The Lawletter Vol 40, No 4

Jim Witt, Senior Attorney, National Legal Research Group

     Dean Smith, the head coach of the University of North Carolina ("UNC") men's basketball team from 1961 to 1997, died on February 7, 2015, at age 83. Aside from the tributes paid to the man and his career that captured a good deal of media attention, a specific aspect of Coach Smith's estate plan also stirred up some interest. Following the modern trend, Smith's estate planners made a revocable living trust an important part, if not the centerpiece, of his plan for disposing of his assets at his death. Presumably, Smith transferred the bulk of his estate to the trust and, by doing so, realized a number of advantages for both himself and his estate: (1) privacy—the details of the trust, unlike information concerning an individual's assets that pass by will, do not become part of the public record; (2) because the transfer or transfers of assets to the trust are made during the individual's life, the assets are not subject to probate administration, and the expenses of such procedure are avoided (although the expenses of setting up the trust and having it administered must be considered); (3) the assets of the trust are not frozen, as can happen under a probate proceeding, thereby improving access to the assets for the estate and the heirs; (4) because the trust is revocable, the individual maintains control over the disposition of his or her assets transferred to the trust, because he or she can withdraw particular assets from the trust or dissolve the entire arrangement, which is also essentially true under a will in that a will has no effect until the individual's death.

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,

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.

The Lawletter Vol 38 No 4

Jim Witt, Senior Attorney, National Legal Research Group

            On Tuesday, October 23, 2012, the Court of Appeals of New York, in a 4‑3 decision, ruled that lap dances do not qualify for the same sales tax exemption as do other "dramatic or musical arts performances," such as a Madonna concert or a Broadway show.   677 New Loudon Corp. v. State Tax Appeals Tribunal, 979 N.E.2d 1121 (N.Y. 2012).

            The court's ruling stemmed from a 2005 audit of the Nite Moves strip club in Latham, New York.  After an investigation, the New York Tax Appeals Tribunal demanded $124,921, based on unpaid sales taxes on cover charges and "performance fees," which were construed to mean fees for private dances.  The petitioner/appellant, the operator of an adult "juice bar," contended that the admission charges and private dance performance fees that it collected from patrons were exempt from state sales and use taxes.  The court of appeals agreed with the appellate division's ruling that the petitioner had failed to meet its burden of proof that a tax exemption applied to those charges.

            The portion of the sales tax in question imposes a sales tax on "'[a]ny admission charge' in excess of 10% for the use of 'any place of amusement in the state.'"  Id. at 1122 (quoting N.Y. Tax Law § 1105(f)(1)).  The legislature defined places of amusement that are subject to this tax to include "[a]ny place where any facilities for entertainment, amusement, or sports are provided."  Id. (quoting N.Y. Tax Law § 1101(d)(10)).  As the court of appeals observed, the tax therefore applies to a vast array of entertainment, including attendances at sporting events such as baseball, basketball or football games; collegiate athletic events; stock car races; carnivals and fairs; amusement parks; rodeos; zoos; horse shows; arcades; variety shows; magic performances; ice shows; aquatic events; and animal acts.  Plainly, no specific type of recreation is singled out for taxation.

            The court went on to explain that the legislature had created the exemption from taxation for admission charges to "dramatic or musical arts performances," N.Y. Tax Law § 1105(f)(1), for the purpose of promoting cultural and artistic performances in local communities.  The petitioner argued that performances regarded as "adult entertainment" qualified for the exemption because exotic stage and couch dances were musical arts performances.  The court, pointing out that it was the petitioner/taxpayer's burden to prove the applicability of any exemption from taxation, ruled that a determination by the Tax Appeals Tribunal could not be overturned unless "erroneous, arbitrary or capricious."  979 N.E.2d at 1123 (quoting Grace v. N.Y. State Tax Comm'n, 332 N.E.2d 886 (N.Y. 1975)).  The court found that given the fact that the performances in question were carried out in "private rooms," the petitioner had failed to prove that the performances qualified as choreographed dance routines presented in a stage performance. 

            The court further concluded that it was not arbitrary, capricious, or an error of law for the Tax Appeals Tribunal to have discredited the petitioner's expert witness's opinion that the private performances qualified for the exemption because they were the same as the routines presented on the main stage.  The evidence showed that the witness had neither seen nor had personal knowledge of what occurred in the private areas.  As the court stated:

[S]urely it was not irrational for the Tax Tribunal to conclude that a club presenting performances by women gyrating on a pole to music, however artistic or athletic their practiced moves are, was also not a qualifying performance entitled to exempt status.

The Lawletter Vol 38 No 2

Brad Pettit, Senior Attorney, National Legal Research Group

The Internal Revenue Code ("I.R.C.") provides that

[e]xcept in the case of a rollover contribution described in [§ 408](d)(3) . . . , no contribution [to a qualified individual retirement account or a retirement plan] will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 219(b)(1)(A).

26 U.S.C. § 408(a)(1) (emphasis added).  A key requirement for a "rollover contribution" is that "the entire amount received" by an individual upon a payment or distribution from a retirement account or plan must be "paid into" an individual retirement account, an individual retirement annuity, or an eligible retirement plan for the benefit of the individual "not later than the 60th day after the day on which" the payment or distribution is received.  Id. § 408(d)(3)(A).

Since we live in an imperfect world, mistakes can be made when an individual seeks to achieve a timely tax-free rollover of money or securities from one tax-favored retirement account or plan into another.  Accordingly, the I.R.C. provides that "[t]he Secretary [of the Treasury] may waive the 60‑day [rollover] requirement under subparagraphs (A) and (D) where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement."  Id. § 408(d)(3)(I) (emphasis added).  In an administrative ruling, the Internal Revenue Service ("IRS") stated that "a taxpayer must apply for a hardship exception to the 60‑day rollover requirement using the same procedure as that outlined in Rev. Proc. 2003‑4 for letter rulings, accompanied by the user fee set forth in Rev. Proc. 2003‑8."  Rev. Proc. 2003‑16, § 3.01, 2003‑1 C.B. 359 [after clicking on this hyperlink, scroll down to page 359].

In determining whether to grant a waiver, the Service will consider all relevant facts and circumstances, including:  (1) errors committed by a financial institution, other than as described in Section 3.03 below; (2) inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error; (3) the use of the amount distributed (for example, in the case of payment by check, whether the check was cashed); and (4) the time elapsed since the distribution occurred.

Id. § 3.02.  According to the IRS, there is an automatic waiver of a defect in an attempt to carry out a tax-free rollover into an IRA, and no formal application for a discretionary waiver is necessary

if a financial institution receives funds on behalf of a taxpayer prior to the expiration of the 60‑day rollover period, the taxpayer follows all procedures required by the financial institution for depositing the funds into an eligible retirement plan within the 60‑day period (including giving instructions to deposit the funds into an eligible retirement plan) and, solely due to an error on the part of the financial institution, the funds are not deposited into an eligible retirement plan within the 60‑day rollover period.

Id. § 3.03.  But the IRS cautions that "[a]utomatic approval is granted only: (1) if the funds are deposited into an eligible retirement plan within 1 year from the beginning of the 60‑day rollover period; and (2) if the financial institution had deposited the funds as instructed, it would have been a valid rollover."  Id.