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    TRUSTS & ESTATES, WILLS, AND TAX LAW UPDATE

    James P. Witt

    Recent Posts

    TAX: Minimum Contacts Necessary for Taxation of Trust

    Posted by James P. Witt on Tue, Mar 26, 2019 @ 09:03 AM

    Jim Witt—Senior Attorney, National Legal Research Group

                In Kimberley Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue, ___ N.C. App. ___, 789 S.E.2d 645, aff'd, ___ N.C. ___, 814 S.E.2d 43 (2018), cert. granted sub nom. North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, No. 18-457, 2019 WL 166876 (U.S. Jan. 11, 2019) the court addressed the issue of whether North Carolina's taxation under North Carolina General Statutes § 105-160.2 of the income accumulated by the trust in question met the minimum contacts requirement of the Due Process Clause of the Fourteenth Amendment to the U.S. Constitution, where the trust's only connection with North Carolina was the residence and domicile of the beneficiary.

                The Trust, the Kaestner 1992 Family Trust, was established by Joseph Lee Rice III, with William B. Matteson as trustee. The situs of the trust was New York. The primary beneficiaries of the trust were the settlor's descendants (none of whom lived in North Carolina at the time of the trust's creation). In 2002, the original trust was divided into three separate trusts: one for each of the settlor's children, with each trust named for a child. At that time, one of the children, Kimberley Rice Kaestner, the beneficiary of the plaintiff Kimberley Rice Kaestner 1992 Family Trust, was a resident and domiciliary of North Carolina. Neither the original trustee nor his successor was a resident of North Carolina.

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    Topics: Due Process Clause, minimum contacts, taxation of trust income, beneficiary's residence, trust situs

    Succession to the Estate of Charles Manson

    Posted by James P. Witt on Mon, Nov 26, 2018 @ 11:11 AM

    Jim Witt—Senior Attorney, National Legal Research Group

                In 1971, Charles Manson (“Manson”), the leader of the Manson Family cult, was convicted of first-degree murder and conspiracy to commit murder for the deaths of nine people in July and August 1969. He was originally sentenced to death, but his sentence was commuted to life with the possibility of parole after the suspension of the death penalty under both California and federal law (California's adoption in 1978 of a death penalty that qualified under federal guidelines and the sentence of life imprisonment with no possibility of parole could not be applied retroactively to Manson). After 46 years of incarceration, Manson died on November 19, 2017 of acute cardiac arrest, respiratory failure, and colon cancer. What has ensued, however, is an estate proceeding that has been complicated by a number of factors:

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    Topics: estates, Jim Witt, Charles Manson, last domiciliary, succession

    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

    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

    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

    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

    TAX: Qualified Tuition Plans (QTPs)

    Posted by James P. Witt on Tue, Jan 19, 2016 @ 12:01 PM

    The Lawletter Vol 40 No 12

    Jim Witt, Senior Attorney, National Legal Research Group

         Given the steep rise in college tuition costs over recent years, the Qualified Tuition Plans ("QTPs") authorized by § 529 of the Internal Revenue Code of 1986 have become increasingly popular. The following summary describes the basic rules governing QTPs, but, as becomes obvious, the restrictions on these plans are formidable, and the rules can vary from state to state.

         There are two basic types of QTPs, a "prepaid qualified tuition program" and a "qualified tuition program savings plan" (informally known as a "college savings plan"). Under a prepaid qualified tuition program, a person may purchase tuition credits or certificates on behalf of a designated beneficiary (the student) that cover future tuition charges and fees, and, in some cases, a room and board option may be purchased. There is generally a premium charged over the current price of tuition, intended to account for inflation. The benefit of this type of QTP is that it locks in tuition costs to the extent of the credits purchased. Many state-sponsored prepaid tuition programs are guaranteed by the state (this is not true for college savings plans). Most state-sponsored plans require either the owner or the beneficiary of the plan to be a resident of the state (college savings plans have no residency requirement). Prepaid tuition plans have a limited enrollment period (there is no limited enrollment period for college savings plans).

         A college savings plan generally allows an individual (the "accountholder") to establish an account for the student/beneficiary to be used for the payment of eligible college expenses, which include tuition, room and board, mandatory fees, and books and computers (where required). College savings plans are not guaranteed, meaning that investment options are subject to market risk and the loss of any benefit should tuition growth outpace investment results. A college savings plan is more expansive in its coverage, providing for the payment of tuition, room and board, fees and books, and a computer (payment for a computer is in doubt as a qualified 529 expense, with proposed federal legislation covering the question).

         The funds invested in both prepaid tuition plans and college savings plans will grow without being subjected to federal income tax, and funds withdrawn from the account will not be taxable as long as they are used for qualified educational expenses. A majority of states provide for a state income tax deduction or credit for an investment in a college savings plan offered by the particular state. Funds withdrawn from a 529 plan that are not used for eligible expenses are subject to federal income tax and to a 10% penalty on earnings. College savings plans charge a fee covering operating costs. One study found that an average annual fee charged by a savings plan obtained through a state was 0.69%, whereas the average annual fee for a savings plan obtained through a broker was 1.17%.

         Obviously a theme of the 529 plans is the assorted restrictions and rules imposed by these plans. More basic is the question of whether these plans are a wise investment for the long term, given rising costs. According to Time magazine (October 5, 2015), a nonpartisan think tank, Education Policy Center, has found that while an annual investment of $1,000 in a 529 plan for 18 years could have funded the tuition at a public university for four years for a student entering college in 1997, the same level of investment would not have covered even one year's tuition for a student starting in 2008.

         Thought should be given to other tax-advantaged strategies such as those available under the Uniform Gifts to Minors Act ("UGMA") (allowing a donor to place securities in a custodial account for the benefit of a minor child), and the Uniform Transfers to Minors Act ("UTMA") (also authorizing a custodial account for the benefit of a minor but allowing the deposit of assets such as real estate, patents, and royalties). Upon reaching the "age of trust termination" (not necessarily the age of majority), the beneficiary's use of the fund or assets is not restricted. Moreover, a Roth IRA, allowing after-tax dollars to be withdrawn by the owner prior to age 59½ if used for educational purposes, should be added to the mix of options.

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    Topics: tax, James P. Witt, QTPs, tax-advantaged strategies, prepaid tuition plan, college savings plan

    TAX: Carly Fiorina, Multistate Income Taxation, and the Dormant Commerce Clause

    Posted by James P. Witt on Wed, Sep 30, 2015 @ 16:09 PM

    The Lawletter Vol 40 No 8

    Jim Witt—Senior Attorney, National Legal Research Group

         A feature of recent U.S. presidential campaigns has been the interest of the press and the public (not to mention the requirements of the law) regarding the finances of those competing for the nomination and, ultimately, for the office itself. A key element of those finances has, of course, been the income tax returns of the various candidates. In this connection, one of the present candidates for the Republican nomination, Carly Fiorina, recently offered reporters who came in person to her campaign headquarters in Virginia the opportunity to review her state income tax returns.

         Ms. Fiorina and her husband had already put their federal income tax returns for 2012 and 2013 online, but it is her state income tax returns that are of special interest. She and her husband were required to file such returns in no fewer than 17 states in 2013, with the couple's connection with some of those states so insubstantial that their tax liability in 11 of the states was less than $250.

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    Topics: tax law, James P. Witt, dormant Commerce Clause, multistate income taxation, Fiorina

    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.

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    Topics: tax law, assessment value, property tax

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