas v. Hamm, 364 P.2d 685 (Cal. 1961), cert. denied, 368 U.S. 987 (1962), California adopted what has come to be known as the "California Test," a multifactor balancing test designed to determine whether a beneficiary can maintain a malpractice claim against an estate planning attorney despite a lack of privity. The factors include "the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury, and the policy of preventing future harm." Lucas, 364 P.2d at 687 (citing Biakanja, 320 P.2d at 19).

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Topics: strict privity rule, duty of care to third parties, attorney-client, Lee Dunham, estate planning

TAX: Inversions—Apple's Complex Web of Subsidiaries

Posted by James P. Witt on Tue, May 3, 2016 @ 13:05 PM

The Lawletter Vol 41 No 4

Jim Witt, Senior Attorney, National Legal Research Group

     The most straightforward tactic taken by large American corporations since the 1980s to avoid the full brunt of U.S. federal corporate income tax is known as "tax inversion" (or "corporate inversion"). This strategy has drawn considerable attention lately, with President Obama last summer calling on Congress to pass tax legislation to end the practice. In November 2015, the U.S. drug giant Pfizer announced its merger with Irish-headquartered Allergan, which, in the largest tax inversion to date, would give the merged company a situs in Ireland.

     Inversion transactions usually involve the transfer of stock of a corporation by one or more shareholders to a wholly owned or controlled foreign subsidiary of that corporation in exchange for newly issued shares of the subsidiary's stock. Internal Revenue Code § 7874 (rules relating to expatriated entities and their foreign parents) contains the tax rules related to inversions.

     Apple Inc., based in Cupertino, California, has gone well beyond the standard tax inversion maneuver. According to a study by Citizens for Tax Justice and the U.S. Public Interest Research Group Education Fund, Apple holds $181 billion in profit offshore that has escaped U.S. income tax. A May 20, 2013 report issued by the Senate Homeland Security Permanent Subcommittee on Investigations concluded that Apple's tax arrangements have nothing to do with the U.S. location of all the intellectual property that supports Apple's products. Non-U.S. sales account for 60% of Apple's profits, and these profits are routed through Irish subsidiaries that Apple established four years after its founding and are not taxed by any jurisdiction. The following discussion broadly outlines the rules that Apple, through its web of subsidiaries, takes advantage of to minimize its corporate income tax liability, eliminating U.S. corporate tax liability as long as foreign earnings are not repatriated.

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Topics: tax, James P. Witt, inversion, Apple Inc., transfer of stock to foreign subsidiary

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