Law Offices of Larry D. Stratton

I came across this article by the Tax Prof Blog, edited by Professor Beyer. It relates to Nancy Silverton, who previously sold her restaruant in Los Angeles, La Brea Bakery, for $5 million. But she then lost all of it after she gave it to Bernard Madoff for investment. Madoff is alleged to have swindled investors to the tune to the total of $50 billion.

“I was silly and I learned a lot,” said Silverton, 54, who is an owner of Pizzeria Mozza and its neighboring Osteria Mozza in Hollywood. “I will never not diversify.”

Here is some more…an even more interesting reaction:

“I need to reinvent my life,” said Silverton, who co-founded the landmark Campanile restaurant and La Brea Bakery with her ex-husband, Mark Peel, and another partner. “To think you have a chunk of money is very comforting. Now, I’m just like 99% of the world. If I had to retire tomorrow, I could not.”

She also needs to “build something” again for her three children, ages 15, 23 and 26. “They don’t have any of that savings.”

This is a somewhat odd story because it is extreme. Still, the consequences are not that unusual.

One aspect of the story is the fact he received only a year in juvenile hall for attempted murder, and that he was released at 18. But that is a different story, for a different day.

Another aspect is that even though his parents attempted to effectively disinherit him by giving him only $50 of their substantial estate, they also failed to update their wills. As a result of failing to name a contingent heir, Sowell now stands to inherit $500,000 after his last surviving parent, his father, passed away.

As stated in the Coshocton Tribune story:

According to the almost identical wills, both the Sowells named each other as their sole heir, with no mention of secondary heirs after they both died.

“It’s a mess, a classic example of what happens when you don’t update your will,” said John Polito, chief magistrate and administrator in Probate Court. “The way it was written, it was as if they had no wills.”

(Hat tip to the Ohio Trust and Estate Blog for this interesting but unfortunate story)

Whoa.

I recall hearing in the media a few years ago of a “kinder, gentler” IRS. I guess even it were possible for perhaps the largest and most aggressive collection agency in the world to be “kinder” and “gentler”. . . this probably isn’t the best case to point that out.

A few days ago the U.S. Tax Court reported Nicholas v. Commissioner, T.C. Summ. Op. 2008-155 (Dec. 15, 2008), where the IRS chased a religious couple literally to hell and back for a delinquency of $712.

As they did every year, the couple donated almost half of their income to charity; in 2005, they donated $43,637 of total income of $89,092. However, in 2005 their accountant made a mistake, listing all contributions as “cash” contributions, even though $4,906 was noncash. Discovering the error, the couple filed an amended return, filing a Form 8283 for the $4,906 noncash contribution.

The IRS apparently flagged the return, and disallowed the $4,906, claiming a delinquency of $712.

Fortunately, the Tax Court was less than impressed with the IRS, and allowed the full deduction. Here is a portion of the decision:

For the 2005 tax year Mrs. Nicholas maintained notes on envelopes and on other documents recording the types of asset,names of charitable recipients, costs, and estimated values of petitioners’ noncash contributions. In substantially all instances petitioners had a receipt and/or letter from the charitable recipient. As is typical with contributions of assets valued under $500, the charitable organization left it to the donor to fill out the items and values, which Mrs. Nicholas did. Although Mrs. Nicholas did not have receipts to substantiate the original cost of each item, she had been the purchaser and had recollection of the amounts. More critically, Mrs. Nicholas frequented garage sales and flea markets and had a keen sense of the value of her contributed items. The items contributed included books, CDs, used furniture and lamps, and similar types of items. Petitioners were avid readers and accumulated large volumes of books which they stored in their home. Many of the books concerned religious topics, and some were children’s books that petitioners regularly purchased for their children. On regular occasions, as books and other items accumulated, Mrs. Nicholas would make a trip to the Salvation Army or some other charitable organization and make a donation.

I must admit: I have been hesitating to write this second installment to Discount Wars. The first part is here. In my last post on this subject I detailed how the IRS is using a certain provision in the Internal Revenue Code, specifically Section 2036, as a weapon to attack the discounting of Family Limited Partnership (“FLP”) interests. Transferring property to an FLP is a technique sometimes used to reduce estate taxes in large estates.

The reason I have hesitated in writing this second installment, quite honestly, is that after posting Part 1 I realized that I would have to actually explain IRC §2036, this IRS weapon of choice. Section 2036 is hardly light reading. In effect, I “blogged” myself into a corner (assuming that the word “blog” is a verb.) But, here goes…

First, as a preliminary explanation: There are certain sections of the Internal Revenue Code providing that certain “gift” transfers to others remain in the giver’s estate for estate tax purposes. The reason is simple: Givers don’t always transfer all of their interest, but often want to keep something back. Many of us get confused with this, in that we think of a “gift” as just that — something we completely give up our right to. Not many of us give a Christmas gift, and say to the recipient, “don’t get too attached to that new Rolex watch. I might call you next week and demand it back.” But making a “gift” that is completely revocable (as in this most extreme example) would place this “gift” squarely back into the estate of this giver, most specifically under a different section of the Code, IRC §2038.

Considering this example, certain people, me included, would question whether a “gift” which is revocable is truly a “gift” in the first place. But that’s really the point of keeping the property in the estate of the “giver,” isn’t it? The point is that some transfers appear to be “gifts” on the surface, but really aren’t.

Section 2036 is directed to a more subtle situation. The issue isn’t so much “give that back!” Rather, the point of Section 2036 might be paraphrased: “You can have this when I am done with it.” The pertinent part of Section 2036 provides that the estate of the giver shall include a transfer of property, where he or she retains “possession or enjoyment of, or the right to the income from, the property” for his or her life, or “a period not ascertainable without reference to his death, or for any period which does not in fact end before his death…”

Therefore, retaining a life estate or an income interest to the property that you “give” away will generally place the property right back into the estate of the “giver.” The reason for this is our simple mortality. After all, all of us only have a life interest in all the property we own, anyway (i.e., “you can’t take it with you.”) Thus, by retaining a life interest in property but “giving” away the rest, we are not giving up much. Are we?

So, where’s the gift? Of course, that’s Congress’ point when enacting Section 2036, and the point of the IRS when enforcing that section.

In my next installment I will discuss how the IRS uses Section 2036 to attack FLP interests and discounting.

Update: Before I get e-mails or comments on this issue, I want to point out that I recognize retaining only a lifetime interest usually precludes the “giver” from selling or consuming the property — something that an outright owner can do. Giving away an apartment complex but retaining the lifetime interest (i.e., the rent) does not mean that the giver can sell the property. However, the fair market value of the building, itself, would probably end up back in the “giver’s” estate as of the date of his or her death under Section 2036.

This qualifies my statement that “retaining a life interest in property but “giving” away the rest, we are not giving up much.”

This has nothing specific to do with estate planning or financial planning; however, it is worth noting. The author of the 1975 law review article, a semi-parody, The Common Law Origins of the Infield Fly Rule, William Stevens, passed away. His passing prompted an article in the New York Times on December 11, 2008:

“The dynamics of the common law and the development of one of the most important technical rules of baseball, although on the surface almost completely different in outlook and philosophy, share significant elements,” he wrote.

Published as a semi-parodic “aside” in June 1975, “The Common Law Origins of the Infield Fly Rule” quickly achieved legal fame, in part because nothing like it had ever appeared in a major law review, in part because of its concise, elegant reasoning. It continues to be cited by courts and legal commentators. It is taught in law schools. It is credited with giving birth to the law and baseball movement, a thriving branch of legal studies devoted to the law and its social context. It made lawyers think about the law in a different way.

R.I.P.

(Hat tip: Prof. Beyer of the Wills, Trusts & Estates Prof. Blog)

Because of the economic crisis, Congress has passed what it evidently thinks is temporary retirement plan relief in through H.R. 7327, the “Worker, Retiree, and Employer Recovery Act of 2008.”

The logic, I imagine, is to prevent the forced liquidation of assets at low stock market prices to meet the RMD requirements. But on the other hand, only Congress would consider the option of taking in less money “relief.”

Setting aside my cynical self, the “technical explanation” does offer a good explanation of the RMD requirements and the regulations. Here is some of the explanation of the Act:

Under the provision, no minimum distribution is required for calendar year 2009 from individual retirement plans and employer-provided qualified retirement plans that are defined contribution plans (within the meaning of section 414(i)). Thus any annual minimum distribution for 2009 from these plans required under current law, otherwise determined by dividing the account balance by a distribution period, is not required to be made. The next required minimum distribution would be for calendar year 2010. This relief applies to life-time distributions to employees and IRA owners and after-death distributions to beneficiaries.

In the case of an individual whose required beginning date is April 1, 2010 (e.g., the individual attained age 70 1/2 in 2009), the first year for which a minimum distribution is required under current law is 2009. Under the provision, no distribution is required for 2009 and, thus, no distribution will be required to be made by April 1, 2010. However, the provision does not change the individual’s required beginning date for purposes of determining the required minimum distribution for calendar years after 2009. Thus, for an individual whose required beginning date is April 1, 2010, the required minimum distribution for 2010 will be required to be made no later than the last day of calendar year 2010. If the individual dies on or after April 1, 2010, the required minimum distribution for the individual’s beneficiary will be determined using the rule for death on or after the individual’s required beginning date.