The Lawletter Vol 37 No 4

Jim Witt, Senior Attorney, National Legal Research Group

It generally recognized that whether an individual dies intestate, or especially if he or she dies testate, escheat of the decedent's assets to the State is viewed as an absolutely last resort for the distribution of an estate.  See 27A Am. Jur. 2d Escheat § 12 "Generally; escheat disfavored."  Yet, in the recent Nevada case, In re Estate of Melton, 272 P.3d 668 (Nev. 2012), the result was escheat despite the fact that the testator, William Melton ("Bill"), left two wills.

Bill executed a formal will in 1975 under which he devised most of his estate to his parents, with small portions of the estate going to his brother, Larry J. Melton, and to two of his cousins.  He indicated in this will that his daughter, Vicki Palm ("Vicki"), was to receive nothing.  Bill also left the following handwritten letter, which he had sent to his friend, Alberta Kelleher ("Susie"), in 1995:

5-15-95

5:00 AM

Dear Susie

I am on the way home from Mom's funeral.  Mom died from an auto accident so I thought I had better leave something in writing so that you Alberta Kelleher will receive my entire estate.  I do not want my brother Larry J. Melton or Vicki Palm or any of my other relatives to have one penny of my estate.  I plan on making a revocable trust at a later date.  I think it is the 15 of [M]ay, no calendar, I think it[']s 5:00 AM could be 7:AM in the City of Clinton Oklahoma.

Lots of Love

Bill

/s/ William E. Melton

AKA Bill Melton

[Social security number]

Id. at 671-72.

Susie died in 2002, thus predeceasing Bill, who died in 2008.  During the administration of Bill's estate, the existence of his daughter (and only known child), Vicki, was discovered.  Prior to the discovery of the 1975 will, Vicki had argued that the 1995 letter did not qualify as a holographic will and that the estate therefore passed to her by intestate succession.  After the 1975 will was found, Vicki argued that the 1995 letter was a valid will (but that it was ineffective because Susie had predeceased Bill) and that it revoked the 1975 will, thereby giving Vicki the entire estate as Bill's sole heir at law.

Bill's half sisters, seeking to uphold the 1975 will, argued that the 1995 letter was not a valid will but that if it was valid, it did not revoke the 1975 will.  They further argued that even assuming that the 1995 letter was a valid will that revoked the 1975 will, the revocation had to be disregarded under the doctrine of dependent relative revocation, by which a subsequent will, which has no testamentary effect, does not revoke a prior will if it is shown that the testator intended that such revocation be conditioned on the effectiveness of the later will.

August 1, 2012

Brad Pettit, Senior Attorney, National Legal Research Group

As part of the Health Care and Education Reconciliation Act of 2010, Congress codified the long‑standing common‑law doctrine of "economic substance," which is applied in federal income tax cases to prevent taxpayers from trying to claim tax benefits from transactions that have no bona fide nontax purpose.  Pub. L. No. 111‑152, § 1409(a), 124 Stat. 1029, 1067‑68 (effective with respect to transactions entered into on or after March 31, 2010) (adding subsection (o) to 26 U.S.C. § 7701 and redesignating former subsection (o) as subsection (p)).  The Internal Revenue Code now expressly provides that

[i]n the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if—

(A)       the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer's economic position, and

(B)       the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.

26 U.S.C. § 7701(o)(1) (Westlaw current through P.L. 112‑90 approved 1‑3‑12).  Section 7701(o) goes on to explain that the term "economic substance doctrine" means the common‑law doctrine under which income tax benefits with respect to a transaction are not allowable if the transaction or series of transactions do not have "economic substance or lack[] a business purpose."  Id. § 7701(o)(5)(A), (D).  It is critical to note that under § 7701(o), there is an "[e]xception for personal transactions of individuals" because Congress expressly provided that the economic substance doctrine is applicable "only to transactions entered into in connection with a trade or business or an activity engaged in for the production of income."  Id. § 7701(o)(5)(B).

The Code also makes it clear that a taxpayer can be subjected to "accuracy‑related penalties" if he or she tries to claim tax benefits from a transaction or series of transactions that lack economic substance.  Id. § 6662(b)(6) (subsection (6) added to § 6662(b) by Pub. L. No. 111‑152, § 1409(b)(1), 124 Stat. at 1069).  Specifically, the Code now expressly provides that accuracy‑related penalties

apply to the portion of any underpayment which is attributable to . . . :

 . . . .

(6)        Any disallowance of claimed tax benefits by reason of a transaction lacking economic substance (within the meaning of section 7701(o)) or failing to meet the requirements of any similar rule of law.

Id.

On at least three occasions, the U.S. Tax Court has noted that the above‑described provisions of § 7701(o) essentially represent the adoption by Congress of the common‑law doctrine of economic substance as articulated by the U.S. Court of Appeals for the Third Circuit in the case of ACM Partnership v. Commissioner, 157 F.3d 231, 247‑48 (3d Cir. 1998), cert. denied, 526 U.S. 1017 (1999).  Crispin v. Comm'r, T.C. Memo. 2012‑70, T.C.M. (RIA) ¶ 2012‑070, 2012 WL 858406, at *6 n.14; Blum v. Comm'r, T.C. Memo. 2012‑16, T.C.M. (RIA) ¶ 2012‑016, 2012 WL 129801, at *17 n.21; Rovakat, LLC v. Comm'r, T.C. Memo. 2011‑225, T.C.M. (RIA) ¶ 2011‑225, 2011 WL 4374589, at *27 n.11. 

April 3, 2012

Brad Pettit, Senior Attorney, National Legal Research Group

Corporate and tax law attorneys frequently are asked to assist clients who have formed or want to create an organization that will serve the public good.  Section 501 of the Internal Revenue Code recognizes the desirability of such organizations by according tax-exempt status to "[c]orporations, and any community chest, fund, or foundation" that is "organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition . . . , or for the prevention of cruelty to children or animals."  I.R.C. § 501(c)(3) (emphasis added).  The Treasury Regulations further indicate that in order to be exempt from taxation under § 501(c)(3), an organization must be both "organized and operated exclusively for one or more of the purposes specified in such section."  Treas. Reg. § 1.501(c)(3)-1(a)(1).  According to the Regulations, "[i]f an organization fails to meet either the organizational test or the operational test, it is not exempt [from taxation]."  Id.

A.         Organizational Test

The Treasury Regulations provide that an organization is organized exclusively for one or more exempt purposes only if its articles of organization (1) limit the purposes of the organization to one or more exempt purposes, and (2) do not expressly empower the organization to engage, other than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes.  Treas. Reg. § 1.501(c)(3)-1(b)(1)(i).  The Regulations go on to caution that

An organization is not organized exclusively for one or more exempt purposes if its articles expressly empower it to carry on, otherwise than as an insubstantial part of its activities, activities which are not in furtherance of one or more exempt purposes, even though such organization is, by the terms of such articles, created for a purpose that is no broader than the purposes specified in section 501(c)(3).

Id.  § 1.501(c)(3)-1(b)(1)(iii).  As part of an organization's application to the IRS for tax-exempt status, it must submit a detailed statement of its proposed activities.  Id. § 1.501(c)(3)-1(b)(1)(v).

B.         Operational Test