TRUSTS & ESTATES, WILLS, AND TAX LAW UPDATE

TAX: State and Local Sales Tax on Internet Sales of Goods

Posted by D. Bradley Pettit on Wed, Apr 15, 2015 @ 17:04 PM

The Lawletter Vol 40 No 2

Brad Pettit, Senior Attorney, National Legal Research Group

      A very recent decision by a Florida appellate court illustrates constitutional issues that arise when a state or locality seeks to impose a tax upon sales of goods to out-of-state customers via the Internet. In American Business USA Corp. v. Department of Revenue, 151 So. 3d 67 (Fla. 4th DCA 2014), the court addressed the question of whether Internet sales of flowers, gift baskets, other items of tangible personal property, and prepaid telephone calling arrangements by a corporation that was registered to do business in Florida to out-of-state consumers were subject to the Florida sales tax. The taxpayer in the American Business case objected to taxation of its Internet sales to out-of-state customers on the ground that such taxation violated the Commerce and/or Due Process Clauses of the U.S. Constitution. The American Business court upheld the State of Florida's taxation of Internet sales of prepaid telephone call cards but rejected the State's taxation of Internet sales of flowers and other tangible goods.

     The American Business court began its discussion of the constitutional issues by pointing out that the Commerce and Due Process Clauses of the federal Constitution "impose distinct but parallel limitations on a State's power to tax out-of-state activities." Id. at 71 (quoting MeadWestvaco Corp. ex rel. Mead Corp. v. Ill. Dep't of Revenue, 553 U.S. 16, 24 (2008)). The American Business court explained that when evaluating the validity of a tax under the Commerce Clause of the Constitution, the tax in question will survive "[if] the tax is applied to an [1] activity with a substantial nexus with the taxing State, [2] is fairly apportioned, [3] does not discriminate against interstate commerce, and [4] is fairly related to the services provided by the State." Id. (alterations in original) (quoting Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977)). According to the American Business court, "if the taxing state is able to show only three of the four prongs under Complete Auto, the tax will not be sustained under a commerce clause challenge." Id. The genesis of the prohibition against collecting a sales tax on purchases made outside the state, such as those made through mail orders, can be traced in large measure to the Commerce Clause, which precludes the application of a state statute to commerce that takes place wholly outside of the state's borders, whether or not the commerce has effects within the state. Id. at 72 (citing Edgar v. MITE Corp., 457 U.S. 624, 642-43 (1982); Geoffrey E. Weyl, Quibbling with Quill: Are States Powerless in Enforcing Sales and Use Tax-Related Obligations on Out-of-State Retailers?, 117 Penn St. L. Rev. 253, 257 (2012)).

     With respect to the Due Process Clause challenge by the taxpayer in the American Business case, the court explained that "[t]he standard for due process analysis under the Fourteenth Amendment, as adopted by the United States Supreme Court, is the same standard as announced in International Shoe, i.e., whether maintenance of the suit would offend 'traditional notions of fair play and substantial justice.'" Id. at 73 (quoting Quill Corp. v. North Dakota, 504 U.S. 298, 307 (1992) (quoting Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945))).

     Ultimately, the American Business court ruled that although the State of Florida's imposition of taxes on sales of prepaid calling arrangements to out-of-state customers via the Internet did not violate the Due Process Clause of the Fourteenth Amendment of the federal Constitution, the assessment of sales tax on Internet sales of flowers, gift baskets, and tangible personal property outside of Florida to out-of-state customers for out-of-state delivery violated the Commerce Clause of the Constitution:

     As we determine "by a case-by-case evaluation of the actual burdens imposed by particular regulations or taxes," we conclude that the taxes imposed here are an undue burden on interstate commerce, as there is not a "substantial nexus" between the activity of the taxpayer and the taxing state. Quill, 504 U.S. at 315, 112 S.Ct. 1904. Cf. Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 184, 115 S.Ct. 1331, 131 L.Ed.2d 261 (1995) (finding Oklahoma's tax on a bus ticket for travel from Oklahoma to another state satisfied the first prong of the Complete Auto because "Oklahoma is where the ticket is purchased, and the service originates there. These facts are enough for concluding that '[t]here is "nexus" aplenty here.'"). Merely registering in a state does not give the taxing state the right to assess sales taxes on transactions without any other facts to constitute "substantial nexus." Further, the Court in Bellas Hess characterized mail order transactions as "exclusively interstate in character." 386 U.S. at 759, 87 S.Ct. 1389. It follows then that the internet transactions at issue here are even more "exclusively interstate in character." 

     . . . .

     Unlike the sale of flowers ordered by out-of-state customers with delivery at an out-of-state location, the prepaid calling arrangements have the required "substantial nexus" to the taxing state. See Complete Auto, 430 U.S. at 279, 97 S.Ct. 1076. Taxes on prepaid calling arrangements are governed by section 212.05(1)(e), Florida Statutes (2012). In contrast with tangible personal property, prepaid calling arrangements are sold and delivered by the taxpayer through the internet. Delivery is effectuated by the taxpayer sending an authorization code directly to the customer via the internet. This makes the sale of prepaid calling arrangements unlike the sale of tangible personal property, such as flowers and gift baskets.

Id.

Topics: Commerce Clause, Due Process Clause, tax law, Internet sales, state and local sales tax

ESTATES: Depletion of Eventual Probate Estate Through Inter Vivos Transfers

Posted by Matthew T. McDavitt on Tue, Apr 14, 2015 @ 13:04 PM

The Lawletter Vol 40 No 2

Matt McDavitt, Senior Attorney, National Legal Research Group

     One problematic issue regarding the administration of probate or intestate estates is that in which the 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.

     In Ayers v. Shaffer, 286 Va. 212, 748 S.E.2d 83 (2013), the Virginia Supreme Court considered whether the circuit court had erred in sustaining a demurrer to an 11-count complaint that certain inter vivos transfers that had significantly reduced a decedent's probate estate were the result of undue influence exercised by persons in a confidential relationship with the decedent during her lifetime. In Ayers, due to issues with the decedent's physical and mental capacity, a friend and a sister of the decedent's had been assisting her with her finances in the years leading up to her death. The friend held power of attorney for the decedent. Just before the decedent's death, the friend and the sister took her to the various banks where she held accounts, and the incapacitated account owner allegedly executed pay-on-death forms, nominating her attorney-in-fact friend, the friend's family members, and her own sister as the pay-on-death beneficiaries on these accounts. Such transactions served to divert an estimated $400,000 from the decedent's probate estate, prompting the beneficiaries under her will to sue the friend and the sister for raiding the decedent's estate inter vivos.

     The defendants claimed that the transactions were proper, given that the account owner had allegedly participated in the pay-on-death beneficiary nominations and the attorney-in-fact friend had signed solely in her personal capacity, never as the decedent's agent. The benefited agent and the sister won at the trial level and on appeal.

     The supreme court reviewed its precedents regarding when a presumption of undue influence arises and when to set aside a transaction benefiting a party in a confidential relationship with the alleged grantor, holding that the plaintiff alleging undue influence establishes a rebuttable presumption of the impropriety of the disputed transactions where he or she can show either (1) the grantor's weakness of mind and significant benefit to the donee, or (2) that a confidential relationship existed between the parties at the time of the disputed transactions:

     A confidential relationship "springs from any fiduciary relationship, and when such relationship is found to exist, any transaction to the benefit of the dominant party and to the detriment of the other is presumptively fraudulent." Nicholson v. Shockey, 192 Va. 270, 278, 64 S.E.2d 813, 817[] (1951)(emphasis added). Thus, whenever a fiduciary relationship exists between parties, the existence of one or more transactions which benefit the party who owes a fiduciary duty to the other shifts the burden of proving the bona fides of the transaction to the party owing the duty. Id. at 277, 64 S.E.2d at 817. It is not necessary that the transaction be accomplished directly as a result of the fiduciary relationship, but rather, it is the fact that "a confidential relationship existed between the parties at the time of the transaction" that gives rise to the presumption and the shifting of the burden of going forward with the evidence. Diehl v. Butts, 255 Va. 482, 489, 499 S.E.2d 833, 838 (1998); Friendly Ice Cream Corp., 268 Va. at 33, 597 S.E.2d at 39.

     From this summary of the law, it is clear that to survive a demurrer, a complaint seeking to set aside a contract or other transaction favorable to a defendant or her interests because of undue influence by the defendant must allege either that [1] because of great weakness of mind of the other party the defendant obtained the bargain for grossly inadequate consideration or under some other circumstance of suspicion, or alternately that [2] a confidential relationship existed between the parties at the time of a transaction beneficial to the defendant, even in the absence of other suspicious circumstances. Both allegations will support a finding of undue influence resulting in a fraudulent transaction, and may be pled independently or in the alternative.

Id. at 225-26, 748 S.E.2d at 91 (bracketed numbers added) (bold emphasis added; italic emphasis the court's). "Importantly, [where the benefited party was serving as agent of the grantor at the time of the transactions complained of], the presumption of undue influence will arise independently of any evidence of actual fraud, or of any limitations of . . . [mental] capacity in the other party to the confidential relationship, and is intended to protect the other party from the influence naturally present in such a confidential relationship." Id. at 225, 748 S.E.2d at 91 (alteration omitted) (bold emphasis added; italic emphasis the court's) (internal quotation marks omitted). Therefore, the supreme court reversed the circuit court's judgment sustaining the demurrer as to the counts alleging breach of fiduciary duty, existence of a confidential relationship, undue influence, and seeking rescission of the improper transactions, remanding the case to the circuit court for further proceedings.

Topics: estates law, depletion of property in estate, inter vivos transfers, confidential relationship

TAX: Assessed Value Dispute Robert De Niro's Hudson Valley Compound

Posted by James P. Witt on Thu, Mar 19, 2015 @ 09:03 AM

Jim Witt, Senior Attorney, National Legal Research Group

     A real property tax assessment dispute involving a large parcel of land in Ulster County, New York, 75 miles north of Manhattan in the Hudson Valley, has recently been settled. The case is of interest for two reasons: (1) It brings into focus the issue of assessed value as based on the uniqueness of the property versus assessed value based on comparable properties in the area; and (2) the property is owned by a Trust on behalf of the actor Robert De Niro and his family.

     The property, well over 50 acres, is located in the town of Gardiner, New York, and has frontage on the Wallkill River (a tributary of the Hudson). The property was acquired in 1997 for $1.5 million, when its main structure was an 18th-century farmhouse, supplemented later by barns. Under De Niro's ownership, the house was renovated to include six bedrooms and seven bathrooms; one barn was converted into a 14,000-square-foot recreation center, containing a game room, gym, basketball court, swimming pool, boxing ring, and small film studio. Another barn was converted into a workshop and another into an office. Also there were $1 million in landscaping expenses to block any view of the property from the road.

     In 2010, De Niro, via the Trust that owns the compound, challenged the Town's $6 million assessment of the property on the basis that the median price for a home in Ulster County was $330,000, with only six properties selling for over $2 million. The Trust's appraiser put a $4 million value on the property. The Town argued that the property was unique and could be marketed to wealthy buyers; its appraiser testified at the trial that the $6 million assessment undervalued the property and that its true worth was $8.98 million. Justice Mary Work of the New York Supreme Court for Ulster County sided with the Town, ruling that the privacy and self-sufficiency of the property meant that the market for it was not limited to Ulster County but extended to a one-hundred mile radius of Manhattan.

     The Town made an offer of settlement at somewhat less than $6 million (the tax bill on the $6 million assessment was $170,000, but the New Paltz School District would be entitled to $124,000 of that). If De Niro prevailed, the Trust would save $57,000 per year.

     The Trust first refused the settlement and was ready to appeal; then the Trust agreed to let the original assessment stand and volunteered to cover the Town's legal expenses. This about-face was reportedly prompted by the loss of support coming from the townspeople, who had initially cheered De Niro on in his right to sue over taxes. But when word got out that the Town stood to lose more in legal fees on the appeal than it would gain from a win, the taxpayers footing the bill began to turn on De Niro, accusing him of using his money to bully the Town.

     At some point during the dispute, a writer for a New Jersey legal publication drove up to the gate of the De Niro compound, announced himself on the intercom as a reporter covering the case, and requested an interview with Mr. De Niro. A male voice came through the speaker: "Are you talkin' to me?"

Topics: tax law, assessment value, property tax

PENSIONS: What Severance Contracts Are Subject to Federal ERISA Law?

Posted by Noel King on Mon, Dec 29, 2014 @ 15:12 PM

The Lawletter Vol 39 No 10

Matt McDavitt, Senior Attorney, National Legal Research Group

     While many employers create severance contracts as incentives for employees to remain during mergers or sales of the company, few employers realize that some severance agreements are governed by the Employee Retirement Income Security Act ("ERISA") and that federal ERISA law preempts state law when such severance contracts are introduced during litigation.

     However, not all employer severance contracts are subject to preemption by federal ERISA law. The ERISA statutes do not define which severance agreements are governed by federal law; fortunately, a line of federal case law has clarified how this determination is made.

[I]n determining whether a plan requires an on-going administrative scheme, we must consider four factors: [1] whether the payments under the plan are one-time lump sum, or continuous, payments; [2] whether the employer undertook any long-term obligation with respect to the payments; [3] whether the severance payments come due upon the occurrence of a single, unique event, or any time that the employer terminates employees; and [4] whether the plan requires the employer to engage in a case-by-case review of the employees.

Rosati v. Cleveland-Cliffs, Inc., 259 F. Supp. 2d 861, 871 (D. Minn. 2003). Importantly, the envisioned onetime, lump-sum payment removing a severance contract from ERISA preemption does not refer to the fact that each employee would receive a lump-sum payout of the severance benefit upon actual or constructive termination; instead, it refers to the unlikely scenario wherein all benefited employees would receive their severance payouts at the same time, via one payment pooling their separate benefits. Thus, where employees eligible under the severance package qualify at differing times, requiring individualized analysis of the benefits due as well as a separate payout to each qualified employee, the severance contract is subject to, and controlled by, ERISA law.

     Additionally, a severance plan will be subject to ERISA law where the employer must invest in ongoing administration of the plan, such as where payments to qualified employees will occur periodically, or where the employer must make case-by-case benefits determinations to determine the proper payout:

      ERISA will preempt a state law breach of contract claim if the claim requires the court to interpret or to apply the terms of an employee benefit plan. An employee benefit plan can include severance payments. The decisive inquiry in determining whether a severance plan falls within ERISA's coverage is whether the plan requires an ongoing administrative program to meet the employer's obligation. ERISA applies when a severance plan potentially places periodic demands on an employer's assets that create a need for financial coordination and control. In contrast, the requirement of a one-time, lump-sum payment triggered by a single event requires no administrative scheme whatsoever to meet the employer's obligation, and ERISA therefore does not apply.

Bowles v. Quantum Chem. Co., 266 F.3d 622, 631 (7th Cir. 2001) (citations omitted) (internal quotation marks omitted).

     Thus, an ERISA-governed severance contract is one in which the employer (or other administrator) must maintain an administrative scheme to deal with processing ongoing severance benefit requests, the benefits determination must be made by analyzing each employee's individual factors, and payment will be made individually to each qualifying employee rather than by some onetime, mechanically determined method.

Topics: ERISA, pensions, severance contracts

ESTATES: The Scope of the Probate Exception to Federal Jurisdiction

Posted by Gale Burns on Tue, Aug 26, 2014 @ 09:08 AM

The Lawletter Vol 39 No 6

Matt McDavitt, Senior Attorney, National Legal Research Group

     It is well known that the jurisdiction conferred to the federal courts by the Judiciary Act of 1798 did not include authority over probate, as administration of decedent estates was reserved for the several states. Markham v. Allen, 326 U.S. 490 (1946). This jurisdictional exclusion of federal courts from probate matters has been deemed the "probate exception."  While traditionally the probate exception was interpreted broadly, thereby deterring federal courts from assuming jurisdiction over matters even tangentially related to probate of estates, the scope of the probate exception has narrowed in recent years such that federal courts now will entertain suits involving probate estates under certain circumstances.

     In 2006, the U.S. Supreme Court dramatically limited the scope of the probate exception, departing from prior jurisprudence and defining more precisely when federal courts may validly assume jurisdiction over disputes involving probate estates. The federal courts are not permitted to adjudicate issues involving (a) the administration of decedent estates, or (b) the disposition of property actually and presently in the in rem custody of the probate court, but issues outside these bounds are fair game for federal jurisdiction:

[T]he probate exception reserves to state probate courts the probate or annulment of a will and the administration of a decedent's estate; it also precludes federal courts from disposing of property that is in the custody of a state probate court. But it does not bar federal courts from adjudicating matters outside those confines and otherwise within federal jurisdiction.

Marshall v. Marshall, 547 U.S. 293, 296 (2006) (emphasis added). Courts after Marshall have acknowledged the now-narrowed scope of the probate exception:

It is clear after Marshall that unless a federal court is endeavoring to (1) probate or annul a will, (2) administer a decedent's estate, or (3) assume in rem jurisdiction over property that is in the custody of the probate court, the probate exception does not apply. Insofar as [prior case law] interpreted the probate exception as a jurisdictional bar to claims "interfering" with the probate, but not seeking to probate a will, administer an estate, or assume in rem jurisdiction over property in the custody of the probate court, that interpretation was overbroad and has been superseded by Marshall.

Three Keys Ltd. v. SR Util. Holding Co., 540 F.3d 220, 227 (3d Cir. 2008).

     Thus, federal courts may now assume jurisdiction over matters relating to probate estates so long as the matter being litigated does not implicate the above-listed subjects. For example, plaintiffs post-Marshall may now assert claims under federal law (after meeting the jurisdictional requirement of having either diversity of parties or the presence of a federal question) for intentional/tortious interference with inheritance so long as the plaintiff seeks in personam damages from the tortfeasor(s), and not the distribution of property in the actual control of the probate court.

Topics: legal research, Matt McDavitt, estates, U.S. Supreme court, Third Circuit, probate exception, federal jurisdiction, Marshall v. Marshall, Three-Keys Ltd. V. SR. Utilities Holding Co., federal court may not probate, annul, dispose of property, The Lawletter Vol 39 No 6

TAX: Disclosure of Taxpayers' Records under Obamacare

Posted by Gale Burns on Tue, Apr 8, 2014 @ 12:04 PM

Brad Pettit, Senior Attorney, National Legal Research Group 

     On August 14, 2013, the IRS issued a "document [that] contains final regulations relating to the disclosure of return information under section 6103(l)(21) of the Internal Revenue Code, as enacted by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010." Regulations Pertaining to the Disclosure of Return Information to Carry Out Eligibility Requirements for Health Insurance Affordability Programs, T.D. 9628, 2013-36 I.R.B. 169 (Aug. 14, 2013). "The [new] regulations define certain terms and prescribe certain items of return information in addition to those items prescribed by statute that will be disclosed, upon written request, under section 6103(l)(21) [of the Code."  Id. 

     As alluded to above, the Internal Revenue Code now provides that

[t]he Secretary [of the Treasury], upon written request from the Secretary of Health and Human Services, shall disclose to officers, employees, and contractors of the Department of Health and Human Services return information of any taxpayer whose income is relevant in determining any premium tax credit under [26 U.S.C.] section 36B or any cost‑sharing reduction under section 1402 of the Patient Protection and Affordable Care Act or eligibility for participation in a State medicaid program under title XIX of the Social Security Act, a State's children's health insurance program under title XXI of the Social Security Act, or a basic health program under section 1331 of Patient Protection and Affordable Care Act. 

26 U.S.C. § 6103(l)(21)(A) (emphasis added). Section 6103(l)(21)(A) goes on to say that 

[s]uch return information shall be limited to— 

(i)         taxpayer identity information with respect to such taxpayer, 

(ii)        the filing status of such taxpayer, 

(iii)       the number of individuals for whom a deduction is allowed under section 151 with respect to the taxpayer (including the taxpayer and the taxpayer's spouse), 

(iv)       the modified adjusted gross income (as defined in section 36B) of such taxpayer and each of the other individuals included under clause (iii) who are required to file a return of tax imposed by chapter 1 for the taxable year,

(v)        such other information as is prescribed by the Secretary by regulation as might indicate whether the taxpayer is eligible for such credit or reduction (and the amount thereof), and 

(vi)       the taxable year with respect to which the preceding information relates or, if avapplicable, the fact that such information is not available. 

Id.  The Code also says that 

[t]he Secretary of Health and Human Services may disclose to an Exchange established under the Patient Protection and Affordable Care Act or its contractors, or to a State agency administering a State program described in subparagraph (A) or its contractors, any inconsistency between the information provided by the Exchange or State agency to the Secretary and the information provided to the Secretary under subparagraph (A). 

Id. § 6103(l)(21)(B). Section 6103 then says that 

[r]eturn information disclosed under subparagraph (A) or (B) may be used by officers, employees, and contractors of the Department of Health and Human Services, an Exchange, or a State agency only for the purposes of, and to the extent necessary in— 

(i)         establishing eligibility for participation in the Exchange, and verifying the appropriate amount of, any credit or reduction described in subparagraph (A), 

(ii)        determining eligibility for participation in the State programs described in subparagraph (A). 

Id. § 6103(l)(21)(C).

     The Regulations that were recently promulgated by the Department of the Treasury elaborate upon the above-quoted information-sharing provisions of 26 U.S.C. § 6103(l)(21). Under the new Regulations, the IRS must share the following types of information when asked to do so by certain federal and state agencies, and their contractors: (1) for each  relevant taxpayer for the reference year where the amount of Social Security benefits not included in gross income is unavailable: (i) the aggregate of adjusted gross income under 26 U.S.C. § 62, any amount excluded from gross income under 26 U.S.C. § 911, and any amount of tax‑exempt interest received or accrued by the relevant taxpayer during the tax year; and (ii) information indicating that the amount of Social Security benefits not included in gross income is unavailable; (2) adjusted gross income under 26 U.S.C. § 62, where modified adjusted gross income ("MAGI") is unavailable, as well as information indicating that the components of MAGI other than adjusted gross income must be taken into account to determine MAGI; (3) the amount of Social Security benefits included in gross income under 26 U.S.C. § 86; (4) information indicating that certain return information of a relevant taxpayer is unavailable for the reference tax year because the relevant taxpayer jointly filed a U.S. Individual Income Tax Return for that year with a spouse who is not listed on the same application; (5) information indicating that, although a return for an individual identified on the application as a relevant taxpayer for the reference tax year is available, return information is not being provided because of possible authentication issues with respect to the identity of the relevant taxpayer; (6) information indicating that a relevant taxpayer who is identified as a dependent for the tax year in which the premium tax credit would be claimed did not have a filing requirement for the reference tax year; and (7) information indicating that a relevant taxpayer who received advance payments of the premium tax credit in the reference tax year did not file a tax return for that year reconciling the advance payments with any premium tax credit under 26 U.S.C. § 36B available for that year (i.e., to account for any difference between the projected and actual amount). 26 C.F.R. § 301.6103(l)(21)-1(a); see also Final Regs Clarify Return Information IRS Can Disclose to Exchanges for ACA Determinations, 59 Fed. Taxes Wkly. Alert (RIA) No. 2 (Aug. 15, 2013). The new Regulations "appl[y] to disclosures to the Department of Health and Human Services on or after August 14, 2013." 26 C.F.R. § 301.6103(l)(21)-1(d). 

     During the next few years, as the Affordable Care Act is fully implemented, it will be interesting to see how well the foregoing information-sharing provisions of the IRS and the Treasury Regulations are received by taxpayers whose tax records are given by the IRS to various federal and state agencies, and their contractors. Hopefully, the new information- sharing rules will not result in privacy violations or other unintended consequences. Undoubtedly, taxpayers will be asking the courts to decide what limits, if any, should be placed on the rights of various governmental agencies and their contractors to access an individual's tax records under § 6103(l)(21) of the Code.

Topics: legal research, Brad Pettit, tax law, taxpayer records disclosure, eligibility requirements, healthcare, information relevant to tax credit under Affordabl, 26 U.S.C. § 6103

ESTATES: Estate Plan of James Gandolfini

Posted by Gale Burns on Tue, Oct 22, 2013 @ 10:10 AM

The Lawletter Vol 38 No 8

Jim Witt, Senior Attorney, National Legal Research Group

     When Sopranos actor James Gandolfini died on June 19 of this year from a heart attack while he was on a vacation trip with his family in Italy, the media reported trivial facts surrounding his death, such as the details of his last meal and drinks. After a month or so had passed, however, attention turned to the details of Gandolfini's estate plan, with the focus on criticism of the plan.  The plan became open to comment because Gandolfini had left a 17-page will, which, like every will, had to be filed in probate court, thereby making it public.

    A general point of the criticism was that Gandolfini had left a $70 million probate estate, with only 20% of the bulk of the estate's value passing to his widow tax-free under the Internal
Revenue Code's unlimited marital deduction and 80% passing to his sisters and his infant daughter.  This plan resulted in a federal estate tax liability of approximately $30 million.

    Criticism of the plan can itself be questioned:  (1) The belief that the estate is worth $70
million is speculative; (2) it may well be that Gandolfini had other substantial assets that he placed in estate planning devices such as trusts and corporations (which might serve as a receptacle for future royalties received by the estate from the Sopranos); it is believed that there is a $7 million life insurance trust fund for Gandolfini's 13-year-old son from a prior
marriage; and (3) it is unfair to criticize the disposition of an estate solely on the basis that the estate tax liability is not minimized:  A decedent should not necessarily allow the objective of tax savings to have precedence over the disposition that he or she desires.

    Yet some of the points of criticism made in regard to Gandolfini's estate plan are valid.  First, there is the matter of privacy.  If Gandolfini's assets had been placed in a revocable trust, with the trust spelling out the disposition of the assets at Gandolfini's death, the trust would not have been filed with the probate court and could have been kept private.  A simple pour-over will could have been used to transfer assets not subject to the trust to the revocable trust.

    Additionally, a tax calculation problem is created by the fact that the will, after bequeathing $1.6 million worth of assets to friends, used percentages to divide the estate among Gandolfini's widow, two sisters, and daughter.  The problem is that because the 20% passing to the widow is not subject to federal estate tax, the calculation of the tax on the remaining 80% becomes complicated.

    Also, the will does not include a trust to govern the disposition of the share of the estate that Gandolfini's daughter will receive.  She is not to receive her share until age 21, but the prospect of having her receive a multimillion dollar sum outright at that age raises questions.  A trust under the will could have protected her share by setting ages (such as 30, 35, and 40) at which she would receive percentages of the principal, with the trustee having discretion over the distribution of principal and income to her for her current needs.

    Gandolfini also owned a home in Italy, and the will directed the ownership to be divided equally between his son and his daughter when the daughter turns 25.  The will further expressed Gandolfini's wish that his children hold on to the home.  According to an estate planning authority who deals with foreign properties, despite the devise in the will, Italian law
requires that the disposition of the property be one-half to the children and one-quarter to the surviving spouse, leaving Gandolfini the freedom to have disposed of only one-quarter of the property as he desired.  The expert observed that an Italian lawyer should have been consulted, with the possibility that a separate Italian will might have been executed to cover the Italian property.  Moreover, the will contained no provision establishing a fund for the upkeep of the Italian property.  There is the possibility of friction as to the payment of the maintenance of property where it has been left to more than one party.

    Gandolfini also owned a co-op in Manhattan, said to be worth $3.5 million.  He put his son in a difficult position by giving him a right of first refusal to purchase the property at fair market value.  Here is a 13-year-old boy, with a beneficial interest in $7 million in insurance proceeds, under pressure to have one-half of the value of the insurance trust fund spent in order to comply with his late father's wishes.

    While the media may have become overexcited about the shortcomings of James Gandolfini's estate plan, there is clearly room for criticizing it.

Topics: legal research, Gandolfini, Sopranos, federal estate tax liability not minimized, speculative value, disposition, privacy of estate, Italian property involved, estate plan shortcomings, estates, Jim Witt, The Lawletter Vol 8 No 8

WILLS & ESTATES: Same-Sex Couples

Posted by Gale Burns on Tue, Oct 1, 2013 @ 11:10 AM

The Lawletter Vol 38 No 7

Brad Pettit, Senior Attorney, National Legal Research Group

     The courts of the various states are quite busy addressing issues that arise in the context of same-sex marriage.  This activity will certainly increase, given the U.S. Supreme Court's recent ruling in United States v. Windsor, 133 S. Ct. 2675 (2013).

     A recent decision by a New York State appellate court, while not relying on Windsor, is illustrative of the kinds of issues that can arise in administering the estate of a decedent who was involved in a same-sex marriage that was recognized in some states but not in others.  In the case of In re Ranftle, 969 N.Y.S.2d 48 (App. Div. 2013), the court held that for purposes of probating the will of a deceased married person, the decedent's surviving same-sex spouse had met his burden of proof in showing that the deceased testator had changed his domicile from
Florida (does not recognize same-sex marriages) to New York (recognizes same-sex marriages) in the months prior to his death.

     In reaching its decision, the Ranftle appellate court stated that "[w]e see no basis for disturbing the Surrogate's Court's finding that Ranftle changed his domicile to New York in the months before his death," id. at 51, even though the decedent's will contained a statement declaring that he was a resident of Florida.  Rather than focusing solely on what the decedent's will said about the testator's residence, the probate and appellate courts in the Ranftle case both relied on New York's rules for determining the domicile of a decedent at the time of his or her death.  The Ranftle court's ruling reads as follows:

     The Surrogate's Court Procedure Act defines domicile as "[a] fixed, permanent and principal home to which a person wherever temporarily located always intends to return" (SCPA 103[15]). "The determination of an individual's domicile is ordinarily based on conduct manifesting an intent to establish a permanent home with permanent associations in a given location" (Matter of Clute v. Chu, 106 A.D.2d 841, 843, 484 N.Y.S.2d 239 [3d Dept 1984]). A person's domicile is generally a mixed question of fact and law, which the court must determine after reviewing the pertinent evidence (see Matter of Brunner, 41 N.Y.2d 917, 918 [1977]).   No single factor is dispositive (Matter of Kartiganer v. Koenig, 194 A.D.2d 879, 881, 599 N.Y.S.2d 312 [3d Dept 1993]), and the unique facts and circumstances of each case must be considered (Ruderman v. Ruderman, 193 Misc. 85, 87, 82 N.Y.S.2d 479 [Sup Ct, N.Y. County 1948], affd, 275 A.D. 834, 89 N.Y.S.2d 894 [1st Dept 1949]). A party alleging a change of domicile has the burden of proving that change by clear and convincing evidence (Gletzer v. Harris, 51 A.D.3d 196, 199, 854 N.Y.S.2d 10 [1st Dept 2008], affd, 12 N.Y.3d 468 [2009]).

     We agree with the Surrogate that Leiby met his burden of proof as to the change of domicile. As noted, petitioner's scattered evidence that Ranftle remained a Florida domiciliary is overwhelmed by the large and consistent body of evidence showing that Ranftle moved back into the New York City apartment he shared with his husband with the intent of permanently remaining there, and that his change of domicile was motivated both by his grave illness and New York's recognition of same‑sex marriages.

Id.

     It will be interesting to follow the evolving case law as to the rights of persons who enter into same-sex marriages. There is little doubt that cases like the Ranftle decision will become more commonplace as long as there is a split among the states as to recognition of same-sex marriages.

Topics: legal research, Brad Pettit, The Lawletter Vol 38 No 7, burden of proof, same-sex marriage, United States v. Windsor, wills & estates, estate administration, domiciliary at death

TAX: Representing the "Innocent Spouse"

Posted by Gale Burns on Tue, Sep 10, 2013 @ 15:09 PM

The Lawletter Vol 38 No 6

Brad Pettit, Senior Attorney, National Legal Research Group

The so-called "innocent spouse relief" provisions of the Internal Revenue Code provide that if, upon

taking into account all the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for such taxable year attributable to [the] understatement [of one of the joint filers], . . . then the other individual shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such understatement.

26 U.S.C. § 6015(b)(1)(D) (Westlaw current through P.L. 113‑13 approved 6‑3‑13) (paragraphing omitted).  Section 6015 goes on to say that if relief is not available to the other individual under subsection (b) (or (c)), "the Secretary may relieve such individual of such liability."  Id. § 6015(f).

Currently, there is some confusion as to which of two administrative rulings by the Internal Revenue Service ("IRS") should be applied when evaluating whether a taxpayer qualifies for equitable innocent spouse relief under § 6015(f):  IRS Notice 2012‑8, 2012‑4 I.R.B. 309; or Rev. Proc. 2003‑61, 2003‑2 C.B. 296.  Both of these rulings by the IRS describe in detail the
procedures that must be followed and the standards that are to be applied in a case in which a taxpayer petitions the IRS for innocent spouse relief. However, according to at least three decisions by the U.S. Tax Court, the guidelines of Revenue Procedure 2003‑61 must be followed unless and until the recommended changes in the procedures and standards set forth in IRS Notice 2012‑8 are "finalized" via the issuance of a formal Revenue Procedure.  Hudgins
v. Comm'r
, T.C. Memo. 2012‑260, T.C.M. (RIA) ¶ 2012‑260, 2012 WL 3964890; Deihl v. Comm'r, T.C. Memo. 2012‑176, T.C.M. (RIA) ¶ 2012‑176, 2012 WL 2361518; Sriram v. Comm'r, T.C. Memo. 2012‑91, T.C.M. (RIA) ¶ 2012‑091, 2012 WL 1021315.  Therefore, although IRS Notice 2012‑8 purportedly "superseded" Revenue Procedure 2003‑61, an attorney or accountant representing a taxpayer seeking innocent spouse relief under § 6015 is advised to consult with the IRS to make sure that both the client and the IRS are following the same guidelines and rules for determining whether the client is entitled to relief from joint and several liability under a jointly filed federal tax return.

A recent Chief Counsel Notice issued by the IRS provides insight as to what to expect when
litigating a case involving a married taxpayer's claim for so-called "innocent spouse" relief from joint and several liability on a joint federal income tax return.  In IRS Chief Counsel Notice
("C.C.N.") CC‑2013‑011 (June 7, 2013), the IRS provided Chief Counsel attorneys with guidance regarding the standard and scope of review that the Tax Court applies when reviewing requests for relief from joint and several liability under § 6015(f) and litigation guidance for cases that involve claims for relief under § 6015.  C.C.N. CC‑2013‑011 points out to all IRS attorneys that a de novo standard of review is applied in innocent spouse relief cases that are argued before the Tax Court:

In all section 6015(f) cases, the scope of review is de novo as provided in Porter v. Commissioner, 130 T.C. 115 (2008), and the standard of review is de novo as provided in Porter v. Commissioner, 132 T.C. 203 (2009). Chief Counsel attorneys should no longer argue that the Tax Court should review the Service's section 6015(f) determinations for  abuse of discretion or that the court should limit its review to evidence in the administrative record. Although Chief Counsel attorneys are no longer required to preserve the standard and scope of review issues for appeal, they should continue to work with petitioners to stipulate to evidence in the administrative record that is relevant to the court's determination regarding section 6015 relief.

Id.

In sum, apart from the statutes, regulations, and case law that deal with innocent spouse relief from liability for federal tax, an attorney or accountant who advises a married taxpayer seeking relief from joint and several liability under a joint federal tax return should consult IRS Notice 2012‑8, Revenue Procedure 2003-61, and C.C.N. CC‑2013‑011 in order to know what to expect when arguing his or her client's case before the IRS or a court. 

Topics: legal research, The Lawletter Vol 38 No 6, IRC, innocent spouse relief for deficiency in tax, 26 U.S.C. § 6015, understatement, IRS Notice 2012 8 supersedes Rev. Proc. 2003-61, C.C.N. CC-2013-011, de novo standard of review in Tax Court, Brad Pettit, tax

TAX & ESTATES: IRAs—Designation of Beneficiaries

Posted by Gale Burns on Tue, Jul 9, 2013 @ 15:07 PM

July 8, 2013

Jim Witt, Senior Attorney, National Legal Research Group

While the designation of beneficiaries and the requirements for changes thereto are normally spelled out in clear terms, complications can arise.  In the North Carolina Court of Appeals case, Smith v. Marez, 719 S.E.2d 226 (N.C. Ct. App. 2011), a dispute arose over the proper disposition of the proceeds of two IRAs (a Rollover IRA and a Traditional IRA) owned by the decedent.  The plaintiff, in her individual capacity and as executrix of the decedent's will, filed a complaint in a declaratory action against the defendants, alleging that the proceeds of the Rollover IRA had been properly distributed to her and that the proceeds of the Traditional IRA should have been distributed to her.  The defendants, three of the decedent's children, contended that the proceeds from the two IRA accounts were the property of the decedent's estate and did not belong to the plaintiff. The defendants filed a counterclaim, asserting that the decedent had intended the two IRA accounts to go to them in the percentages set forth in his will or, in the alternative, that if the changes to his IRA beneficiary forms were not effective (directing that the IRA proceeds be distributed in accordance with his will, which included the defendants as beneficiaries), the IRA accounts should have been distributed pursuant to the original designation forms, which gave the defendants specific percentages.

In affirming the grant of the plaintiff's motion for summary judgment, the court of appeals found that, as per the record before it, the decedent had executed both IRAs in 2006, making beneficiary designations to the defendants in specific percentages. In 2007, after the decedent had been diagnosed with cancer, he executed his will, under which he bequeathed $100,000 to the plaintiff and the residue of his estate to the defendants in specific percentages, different from those in the IRAs.  On the same day, the decedent executed new designation-of-beneficiary forms for the IRA accounts.  In the space provided on each form, he directed that the proceeds of the accounts be distributed pursuant to his last will.

In December 2007, the decedent was informed that his cancer was terminal.  He married the plaintiff on December 16, 2007 and died on February 29, 2008.

In reviewing the grant of the plaintiff's motion for summary judgment, the court applied New York law, the jurisdiction designated by the decedent on the IRAs.  The court broke down its discussion into three categories:  contract interpretation, doctrine of dependent relative revocation, and incorporation by reference.

The court's basic finding as to contract interpretation was that, given that there was no evidence that the custodian of the IRAs had waived strict compliance with the requirement of the IRAs that the beneficiary designations include information such as the beneficiary's name, date of birth, and Social Security number, the decedent's direction that the IRA proceeds be distributed in accordance with his will was not in accord with the beneficiary designation requirements; the court also found that the decedent's original designations of individual beneficiaries could not stand, because they had been explicitly revoked by the decedent on the change-of-beneficiary forms.

The court rejected the defendants' assertion of the doctrine of dependent relative revocation (under which, if a revocation of a beneficiary is proven to have been conditioned upon the validity of a subsequent designation, the revocation is found to be ineffective), because the application of the doctrine has been limited to wills.

Finally, the court rejected the application of incorporation by reference, because the decedent's reference in the IRA change-of-beneficiary forms to the document to be incorporated, the decedent's will, was insufficiently precise in that the general direction of payment of the proceeds pursuant to the will was not clear either as to which beneficiaries under the will were to share the proceeds or as to the amounts or percentages each was to receive.

The case thus stands as a warning to those executing IRAs, or trying to effect changes as to the beneficiaries of IRAs, to pay strict attention to requirements on the form as to the designation of beneficiaries.  This is especially true where the intent is to distribute the IRA proceeds in accordance with a scheme of disposition under a will.

Topics: legal research, Jim Witt, tax and estates, beneficiaries, designation, distribution of proceeds, contract interpretation, dependent relative revocation, incorporation by reference, adherence to form requirements

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